Lecture 3

Egyptian Corporate Governance Code

1. A comprehensive and general framework of governance.
2. It encompasses a set of guiding rules of corporate governance, based on international and
regional best practices, to serve as guidelines for the application of corporate governance in
all kinds of companies in Egypt.
3. It helps as a guide to legislators in enacting the regulatory legislation and instructions related
to governance applications.
4. It does not contradict with:
➢ The Joint Stock Companies Law No. 159 of 1981.
➢ The Capital Market Law No. 95 of 1992.
➢ Egyptian Exchange Listing and Delisting Rules to be issued by the EFSA Board of
Directors.

The state represented by

1. The government.
2. Legislative body.
3. Regulatory body.
➢ They play a crucial in gradually developing a corporate governance regulatory system.
➢ This system should be adaptable to companies of varying sizes and complexities, while
also promoting public awareness of governance principles.
➢ The ultimate goal is to improve the application of governance principles, promote
prudent management, transparency, and equitable treatment of investors, particularly
small investors, while minimizing corruption.

Scope of application
➢ All types of companies in Egypt, whether listed or unlisted, including financial
institutions and companies of various sizes and nature of activity.
➢ Sound corporate governance is not just about following principles narrowly, but also
involves creating a culture and mechanism that governs the relationship among
business owners, the board of directors, and stakeholders.
➢ The broader the application of good governance, the greater the benefits for society
and the rights of small investors.

The “Comply or Explain” principle

➢ Requires companies to either comply with established principles or provide a clear and
justifiable explanation for its non-compliance.
➢ The report detailing the company's compliance or explanation is typically required to be
posted on the company's website and published in its annual report for shareholders.

References used in drafting the Egyptian Corporate Governance Code

➢ The Egyptian Institute of Directors (EIoD) has used various references in drafting its
Code, the most important of which are the Organization for Economic Co-operation
and Development (OECD) principles of corporate governance.
 1. These principles were first issued in 1999 and have since been amended in 2004 and
2015.
2. It is considered an important standard for corporate governance globally, as it includes
six key principles that are widely recognized and applied in corporate governance
practices around the world.

The six key principles

1. General Framework:
➢ Emphasizes the importance of establishing an effective framework for corporate
governance that ensure transparency and efficiency in the markets where the
organization operates and should also comply with relevant laws and regulations.
➢ The segregation of responsibilities should be clearly articulated.
2. The Rights and Equitable Treatment of Shareholders:
➢ The corporate governance framework should protect all shareholders’ rights & ensure
equitable treatment of them all, including small shareholders and foreign shareholders.
➢ Ensure that all shareholders can obtain actual indemnity, should their rights be violated.
3. The Role of Institutional Investors, and other Intermediaries in Stock Markets:
➢ The structure and regulations governing corporate governance should be designed in a
way that encourages institutional investors and intermediaries to act in a manner that
promotes the efficient operation of stock markets throughout the economic incentives.
4. The Role of Stakeholders:
➢ It is essential for ensuring that the rights of stakeholders, including shareholders,
employees, customers, suppliers, and the community, as established by law, are
recognized and respected. This means that their interests and concerns should be taken
into account in decision-making processes.
➢ It is important to encourage cooperation between companies and different stakeholders
to maximize wealth, create employment opportunities and achieve sustainability of
financially sound enterprises.
5. Disclosure and Transparency:
➢ The framework should guarantee timely and accurate disclosure of all significant
matters, including financial situation, performance, ownership structure, and
management of the company.
6. The Responsibilities of the Board of Directors:
➢ The corporate governance framework should offer strategic direction to the company,
oversee the executive management through the Board, and ensure the Board's
responsibility to the company and its shareholders.

Definitions

• General Assembly: A meeting that encompasses all the company’s owners or shareholders.
• Minority Shareholders: means shareholders that have a non-controlling interest in a company’s
equity.
• Related parties and groups: are entities or individuals under the direct control of shareholders
or with agreements to coordinate voting in company meetings.
• Control: the ability to appoint a majority of the Board members or influence decisions in the
company through ownership of shares or other agreements.
• Board of directors: is the authority elected by the General Assembly responsible for setting
objectives and strategies, and following up the performance of the management of the
company.
• Chairman of the Board of directors: is a member of the Board, appointed by the other members
of the Board to chair the Board’s meetings, and to be the legal representative of the company.
• Managing director: is a Board member appointed to oversee the actual management of the
company and holds the highest position in the management hierarchy. The Board of Directors
determines the responsibilities and compensation of the Managing Director.
• Executive Director: is a Board member who occupies an executive position within the company.
• Non-Executive Director: A board member who does not hold an executive position in the
company and does not receive a monthly or annual salary, except for compensation as a board
member. They are not allowed to provide paid services or consultations to the company, its
subsidiaries, or affiliates.
• An independent director:
✓ Non-executive board member who is not a shareholder in the company and has been appointed
as an expert within the board.
✓ They have no other relation with the company except for their membership on the board and
are not a representative of the company's owners.
✓ They should have no personal interest in the company, no close relationships with shareholders
or executives, and should not have held certain positions within the company for three years
prior to their appointment.
✓ Additionally, their tenure as an independent director should not exceed six consecutive years to
maintain their independence.
• Board Committees: are sub-committees formed by the Board from its members to assist in
performing its duties. The Board decides the functions and powers of these committees and
oversees their work to ensure effective performance.
• Board Secretary: is responsible for organizing meetings of the Board of Directors, committees,
and General Assemblies. They also oversee the recording and approval of meeting minutes and
follow up on the implementation of decisions made.
• Investor Relations Department: is a strategic function that combines finance, communication,
marketing, and knowledge of securities laws to facilitate effective communication between a
company and the financial community. This aims to ensure fair valuation of the company's
securities.
• Stakeholders: are those who have any kind of interest or concern in the organization, such as
employees, customers, suppliers, distributors, creditors, and regulatory bodies.
• Insiders: are individuals closely associated with a company, such as key executives, board
members, representatives, spouses, and minor children of board members. They also include
those who have access to inside information about the company.
• Related Parties: are individuals or entities that have a direct or indirect connection to the
company, which allows them to influence the company's decisions. This connection may arise
from their position within the company or its subsidiaries, or from holding a substantial
ownership stake in the company or its subsidiaries.
• Related Party Transactions: are deals between the company and its board members or major
shareholders. The general assembly's approval is required before these transactions can be
carried out.
• Cumulative (proportional) voting: is a method of voting for a company's directors where each
shareholder is entitled to a number of votes equal to the number of shares they own multiplied
by the number of directors to be elected. This allows shareholders to concentrate all their votes
on one candidate or distribute them among multiple candidates.
• Corporate Social Responsibility (CSR): refers to a company's ongoing commitment to
contributing to economic and social progress while upholding ethical behavior and responsibility
towards all stakeholders, the local community and the environment.