Bahrain issues new corporate governance rules
Manama, November 14, 2010
The Central Bank of Bahrain (CBB) has issued the new requirements incorporating the corporate governance code of the Kingdom in line with the code issued earlier this year by the Ministry of Industry and Commerce.
The new rules issued last month for banks include both the new corporate governance code requirements (formally announced, the existing CBB requirements and new Board attendance rules).
The new rules incorporate the nine fundamental principles of corporate governance stipulated in the code for financial institutions, their boards and management to follow, said a CBB statement.
As Islamic finance is considered an increasingly important market segment, one of the principles of the code is targeting Islamic institutions in relation to the implementation of Islamic Shari'a principles, the statement added.
The CBB corporate governance rules focus on the Board’s roles and responsibilities, the decision-making process and independence of judgment.
The CBB rules clearly state that the Board’s role and responsibilities should include:
•Monitoring the overall business performance and strategy for the bank;
•Causing financial statements to be prepared which accurately disclose the bank’s financial position;
•Monitoring conflicts of interest and preventing abusive related party transactions; and
•Assuring equitable treatment of shareholders including minority shareholders.
The review of the strategy process requires the Board to review the bank’s business plans and the inherent level of risk in these plans as well as assess the adequacy of capital to support the business risks of the bank.
The CBB rules stipulate that independence of judgment necessitates stringent requirements on non-executive directors who must be fully independent and must constructively scrutinize and challenge senior management and executive directors.
Being a single regulator for all listed and unlisted financial institutions, the CBB will issue similar requirements for insurance companies, investment firms & BSE Listed companies in the near future.
“The purpose of these new rules is to establish best-practice corporate governance principles in the Kingdom and provide protection for depositors, investors and other stakeholders through compliance with those principles,” said Khalid Hamad, executive director of Banking Supervision.
“International experience and research have proven that good corporate governance attracts investment, protects investors and other stakeholders, and enhances a company’s value.”
The new rules include more detailed requirements on the role of the Board and their committees in establishing clear and efficient management structure which aims at achieving optimum assurance of rigorous controls of critical functions such as financial audit, compliance and internal control.
The rules also cover detailed requirements for audit, remuneration and nominating committees recognising the essential roles of these committees in ensuring that the bank maintains high standards of corporate governance.
"Rules on avoidance of conflict of interest have been strengthened, detailing the expectations of the CBB whereby directors and senior managers must not enter into competition with the bank; not demand or accept substantial gifts from the bank for himself or his associates; not misuse the bank’s assets nor use privileged information or take advantage of business opportunities to which the bank is entitled, for himself or his associates."
"Furthermore, directors and senior managers must absent themselves from any discussions or decision-making that involves a subject where they are incapable of providing objective advice, or which involves a subject or transaction where a conflict of interest exists," it added.
One of the fundamental new requirements played by the board is its critical role in disclosing the bank’s corporate governance to the public and to its shareholders. In line with international best practices and the code, the CBB rules dealing with disclosure on corporate governance have been enhanced.
As part of the rules dealing with the board’s decision making process, individual board members must attend 75 per cent of all board meetings in a given financial year. Voting and attendance proxies for board meetings are now prohibited at all times.
The new rules will become fully effective from January 1, 2011 in line with the implementation date of the Code, the CBB said.
The CBB has asked all banks to make a detailed assessment of their work in order to comply with the new code and send it to them by December 1.-TradeArabia News Service