Egyptian Corporate Governance Code

Issued by the Egyptian Center for Directors, Egyptian Financial Regulatory Authority Third Edition, dated June 2016

Preamble

This edition of the Corporate Governance Code for the Arab Republic of Egypt, issued by the Egyptian Center for Directors affiliated with the Egyptian Financial Regulatory Authority, is the first comprehensive update since 2002. It aims to provide guidance based on the best practices in governance, transparency, and sound management, serving all stakeholders of companies that adopt it.

The importance of this update arises from significant global developments in governance rules and the attention paid by various entities, including international organizations, financing institutions, investment funds and companies, individual investors, and civil society associations. It was essential for the relevant authority in Egypt—the Egyptian Center for Directors—to keep pace with these developments and adopt best practices. The Center preferred this guide to be general in nature, allowing companies (whether private or public) to select what suits them best.

As part of this update, a working group of market experts and Center staff was formed, spending several months reviewing the guide and examining the best principles and applications adopted by relevant international organizations.

On my own behalf and on behalf of the Board of Directors of the Egyptian Financial Regulatory Authority, I extend my sincere gratitude and appreciation for the effort made by the members of the working group. May God reward them all with goodness.

Chairman of the Egyptian Financial Regulatory Authority Sherif Samy

Table of Contents

Page Number

• Introduction 5
• Chapter One: General Framework of Corporate Governance 8
  • 1.0 The Egyptian Corporate Governance Code 8
  • 2.0 Role of the State and Legislative and Regulatory Authorities 8
  • 3.0 Concept of Corporate Governance 9
  • 4.0 Objectives and Benefits of Applying Corporate Governance 9
  • 5.0 Scope of Application 10
  • 6.0 "Comply or Explain" Principle 10
  • 7.0 References for Preparing the Egyptian Corporate Governance Code 10
  • 8.0 Definitions 13
• Chapter Two: Main Pillars of Corporate Governance 15
  • 1.0 Axis One: General Assembly of Shareholders 17
    • 1.1.1 Formation of the General Assembly 17
    • 1.2.1 Attendance at the General Assembly 17
    • 1.3.1 Conduct of General Assembly Meetings 17
    • 1.4.1 Resolutions of the General Assembly 18
  • 2.0 Axis Two: Board of Directors 18
    • 1.1.2 Formation of the Board of Directors 18
    • 1.2.2 Conduct of Board Meetings 20
    • 1.3.2 Role and Responsibilities of the Board of Directors 20
    • 1.4.2 Responsibilities of the Chairman of the Board 22
    • 1.5.2 Responsibilities of the Executive Director 22
    • 1.6.2 Role of the Company Secretary 22
  • 3.0 Axis Three: Board Committees 25
    • 1.1.3 Audit Committee 23
    • 1.2.3 Nominations Committee 22
    • 1.3.3 Remuneration Committee 22
    • 1.4.3 Risk Management Committee 21
    • 1.5.3 Governance Committee 21
    • 1.6.3 Other Committees (Executive Committee, Investment Committee, Corporate Social Responsibility Committee, Occupational Health and Safety Committee, Environmental Protection Committee, Policyholders Protection Committee) 21
  • 4.0 Axis Four: Supervisory Environment 28
    • 1.1.4 Internal Control System 28
    • 1.2.4 Internal Audit Management 29
    • 1.3.4 Risk Management 30
    • 1.4.4 Compliance Management 30
    • 1.5.4 Governance Management 35
    • 1.6.4 External Auditor 35
• Chapter Three: Disclosure and Transparency 34
  • 1.3 Introduction to Disclosure and Transparency 34
  • 2.3 Material Information and Financial and Non-Financial Disclosure 34
  • 3.3 Investor Relations 32
  • 4.3 Disclosure Tools (Annual Report, Board Report, Governance Report, Disclosure Report, Sustainability Report, Website) 31
• Chapter Four: Corporate Governance Charters, Regulations, and Policies 46
  • First: Charters and Regulations 46
    • 1.4 Code of Ethics and Professional Conduct 45
    • 2.4 Board of Directors Regulations 45
    • 3.4 Board Committees Regulations 43
  • Second: Policies 43
    • 4.4 Succession Policy 43
    • 5.4 Disclosure Policy 44
    • 6.4 Whistleblowing Policy 44
    • 7.4 Conflict of Interest Policies 42
      • 1.1.7 Insider Dealing Policy 42
      • 1.2.7 Related Parties and Affiliated Parties Policy 42
    • 8.4 Corporate Social and Environmental Responsibility Policy 41
• Egyptian Corporate Governance Code Working Group 47

Introduction

Since its establishment in 2003, the Egyptian Center for Directors has been issuing guidance guides for corporate governance applications in accordance with international best practices and aligned with all laws regulating company operations within the Arab Republic of Egypt.

