Transcript Presentation title (32 pts)

Corporate Governance Code
and the Role of Regulators
Role of the Regulator
Best Practices
Implementation Process
David A. Brown, C.M., Q.C.
May 5, 2009
Bahrain
Overview
• Policy makers and thought leaders are turning
their attention to corporate governance issues
• For three reasons

Good governance works!

Investors expect good governance

Government social agendas
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Good Governance Works!
• Institutional investors recognize that good governance
contributes positively to corporate performance
 Example – Canadian Coalition for Good Governance –
41 pension funds holding $1.4 trillion assets of
Canadian public companies
 “good governance practices contribute to a
company’s ability to create value for its
shareholders”
 Corporate activist
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Investors Expect Good Governance
• Confidence in fairness has been shaken by recent
events

Corporate failures (Enron, etc)

Global financial crisis
• Perception that inadequate governance
contributed to the destruction of shareholder
values
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Government Social Agendas
• Governments seeking to foster economic
development

Create jobs

Create opportunities for wealth creation for
their populations
• Recognize advantages of a viable capital market

Good corporate governance a cornerstone
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Particularly Important for Bahrain
• Relative infancy of capital markets
• Historical and cultural background - survey
 Companies owned by families or closely held
 Boards reflect ownership structures
 More representative than strategic
• Boards must evolve to align more with structures in
developed markets
 Fulfill several functions including oversight of
management, strategy setting, risk management
• Assist establishment of a viable capital market
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Why is a Corporate Governance
Code Necessary?
• To compete for issuers and investors, must have
a viable capital market
• Issuers and investors must have confidence in the
integrity of the market
 Fair and efficient access for issuers
 Safe environment; level playing field for
investors
• Market reputation is critical
 Must be seen as a fair place for investors to
invest
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A Viable Capital Market
• Major determinant of a marketplace’s reputation for
fairness will be the principles by which listed companies
conduct themselves
• Compliance with a robust governance code is essential
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A Viable Capital Market
• Draft Bahrain Code captures the best practices that have
been developed since the failures of Enron, Parmalat, etc.
• Adapts internationally accepted principles to the
environment here in Bahrain
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A Viable Capital Market
• If the new Code is embraced and enforced by all
of the principal players, Bahrain will be a viable
competitor for investors and listings among
competing marketplaces
• There will be tangible improvements in the
businesses that adopt them
• Economic development will be enhanced
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Role of Regulators
• Pressure on regulators to provide marketplaces
with a competitive edge

From politicians
 Benefits

in fostering social change
From market participants
– burden with complying with
foreign regulations
 Convenience
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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
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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
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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
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Global Context
• Global pressures for governance reform
 Enron etc. collapses attributed, in part, to failures of
corporate governance
 Failure by boards of directors to provide
independent oversight of management
 Failure to ensure that external auditors provided
independent, objective review of financial reports
 Failure by companies to provide timely and accurate
information
 Rules and practices evolved to rectify these failures
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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
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Empowering the Board
• Enron and other failures exposed serious issues
about board effectiveness

Boards had been comprised of competent,
experienced people; some with high profiles

Yet, management wasn’t challenged

Necessary stewardship wasn’t provided
• No one was protecting the best interests of the
corporation and its investors
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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
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Empowering the Board
• Result

Public companies are recruiting
knowledgeable, independent directors

Legitimized conduct by directors
 Questioning,
 Holding

probing management
management accountable
Now widely accepted as part of board culture
• Draft Bahrain Code incorporates these best
practices
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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
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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”
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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
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Protection of Minority
Shareholders
• Regulators recognize the importance to markets
and economies of the entrepreneurial drive of
family groups and other controlling shareholders
• For the most part, interests of controlling
shareholders are aligned with the minority
• Corporate scandals exposed areas where
controlling shareholders can use their position to
advantage
• Need to find a proper balance
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Protection of Minority
Shareholders
• Responses to these issues vary depending on local
environment
 Universal requirement – all directors owe their duties
to the corporation and all of its shareholders
 All shareholders are equal
 In many countries there are further protections
 Nominees of controlling shareholders are not
classified as independent directors
 Dealings with controlling shareholders must be
approved by independent directors
• Draft Companies Law and Code adopt these provisions
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Compensation and Incentives
• Following Enron and other failures – recognized that
form of management compensation could create perverse
incentives
• Stock options seen as fostering short term outlooks
 Interests not aligned with shareholders
 Particularly when awarded to directors
 Share ownership better aligns interests with
shareholders
 Many companies require directors to own shares
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Compensation and Incentives
• Still, properly designed compensation plans can
be an effective tool for motivating management

Some forms of incentive plans are here to stay
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Compensation and Incentives
• Global response in the post-Enron period
 Governments generally reluctant to legislate the form
or amount of compensation
 Instead required compensation committees of the
boards
 All or a majority independent of management
 Required extensive public disclosure of management
compensation
 Amounts and components
 Factors considered in designing compensation
• Draft Bahrain Code adopts these approaches
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Compensation and Incentives
• Recent economic crisis has exposed instances of
compensation excesses

Particularly in some financial institutions

Incentivizing excessive risk-taking
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Compensation and Incentives
• Responses are still being formulated

In the U.S., caps are put on executive pay in
corporations receiving government monetary
support

“Say on pay” votes by shareholders
• Bahrain draft Company Law and Code require
shareholder approval of executive compensation
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Comply or Explain Approach
• Rationale

Alternative to US-based “rules” approach

Principles based, flexible

Allows companies to phase in, adapt to
specific circumstances
• Canada adopted a code and a comply or explain
approach in response to Sarbanes Oxley
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Comply or Explain Approach
• Properly administered, comply or explain can be
very effective
• Theory is that market forces will determine
whether a company is following appropriate
governance practices
• In Canada – market and peer pressure have
prompted uniformity of adoption of all aspects of
the code
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Comply or Explain Approach
• Success depends on effective, constant oversight by
regulators
 Failure to address disclosure items
 “Boilerplate” disclosure
• Guidance; assistance to help issuers make appropriate
disclosure
 available precedent
• After initial start up phase
 Regulators can issue public report highlighting
deficient areas of disclosure
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Comply or Explain Approach
• Targeted reviews of problem areas of disclosure
• Enforcement
 Require delinquent companies to republish correct
disclosure
 Fines, sanctions of directors and/or officers
 Delisting last resort
 punishes shareholders, not those responsible for the
failure
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Comply or Explain Approach
• Challenges

Be wary of relying on the stock exchange to
police disclosure

Possible confusion of responsibilities under the
Code
 Ministry

of Industry and Commerce (MOIC)
 Central
Bank of Bahrain (CBB)
 Bahrain
Stock Exchange (BSE)
Should be a single authoritative voice
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Summary
• Compliance with a robust governance code is
essential to a financial market’s reputation for
fairness
• Draft Bahrain Code captures best practices that
have been accepted by investors, listed
companies and regulators around the world
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Summary
• As regulators you play an important part in ensuring that
the Code is complied with
• If listed companies embrace the Code and you enforce it
 Bahrain will be a viable competitor for investors and
listings among competing financial markets
 There will be tangible improvements in the businesses
that adopt them
 Economic development will be enhanced
• Thank you
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Dialogue, Questions
• Dialogue
• Discussion
• Questions?
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Implementation Process
• Discussion of some of the provisions of the Code

Some issues to watch for
• Review and discussion of precedent materials
• Dialogue and discussion
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