Corporate Governance Practice in the GCC: Kuwait As a Case Study
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Corporate Governance Practice In the GCC: Kuwait As A Case Study Thesis submitted for the degree of Doctor of Philosophy By Mohammad E. Al-Wasmi LLB, LLM School of Law Brunel University December 2011 Abstract Corporate governance practice has recently become an important topic around the world and specifically within the emerging stock markets in order to avoid expropriation by corporate management at the expense of minority shareholders. Although corporate governance is considered to be tremendously important in many countries, whether developed or developing, corporate governance does not exist in Kuwait as a mean of shareholder protection. This thesis intends to provide a regulatory analysis to laws and regulations that should be implemented to regulate corporate governance practice in Kuwait in private companies and in the State-Owned Enterprises. The second chapter draws a theoretical framework of corporate governance. These theories must be discussed, because this thesis is the first to address corporate governance from a legal perspective and will help Kuwaiti practitioners and those involved in corporate governance practice to gain a better and more comprehensive understanding of and appreciation for effective corporate governance. The third chapter provides an overview of the corporate governance practice in the emerging markets. The fourth chapter presents the characteristics of a corporate culture to lay the groundwork for adopting corporate governance that will fit within the Kuwaiti culture. The fifth chapter offers an assessment of the institutional settings necessary to establish a sound corporate governance system in Kuwait, including legal and political institutions. The sixth chapter will examine corporate governance practice in the State-Owned Enterprises in Kuwait. I The seventh chapter focuses on the best practices of corporate governance and the protection of shareholders in companies listed in the Kuwait Stock Exchange (KSE) by analysing the regulations and laws that apply to the KSE and that should relate to corporate governance. Chapter eight offers recommendations for corporate governance reform that derive from the assessment made in this thesis in both public and private sectors in Kuwait. Finally, chapter nine provides the general conclusion of the thesis and the contribution of this study. II Acknowledgement All praises and thanks be to Allah, the Almighty. First of all the sincere thanks should be expressed to my parents for their constant support and for their endless prayers to achieve this study. Special thanks and gratefulness should also be expressed to my wife and son Wasmi for their endless assistance and patience during my study period. In addition, I would like to thank my sister and brothers for their support. Also I would like to express special thanks for a number of friends since there advices were ready all the time during my study, Dr Abdulla Alhayyan, Dr Fahad Alzumai and Dr Hesham ALmujamed. Also I should not forget to thank my first supervisor Dr Luca Cerioni, in addition a special gratefulness is to Professor Peter Jaffey who accepted to supervise my thesis before the submission. Also many thanks should be sent to my Sponsor Kuwait Petroleum Corporation for granted me the scholarship. III Table of Contents Abstract……………………………………………………………………..I Acknowledgement………………………………………………………...III Table of Contents…………………………………………………………IV Chapter One: Introduction: 1.1 Introduction………………………………………………………………………….1 1.2 The Research Question……………………………………………………………...7 1.3 The Importance and The Aims of The Study……………………………………………………………………………………..7 1.4 Research Methodology...............................................................................................9 1.5 The Previous Studies….……………………………………………………………10 Chapter Two: Theoretical Framework of Corporate Governance 2.1 Introduction………………………………………………………………………...11 2.2 What is Corporate Governance?.............................................................................12 2.3 Agency Theory..........................................................................................................16 2.4 Stakeholder Theory………….…………………………………………….………22 2.5 Stewardship Theory………...…………………………………………….……….27 2.6 Conclusion……………………………………………………………….…………29 Chapter Three: Corporate Governance in the Emerging Markets 3.1 Introduction…………………………………………………………….………….32 3.2 Ownership Structure………………………………………………….…………..34 3.3 Privatization: As One of the Major Reasons Behind the Concentrated Ownership in the Emerging Market…………………………………….…………...37 3.4 Corporate Governance Challenges in The Emerging Markets…………..…….40 3.5 Conclusion……………………………………………………………………..