In Kuwait, corporate governance is still in its infancy and underdeveloped compared to its neighboring countries within the GCC. While the other GCC countries have made considerable progress in developing their respective country codes for corporate governance, Kuwait is still lacking in this aspect. One survey revealed that companies in Kuwait have the lowest standards of corporate governance in the GCC.

Despite the above, significant initiatives are underway to improve corporate governance in Kuwait. This includes the introduction of the new capital markets law which establishes an independent capital market authority. The authority is given the power and independence to regulate and supervise the capital markets, including implementing a full-disclosure policy to ensure fairness and transparency and avoid conflicts of interest and exploitation of internal information.

Corporate governance is loosely defined as the policies and practices that affect the relationships between a company's shareholders, board of directors (the "Board"), management and other stakeholders with legitimate interests in a company's performance (employees, customers, creditors, etc.). It aims to protect the interests of stakeholders by, for example, requiring that the board of directors be transparent, accountable and fair in its relationship with the stakeholders. "Good" corporate governance gives comfort to a company's investors that their investments are being used prudently by the management in order to enhance their value.

While noting that there are no specific regulations addressing corporate governance in Kuwait, related laws are found in the following:

  • The Kuwait Commercial Companies Law (the "CCL");
  • The rules and regulations of the Central Bank of Kuwait (the "CBK") for banks and investment companies;
  • The listing rules of the Kuwait Stock Exchange (the "KSE") for listed companies; and
  • The new Kuwait Capital Markets Law (the "CML").

This article focuses on corporate governance related to a joint stock / Kuwait stock company ("KSC") and the role, duties and liabilities of the Board.

Duties and Powers
The management of a KSC is vested with the Board. Appointed by the shareholders, Directors have the duty to manage the company for the benefit of the shareholders and, therefore, are accountable to them.

Directors are required to carry out their management duties with diligence, honesty, and reasonable care. They must disclose any interest, direct or indirect, in any transactions or matters potentially entered into by the company. Accordingly, Directors cannot use their positions within a KSC to generate secret profits. Directors may not transact or act personally in the name or on behalf of the KSC without being authorized to do so by the Board. They must abide by the duty of confidentiality in respect of any information considered as such.

As a general rule, Kuwaiti law empowers the Board of Directors to carry out all and any activities which are necessary to realize the objectives of the KSC as outlined in its bylaws. Under the law, the Chairman and the Vice Chairman of the Board of Directors have the power to bind the KSC with third parties.

The Board also has a general power of management and as such is granted extensive powers to carry out and execute the resolutions of the shareholders and to enter into transactions which are in the ordinary course of the KSC. The Board may appoint a managing director(s) to undertake some of the Board's authorities or to carry out day-to-day management. The Board may also delegate some of its authorities and duties to third parties. Nonetheless, the Board shall remain liable for the actions of its appointees.

Competition and Conflict of Interest
The CCL contains provisions to regulate competition and conflicts of interest. For instance, a director may not hold directorship in more than three companies in Kuwait or be a chairman or a managing director for more than one company in Kuwait. Additionally, a director may neither hold directorship or a management position in a competing company or a company with similar activities to that of the KSC. Any transaction in which a director has direct or indirect interest must obtain the prior approval of the shareholders.

The total remuneration of the Board may not exceed 10% (ten percent) of the KSC's net profit after deducting provisions for depreciations and reserves and distribution of dividend of not less than 5% (five percent) of the KSC's capital to its shareholders. Alternatively, a maximum annual remuneration of KD1,000 (one thousand Kuwaiti Dinar) may be made to every director from incorporation until the company realizes profit.

Article 148 of the CCL states that Directors are liable to the KSC, the shareholders and to third parties for all acts of fraud, abuse of powers, mismanagement or any other violation of the law or the KSC's bylaws. A vote by the shareholders' general assembly to release the Directors from such liability will not prevent the initiating of legal action. Thus, shareholders or third parties would still have recourse against a Director for such acts.

There is no definition of what constitutes "mismanagement". It is possible that Kuwaiti courts broadly interpret the term in order to cover a wide range of behaviors. This would grant shareholders and third parties the right to claim damages from Directors for many kinds of acts or errors in their management of the KSC, whether or not committed in bad faith.

A Director may avoid liability by objecting to resolutions passed by the Board which had approved the acts falling under Article 148 of the CCL. The Director's objection must be proved through the minutes of the meetings. Otherwise, the objecting Director would still be held jointly liable with the other Directors.

Specific Requirements for Directors of Banks and Investment Companies
Directors and key officers of banks and investment companies are required to have adequate experience in banking or in the financial sector. They are also held to a high moral and ethical standard. The specific qualifications required for a bank director is provided under Central Bank Regulation No. 4/220 of 1995.

In addition, bank directors are subject to additional disclosure requirements and responsibilities provided under Law No. 32 of 1968 (Central Bank Law) and the associated implementing regulations. The CBK has the power to carry out at any time audits and inspections of banks and investment companies under its supervision. The Central Bank Law provides that bank directors are liable for failing to produce information or documents required by the CBK for its audits or for knowingly submitting incorrect information and may be fined or imprisoned.

The penalties provided under the Central Bank Law may be imposed not only on the executive officers and managing directors of the banks, but also on other Directors in the event they knowingly agreed or acquiesced to the commission of the prohibited acts.

Specific Requirements for Directors of Listed Companies
Listed KSCs are subject to the disclosure obligations and reporting requirements of the KSE and are particularly obliged to comply with Law No. 2 of 1999 (Regarding the Disclosure of Interests in Joint Stock Companies) and Decision No. 5 of 1999 of the Kuwait Stock Exchange Committee (Regularizing Disclosure of Interests in Joint Stock Companies) which require the KSC to submit to the KSE a statement of shares or securities owned by its Directors in such KSCs within one month of the Directors' respective appointments or the effective date of dealing with their shares or securities in the KSE.

With the passing of the new CML, which contains disclosure provisions, most of the former disclosure requirements have now been superseded. Of relevance, Directors of a listed KSC and their first degree family members or spouses must now disclose their interests in the listed KSC (regardless of the percentage) to the Capital Markets Authority, the relevant bourse and the listed KSC, and any changes thereto, in securities of the company where the director works, their subsidiaries and associated companies. This disclosure obligation extends to any rights granted to the Director on any exercise of options.

The Capital Markets Authority has recently been established, but the regulations of the CML have yet to be developed. Therefore, there remain uncertainties as to the implementation of this disclosure obligation.

While the corporate governance framework in Kuwait is still scattered and not uniformly and comprehensively codified, the laws generally cover the basic elements relating to the accountability and transparency of the Board in a KSC. However, such basic framework is still insufficient to ensure the highest standards of corporate governance. Therefore, Kuwait must "catch up" with its GCC neighbors which have made progress in developing their respective country codes addressing corporate governance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.