In 2002, the Center issued its first corporate governance guide, primarily addressing companies listed on the stock exchange, to help them comply with governance and disclosure requirements, benefiting them and all their shareholders and counterparties, while also contributing to achieving the highest desired levels of efficiency and sustainability.

Then, in 2001, the Center issued a corporate governance guide for the public business sector, given the paramount importance of this broad sector to the Egyptian national economy, as it contains a large group of companies operating across all strategic industries in the country. This guide was issued to strengthen the state's role as owner of this sector, support its supervisory systems, and ensure its operational efficiency.

In 2000, the Center updated the corporate governance guide for listed companies to align with the governance application rates at that time, aiming to keep pace with international and regional best practices regarding the role of boards of directors. It also recommended activating various supervisory systems within companies, addressed the role of companies in corporate social responsibility and environmental protection, and recommended adopting the "Comply or Explain" principle.

What is New in This Edition of the Egyptian Corporate Governance Code

The Egyptian Center for Directors worked on developing and updating previous guides and merging them all into this guide under the title "Egyptian Corporate Governance Code" as follows:

First: It gave a general and comprehensive nature to the latest version, incorporating the latest global and regional developments in governance, addressing all types of companies in Egypt, allowing each to apply governance rules suitable to its nature and size, and enabling them to develop future plans to adopt missing rules over the medium and long term as their size grows.

Second: It was presented as a guidance guide for all legislative and regulatory authorities to consider when drafting and updating related corporate governance legislation and regulatory instructions within the Arab Republic of Egypt.

The following is a brief overview of what was updated and developed in this edition: a. Establishing a general methodology for presenting the governance guide, clarifying the necessity of a developed corporate governance code in Egypt and the importance of the state, government, and its institutions in supporting governance concepts and applications. b. Clarifying the importance of governance uniquely and confirming the benefits companies gain from its application. c. Clearly defining the scope of application of these rules and their degree of alignment with the nature and size of each company. d. Giving special importance to the "Comply or Explain" principle as a fundamental rule paving the way for mandatory application. e. Expanding the introduction to concepts and terms used in the guide to enhance users' understanding and comprehension of its contents. f. Emphasizing the role of the General Assembly of Shareholders in selecting a competent board of directors to achieve company objectives. g. Giving greater importance to the role of the Board of Directors as the most crucial element in managing and directing the company, along with its primary responsibility for applying governance. The guide presents the optimal mix of board members in terms of quality and responsibilities, and reviews various committees emanating from the board to assist in its work. h. Addressing the role and responsibilities of the Company Secretary within the company comprehensively and in accordance with international best practices. i. Focusing more on the components of the supervisory environment and their great importance within any company, starting from the internal control system, risk management, internal audit management, compliance management, and recommending the existence of a governance management department within each company. j. Giving special importance to external auditors given their significant role. k. Shedding more light on the role of investor relations activities within listed companies. l. Addressing various disclosure methods and tools, and enhancing the importance of non-financial disclosure by clarifying material information that must be disclosed through various periodic reports. m. Finally, reviewing all policies, charters, and guides that every company must draft and apply to regulate its internal operations regarding governance.

This guide aims to support all companies wishing to understand and apply governance as an integrated approach toward growth and sustainability, fulfilling the Egyptian Center for Directors' mission and vision, which benefits companies and the national economy as a whole.

Chapter One: General Framework of Corporate Governance

1.0 The Egyptian Corporate Governance Code

The "Egyptian Corporate Governance Code" serves as the comprehensive general framework for governance and its related topics. It includes a set of guidance rules for corporate governance based on international and regional best practices, used as a guidance guide for applying governance in all types of companies within the Arab Republic of Egypt. It is also referenced when drafting legislation and regulatory instructions specific to governance applications. This guide does not conflict with Law No. 115 of 1981 on Joint Stock Companies and its Executive Regulations, Capital Market Law No. 95 of 1992 and its Executive Regulations, and the rules for listing and delisting securities on the Egyptian Exchange issued by the Board of Directors of the Egyptian Financial Regulatory Authority.

