LEGAL VIEWPOINT: “Comply of Explain” – Certain Characteristics in Corporate Governance Codes By Dr AbdelGadir Warsama Ghalin, Legal Counsel, Bahrain

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Dr AbdelGadir Warsama Ghalib, Legal Counsel, Bahrain

The Corporate Governance Code, everywhere, is mainly intended to enhance company’s values and to protect investor’s rights and, at the same time, to attract foreign investments from multinational companies to the concerned country wherein proper corporate governance principles are appropriately in place and are rightly applicable.

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The Corporate Governance Code applies to all companies incorporated under the Commercial Companies Law and whose shares are listed in the Stock Exchanges (Borse). However, the Code can at the same time function as a model and reference framework for all other companies including the unlisted companies and, also, the foreign companies that are undertaking business in the country.

It would be very important to mention that the Code supplements The Company Law. However, it does not by all means replace the Company Law, but it is rather intended to further the laws’ objectives and to provide the necessary help in understanding, complying with, monitoring performance and ensuring fair disclosure under that law.

The Commercial Companies Law for example, mandates best practices as the Law includes the rules that govern The Board of Directors and shareholders’ meetings, fiduciary rules and duties, rules for company shares, rules for accounting and auditing, liquidation or insolvency of the company … etc. The Code, also, refers to many of such mentioned “rules” but it does not repeat or incorporate them all. The Code intends to highlight the main duties that are to be observed and carefully respected to achieve desired top-level corporate governance.

Based on this understanding, it would be advisable for all companies in each country to be familiar with both The Company Law, as well as, The Corporate Governance Code because they both work very closely together to achieve the same goals to the benefit of all.

In certain instances, the Code goes beyond The Company’s Law requirements in many cases. As a good example, the Code recommends that the Chairman of the Board of Directors and the CEO of the company should not be the same person and that at least 50% of the Board of Directors’ members should be non-executive directors. Those points are not clearly required by the law but are strong recommendations which should be considered carefully in evaluating the quality of the company’s corporate governance, and which the company should follow unless it has good reasons not to follow them and, at the same time, the company discloses those reasons under the “comply or explain” principle.

The “comply or explain” principle has been adopted by many countries and the flexibility it offers has been welcomed. The idea behind this principle is to avoid imposing rigid rules which exceed the law’s requirements, and which may not take account of the company’s specific circumstances such as the size and nature of its business, its shareholders structure, activities, or its exposure to risks and management structure. This approach recognizes that it is not desirable, considering the great diversity of companies, to impose formal and identical rules of organization and operation for all companies.

The Code states many principles are of essence and forming the existing pillars of good corporate governance. Each of the principles includes certain directives. These principles and directives are broad and all companies should follow them. There is no exception for non-compliance and explanation about the principles and related directives. All companies are expected to apply and “comply” the recommendations stated in the Code, or “explain” why they do not comply, taking into account their specific situation according to the merits of each case.

Disclosure and transparency are underlying and major principles for the Corporate Governance Code in all countries. Disclosure is crucial and is required to allow outside necessary monitoring to function effectively.

Based on this, the Code is looking to a combined monitoring system relying on the Board of Directors, the shareholders and official bodies including Ministries of Commerce, Central Banks, Stock Exchanges (Borse), The Courts and many professional firms as auditors, lawyers and investment advisors.  The Ministry of Commerce is, normally, the official government body vested with the required authority to administer The Company Law and the Code. The Ministry will actively exercise its monitoring and penalty powers under The Company Law. However, this power will be exercised closely with all other competent government authorities enumerated above.

The joint work of all competent official authorities is crucial to maintain proper framework for corporate governance in the country. Each company, therefore, shall endeavor to take the lead in this important corporate race.