In recent years, corporate governance has become an important focus for both regulators and investors worldwide. Following the financial crisis, good corporate governance serves a number of key public policy objectives–especially for emerging markets like Bahrain–by contributing to:

  • sustainable economic development;
  • enhancing company performance;
  • increasing investor confidence; and
  • encouraging foreign direct investment.

Bahrain has taken the initiative to codify corporate governance principles mirroring the “OECD Principles of Corporate Governance” in its new Corporate Governance Code (CG Code). The CG Code was launched by the Ministry of Industry and Commerce and the Central Bank of Bahrain (CBB) and became effective from 1 January 2011.

Although the CG Code only covers joint stock companies incorporated in Bahrain and publicly listed on the Bahrain Stock Exchange, the intention is for it to be a model for all other Bahraini companies. The CBB Rulebook has recently incorporated the principles of the CG Code, which now applies to CBB licensees, including banks, securities companies and privately incorporated financial institutions.

Features of the Code

The CG Code consists of nine fundamental principles:

  • The company shall be headed by an effective, collegiate and informed board.
  • The directors and officers have to be loyal to the company.
  • The board shall have rigorous controls for financial audit, internal controls and compliance with law.
  • The company shall have rigorous procedures for appointment, training and evaluation of the board.
  • The company shall remunerate directors and officers fairly and responsibly.
  • The board shall establish a clear and efficient management structure.
  • The board shall communicate with shareholders and encourage their participation.
  • The company shall disclose its corporate governance.
  • Companies which refer to themselves as “Islamic” must follow the principles of Islamic Shari’ah.

The principles are supported by directives. Both principles and directives must be complied with but are broadly drafted to enable companies with unique business structures to comply. Most directives are supplemented by recommendations that, while not compulsory, must be explained in the event of non-compliance. Many countries have adopted this “comply or explain” approach as it offers flexibility when applying uniform rules to a range of companies of different sizes, structures, business, activities and exposures to risk.

The CG Code supplements the existing principles of corporate governance contained within Bahrain’s legislative framework, such as providing further guidance on the Companies Law's provisions on board and shareholder meetings, directors’ and officers’ fiduciary duties and the appointment and remuneration of directors.

The CG Code includes other noteworthy features listed here:

  • Companies must adopt written corporate governance guidelines covering the CG Code’s core principles, publish their guidelines on their websites (if any), report annually to their shareholders on their compliance with those guidelines and explain non-compliance to their shareholders.
  • It recommends that boards review the independence of each director at least once a year and that the chairman of the board should be an independent director. The chairman should not also be the chief executive officer.
  • At least 50 per cent of the board of directors should be non-executive directors. At least three of those persons should be independent directors. Companies with a controlling shareholder should have at least one-third of the board constituted by independent directors.
  • A company should establish audit, remuneration and nominating committees, among other specialised committees. The decision of these committees must be re-examined and approved by the entire board and are not to replace the board’s decision-making powers and responsibilities.
  • The remuneration committee should make recommendations and obtain shareholder approval for remuneration policies for board members to ensure that remuneration is linked to their performance.
  • One person cannot hold more than three directorships in Bahraini public companies and the board should not propose the election (or re-election) of any director who does.
  • Each new director must undertake a formal and tailored induction. Existing board members should be trained on a regular basis throughout their board term to help them fulfil their responsibilities.
  • Companies who refer to themselves as “Islamic” must establish a Shari’ah supervisory board with at least three Shari’ah scholars, to ensure compliance with Shari’ah principles.

CBB Implementation of CG Code Principles

The CBB has recently issued revised High-Level Controls Modules (CBB HC Modules) in Volumes 1 and 2 (covering conventional and Islamic bank licensees), Volume 3 (covering insurance licensees) and Volume 4 (covering investment firm licensees) of the CBB Rulebook. The CBB HC Modules set out best practice corporate governance rules and guidelines for the those licensees (Licensees) following the structure of the CG Code. Directives under the CG Code are rules for the purposes of the CBB HC Modules. Recommendations under the CG Code have been included as guidance. The CBB HC Modules were effective on 1 January 2011 and Licensees have until the end of the 2011 financial year to comply.

The CBB HC Modules have the following new features.

  • A Licensee’s board must have no more than 15 members, and must periodically review its size and composition to ensure that:
    • it is small enough for efficient decision-making yet large enough to have members who can contribute from different specialities and viewpoints; and
    • at all times  the board consists of a healthy mix of executive, non-executive and independent non-executive directors.
  • In accordance with the CG Code, the CBB recommends that at least half of a Licensee’s board should be non-executive directors and at least three should be independent directors. However, in the case of a Licensee that is part of an overseas group, where there is sufficient independent scrutiny of the operations of the Licensee on a group-wide basis, the CBB will consider exempting the Licensee from these requirements.
  • A board member can have a maximum of two directorships of financial institutions inside Bahrain (but not within the same category), subject to CBB exemption.
  • Individual board members must attend at least 75 per cent of all board meetings in a financial year to enable the board to discharge its responsibilities effectively. No proxies for attendance or voting are permitted. At least half the board meetings in any 12-month period must be held in the Kingdom of Bahrain.
  • A Licensee should maintain a website that sets out shareholders’ rights to participate and vote at shareholders’ meetings and provide all shareholder documents. The Licensee may also consider establishing an electronic means for shareholders' communications, including appointment of proxies and controlled access for confidential information. The CBB is in the process of developing a new framework under Volume 6 (covering the regulation and supervision of Bahrain's capital markets) to govern corporate governance with respect to capital market service providers. A consultation paper was circulated in April 2011 seeking comments.


The introduction of the CG Code marks a very important development for businesses in Bahrain. It is in line with the key objectives of the Economic Development Board’s “Economic Vision 2030”, which aims at achieving a sustainable, competitive and fair marketplace in Bahrain.

The question that remains is how many of the small and medium-sized enterprises, which make up almost 80 per cent of the businesses in Bahrain (a significant part of which are family-owned), will voluntarily adopt the CG Code principles. In light of the increasing importance of sound corporate governance to attracting investors and outside capital to Bahrain, it may be only a question of time before the CG Code is compulsory for all companies in Bahrain.