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Location: Central Bank of Bahrain Volume 4—Investment Business > Part A > High Level Standards > HC High-Level Controls Module > HC-1 The Board
  • HC-1 The Board

    • HC-1.1 Principle

      • HC-1.1.1

        All Bahraini investment firm licenseesG must be headed by an effective, collegial and informed Board of Directors ('the Board').

        January 2011

    • HC-1.2 Role and Responsibilities

      • HC-1.2.1

        All directors must understand the Board's role and responsibilities under the Commercial Companies Law and any other laws or regulations that may govern their responsibilities from time to time. In particular:

        (a) The Board's role as distinct from the role of the shareholders (who elect the Board and whose interests the Board serves) and the role of officers (whom the Board appoints and oversees); and
        (b) The Board's fiduciary duties of care and loyalty to the investment firm licenseeG and the shareholders (see HC-2.1).
        January 2011

      • HC-1.2.2

        The Board's role and responsibilities include but are not limited to:

        (a) Approving and reviewing at least annually the overall business performance and strategy for the investment firm licenseeG ;
        (b) Reviewing regularly the implementation of the strategy and operational performance;
        (c) Causing financial statements to be prepared which accurately disclose the investment firm licensee'sG financial position;
        (d) Monitoring management performance;
        (e) Reviewing regularly the level of risk;
        (f) Approving and reviewing at least annually systems and controls framework (including policies and procedures);
        (g) Convening and preparing the agenda for shareholder meetings;
        (h) Monitoring conflicts of interest and preventing abusive related party transactions;
        (i) Assuring equitable treatment of shareholders including minority shareholders; and
        (j) Setting out clearly and reviewing on a regular basis who has authority to enter the licensee into contractual obligations.
        January 2011

      • HC-1.2.3

        With respect to Subparagraph HC-1.2.2(j), the Board should set a materiality threshold so that contractual obligations above this set threshold are regularly reported to the Board. In setting the materiality threshold, the Board will consider the financial impact the contractual obligation may have in relation to its capital.

        January 2011

      • HC-1.2.4

        The directors are responsible both individually and collectively for performing these responsibilities and must have sufficient expertise as a Board to understand the important issues relating to operation and control of the investment firm licenseeG . Although the Board may delegate certain functions to committees or management, it may not delegate its ultimate responsibility to ensure that an adequate, effective, comprehensive and transparent corporate governance framework is in place. This statement must be clearly communicated to Board members and senior managementG .

        January 2011

      • HC-1.2.5

        When a new director is inducted, the chairman of the Board, or the licensee's legal counsel or compliance officer, or other individual delegated by the chairman of the board, should review the Board's role and duties with that person, particularly covering legal and regulatory requirements and Module HC (see also HC-4.3.1).

        Amended: January 2012
        January 2011

      • HC-1.2.6

        The investment firm licenseeG should have a written appointment agreement with each director which recites the directors' powers and duties and other matters relating to his appointment including his term, the time commitment envisaged, the committee assignment if any, his remunerationG and expense reimbursement entitlement, and his access to independent professional advice when that is needed.

        January 2011

      • HC-1.2.7

        The Board should adopt a formal Board charter or other statement specifying matters which are reserved to it, which should include but need not be limited to the specific requirements and responsibilities of directors.

        January 2011

      • Additional Guidance

        • HC-1.2.8

          In assessing the licensee'sG strategic plans (see Paragraph HC-1.2.2), the CBB would expect the Board to address the licensee'sG current and future aspirations with respect to its position in the market place, its size, products, value and other key aspirations that would be considered important by investors. Furthermore, the Board should demonstrate that it is able to identify proactively and understand the significant risks that the licensee faces in achieving its business objectives. A description of the licensee'sG strategy should be included in the annual financial statements.

