Role of Regulators

• Pressure on regulators to provide marketplaces with a competitive

edge From politicians
• Benefits in fostering social change From market participants
• Convenience – burden with complying with foreign regulations
Role of Regulators Difficult role for
regulators
• Very least – ensure regulatory systems not a drag
• Probably pressured to go further – create a favourable regulatory
climate
• Not an impossible job Effective regulation and competitive markets
have common roots
• Both require fair treatment of investors
 Role of Regulators Must have investors
who want to invest
• Climate in which investors confident of protection against fraud, manipulation,
unfairness
• Wide choice of listed companies
• Must have listed companies
• Efficient and fair marketplaces
• Will be attracted by presence of investors
• Not if rules designed to attract investors place unreasonably high regulatory burdens
• Need an environment attractive to both sides
• Real challenge is to maintain a proper balance
 Global Context

• Useful to examine your draft Code in the context of global corporate

governance developments
• Explain why some principles evolved
• Discuss objectives sought to be achieved
• Underscore the desirability of implementing and enforcing the Code
• Core Principles of Bahrain Code
Examine the principles of your draft Code against the background of
this global evolution
• Focus on four key areas
• Empowering the board
• Role of the audit committee
• Protection of minority shareholders
• Compensation and incentives
 Empowering the Board

• Enron and other failures exposed serious issues about board

effectiveness
• Boards had been comprised of competent, experienced people,some
with high profilesYet, management wasn’t challenged
• Necessary stewardship wasn’t provided
• No one was protecting the best interests of the corporation and its
investors
Empowering the Board

• Empowering the Board Global response to board shortcomings

Require some degree of board independence from management
• Clearly articulate the board’s accountabilities, duties of loyalty
• Many countries have gone further separate the roles of the chair of
the board and the CEO
• Require CEO and CFO certification of financial statements
• Empowering the Board Result
Public companies are recruiting knowledgeable, independent
directors
• Legitimized conduct by directors
• Questioning, probing management
• Holding management accountable
• Now widely accepted as part of board culture Draft Bahrain Code
incorporates these best practices
• Role of the Audit Committee
External auditors had become too aligned with management
• Audit not a reliable independent, professional review of management’s
financial statements
• Auditors looked to management as their client
• Required a knowledgeable body, independent of management, to direct
external auditors
• Role of the Audit Committee
Global response was to mandate and empower an audit committee of
the board
• Independent of management Members
• financially literate Audit committee rather than management would
become the external auditor’s “client”
• Role of the Audit Committee
Result Audit committees are part of virtually every public company
• External and internal auditors report to the audit committee
• Boards are now allocating additional responsibilities to the audit committee
• Danger that they will become over burdened
• Draft Companies Law and Code mandate and empower an audit committee
• Protection of Minority Shareholders
Regulators recognize the importance to markets and economies of the entrepreneurial drive
of family groups and other controlling shareholdersFor the most part, interests of controlling
shareholders are aligned with the minorityCorporate scandals exposed areas where
controlling shareholders can use their position to advantageNeed to find a proper balance

• Protection of Minority Shareholders

Responses to these issues vary depending on local environmentUniversal requirement – all
directors owe their duties to the corporation and all of its shareholdersAll shareholders are
equalIn many countries there are further protectionsNominees of controlling shareholders
are not classified as independent directorsDealings with controlling shareholders must be
approved by independent directorsDraft Companies Law and Code adopt these provisions
• Compensation and Incentives
Recent economic crisis has exposed instances of compensation
excessesParticularly in some financial institutionsIncentivizing excessive
risk-taking

•  Compensation and Incentives

Responses are still being formulatedIn the U.S., caps are put on
executive pay in corporations receiving government monetary
support“Say on pay” votes by shareholdersBahrain draft Company Law
and Code require shareholder approval of executive compensation