The report involved critically analyzing the nine pillars of corporate governance for SMEs in Dubai, providing recommendation for strengthening the principles as well as comparison with OECD Principles of Corporate Governance, Commonwealth Association for Corporate Governance and Corporate Governance principles in India.

1. Nine Pillars of Corporate Governance,
Critical Analysis and Recommendations
Karan Mahajan

2. Page 1
Index
Topics Pages
Introduction 2
Nine Pillars of Corporate Governance 2
Critical Analysis of Nine Pillars of Corporate
Governance
3
Corporate Governance in India 6
Recommendations 7
Conclusion 7
“Corporate governance is concerned with holding the balance between economic and social
goals and between individual and communal goals. The governance framework is there to
encourage the efficient use of resources and equally to require accountability for the
stewardship of those resources. The aim is to align as nearly as possible the interests of
individuals, corporations and society.”
-Sir Adrian Cadbury, UK, Commission Report: Corporate Governance 1992

3. Page 2
Introduction
There are no second thoughts about how important Small and Medium Enterprises (SMEs)
industry is to Dubai economy. According to Dubai SME – An agency for the Department of
Economic Development – Government of Dubai, SME industry represents about 95% of the
establishments in the Emirate, accounts for 42% of the labor force and contributes about 40%
value to Dubai’s economy1
. Due to the continuous growth and development of SME industry, it is
certain that it will be a key driver for the economy in years to come.
Most of the financial institutions have doubled their financial support to this industry in 2014 to
fund business development and growth. Government too has been playing an active role through
initiatives like Khalifa Fund and Dubai SME 100.
Considering the growing strategic importance of SME industry to Dubai economy, a code of
corporate governance has been developed constituting of nine pillars of corporate governance to
guide SMEs on establishment of robust business processes & practices that are transparent and
responsible and which will enable them to be more bankable and investable.
Nine Pillars of Corporate Governance
1. Adopt a formal corporate governance framework outlining the roles of the key
bodies such as partners, shareholders, board of directors and management.
2. Conduct a succession planning process.
3. Establish a timely, open and transparent flow of information with shareholders
4. Endeavor to set up a formal Board of Directors (BOD) to accompany the growth of
the company.
5. Develop a clear mandate for its Board of Directors to oversee the operational
performance of the business as well as evaluating and improving business
strategies.
6. Maintain credible books of accounts, which are annually audited by an external
auditor.
7. Set up an internal control framework in place and conduct a regular review of risk.
8. Recognize the needs of stakeholders.
9. Formulate a framework setting out the family’s relationship with the business.

4. Page 3
Critical Analysis of Nine Pillars of Corporate
Governance
The corporate governance pillars set out important steps that companies must undertake in
order to establish good governance practices within the company framework. The pillars support
growth, profitability and sustainability objectives of SMEs in Dubai market. The nine pillars are
incorporated under the following heads:
A. Corporate Governance Policies and Procedures
Pillar 1: Adopt a formal corporate governance framework outlining the roles of the key
bodies such as partners, shareholders, board of directors and management.
Stakeholders are vital to the growth and development of the company. The first pillar explains
to clearly define role, rights, obligations, responsibilities and duties of key stakeholders of the
company especially partners, shareholders, board of directors and management. This is
especially important in SMEs because of their micro structure where seldom there is overlapping
of duties. It will help the SMEs evolve from one man structure to an organization that has
delegated responsibilities and duties to key stakeholders. The framework outlining the duties
should be on paper and delegated authorities need to be periodically reviewed as the SME
evolves.
Pillar 2: Conduct a succession planning process.
The second pillar explains the importance of succession planning in SME. The planning process
should involve identifying key internal people with requisite experience to fill up future
leadership positions within the company. This helps in protection of the brand value of the
company as well as provides confidence to the stakeholders for longevity of the company.
Succession planning must always be done keeping in mind the long term goals of the company.
B. Transparency and Shareholder Relations
Pillar 3: Establish a timely, open and transparent flow of information with shareholders.
Clear and transparent communication regarding the financial position of the company,
performance, activities, ownership and governance should be sent to shareholders on a timely
basis. The SME should arrange for Annual general Meeting (AGM) where the board should meet
the shareholders to discuss key decisions about the company. The AGM should be called after
providing sufficient time in advance to the shareholders and should open up discussions
regarding strategic objectives of the company.

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According to OECD Principles of Corporate Governance, shareholders have to be sufficiently
informed about
a) Amendments to the statutes, or articles of incorporation or similar governing documents
of the company
b) the authorization of additional shares
c) extraordinary transactions, including the transfer of all or substantially all assets, that in
effect result in the sale of the company
The importance of communication to shareholders about effectively participating in AGM
including rules and voting procedures should also be highlighted according to OECD Principles.
C. Board of Directors
Pillar 4: Endeavor to set up a formal Board of Directors (BOD) to accompany the growth of
the company.
The BOD forms an integral part of any company and SMEs should set up a formal BOD. They help
in decision making process, formulate strategies, align the goals of the company to shareholders
interest and keep a check on management for operational and financial performance. For small
SMEs or entrepreneurs, an advisory board or outside independent non-executive directors can be
alternatives to a formal BOD structure and can provide expert advice and credibility to a
company.
The BOD should adopt formalprocedures for board meetings, address strategic issues and record
minutes of the meetings. Having outside directors is a good governance practice, however
initially the owner can choose to have inside directors who can be family or friends.
As the SME evolves, having an outside non-executive director with credible education and
experience can strengthen the board with independent & objective views and ideas. This process
also helps provide confidence in the minds of minority shareholders that their interests are
protected.
In addition, the non-executive directors should hold meetings with large shareholders, senior
management, supervise financial and operating performance as well as pay visits to company
plants/factories.
Pillar 5: Develop a clear mandate for its Board of Directors to oversee the operational
performance of the business as well as evaluating and improving business strategies.
Once the board is formed, a board mandate and objectives needs to be formulated as well as
enough resources need to be provided for it to perform its role. This should include meetings
with senior management, formulation of agendas for meeting, discussion on operational and
strategic issues and key risks associated with relevant decisions.