          January 2011

        • HC-1.2.9

          In assessing the management framework (see Paragraph HC-1.2.2), the CBB would expect the Board to have effective policies and processes in place for:

          (a) Ensuring a formal and transparent Board nomination process;
          (b) Appointing senior managersG , and ensuring that they have the necessary integrity, technical and managerial competence, and experience;
          (c) Overseeing succession planning, and minimizing undue reliance on key individuals;
          (d) Reviewing key senior managementG and Board remuneration packages and ensuring such packages are consistent with the corporate values and strategy of the licenseeG and encourage prudent risk taking;
          (e) Monitoring and evaluating management's performance in implementing agreed strategy and business plans, and ensuring appropriate resources are available; and
          (f) Approving budgets and reviewing performance against those budgets.
          January 2011

        • HC-1.2.10

          In assessing the systems and controls framework (see Paragraph HC-1.2.2), the CBB would expect the Board to be able to demonstrate that the licensee'sG operations, individually and collectively:

          (a) Are measured, monitored and controlled by appropriate, effective and prudent risk management systems commensurate with the scope of the licensee'sG activities. These should pro-actively identify as well as monitor risk. The systems should produce information on a timely basis, and in a form and quality appropriate to the needs of the different recipients;
          (b) Are supported by an appropriate control environment. The risk management and financial reporting functions must be independent of business lines and must be run by individuals not involved with the day-to-day running of the various business areas; and
          (c) Make effective use of the work of internal and external auditors.
          January 2011

    • HC-1.3 Composition

      • HC-1.3.1

        The Memorandum and Articles of Association of Bahraini investment firm licenseesG must adequately set out procedures for the appointment, removal and retirement of directorsG .

        January 2011

      • HC-1.3.2

        The Board should have no more than 15 members, and should regularly review its size and composition to ensure that it is small enough for efficient decision-making yet large enough to have members who can contribute from different specialties and viewpoints. The Board should recommend changes in Board size to the shareholders when a needed change requires amendment of the investment firm licensee'sG Memorandum of Association.

        Amended: October 2014
        January 2011

      • HC-1.3.3

        It is not expected that every Board member is proficient in all areas, but collectively the Board is expected to have the required expertise. CBB also expects Board members to undertake relevant training on a regular basis to help them fulfill their responsibilities as DirectorsG .

        January 2011

      • HC-1.3.4

        Potential non-executive directorsG should be made aware of their duties before their nomination, particularly as to the time commitment required. The Nominating Committee should regularly review the time commitment required from each non-executive directorG and should require each non-executive directorG to inform the Committee before he accepts any Board appointments to another company. One person should not hold more than three directorships in public companies in Bahrain with the provision that no conflict of interest may exist, and the Board should not propose the election or reelection of any director who does.

        January 2011

      • HC-1.3.5

        To fulfil its responsibilities outlined in Section HC-1.2, the Board of Bahraini investment firm licenseesG must periodically assess its composition and size and, where appropriate, reconstitute itself and its committees by selecting new directorsG to replace long-standing members or those members whose contributions to the licenseeG or its committees is not adequate.

        January 2011

      • HC-1.3.6

        To demonstrate compliance with Rule HC-1.3.5, the Board should be able to demonstrate that it regularly considers (e.g. every one or two years) the mix of executive, non-executive and independent non-executive DirectorsG , and skills and experience, that it requires. See also Paragraph HC-1.3.2.

        January 2011

      • HC-1.3.7

        A Board member may have a maximum of two Directorships of financial institutions inside Bahrain. However, two Directorships of investment firm licenseesG would not be permitted. Investment firm licenseesG may approach the CBB for exemption from this limit where the Directorships concern financial institutions within the same group.

        Amended: April 2013
        January 2011

      • HC-1.3.8

        The appointment of Board members is conditional on the approval of the CBB (See Section AU-1.2).

        January 2011

    • HC-1.4 Decision Making Process

      • HC-1.4.1

        The Board must be collegial and deliberative, to gain the benefit of each individual director's judgment and experience.

        January 2011

      • HC-1.4.2

        The chairman must take an active lead in promoting mutual trust, open discussion, constructive dissent and support for decisions after they have been made.

        January 2011

      • HC-1.4.3

        The Board must meet frequently but in no event less than four times a year. All directors must attend the meetings whenever possible and the directors must maintain informal communication between meetings.

        January 2011

      • HC-1.4.4

        Individual board members must attend at least 75% of all Board meetings in a given financial year to enable the Board to discharge its responsibilities effectively (see table below). Voting and attendance proxies for board meetings are prohibited at all times.

