The Corporate
Governance
Initiative
Middle East Partnership Initiative
The Corporate Governance Initiative
White paper
Public Debate
CG committee
Corporate Governance Code
United States Department of Commerce
CLDP Commercial Law Development Program
What has been achieved…
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Established a Corporate Governance
Initiative together with the Central Bank
Invited position papers from audit and law
firms
Invited public response to a questionnaire
Developed posters for stakeholder use
Produced a series of booklets for Directors
Contracted InCite to complete and analyze
the market survey
What has been achieved…
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Formed a Steering Committee
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Conducted a Workshop for the Steering
Committee and support team
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Nearly all respondents believe that Bahrain
needs a standardized code
What has been achieved…
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A White Paper has been developed based on the
survey results
Steering Committee met to discuss White Paper
Responses were invited to the White Paper from
various interested groups
A Draft Code has been developed with the help
of United States Department of Commerce
Commercial Law Development Program (CLDP)
NEW BAHRAIN CORPORATE GOVERNANCE CODE – NUTS AND BOLTS
OF DRAFTING IT
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When work began on a Bahrain Corporate Governance Code it was
immediately discovered that the new Bahrain company law already had many
provisions which, in some countries, are contained in their CG Codes or in
separate stock exchange codes, private group codes, or individual companies’
codes.
For this reason the drafting of a new Code in Bahrain has been closely
coordinated with drafting of the company law. The two go together – with the
Code supplementing and adding to the rules in the company law.
The relationship, and some of the issues discussed, can be seen in the following
materials which begin at the fifth page following:
(1) a list of corporate governance provisions which are already in the new
Bahrain law,
(2) the table of contents of the current draft of the new Bahrain Corporate
Governance Code (a full draft is not yet ready), with notes indicating some of the
contents themselves, and
(3) a list of “major issues” which were discussed at the last meeting of the
Steering Committee for the new Code.
Provisions in the Law Relating to a
Corporate Governance Code…
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Every listed company must adopt and publish its
own corporate governance code. This is not
required for non-listed companies
The required contents for the code are fairly
detailed; also, they must be consistent with any
later-adopted national code
A public company must comply or explain
annually regarding its code
No formal mechanism for enforcement is
provided
Provisions in the Law Relating to the
Board of Directors
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The role of board vs. shareholders vs. officers is
detailed
Director compensation is subject to shareholder
approval
Shareholders may nominate board candidates
Three independent directors are required in
public companies – and “independent” is defined
in detail
Three-year maximum term for directors with no
limit on reelection
Provisions in the Law Relating to the
Board of Directors
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The Chairman may also be the CEO
Detailed procedures for meetings, notice, voting
Three board committees required: audit,
nominating and remuneration, with independent
director membership
Cumulative voting for board is specifically
permitted but not required
Provisions in the Law Relating to
Shareholder Meetings and Rights
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Certain listed actions may be decided only by
shareholders
AGM is required; its agenda must include director
election and remuneration, auditor approval,
financial
statement
review;
Corporate
Governance Code comply or explain review in
listed companies; others
10% of shareholder votes can call an
extraordinary shareholder meeting; a court or
the Ministry can also call one if the company
does not do so in response to the request
Provisions in the Law Relating to
Shareholder Meetings and Rights
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Detailed rules for notice, agenda, record date,
voting, secret ballot, quorum, proxies for all
meetings
5% of shareholder votes may propose two agenda
items for AGM
Certain major actions (charter amendment, increase
in authorized shares, etc). require 2/3 vote unless
charter reduces this to not less than a simple
majority
Provisions in the Law Relating to
Shares
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Two types: common and preferred
One share = one vote. Preferred voting is restricted
Shareholders must be registered
No bearer shares
Preemptive rights unless the company’s charter
provides otherwise
Options, warrants, bonds, convertibles, Islamic
securities and other securities are all specifically
permitted
Fiduciary Duties and Remedies
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The duties of care and loyalty, and the business
judgment rule, are stated in detail – similar to
US/UK case law
The duties apply to directors, officers, controlling
shareholders (in some cases), LLC managers, and
partners in all forms of company.
Disclosure of conflicts of interest is required
Fiduciary Duties and Remedies
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There are specific rules for approval/ratification of
conflict
transactions
by
disinterested
directors/shareholders/members; reporting of this
to shareholders is required in public company
Unapproved transactions may still be valid if they
are proven fair to the company, but the conflicted
person has burden of proof
Derivative litigation is permitted and the
procedures are detailed – similar to US/UK
Application of the proposed Code
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It is being proposed that the Code would be
applicable to all companies, both public and private
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The application will be on the basis of ‘comply or
explain’, similar to the UK model.
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Public listed and private joint stock companies
would be required to comply immediately on
adoption of the Code
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Private limited liability companies would be given a
a period of time to adapt, before the Code
becomes mandatory
(2) Table of Contents of the Current Working Draft of the Bahrain Corporate Governance Code
THE CORPORATE GOVERNANCE CODE
OF THE KINGDOM OF BAHRAIN
TABLE OF CONTENTS
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Note: material in italics below describes some (not all) of the “comply and explain” rules in the draft. It also describes a few of
the mandatory rules, which are marked and shown in brackets.
