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  • HC-1.3 HC-1.3 Board Composition and The Role of Committee

    • Board Composition & Frequency of Meetings

      • HC-1.3.1

        To fulfil its responsibility for the review of the systems and controls framework (HC-1.2.3 c), the Board must periodically assess its composition and size and, where appropriate, reconstitute itself and its committees by selecting new Directors to replace long-standing members or those members whose contribution to the bank or its committees (such as the audit committee) is not adequate.

      • HC-1.3.2

        No Board member may have more than one directorship of a Full Commercial Bank and an Offshore Banking Unit or Investment Bank. This would mean an effective cap of a maximum of two directorships of financial institutions inside Bahrain. Two directorships of licensees within the same category (e.g. "OBU") would not be permitted. Banks may approach the Agency for exemption from this limit where the directorships concern banks or financial institutions within the same group.

      • HC-1.3.3

        The Board must meet sufficiently often to enable it to discharge its responsibilities effectively, taking into account the bank's scale and complexity. The full Board should meet preferably no less than four times per year. The Agency recommends that meetings should take place once every quarter to address the Board's responsibilities for management oversight and performance monitoring.

      • HC-1.3.4

        Board rules should require members to step down if they are not actively participating in Board meetings.

    • Independent and Non-Executive Directors

      • HC-1.3.5

        Where there is the potential for conflict of interest, or there is a need for impartiality, the Board must assign a sufficient number of independent non-executive Board members capable of exercising independent judgment. The Board should outline its criteria and materiality thresholds in the annual report for the definition of "independence". The Directors should be identified in the annual report as executive, non-executive, and independent non-executive, as follows:

        a) Executive Director (or "Managing Director" under the Commercial Companies Law "CCL") — A person who is involved in the day-to-day management and/or is in full-time employment of the bank and/or any of its affiliates or subsidiaries or parent companies. An executive Director may not occupy the post of "Chairman";
        b) Non-Executive Director — A person not involved in the day-to-day management and/or is not a full-time salaried employee of the bank and/or any of its affiliates, or subsidiaries or parent companies; and
        c) Independent Non-Executive Director — A non-executive Director (as defined above), who also:
        • Is not a "controller" of the bank (see Section HC-2.1).
        • Is not an Associate (see paragraph HC-2.1.4 (g)) of a Director or a member of senior management of the bank.
        • Is not a professional advisor to the bank or group (A partner or member of senior management of an accountancy or law firm that provides services to the bank would not be perceived by the Agency as an independent non-executive Director).
        • Is not a large depositor with, or large borrower from the bank (i.e. whose deposits or credit facilities exceed 10% of the capital base of the bank).
        • Has no significant contractual or business relationship with the bank or group which could be seen to materially interfere with the person's capacity to act in an independent manner.

      • HC-1.3.6

        Independent non-executive Directors should be permitted to meet periodically (for example at separate meetings from the main Board) without executive management present.

    • Checks and Balances

      • HC-1.3.7

        To ensure a clear segregation of duties, the Board should clearly define, document and enforce its own responsibilities, including those of its Chairman, as well as the delegated authorities, responsibilities and accountabilities of the Board and management committees, the bank's Chief Executive and senior management to the stakeholders of the bank.

      • HC-1.3.8

        In particular, the Board should issue formal letters of appointment both to senior management and Board members, outlining their specific responsibilities and accountabilities. Wherever possible, these documents or a summary of responsibilities should be disclosed publicly, for example in the annual report. Letters of appointment facilitate better understanding of the respective accountabilities of the Board and management.

    • Responsibilities of the Chairman

      • HC-1.3.9

        The Chairman is responsible for the leadership of the Board, and for the efficient functioning of the Board. The Chairman is responsible for ensuring that Board members are adequately briefed in sufficient time for issues arising at Board meetings; therefore it is vital that the Chairman commit sufficient time to perform his role effectively, taking into account the points below:

        a) First, the Chairman of the Board preferably should be non-executive and independent (see HC-1.3.5 for the definitions of "non-executive" and "independent");
        b) Also, the role of Chairman and Chief Executive may not be exercised by the same person; and
        c) Furthermore, there needs to be a clear division of responsibility between these two positions (see also HC-1.3.8 in this regard).

    • The benefits and functions of committees

      • HC-1.3.10

        In order to perform its duties more efficiently, the Board may set up committees where it feels appropriate with specific responsibilities, which must be documented. Where committees are set up, they should keep full minutes of their activities and meet regularly to fulfil their mandates. In particular, there are three areas where there is a need for checks and balances within the Board itself:

        a) The nomination of Directors;
        b) The remuneration of Directors; and
        c) The audit of the bank's financial performance.

        In these areas, executive Directors have clear potential conflicts of interest. Nomination is all about the continuation of their own jobs and the jobs of their colleagues and potential new colleagues. Remuneration is all about the rewards that executive Directors and/or senior management receive for their services to the bank. Audit concerns the probity of the financial and non-financial reporting of the performance of the company by the very same persons who are responsible for its performance.

        For larger banks that deal with the general public, committees can be a more efficient mechanism to assist the main Board in its monitoring and control of the activities of the bank. The establishment of committees should not mean that the role of the Board is diminished, or that the Board becomes fragmented. Each Committee must have a clear written mandate outlining its purpose, objectives and responsibilities, including composition, frequency of meetings and reporting relationships.

    • Audit Committee

      • HC-1.3.11

        The Agency requires all banks to establish an Audit Committee. The committee members must have sufficient technical expertise to enable the committee to perform its functions effectively. Preferably, there should be at least one qualified and appropriately experienced accountant in the committee. All members of the committee must be financially literate. The CEO may not be a member of this committee.

      • HC-1.3.12

        Responsibilities of the Audit Committee are as follows:

        a) To review the integrity of the bank's financial reporting (particularly with reference to information passed to the Board — see HC-1.2.6 a). This review should include the choice of accounting policies. The information needs of the Board to perform its monitoring responsibilities must be defined in writing, and regularly monitored by the Audit Committee;

        To oversee the selection and compensation of the external auditor for appointment and approval at the shareholders' meeting. The audit committee should oversee relations with the external auditors, including ensuring the external auditor's independence (in particular, making sure that the external audit firm and its partners have no other financial or business relationship without the Board's knowledge), the terms and conditions of the auditor's appointment and remuneration arrangements. The committee should monitor rotation arrangements for audit engagement partners. The audit committee should monitor the performance of the external auditor and the non-audit services provided by the external auditor. The committee should meet with the external auditor at least twice per year, and at least once per year in the absence of any members of executive management;
        b) To regularly review the activities and performance of the internal audit function;
        c) To review whether the bank complies with all relevant laws, regulations, codes and business practices, and ensure that the bank communicates with shareholders and relevant stakeholders (internal and external) openly and promptly, and with substance of compliance prevailing over form; and
        d) To review and supervise the implementation of, enforcement of and adherence to the bank's code of conduct.

      • HC-1.3.13

        Below the Audit Committee, the bank must set up an internal audit function, which reports directly to the Audit Committee (with a parallel reporting line to senior management for day-to-day matters as appropriate).