        Meetings per year 75% Attendance requirement
        4 3
        5 4
        6 5
        7 5
        8 6
        9 7
        10 8
        Amended: April 2011
        January 2011

      • HC-1.4.4A

        The absence of Board members at Board and committee meetings must be noted in the meeting minutes. In addition, Board attendance percentage must be reported during any general assembly meeting when Board members stand for re-election (e.g. Board member XYZ attended 95% of scheduled meetings this year).

        Added: April 2011

      • HC-1.4.4B

        In the event that a Board member has not attended at least 75% of Board meetings in any given financial year, the investment firm licenseeG must immediately notify the CBB indicating which member has failed to satisfy this requirement, his level of attendance and any mitigating circumstances affecting his non-attendance. The CBB shall then consider the matter and determine whether disciplinary action, including disqualification of that Board member pursuant to Article 65 of the CBB Law, is appropriate. Unless there are exceptional circumstances, it is likely that the CBB will take disciplinary action.

        Added: April 2011

      • HC-1.4.5

        To meet its obligations under Rule HC-1.4.3 above, the Board should meet preferably no less than four times per year. The CBB recommends that meetings should take place once every quarter to address the Board's responsibilities for management oversight and performance monitoring. Furthermore, Board rules should require members to step down if they are not actively participating in Board meetings. Board members are reminded that non attendance at board meetings does not absolve them of their responsibilities as directors. It is important that each individual director should allocate adequate time and effort to discharge his responsibilities. All Directors are expected to contribute actively to the work of the Board in order to discharge their responsibilities and should make every effort to attend board meetings where major issues are to be discussed. Investment firm licenseesG are encouraged to amend their Articles of Association to provide for telephonic and videoconference meetings. Participation in board meetings by means of video or telephone conferencing is regarded as attendance and may be recorded as such.

        Amended: April 2011
        January 2011

      • HC-1.4.6

        At least half the Board meetings of Bahraini investment firm licenseesG in any twelve-month period must be held in the Kingdom of Bahrain.

        January 2011

      • HC-1.4.7

        The chairman must ensure that all directors receive an agenda, minutes of prior meetings, and adequate background information in writing before each Board meeting and when necessary between meetings. All directors must receive the same Board information. At the same time, directors have a legal duty to inform themselves and they must ensure that they receive adequate and timely information and must study it carefully.

        January 2011

      • HC-1.4.8

        The Board must maintain adequate records of its meetings, such that key decisions and how they are arrived at can be traced.

        January 2011

    • HC-1.5 Independence of Judgment

      • HC-1.5.1

        The Board must ensure that it has sufficient non-executive and independent non-executive directorsG (in addition to its Chairman), in order to provide sufficient independent scrutiny of management.

        January 2011

      • HC-1.5.2

        In the case of a Bahraini investment firm licenseeG , which is part of an overseas group, where there is sufficient independent scrutiny of the operations of the firm on a group wide basis, the CBB will consider exempting the licensee from the independence requirements of Paragraph HC-1.5.1.

        January 2011

      • HC-1.5.3

        Every director must bring independent judgment to bear in decision-making. No individual or group of directors must dominate the Board's decision-making and no one individual should have unfettered powers of decision.

        January 2011

      • HC-1.5.4

        Executive directorsG must provide the Board with all relevant business and financial information within their cognizance, and must recognise that their role as a director is different from their role as an officer.

        January 2011

      • HC-1.5.5

        Non-executive directorsG should be fully independent of management and should constructively scrutinise and challenge management including the management performance of executive directorsG .

        January 2011

      • HC-1.5.6

        At least half of an investment firm licensee'sG Board should be non-executiveG directorsG and at least three of those persons should be independent directors.G (Note the exception for controlled companies in Paragraph HC-1.6.2 and for possible exemption under Paragraph HC-1.5.2).

        January 2011

      • HC-1.5.7

        The chairman of the Board should be an independent directorG so that there will be an appropriate balance of power and greater capacity of the Board for independent decision making.

        Amended: January 2012
        January 2011

      • HC-1.5.7A

        The chairman and/or deputy chairman must not be the same person as the CEO.

        Added: January 2012

      • HC-1.5.8

        The Board should review the independence of each director at least annually in light of interests disclosed by them. Each independent directorG shall provide the Board with all necessary and updated information for this purpose.

        January 2011

      • HC-1.5.9

        To facilitate free and open communication among independent directorsG , each Board meeting should be preceded or followed with a session at which only independent directorsG are present, except as may otherwise be determined by the independent directorsG themselves.