2.0 Role of the State and Legislative and Regulatory Authorities

The state, represented by its government and legislative and regulatory authorities, plays a primary role in adopting a clear direction to gradually and objectively develop the corporate governance legislative system. This allows the application of all rules in this guide to all types of companies in the country, each according to its size and nature of work, as well as supporting and encouraging those responsible for promoting and spreading awareness of governance culture and applications. All this aims to achieve the main goal: ensuring that all parties benefit from the fruits of applying governance rules correctly, leading Egypt to elevate its corporate governance practices, consolidate sound management thinking, increase transparency and disclosure rates, curb corruption, ensure fair treatment for all investors, and specifically protect minority shareholders' rights.

3.0 Concept of Corporate Governance

Corporate governance, in general, is a set of foundations, principles, and systems that govern the relationship between the board of directors on one hand, and the company owner and other interacting parties on the other hand, aiming to achieve the best protection and balance among the interests of all those parties.

4.0 Objectives and Benefits of Applying Corporate Governance

Egyptian companies should strive to apply and comply with governance rules not only to comply with laws and regulatory instructions, but also because governance brings numerous benefits, in addition to developing the investment climate and increasing economic growth in general.

Corporate governance is applicable, and its benefits are numerous, including but not limited to:

• Absolute protection of rights, such as protecting shareholders' or company owners' rights, employees' rights, and rights of counterparties like customers, creditors, suppliers, and state authorities, extending to protecting society as a whole and the environment in which the company operates.
• Achieving the best possible sustainability rates for companies.
• Improving operational efficiency and supporting performance supervision.
• Facilitating financing and reducing the cost of capital.
• Limiting the impact of risks and crises.
• Working to avoid conflicts of interest in dealings with insiders and related parties.
• Helping family companies transition to an institutional form.

Through applying governance, closed joint stock companies will find it easier to list their securities on the stock exchange, which requires their shareholders to pay attention to the necessity of monitoring governance application in preparation for listing in the securities market. Proper qualification for an IPO or stock exchange listing comes through the prior and correct application of governance principles.

5.0 Scope of Application

Without prejudice to all legislation and regulatory instructions regulating the operation of all companies within the Arab Republic of Egypt, these rules apply to listed and unlisted companies, banking and non-banking financial institutions, and industrial, commercial, and service companies regardless of their size and nature of activity, whether family-owned or publicly owned.

Also related to this is that proper corporate governance does not merely mean complying with a set of rules and interpreting them narrowly and literally. It is a culture and a method of regulating the relationship between the company owner, its board, and its counterparties. Therefore, the broader the scope of those adopting governance applications, the greater the benefit to society as a whole.

6.0 "Comply or Explain" Principle

Without conflicting with the mandatory nature of laws and regulatory instructions, the default is that the company works to apply all rules contained in this guide. If it cannot apply some rules for any reason, it must explain this objectively and acceptably, implementing the "Comply or Explain" principle. Each company must prepare a table listing all rules in this guide, indicating which it complies with and which it does not, along with reasons for non-compliance, as well as its future implementation plan. This report must be disclosed on the company's website and in the annual report prepared for its shareholders.

7.0 References for Preparing the Egyptian Corporate Governance Code

The Egyptian Center for Directors relied on numerous references in preparing and developing this guide, the most prominent of which are the OECD Principles issued in 1999 and its amendments issued in 2004, as well as its latest amendments issued in 2016, which consist of six fundamental principles representing a general reference for corporate governance worldwide, specifically:

