Governance is important due to the role it plays in regulating the relationship between the main parties to the company (the shareholders, the company's executive management, and the board of directors) so that it specifies the responsibilities and rights of each party.
The characteristics of the contemporary companies made it necessary to set governance controls that are particularly specified as follows:
- The power that the major shareholders have over the minor shareholders.
- The separation between the company's ownership and its management.
Thus, this resulted in setting a regulatory system that ensures for the company's stakeholders that the management performs its tasks as best as possible, while the system protects the minor shareholders from the dominance of major shareholders.
Therefore, the governance appeared as a system that controls the work of all the company's relevant parties including the shareholders, the executive management, and the board of directors.
Concept of governance:
The Securities & Commodities Authority (SCA) adopts the governance concept as: "the set of controls and rules that govern the institutional discipline concerning the relations and the management of the company in accordance with the global standards and methods, by specifying the responsibilities and duties of the members of the board of directors and the supreme executive management of the company, taking into account the protection of the rights of shareholder and stakeholders.
There are other several definitions of the term of governance as the International Finance Corporation (IFC) defines it as "the system by which the company is managed and its business is controlled".
Moreover, the Organization for Economic Co-operation and Development (OECD) defines it as "the set of relations among the parties responsible for the management of the company, the board of directors, the shareholders, and the other stakeholders".
There is also another definition of governance on the method by which the company is managed and the mechanism of dealing with all the stakeholders therein starting from the company's customers, shareholders, and employees including (the executive management and the board of directors members) to the mechanism by which the company deals with the whole society.
In general, governance means the existence of systems that control the relations among the main parties to the company (the members of the board of directors, the executive management, and the shareholders…) for the purpose of achieving transparency and justice, combating corruption, and granting the right to hold the company's management accountable for protecting the shareholders, along with making sure that the company achieves its goals and its long term strategy.
Governance seeks to enhance the principles of transparency, accountability, responsibility, and justice, by setting a group of rules that the company should comply with. The most prominent goals aimed to be achieved by applying governance are as follows:
- Transparency: transparency means openness and abandonment of obscurity, confidentiality, and misleading, in addition to making anything verifiable and subject to sound vision.
- Accountability: the shareholders shall be entitled to hold the executive management accountable for its performance under the law and the governance systems. Furthermore, accountability ensures the responsibility of the executive management before the board of directors and the board's responsibility before the shareholders.
- Responsibility: it means raising the sense of responsibility of both of the two parts of the management (the board of directors and the executive management) and that each one of the board of directors’ members shall act according to a high level of professional ethics. Furthermore, responsibility acknowledges the legal rights of the shareholders and it encourages cooperation between the company and shareholders concerning matters such as profit and provision of job opportunities.
- Equality: in this regard, it means equality in rights between the minor investors and the major investors. It also means equality between the local investors and the foreign investors.
The SCA's role concerning the governance of public joint stock companies:
"The governance controls, applied by the SCA on the public joint stock companies that are subject to the regulations issued by it over the past years concerning institutional discipline and the governance of public joint stock companies, aim at making the company's management achieve the principles of good governance by achieving transparency and justice, and granting the right to hold the company's management accountable and, accordingly, achieving protection for all shareholders along with taking into account the interests of work and workers and reducing the utilization of power for any purpose other than the public interest, thus, this shall enhance investment. The aforementioned is based on the main standards and the international principles related to the rules regulating the companies' management as concluded by the Organization for Economic Co-operation and Development (OECD) as they are summarized in providing an effective frame for companies' governance, the shareholders rights, equitable treatment of shareholders, disclosure, transparency, the responsibilities of the board of directors, and the role of the interested or relevant parties".
Furthermore, the SCA has recently developed the companies' governance regulations according to the latest global developments in this regard in order to improve it to keep pace with the best international standards and practices in this regard. This comes as part of its continuous efforts to develop and regulate the securities sector in the country and for the purpose of developing the regulations concerning the governance of public joint stock companies, by setting a legal, clear, and effective regulatory framework to regulate the affairs of those companies in order to protect the rights of all stakeholders there. Moreover, to enhance the supervisory role played by the SCA and to more clearly specify the responsibilities of the board of directors and the executive management of the public joint stock companies along with ensuring the achievement of sufficient level of transparency and neutrality in the capital market so that the "Guide to Institutional Discipline Standards and Governance of Public Joint-Stock Companies" that was approved by the SCA's Board of Directors in its last meeting held in December 2019 - included new standards and requirements related to the environmental, social, and governance (ESG) considerations.