6. Page 5
The board should:
 review companies goal and policies,
 supervise, evaluate and approve business plans, strategies and resources to achieve them
 determine threats and risks in the external environment
 ensure strong internal controls by senior management
 align companies goals and polices to shareholder’s interest
The board should undergo performance evaluation themselves. This can be done through self-
assessment or through a third party. To further enhance corporate governance, SME ideally
should separate the roles of chairman and chief executive.
D. Control Environment
Pillar 6: Maintain credible books of accounts, which are annually audited by an external
auditor.
SME’s require the support of banking and financial services as well as investors who believe in
their growth story. The only way for them to assess the performance is through books of
accounts of the company. Books of accounts should be transparent, credible, based on
international financial reporting standards (IFRS) as well as audited by an external auditor. Any
changes to previous accounting policies should be disclosed immediately with appropriate
justification. Companies should preserve the independence of audit function in order to evaluate
effectiveness of external audit.
Pillar 7: Set up an internal control framework in place and conduct a regular review of risk.
Internal control framework within an organization is of paramount importance for business
continuity and longevity. Developing a strong and robust internal control framework is the duty
of the senior management and BOD. Significant business risks i.e. operational risks as well as
financial risks that affect the overall stakeholders of the SME should be identified, post which
the risks should be mitigated, insured or avoided. However risk management should not be an
obstacle for innovation and new ideas.
Risk management practices including risk tolerance and risk mitigation should be clearly defined
between the board and the management. An internal audit committee can review and supervise
the risk management approach from time to time.
E. Stakeholder Relations
Pillar 8: Recognize the needs of stakeholders.
For any company including SME, managing stakeholder relations is vital. Strong relations are
developed on the pillars of transparency, trust and honesty. The management needs to

7. Page 6
continuously engage these stakeholders and identify their needs. In addition, involving
stakeholders in decision making process of the company is good governance action. As with
revenue targets, SMEs should have stakeholder relations target and should continuously strive to
achieve them.
According to OECD Principles of Corporate Governance, corporate governance addresses
the rights and needs of the stakeholders and their ability to participate in corporate
wealth creation.
F. Family Governance
Pillar 9: Formulate a framework setting out the family’s relationship with the business.
Pillar 9 is of key importance to Dubai SMEs as most businesses are family owned. When the
business is controlled by the family, a clear distinction w.r.t authority and decision making
needs to be made.
Family governance institutions like “family council” could be developed which helps in
institutionalizing cooperation in large families and helps bridge the gap between family and the
business. Clear procedures need to be developed for family council too so that all family
members are well informed about the developments in the business.
Corporate Governance in India
Securities and Exchange Board of India (SEBI) had appointed “Birla Committee” under the
leadership of Shri Kumar Mangalam Birla. The objective of this committee was to develop code
and principles of corporate governance that would suit Indian Corporate Environment as well as
protect shareholders and investors interest.
SEBI has also taken various steps towards this objective like:
1. Declaration of quarterly results
2. Appointment of compliance officer for monitoring of share transfer process
3. Timely disclosure of material and price sensitive information
4. Dispatching of a copy of balance sheet to all shareholders
5. Providing explanation of variation between projected and actual use of funds in Director’s
report, etc.

8. Page 7
Recommendations
Recommendations to strengthen the pillars of Corporate Governance in SMEs
1. Greater empowerment to shareholders to question the board, propose resolutions, nomination &
election of board members and equal importance to vote in person or in absentia.
2. Any related party transaction that can create conflict of interest should be disclosed in front of
the board and shareholders. Key executives and members should disclose to the board and
shareholders if they act on behalf of third parties or their interest.
3. A platform should be provided to address the grievances of shareholders and stakeholders who
should be able to communicate their concerns to the company board in a free and just manner.
4. Investors and shareholders need to be provided with information regarding board members, their
qualifications & selection process as well as their independency status.
5. Succession planning should not only be the responsibility of management, board members should
endeavor to select, compensate and monitor key executives and their replacement.
6. Greater importance and push for non-executive board members should be the priority of any
stable BOD.
7. The Board should also oversee that the technology and systems used in the corporation are
adequate to properly run the business. In addition overseeing internal control systems, creating
a risk management committee and whistleblowing policy are effective corporate governance
measures.
Conclusion
Corporate Governance and its nine pillars build a strong relationship between company’s board,
management and various stakeholders. They provide a framework by which each of the three
parties has a defined role to play for the growth of the company.
As SMEs evolve and play a greater role in Dubai economy, the pillars described above will
maintain their role as a leading instrument for policy making in the area of corporate
governance.
Sources and References:
 Dubai SME
 OECD Principles ofCorporate Governance
 Commonwealth Association for Corporate Governance Principles for Corporate Governance
 OECD – 2nd
Asian Corporate Governance Round Table