1. General Framework: The necessity of ensuring an effective general framework for corporate governance that guarantees market efficiency and transparency and compliance with legislation and laws, clearly stating the need to define responsibilities among different legislative and regulatory authorities.
2. Rights and Equitable Treatment of Shareholders: The corporate governance framework must protect all shareholders' rights and ensure equitable treatment among them, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective compensation if their rights are violated.
3. Role of Institutional Investors and Different Parties in Capital Markets: The general framework for corporate governance must provide economic incentives for institutional investors and different capital market parties throughout the investment cycle to ensure efficient capital market management and optimal application of corporate governance.
4. Role of Stakeholders: The corporate governance framework must recognize stakeholders' rights as established by law, and also work to encourage cooperation between companies and different stakeholders to maximize wealth, create jobs, and achieve sustainability for projects based on sound financial foundations.
5. Disclosure and Transparency: The corporate governance framework must ensure accurate and timely disclosure regarding important matters that result in material events, specifically regarding the company, its financial position and performance, ownership structure, and management practices.
6. Responsibilities of the Board of Directors: The corporate governance framework must provide guiding lines and strategies to direct companies, ensure effective supervision of executive management by the board of directors, and ensure the board's accountability to the company and shareholders.

The Egyptian Center for Directors also referenced some basic references to update this guide, including:

• The Cadbury Report issued in the United Kingdom in 1992.
• The corporate governance methodology issued by the International Finance Corporation (IFC) of the World Bank Group.
• Bank governance instructions issued by the Central Bank of Egypt in 2000.
• Principles issued by the International Organization of Securities Commissions (IOSCO).
• Rules for listing and delisting securities on the Egyptian Exchange issued by the Egyptian Financial Regulatory Authority in January 2004 and its amendments.
• Various regulatory instructions and those specifically related to corporate governance issued by the Egyptian Financial Regulatory Authority.

Best international and regional practices and different countries' experiences in applying corporate governance were also taken into account as fundamental pillars in developing the governance system within the Arab Republic of Egypt.

8.0 Definitions

• General Assembly: The gathering comprising all company owners or shareholders.
• Minority and Small Shareholders: Shareholders who own a non-material percentage of the company's capital.
• Related Parties and Groups: Any group subject to actual control by natural or legal persons who are shareholders of the company, or united by an agreement to coordinate voting at the company's general assembly or board of directors meetings.
• Control: Any situation, agreement, or ownership of shares or stakes regardless of percentage that leads to controlling the appointment of the majority of board members or affects decisions issued by the board or the general assembly.
• Board of Directors: The authority responsible for setting objectives and strategies and monitoring the company's management performance according to its articles of association.
• Chairman of the Board: A board member elected by the members to chair board meetings and serve as the company's legal representative.
• Executive Director: A board member appointed by the board to carry out the actual management of the company, ascending to the top of its executive hierarchy. The board defines his competencies and remuneration.
• Chief Executive Officer (CEO): The person appointed by the board to carry out all daily company operations, subject to the direct supervision of the Executive Director. The board defines his competencies, authorities, allowances, and signing powers on behalf of the company, and determines his monthly or annual salary.
• Executive Board Member: A board member who holds an executive position in the company.
• Non-Executive Board Member: A board member who does not hold an executive position in the company and does not receive a monthly or annual salary for board membership, except for what he receives as compensation. He is not allowed to provide any paid consulting or services to the company, its subsidiaries, or related parties.
• Independent Board Member: A non-executive board member who is not a shareholder and is appointed as an expert. His relationship with the company is limited to his board membership. This member does not represent the owner, has no material dealings with the company, and does not receive remuneration, commissions, or fees from it, except for his board membership compensation. He has no special interest in the company, nor is he related by blood or marriage to any shareholder, board member, or executive leadership up to the second degree. He was also not a senior employee, advisor, or external auditor of the company during the three years preceding his appointment to the board. His board membership as an independent member must not exceed six consecutive years as a maximum limit.
• Board Committees: Committees emanating from the board of directors, formed by the board from among its members to assist in accomplishing its tasks. The board defines their authorities and competencies and monitors their work to ensure the effectiveness of their role.
• Company Secretary: The person responsible for preparing and coordinating board and committee meetings, as well as general assembly meetings, recording and documenting meeting minutes, and following up on the implementation of decisions. He also acts as an advisor to all board members regarding governance applications, without conflicting with the role of other concerned departments.
• Investor Relations Management: A strategic management function combining financial science skills, effective communication, marketing, and knowledge of capital market laws to achieve effective two-way communication between the company and the investment community and interested parties, leading to a fair valuation of the security.
• Stakeholders: Anyone with interests related to the company, such as employees, customers, suppliers, distributors, creditors, and regulatory authorities.
• Insiders: Refers to senior company managers, board members, board members of related companies and their representatives, their spouses, and minor children, as well as anyone capable of obtaining or accessing any internal company information.
• Related Parties: Refers to anyone connected to the company directly or indirectly, enabling them to influence company decisions, whether through their positions in the company or related companies, or by owning a material percentage of shares in the company or related companies.
• Contracts of Exchange: Contracts concluded between the company and its board members or major shareholders, requiring general assembly approval before execution.
• Cumulative Voting: A voting method used in the general assembly of shareholders, allowing each shareholder a number of votes equal to the number of shares they own, enabling them to cast all votes for one candidate or distribute them among chosen candidates without repetition, providing a greater opportunity for minority shareholders to be represented on the board.
• Corporate Social and Environmental Responsibility: The company's continuous commitment to contributing to economic and social development, encouraging responsible work towards all stakeholders and the community in which it operates, and its impact on the surrounding environment.

