1. Corporate Governance Code Kingdom of Bahrain David A. Brown, C.M., Q.C. May 4, 2009 Bahrain Sustaining a Viable Capital Market

2. 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 2

3. 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 3

4. 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 4

5. 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 5

6. 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 6

7. 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 7

8. 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 8

9. 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 9

10. 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 10

11. 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 11

12. 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 12

13. 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 13

14. 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 14

15. 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 15

16. 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 16

17. 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 17

18. 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 18

19. 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 19

20. 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” 20

21. 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 21

22. 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 22

23. 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 23

24. 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 24

25. 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 25

26. 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 26

27. 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 27

28. 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 28

29. 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 29

30. Questions Questions? 30