INTRODUCTION
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Purpose of this Code
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Companies to Which this Code Applies
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This Code and the Company Law
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The “Comply or Explain” Principle
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Monitoring and Enforcement of this Code
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Effective Date of this Code
CORPORATE GOVERNANCE PRINCIPLES
PRINCIPLE 1 THE COMPANY SHALL BE HEADED BY AN EFFECTIVE, COLLEGIAL AND INFORMED BOARD
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induction review with all new directors of the board’s role and responsibilities, with legal counsel
written appointment agreement for directors, with contents and responsibilities detailed
rules for notice, agenda and information sent to directors for board meetings
one director may not serve on more than three boards of public companies
at least 50% to be non-executive and at least three of those independent
if chairman not independent, have a lead director with stated powers
chair and CEO to be different
independent directors meet separately
in controlled companies: at least 1/3 independent plus rules for serving all shareholders’ interests
directors to seek independent legal advice when concerns
rules for regular contact with management
PRINCIPLE 2 THE DIRECTORS AND OFFICERS SHALL HAVE FULL LOYALTY TO
THE COMPANY
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formal procedures for disclosure, updating, and advance approval by disinterested directors
or shareholders of all conflict transactions.
PRINCIPLE 3 THE BOARD SHALL HAVE RIGOROUS CONTROLS FOR FINANCIAL
AUDIT, INTERNAL CONTROL AND COMPLIANCE WITH LAW
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audit committee to be all independent directors
all members to have financial qualifications
establish whistleblower procedures
[mandatory: CEO of CFO to certify certain financial statements]
PRINCIPLE 4 THE COMPANY SHALL HAVE RIGOROUS PROCEDURES FOR
APPOINTMENT, TRAINING AND EVALUATION OF THE BOARD
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nominating committee should also review the company’s corporate governance guidelines
and be called the “nominating and corporate governance committee”
[mandatory: rules for information to shareholders on director candidates]
[mandatory: rules for induction and then regular training of directors]
rules for the regular evaluation of the board and each committee – which itself is mandatory
PRINCIPLE 5 THE COMPANY SHALL REMUNERATE DIRECTORS AND OFFICERS FAIRLY AND
RESPONSIBLY
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remuneration committee to be all independent or non-exec with an independent chair
[mandatory: all director remuneration is subject to shareholder approval]
[mandatory: “remuneration” includes everything, cash or non-cash]
[mandatory: no stock options for directors]
[mandatory: officer remuneration should include performance-base incentives]
PRINCIPLE 6 THE BOARD SHALL ESTABLISH A CLEAR AND EFFICIENT MANAGEMENT
STRUCTURE
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[mandatory: rules for appointing, titling, and assigning responsibilities to officers including corporate
secretary]
rules for corporate secretary duties
rules for succession plan for the CEO both short-term (death) and long-term
PRINCIPLE 7 THE BOARD SHALL COMMUNICATE WITH SHAREHOLDERS AND ENCOURAGE
THEIR PARTICIPATION
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numerous rules for conducting shareholder meetings – notice, information, minutes, director and auditor
attendance, website [some mandatory]
rules for regular direct shareholder communication
PRINCIPLE 8 THE COMPANY SHALL DISCLOSE ITS CORPORATE GOVERNANCE
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[mandatory: numerous rules for “explain” and other disclosures to shareholders]
APPENDICES
Appendix A Independent Director
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meeting the formal rules in the law not enough – the board must also make a formal good faith finding of
independence after discussion
Appendix B Audit Committee
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states purposes -- membership and qualifications -- duties and responsibilities which include initial selection,
oversight, determination of independence, etc. of outside auditor – supervision etc. of internal audit function –
overseeing compliance with law, etc.
Appendix C Nominating/Corporate Governance Committee
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similar detail
Appendix D Remuneration Committee
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similar detail
TERMS USED IN THIS CODE
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Terms Already Used in the Company Law
CEO
Executive director
Nonexecutive director
Remuneration
[[[add others needed]]]
(3)
List of Major Issues Currently under Discussion
1. What companies are covered by the Code? The present draft is mandatory
only for stock-exchange listed companies; for others it is merely
“recommended.” Most other countries’ Codes are the same. Question: Should
the Bahrain Code be mandatory for all companies, large, small, LLC,
partnership, etc.? Is that practical, given the large number of unlisted
companies and the amount of detail in the Code that applies only to companies
with wide shareholding? (Small or closely-held companies could “comply or
explain” that the detailed Code provisions don’t apply to them. They could do
this in an annual filing with the MOIC.)
 Decision in November 2006: Apply only to listed companies now. Others to
come in “Wave 2.”
2. Enforcement. What happens if a company violates a mandatory principle in the
Code or does not “explain” why it does not follow a non-mandatory principle?
Note that the Code – unlike the company law itself – has many rules that are
not objectively measurable (examples: the company must have an “effective
and informed board” or must remunerate directors “fairly and responsibly”).
Following are some monitoring and enforcement devices – would they be
effective?:
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Monitoring by the board, particularly by its independent directors
Monitoring by shareholders, particularly larger and institutional shareholders
who should be encouraged to consider “explanations” and discuss with the
board if they do not accept the company’s position
The Ministry’s present powers of inspection and supervision – it can demand
information, attend board meetings, etc.
Issue a public reprimand letter or announcement of violation – this could
adversely affect a listed company and its stock price, but is less drastic than
suspension of trading or delisting
Give the Ministry and/or the courts specific power to issue “cease and desist”
orders that are enforceable in court
Expand the monetary penalties now in the company to cover Code violations
also
Lawsuits by shareholders against directors under the company law; lawsuits by
the Ministry or the BMA against the company
Add Code compliance to the stock exchange listing rules and provide for
suspension of trading or delisting of companies violating the Code
3.
What does “Explain” mean? Under the draft Code a company must
“comply or explain” why it does not or cannot comply. The new
company law requires a listed company to “explain” at its annual
shareholder meeting but does not require that this be in writing or be
posted on the website. On this point the company law should be
expanded. In some countries, companies publish detailed multi-page
explanations on their websites.
Questions:
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Should the Ministry review the companies’ explanations and decide if
they are adequate?
What detail should the law require for the explanation (annual report,
website, etc.) (note that the Code has some of this)
If the Code applies to unlisted companies, what method and detail
should it require?
Thanks……