Transcript Presentation title (32 pts)

Corporate Governance
Code Kingdom of Bahrain
Sustaining a Viable Capital
Market
David A. Brown, C.M., Q.C.
May 4, 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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Good Governance Works!
• Governance is a factor in determining
credit ratings
• For example, Standard & Poors takes
into account a number of governance
factors when assessing the credit quality
of companies, including:
• Ownership and organizational structures
• Board of directors and senior management
• Transparency and disclosure
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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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Context for Bahrain
• Relative infancy of capital markets
• Survey Results: Historical and cultural
background
– Most 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
– Boards should fulfill several functions including
oversight of management, strategy setting, risk
management
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Creating a Viable Capital Market
• Viable capital markets must maintain
deep and liquid capital pools
– Motivated issuers
– Confident investors
• Issuers and investors must have
confidence in the integrity of the market
– Fair and efficient access for issuers
– Safe environment and level playing field for
investors
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A Viable Capital Market
• Capital can flow seamlessly across
borders around the globe
• Markets must compete to retain
domestic investors; attract foreign
investors
• Market reputation is critical
• To be viable, a marketplace must be
seen to be 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
• Basic objective of corporate governance principles is
protection of minority shareholders
• Especially important where businesses have traditionally
been controlled by governments or family groups
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A Viable Capital Market
• Draft Bahrain Code captures the best practices that
have been developed since the global failures of
Enron, Parmalat, etc.
• Code adapts internationally accepted principles to the
environment in Bahrain
• 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
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Global Context
• Useful to examine Bahrain 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
– Int’l 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
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Global Context
• During intervening years, rules and
practices have evolved and become
widely accepted that are designed to
rectify these deficiencies
• Marketplaces are judged by their
willingness to embrace these standards
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Core Principles of Bahrain Code
• Examine the principles of your draft
Code against the background of this
global evolution
– Empowering the board
– Role of the audit committee
– Protection of minority shareholders
– Compensation and incentives
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Empowering the Board
Problem: 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
• Best interests of the corporation and its
investors ignored
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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
– In many countries
• 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
• A strong board provides concrete results
– Public companies are recruiting knowledgeable,
independent directors
– Legitimized conduct by directors
• Questioning, probing management
• Holding management accountable
– Improved corporate performance
– Now widely accepted as part of board culture
• Bahrain Draft Companies Law and Code
incorporate these best practices
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Role of the Audit Committee
Problem:
• External auditors had become too aligned with
management
• Audit not a reliable independent, professional
review of management’s financial statements
• Requires a knowledgeable body, independent of
management, to direct external auditors
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Role of the Audit Committee
Global response
– Mandate and empower an audit committee of
the board
– Independent of management and 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 when controlling
shareholders 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
• 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
Problem:
• Realization that the form of management
compensation could create perverse
incentives
• Stock options seen as fostering short term
outlooks
– Interests not aligned with shareholder
• Particularly when awarded to directors
– Share ownership better aligns interests
with shareholders
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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
• Still, properly designed compensation
plans can be an effective tool for
motivating management
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Compensation and Incentives
• Global response
– 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
• 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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Summary
• Good governance works!
• Compliance with a robust governance
code
– Improves corporate performance
– Essential to a financial market’s reputation for
fairness
• Draft Bahrain Companies Law and Code
capture best practices that have been
accepted by investors, listed companies
and regulators around the world
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Summary
If listed companies, shareholders and
regulators embrace and enforce the Code,
Bahrain will be a viable competitor for
investors and listings among competing
financial markets
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Questions
• Questions?
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