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Corporate governance is a fundamental pillar for business sustainability, strengthening investor confidence, and ensuring sound management. It is a system of rules and practices designed to balance the interests of a company’s management, its shareholders, and other related stakeholders.

However, despite the Kuwaiti legislator having enacted numerous provisions regulating corporate governance and oversight of management activities, effective supervision may in practice be absent. This creates an environment conducive to serious errors, conflicts of interest, and loss of shareholders’ funds unless governance rules are applied with genuine and effective oversight.

This situation may be described as “paper governance”, where supervisory committees are formally established, internal regulations and written policies are adopted, and periodic meetings are held merely as a formality, without any real effectiveness in monitoring, follow-up, or risk assessment. The Court of Cassation has described such a situation in one of its rulings as “a formal structure that conceals a complete breakdown of internal control.”

The legal framework governing corporate governance under Kuwaiti legislation is set out in the Companies Law and the Corporate Governance Rules issued by the Capital Markets Authority (CMA). Article (186) of the Companies Law provides that the competent regulatory authorities shall establish corporate governance rules for the entities subject to their supervision in a manner that ensures the best protection and balance between the interests of company management, shareholders, and other related stakeholders. The same article also sets out the conditions that must be met by independent members of the board of directors.

Article (187) of the same law authorizes regulatory authorities to require companies under their supervision to appoint one or more independent board members possessing the requisite expertise and competence. Articles (193) and subsequent provisions further specify the conditions for nomination to board membership. In particular, a person, whether representing a natural or legal person, may not be a member of the board of directors of more than five public companies in Kuwait, may not serve as chairman of the board of more than one Kuwaiti joint-stock company, and may not simultaneously serve on the boards of competing companies, in order to avoid conflicts of interest.

Moreover, the chairman or any board member is prohibited from exploiting information obtained by virtue of their position to achieve a benefit for themselves or others, from trading in the company’s shares while serving on its board, or from engaging in any activity that competes with the company. All these provisions clearly reflect the legislator’s intent to impose a robust governance framework, in addition to the CMA’s governance rules, which emphasize that adherence to the highest governance standards is essential to ensure integrity, transparency, and the protection of shareholders’ and related parties’ interests.

Among the CMA’s governance rules are the requirements to appoint competent individuals to the board of directors and executive management, and to establish a system ensuring the integrity of financial reporting, disclosure, and transparency in an accurate and timely manner. Failure to apply these rules and legal provisions effectively and rigorously renders governance merely formal, opening the door to serious errors, conflicts of interest, mismanagement, loss of shareholders’ funds, and erosion of investor confidence. In some cases, this may even lead to delisting from the stock exchange, financial losses, and corporate collapse, as it has been established that the majority of delisted companies suffered from weak internal controls.

Several judicial rulings have affirmed liability arising from poor governance. In one Court of Cassation judgment, the court held that “the liability of a board member is not negated merely by the existence of internal committees, unless it is proven that such committees carried out effective supervisory functions.” In another ruling, the court stated that “the board of directors is responsible for overseeing executive management, and where such oversight is proven to be merely formal or non-existent, civil liability arises.” In yet another ruling, the court held that “failure to disclose a personal interest constitutes a gross error giving rise to liability.”

These judicial precedents demonstrate that the Kuwaiti judiciary does not recognize ineffective or illusory governance, but rather imposes legal liability where governance is not properly and effectively implemented.

This article was recently published in Arabic in Al-Jarida newspaper. You can view the original newspaper clipping here- https://www.aljarida.com/article/117516

Lawyer Abdulrazzaq Abdullah E-mail: azq@arazzaqlaw.com