Corporate Governance

1. Definition

Corporate governance refers to the systems, principles and processes through which companies are directed and controlled. In many jurisdictions, corporate governance framework often arises not from legislation, but from soft law. Soft law reflects the guidelines and principles that are not binding but widely followed due to the regulatory expectations or market pressure. In Bahrain, the Corporate Governance Code (the "Code") was first introduced by the Minister of Industry and Commerce in Resolution No. 19/2018 and later amended through Ministerial Resolution No. 91/2022. The Code applies primarily to joint-stock companies (both public and private). It operates on a "comply or explain" basis wherein companies must either follow the outlined provisions in the Code or justify deviations. Despite being non-binding, the Code's principles influence judicial assessments, regulatory scrutiny and boardroom behaviour, effectively turning best practices into functional norms within Bahrain's corporate sector. The Code expressly defined corporate governance as "a method to lead, guide and control the company's business including the regulation of various relationships between the board of directors, executives and shareholders".

2. Legal framework

The Code's primary aim is to bridge the regulatory gap left by Decree Law No. 21/2001 in respect to Commercial Companies Law ("CCL"). It introduces best-practice rules aligned with international standards focusing on various core principles aimed at ensuring accountability and ethical leadership in joint-stock companies. The Code derives its statutory authority from the CCL, particularly Article 362, which serves as the principal enforcement mechanism for breaches of mandatory corporate governance requirements. Article 362 bis authorizes the Ministry to impose a range of administrative penalties for non-compliance, including warnings, fines and business suspensions without prejudice to any civil or criminal liability that may arise in parallel.

Key principles of the Code include:

1. Board Composition: The board is required to comprise a balanced mix of executive, non-executive and independent directors. Notably, at least one female board member is not required for listed companies, reflecting Bahrain's commitment to diversity and inclusion.
2. Conflict of Interest: directors and key officers are expected to avoid conflicts and disclose personal interests. The Code goes further than the statute by applying conflict-of-interest rules to non-board officers requiring recusal from related decisions.
3. Audit and Oversight: an audit committee led by an independent chair and comprising at least three members is required. Closed joint-stock companies now have the option to appoint external participants if independent directors are not available.
4. Record-Keeping: companies must retain corporate records including but not limited to board minutes, financial disclosures and internal policies for a minimum of 10 years. These must be accessible to shareholders and regulators upon request.
5. Corporate Governance Reporting: companies must submit annual governance reports detailing compliance and providing a map of policies, board structure, committee functions and related party transactions.
6. Remuneration and Performance Alignment: compensation for directors and executives should be fair and linked to the company's performance. Annual disclosure of total benefits is required.
7. Shareholder Rights and Participation: companies must facilitate electronic participation and voting including relevant technological means to engage remote or minority shareholders.
8. Sharia Governance (When Applicable): companies subject to Sharia law must maintain relevant oversight mechanisms such as a Sharia supervisory board.

3. Judicial References and Influence

There is increasing evidence that the Court of Cassation and lower courts are engaging more directly with governance principles, particularly in cases where statutory provisions are unclear or absent. In corporate disputes involving director conduct, minority shareholder rights, or disclosure failures, courts have referred to governance standards even when the provisions of the Code are not explicitly cited. For instance, judges have scrutinized the lack of board independence or inadequate disclosure as indicators of misconduct or abuse of control, aligning with the Code's vision.

4. Practical implications

Although the Code is formally non-binding, in practice it is no longer optional in any meaningful sense. Compliance is effectively mandatory due to regulatory and judicial expectations. Failure to comply can result in regulatory penalties under Article 362 of CCL, including but not limited to warnings, fines, suspension of activities, or public censure. For legal advisors, the Code now serves as a key compliance benchmark. Lawyers must ensure that board procedures, reporting practices and internal policies are aligned with the Code requirements. Failure to do so may expose companies and their directors to increased liability. Directors and officers are also exposed to greater scrutiny, as courts are increasingly interpreting fiduciary duties in light of governance expectations that extend beyond statutory text. As a result, the Code is actively reshaping internal compliance programs. Companies must not only adopt policies that reflect its standards but also ensure those policies are properly documented, monitored and available for regulatory or judicial review when needed.

5. Concluding Remarks

The development of the Code illustrates a broader shift in how corporate responsibility is defined and enforced. Though it began as soft law, the Code has gradually evolved into a quasi-legal framework. This transformation reflects a changing corporate landscape where legal obligations are no longer confined to statutes. Instead, principles and ethical norms are now actively shaping decisions in boardrooms and influencing judicial outcomes. For Bahraini joint-stock companies, adherence to the Code is not merely a compliance exercise, it represents a commitment to credibility, responsible leadership and effective risk management in a more demanding regulatory environment.

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.