…..51 Chapter Four: The Corporate Culture in Kuwait 4.1 Introduction………………………………………………………………………..54 4.2 The Historical Development of Modern Corporations in Kuwait……………...56 4.3 The Rentier Nature of The Kuwaiti Economy……………………………….......61 4.4 The Domination of Family Businesses in Kuwait…………………………...…...65 4.5 The Islamic Corporations in Kuwait……………………………………...……...68 4.6 Conclusion………………………………………………………………...………..71 Chapter Five: Corporate Governance Political and Legal Institutions in Kuwait 5.1 Introduction………………………………………………………...…...72 5.2 The Political Institutions in Kuwait……………………………………………...75 5.2.1 The Political System in Kuwait………………………………………………...77 IV 5.2.2 Kuwaiti Constitution as a Base for the Corporate Governance…………..….79 5.2.3 The Current Obstacles of the Political Life in Kuwait………………………..79 5.2.3.1 The Interest Groups and Political Parties……………………………………79 5.2.3.2 Parliamentary Deviations……………………………………………………..81 5.3 Corporate Governance Legal Institutions in Kuwait…..…………………….…84 5.3.1 Kuwait Legal Origin…..………………………………………………...….…...86 5.3.2 The Judiciary Authority in Kuwait…………..…………………….........91 5.3.2.1The Judicial System in Kuwait………………………………………………..91 5.3.2.2 The Judiciary Independence in Kuwait………………..……………….……92 5.3.2.3 Can the Judicial System in Kuwait Absorb the Corporate Governance Concept…..……………………………………………………………….……………93 5.3.3 Corporate Governance Tools in the Light of the Kuwaiti Companies Law No. 15/1960…….……………………………………………………………….………….95 5.3.3.1 Board of Directors Composition or Board Structure under Kuwaiti Companies Law…….…………………………………………………………………96 5.3.3.2 Director’s Duties…………………...…………………………………………102 5.3.3.3 The Director’s Power Limitations…………………………………………..103 5.3.3.4 The Director’s Duties…….…………………………………...……………...104 5.3.3.4.1 Duty of Care……….………………………………………………………..106 5.3.3.4.2 Duty of Loyalty……………….……………………………………….........110 5.3.3.5 Director’s Conflict of Interest legal Framework in the Light of the Kuwaiti Companies Law………………………………………………………………………113 5.3.3.6 Shareholder’s Rights Under Kuwait Companies Law………………...…..115 5.3.3.6.1 Shareholders Basic Rights.………………………………………………...119 5.3.3.6.2 Shareholders’ Rights under the Kuwaiti Companies La…………....…...121 5.3.3.6.2.1 Equitable Treatment Between Shareholders……………………...........121 5.3.3.6.2.2 Minority Shareholders Protection………………………………......…..122 5.3.3.6.3 The Derivative Claims……………………………………………......…....126 5.4 Conclusion………………………………………………………………...……...130 Chapter Six: The Current Best Practice of Corporate Governance in the State-Owned Enterprises in Kuwait 6.1 Introduction………………………………………………………….….……….133 6.2 The Corporate Governance of State-Owned Enterprises………….....……....135 6.2.1 Different Definitions of The State-Owned Enterprises………….………….135 6.2.2 Differences Between The State-Owned Enterprises And The Private Corporations……………………………………………………..…….…………….137 6.2.3 State-Owned Enterprises Establishment Objectives………….…………….138 6.2.4 State-Owned Enterprises Accountability And Performance…….....……....140 6.3 Corporate Governance of State-Owned Enterprises……………………...…..142 6.3.1 Guidelines for Corporate Governance in State-Owned Enterprises……....145 6.3.1.1 OECD Corporate Governance Guidelines for State-Owned Enterprises.147 6.4 The State-Owned Enterprises in Kuwait………………………………...…….148 V 6.4.1 The Public Sector in Kuwait……………………………………………………148 6.4.2 Nationalization and the creation of State-Owned Enterprises in Kuwait…...149 6.4.3 Privatization of State-Owned Enterprises in Kuwait…………………………152 6.5 The Main Challenges Facing the Application of the Best Practice of Corporate Governance for the State-Owned Enterprises in Kuwait…………………………..161 6.5.1 The Absence Legal Framework for State-Owned Enterprises in Kuwait…..164 6.5.2 Political Interference in the State-Owned Enterprises in Kuwait……………171 6.5.2.1 Projects Cancelled Due To Political Interference……………………….…..175 6.5.2.1.1 AL-Zour Refinery…..……………………………………………………….175 6.5.2.1.2 K-Dow Deal……….………………………………………………………....176 6.6 Initiatives Enhance the Application of Best Practice of Corporate Governance in the State-Owned Enterprises in Kuwait………………………………………….….178 6.6.1 Code of Conduct for Oil Sector Employees…..…………………………….….178 6.6.2 Corporate Governance Seminar for Executives in the Oil Sector…….….….179 6.7 The Roles of Several Entities Regarding the Application of Corporate Governance Issues in the State-Owned Enterprise in Kuwait……….…………….180 6.7.1 The State Audit Bureau of Kuwait (SAB)….…………………………….……180 6.7.2 Kuwaiti Law No: 1/1993 Regarding Protection of The Public Funds….…....182 6.8 Conclusion………………………………………………………………………....184 Chapter Seven: The Corporate Governance as An Investors’ Protection mechanism Under The Current Kuwait Stock Exchange Laws and Regulations 7.1 Introduction…………………………………………………………………….…187 7.2 The Financial Crisis