        January 2011

    • HC-1.6 Representation of all Shareholders

      • HC-1.6.1

        Each director must consider himself as representing all shareholders and must act accordingly. The Board must avoid having representatives of specific groups or interests within its membership and must not allow itself to become a battleground of vested interests. If the company has a controllerG (or a group of controllersG acting in concert), the latter must recognise its or their specific responsibility to the other shareholders, which is direct and is separate from that of the Board of directors.

        January 2011

      • HC-1.6.2

        In investment firm licenseesG with a controllerG , at least one-third of the Board must be independent directorsG . Minority shareholders must generally look to independent directors'G diligent regard for their interests, in preference to seeking specific representation on the Board.

        January 2011

      • HC-1.6.3

        In investment firm licenseesG with a controllerG , both controllers and other shareholders should be aware of controllers'G specific responsibilities regarding their duty of loyalty to the investment firm licenseeG and conflicts of interest (see Chapter HC-2) and also of rights that minority shareholders may have to elect specific directors under the Company Law or if the investment firm licenseeG has adopted cumulative voting for directors. The chairman of the board or other individual delegated by the chairman of the board should take the lead in explaining this with the help of company lawyers.

        Amended: January 2012
        January 2011

    • HC-1.7 Directors' Access to Independent Advice

      • HC-1.7.1

        The Board must ensure that individual directors have access to independent legal or other professional advice at the investment firm licensee'sG expense whenever they judge this necessary to discharge their responsibilities as directors and this must be in accordance with the investment firm licensee'sG policy approved by the Board.

        January 2011

      • HC-1.7.2

        Individual directors must also have access to the investment firm licensee'sG corporate secretary, who must have responsibility for reporting to the Board on Board procedures. Both the appointment and removal of the corporate secretary must be a matter for the Board as a whole, not for the CEO or any other officer.

        January 2011

      • HC-1.7.3

        Whenever a director has serious concerns which cannot be resolved concerning the running of the investment firm licenseeG or a proposed action, he should consider seeking independent advice and should ensure that the concerns are recorded in the Board minutes and that any dissent from a Board action is noted or delivered in writing.

        January 2011

      • HC-1.7.4

        Upon resignation, a non-executive directorG should provide a written statement to the chairman, for circulation to the Board, if he has any concerns such as those in Paragraph HC-1.7.3.

        January 2011

    • HC-1.8 Directors' Communication with Management

      • HC-1.8.1

        The Board must encourage participation by management regarding matters the Board is considering, and also by management members who by reason of responsibilities or succession, the CEO believes should have exposure to the directors.

        January 2011

      • HC-1.8.2

        Non-executive directorsG should have free access to the investment firm licensee'sG management beyond that provided in Board meetings. Such access should be through the Chairman of the Audit Committee or CEO. The Board should make this policy known to management to alleviate any management concerns about a director's authority in this regard.

        January 2011

    • HC-1.9 Committees of the Board

      • HC-1.9.1

        The Board must create specialised committees when and as such committees are needed. In addition to the Audit Committee described elsewhere in this Module, these may include an Executive Committee to review and make recommendations to the whole Board on company actions, or a Risk Committee to identify and minimise specific risks of the investment firm licensee'sG business.

        January 2011

      • HC-1.9.2

        The Board should establish a corporate governance committee of at least three independent members which should be responsible for developing and recommending changes from time to time in the investment firm licensee'sG corporate governance policy framework.

        Amended: January 2012
        January 2011

      • HC-1.9.3

        The Board or a committee may invite non-directors to participate in, but not vote at committee meetings so that the committee may gain the benefit of their advice and expertise in financial or other areas.

        January 2011

      • HC-1.9.4

        Committees must act only within their mandates and therefore the Board must not allow any committee to dominate or effectively replace the whole Board in its decision-making responsibility.

        January 2011

      • HC-1.9.5

        Committees may be combined provided that no conflict of interest might arise between the duties of such committees.

        Amended: July 2012
        January 2011

      • HC-1.9.6

        Every committee should have a formal written charter similar in form to the model charter which is set forth in Appendix A of this Module for the Audit Committee.

