The corporate governance code of Bahrain (the Code) aims to bring international corporate governance standards to public companies, and in particular financial institutions, incorporated under the Bahrain Commercial Companies Law (the Companies Law). The Code came into effect on January 1, 2011, with full compliance required by public companies by the end of 2011. Subject to the appropriate modifications being made, it is expected that application of the Code will eventually also extend to non-public companies in Bahrain. The Companies Law already implements several corporate governance standards that the Code seeks to supplement and expand on. In this regard, it should be noted that the Code is not a stand-alone law and should be read in conjunction with the Companies Law. Among the eight corporate governance principles addressed in the Code are those relating to board and director duties, remuneration for directors and officers, internal financial controls, management structure of the board and the board’s communication with shareholders.
All eight principles, outlined briefly below, contain requirements for bringing listed companies into compliance with the Code. The Code further contains a few recommendations that, although not required by law, are reflective of best governance practices and strongly encouraged.
In addition to the requirements imposed by the Companies Law, the rules imposed by the Code stipulate for the following, without limitation.
- Collaborative decision-making, achieved through open communication and frequent board meetings. The Code recommends that board size be reviewed to ensure efficient decision-making and that potential non-executive directors be adequately informed as to the time commitments required in connection with membership on the board. The purpose of this measure is to ensure that individuals do not commit to more than three directorships in public companies.
- Independence of director judgment so that no individual or group of directors dominates the decision-making. The Code recommends that at least half of the board be composed of non-executive directors, three of which shall be independent, and that the chairman of the board be an independent director, with a different individual filling the chief executive officer role, so as to ensure appropriate balance of power. The Code further recommends reviewing the independence of each director at least every year and setting aside time for an executive session at each board meeting, to be attended only by independent directors.
- The board’s representation of all shareholders, such that in companies with a controlling shareholder, at least one-third of the board be composed of independent directors.
- Directors’ access to independent advice and communication with managers and the creation of specialized board committees when needed.
- The loyalty of directors and their responsibility to avoid personal or business conflicts of interest. In this regard, the Code recommends that the board establish formal procedures for periodic disclosure and updating of director conflicts of interest and advance approval by disinterested directors or shareholders in accordance with the Companies Law.
- The board’s establishment of an audit committee, in accordance with the Companies Law. The Code further recommends that such audit committee include only independent directors and that its members possess certain minimum financial literacy qualifications.
- The board’s establishment of a nominating and corporate governance committee composed of only independent or non-executive directors, the majority of whom are independent, to identify potential board members or officers and make recommendations to the board. The Code recommends that such committee also be responsible for developing and recommending changes to the company’s corporate governance policies.
- The board’s conduct of performance evaluations for the board, each committee and each individual director, on at least an annual basis.
- The board’s adoption of bylaws prescribing the title, authorities and duties of each officer. The board is also recommended to set limits on the authority of officers and review and concur on a succession plan on an annual basis.
- The conduct of shareholder meetings in accordance with advance notice, voting, conduct and recording requirements. The Code further recommends that all directors (including chairs of the audit, remuneration and nominating and corporate governance committees) and the company’s outside auditor attend, and be available to answer questions at, shareholder meetings.
- The continuing personal contact on the part of the chairman of the board with major shareholders, in order to understand and communicate their views to the board.
- The delivery of the report of the company to shareholders in writing at the annual shareholder meeting (as required under the Companies Law) and the posting of such report on the company website.
The Code recommends that its provisions be incorporated into the adopted corporate governance policies of companies.
While the Code seeks to largely standardize corporate governance in Bahrain, it nonetheless affords companies a certain degree of flexibility to tailor their own unique corporate governance structures around the principles and recommendations contained in it. While companies are required to issue a statement confirming their compliance with the Code, they are also permitted to explain and justify any variations from its provisions.