Chapter Two: Main Pillars of Corporate Governance

1.0 Axis One: General Assembly of Shareholders

1.1.1 Formation of the General Assembly

The general assembly consists of all company shareholders, each according to their percentage of ownership. While the company's articles of association may stipulate that only shareholders owning a specific number of shares may attend general assembly meetings, such a provision should be considered an exception. It should only be used when the number of shareholders exceeds the company's capacity to provide a venue for the assembly, with the necessity of ensuring this right is not used as a means to ignore minority shareholders.

1.2.1 Attendance at the General Assembly

Shareholders should be encouraged and educated on the necessity of attending the company's general assembly meetings. Meeting dates and venues should be arranged to facilitate and encourage attendance. For companies with a large number of members, and in accordance with international best practices, the company may use electronic means and various communication systems to broadcast or record events for shareholders abroad or domestically. The company must facilitate shareholder attendance procedures while complying with the law and the company's articles of association regarding general assembly convocation and management procedures.

1.3.1 Conduct of General Assembly Meetings

A secretary and vote counters must be appointed from outside the general assembly and board of directors. The general assembly is managed in a manner that allows shareholders to express their opinions based on what is regulated by law and the articles of association, and in alignment with the assembly's agenda. Company management must fully and adequately disclose all topics included in the agenda.

Each item presented on the agenda of an ordinary or extraordinary general assembly must be accompanied by data and information enabling shareholders to make informed decisions. The purpose of providing this information must be to enable shareholders to make sound and considered decisions, not merely to fulfill formal meeting requirements. All inquiries from shareholders, whether sent before the meeting to be included in the agenda or requiring responses during the meeting, must be answered, with sufficient time allocated during the meeting for such responses.

1.4.1 Resolutions of the General Assembly

The "cumulative voting" method is preferred and should be stipulated in the company's articles of association to represent all shareholders when electing board members, ensuring the final result reflects the proportional representation of all shareholders. A brief resume of each candidate for board membership must be provided to shareholders upon invitation to elect the board.

Voting on general assembly resolutions must be recorded with extreme precision. In case of any dispute regarding the validity of votes on all or some resolutions presented to the general assembly, the votes shall be considered valid once and invalid once for subsequent presentation to the competent administrative or judicial authority, while general assembly procedures continue under all circumstances.

In accordance with prevailing laws and each company's articles of association, minority shareholders owning at least 2% of the company's issued capital have the right to request adding items to the general assembly agenda, as well as objecting to general assembly resolutions to the administrative authority, which in turn must halt resolutions issued in favor of the majority against the minority. Furthermore, shareholders representing 3% or more have the right to compel the company to convene a general assembly in the manner regulated by law to protect minority shareholders' rights.

The general assembly secretary drafts the meeting minutes, including all discussions, events, and decisions made during the meeting. The company must disclose the decisions taken and all material events to the public simultaneously. The company must also publish its general assembly meeting minutes on its website and make printed copies available whenever possible.

Companies listed on the stock exchange must notify the Egyptian Financial Regulatory Authority and the Egyptian Exchange of ordinary and extraordinary general assembly resolutions immediately upon conclusion, and at the latest before the start of the first trading session following the meeting, to ensure fair information availability for all.

In case of transactions with related groups and related parties, or concluding contracts of exchange, the board of directors must obtain prior approval from the general assembly for such transactions or contracts to avoid conflicts of interest, specifically with major shareholders, board members, insiders, or any other companies.