Bahrain: Corporate Governance for Family Companies: Why it Should no Longer be an Option

Last Updated: 24 August 2010
Article by Clive Hopewell

Introduction

In a global context in the wake of the financial crisis there has been an increasing emphasis on Corporate Governance. In the Middle East there have been developments such as the introduction of the Bahrain Corporate Governance Code (the Bahraini Code). The Bahraini Code keeps the Middle East in line with European developments such as the publication last month by the Institute of Directors in London of "Corporate Governance Guidance and Principles for Unlisted Companies in Europe" (the Guidance) as an initiative of the European Confederation of Directors. The Guidance sets out best practice recommendations for unlisted companies, including start-ups, single owner-manager companies, family businesses, private equity-owned companies, joint ventures and subsidiary companies, as well as state-owned companies and social profit organisations.

The Bahraini Code was launched on the 16 March 2010 in an effort to improve Bahrain's business and investment environment. It is Bahrain's first corporate governance code and follows eight years of consultation with Bahrain's private sector leaders, government officials and local business associations. The development of the Bahraini Code represents Bahrain's increasing effort in the Gulf to become more competitive in the global market.

The Bahraini Code applies to all companies which are incorporated under the Bahraini Commercial Companies Law whose shares are listed under the Bahrain Stock Exchange. The Bahraini Code can also function as a model and reference framework for all other companies including unlisted Bahraini Companies and foreign companies doing business in Bahrain and it is highly recommended for that purpose. It is expected that the Bahraini Code will be extended to include such companies in the future with some modification.

It is accepted that most unlisted companies will not be concerned with corporate governance in the same way as listed entities i.e. transparency between the board and its external shareholders, although this will be important for the private equity owned companies, joint ventures and state owner/social profit organisation. Notwithstanding this, establishing a framework of company processes and governance can add value to the business of any unlisted company, help build its reputation and ensure its long term continuity.

Corporate Governance Principles

The Guidance sets out fourteen principles, nine of which are applicable to all unlisted companies and an additional five for larger and/or more complex unlisted companies. The principles that are applicable to all unlisted companies are set out below.

The Guidance, and the principles set out in it, are only applicable on a voluntary basis, so unlisted companies are left to decide which, if any, of the principles they want to apply. Some of the principles set out in the Guidance may well be incorporated into the Bahraini Code in the near future.

  • Shareholders should establish an appropriate constitutional and governance framework for the company.
  • Every company should strive to establish an effective board, which is collectively responsible for the long term success of the company, including the definition of the corporate strategy. However an interim step on the road to an effective (and independent) board may be the creation of an advisory board.
  • The size and composition of the board should reflect the scale and complexity of the company's activities.
  • The board should meet sufficiently regularly to discharge its duties, and be supplied in a timely manner with the appropriate information.
  • Levels of remuneration should be sufficient to attract, retain, and motivate executives and non-executives of the quality required to run the company successfully.
  • The board is responsible for risk oversight and should maintain a sound system of internal controls to safeguard shareholders' investment and the company's assets.
  • There should be a dialogue between the board and the shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. The board should not forget that all shareholders have to be treated equally.
  • All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.
  • Family controlled companies should establish family governance mechanisms that promote coordination and mutual understanding amongst family members, as well as organise a relationship between family governance and corporate governance.

The additional principles applicable to large and/or more complex unlisted companies:

  • There should be a clear division of responsibilities at the head of the company between the running of the board and the running of the company's business. No one individual should have unilateral powers of decision.
  • Board structures vary according to national regulatory requirements and business norms. However, all boards should contain directors with a sufficient mix of competencies and experiences. No single person (or small group of individuals) should dominate the board's decision-making.
  • The board should establish appropriate board committees in order to allow a more effective discharge of its duties.
  • The board should undertake a periodic appraisal of its own performance and that of each individual director.
  • The board should present a balanced and understandable assessment of the company's position and prospects for external stakeholders, and establish a suitable programme of stakeholder engagement.

Summary

As has been evident in the recent past in the Middle East region, the collapse of a private family business can have just as damaging implications for employment, investment and

Business confidence generally as would the collapse of a publicly quoted company. Yet the focus of laws and regulations is on public companies, as a consequence large economically-significant privately-held companies are facing, and will continue to face, a marked increase in scrutiny from politicians, regulators, shareholders, creditors and employees.

In the light of this, and the increasingly-accepted link between sound corporate governance and shareholder value, significant family-owned businesses should consider very carefully whether they are adhering to the principles underpinning this new Guidance and the new Bahraini Code. If they are not, it may be time for a dispassionate review of their governance arrangements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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