        January 2011

    • HC-1.10 Evaluation of the Board and Each Committee

      • HC-1.10.1

        At least annually the Board must conduct an evaluation of its performance and the performance of each committee and each individual director.

        Amended: January 2012
        January 2011

      • HC-1.10.2

        The evaluation process must include:

        (a) Assessing how the Board operates, especially in light of Chapter HC-1;
        (b) Evaluating the performance of each committee in light of its specific purposes and responsibilities, which shall include review of the self-evaluations undertaken by each committee;
        (c) Reviewing each director's work, his attendance at Board and committee meetings, and his constructive involvement in discussions and decision-making; and
        (d) Reviewing the Board's current composition against its desired composition with a view toward maintaining an appropriate balance of skills and experience and a view toward planned and progressive refreshing of the Board.
        January 2011

      • HC-1.10.3

        While the evaluation is a responsibility of the entire Board, it should be organised and assisted by an internal Board committee and, when appropriate, with the help of external experts.

        January 2011

      • HC-1.10.4

        The Board should report to the shareholders, at each annual shareholder meeting, that evaluations have been done.

        January 2011

    • HC-1.11 Annual Board Review and Certification

      • HC-1.11.1

        The Board must assess and document each year whether the internal corporate governance processes that it has implemented have successfully achieved their objectives, and consequently whether the Board has fulfilled its responsibilities for directing and monitoring the overall conduct of the licensee'sG affairs.

        January 2011

      • HC-1.11.2

        The results of the review referred to in Paragraph HC-1.11.1 must be summarised in a written certification, to be signed by all Board members, and sent to the CBB within 3 months of the financial year-end of the licenseeG . The Board must report any material deficiencies identified during the review, along with an action plan and timescales for their correction.

        Amended: October 2012
        January 2011

      • HC-1.11.3

        The Board certification comprises a prescribed standard statement, to be signed by all Board members, attached to which should be a summary of the steps the Board has taken in carrying out the review; a summary of the results of that review; and a summary action plan (with timescales) for addressing any identified material deficiencies.

        January 2011

      • HC-1.11.4

        The prescribed standard statement referred to in Paragraph HC-1.11.3 is as follows:

        "We, the Directors of [insert licensee name], do hereby confirm that we have undertaken the review required under Rule HC-1.11.1 of Volume 4 of the CBB Rulebook. The scope of this review was in accordance with the requirements specified in Paragraph HC-1.11.5 of Volume 4 of the CBB Rulebook.

        The summary results of this review, setting out (i) the actions taken to carry out this review; (ii) any material deficiencies identified as a result of the review; and (iii) an action plan and timescales for the correction of any such deficiencies (where appropriate), are attached.

        We understand that it is a breach of our licensing conditions to provide false or misleading information to the CBB, or to withhold material information that may reasonably be expected to be provided to the CBB.

        [signed and dated by all Board Directors]"

        January 2011

      • HC-1.11.5

        The Board's review should cover the following specific matters:

        (a) That the Board has reassessed the licensee'sG objectives and plans, and has reviewed the licensee'sG corporate strategy document;
        (b) That the Board has reassessed the licensee'sG overall risk profile, and its mapping of risks and the control environment put in place to meet those risks. The Board must comment whether the control environment remains effective and appropriate;
        (c) That the Board has assessed the licensee'sG internal controls, to confirm that these are based on established policies and procedures approved by the Board and provide reasonable assurance of the integrity and reliability of its financial records;
        (d) That the Board has assessed whether adherence to established internal limits and controls was continuously monitored;
        (e) That the Board has assessed that all new (or material changes to) significant policies, procedures and products introduced by the licenseeG since the last Board certification were appropriately reviewed and approved at the time;
        (f) That the Board has assessed that management and staff have complied with the licensee'sG corporate code of conduct (see Paragraph HC-2.2.4); and
        (g) That in the period under review, the Board had received and reviewed the external auditor's management letter within six months of the (previous) financial year end, together with comments on the letter and proposed actions, from the licensee'sG audit committee and senior management.
        January 2011

      • HC-1.11.6

        With respect to HC-1.11.5(g), a Director'sG certificate received (for example) no later than 31 March 2004, covering the year ending 31 December 2003, would need to certify that the management letter for the year ending 31 December 2002 was received and reviewed by the Board by 30 June 2003.

        January 2011

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