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Introduction

Purpose and Background of this Code. The purpose of this Code is to establish best-practice corporate governance principles in Bahrain, and to provide protection for investors and other company stakeholders through compliance with those principles. International experience has proven that good corporate governance attracts investment, protects investors and other stakeholders, and enhances companies' value.

The Code is being issued by the Ministry of Industry and Commerce following a deliberative process extending over more than a year. The process included a review of more than 25 national and company codes from other countries, drafting by a steering committee whose members included officials of the Ministry, the Central Bank of Bahrain, Bahraini companies and representatives of the accounting and legal professions, and, following that, revision based on comments received from more than ___ Bahraini companies and international experts to whom it was circulated for their suggestions.

Whilst this Code follows best-practice, it is nevertheless considered as the minimum standard to be applied. Companies may adopt higher standards of corporate governance, and industry regulators, in particular the Central Bank of Bahrain (CBB) may issue additional directives or guidance as appropriate.

Companies to which this Code Applies. This Code is intended to apply to all operating Joint Stock companies which are incorporated under the Bahrain Commercial Companies Law (the "Company Law"). In its initial form it will apply to public companies but it should be used as a model by all other companies to the extent that it applies to their circumstances. It is expected that the Ministry will issue revisions to apply the Code directly to other types of companies.

This Code and the Company Law. This Code supplements the Company Law. It does not replace the Company Law but is intended to further that Law's objectives and to provide a help in understanding, complying with, monitoring performance under, and ensuring fair disclosure under that Law.

The Company Law already mandates many corporate governance best practices. Examples are found in the Law's rules for board and shareholder meetings, its statement of directors' and officers' fiduciary duties, and its rules for company shares. This Code refers to many of those principles, but it does not repeat or incorporate them all; that would not be practicable. Thus a company should be familiar with the both the Company Law and this Code.

This Code goes beyond the Company Law's requirements on several points. Examples are this Code's recommendations that the chairman of the board and the CEO should not be the same person, and that at least 50% of the board of directors should be non-executive directors. Those are not required by the law but they are strong recommendations which should be considered in evaluating the quality of a company's corporate governance, and which a company should follow unless it has good reasons not to follow them and it discloses those reasons under the "comply or explain" principle.

Structure of the Code. The Code states nine fundamental Principles of corporate governance, each of which is followed by one or more numbered directives for applying the Principle. These Principles and directives are broad and they should be complied with by every company.

The Code then adds recommendations under almost all of the directives. These recommendations are not required to be complied with by every company and may not be appropriate in some companies. However, every company should either comply with those recommendations or explain why it does not because of its specific situation. This is known as the "comply or explain" principle.

The Comply or Explain Principle. Principle 8 below calls for companies to adopt written corporate governance guidelines covering the matters stated in this Code, to report annually to their shareholders on their compliance with those guidelines, and to explain to the shareholders if it has varied them or believes that any noncompliance was justified. In any event, every company should be expected either to comply with this Code or explain its noncompliance.

The comply or explain approach has been adopted by many other countries and the flexibility it offers has been welcomed by both company boards and investors. It avoids imposing rigid rules which may not take account of a company's specific circumstances such as the size and nature of its business, its shareholding 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.

Monitoring and Enforcement of this Code. Disclosure and transparency are underlying principles of this Code. Disclosure is crucial to allow outside monitoring to function effectively. However, one cannot rely on market monitoring alone to guarantee adequate compliance with the Code. Thus the Code looks to a combined monitoring system relying on the board, the company's shareholders and other bodies and mechanisms including those described below:

•   The board. The company's board should support entrepreneurship but also ensure effective monitoring and control. Thus it is important that the board be composed of both executive and non-executive directors, including fully independent non-executive directors. It is the board's responsibility to see to the accuracy and completeness of the company's corporate governance guidelines and compliance with this Code.
•   Shareholders. Given the reliance of this Code on a flexible "comply or explain" approach, shareholders, and in particular larger shareholders and institutional investors, should play an important role in evaluating a company's corporate governance and should give weight to all relevant factors that come to their attention. Shareholders should carefully consider explanations given for deviations from the Code and make reasoned judgments in each case. They should be prepared to enter into a dialogue with the board if they do not accept the company's position, bearing in mind in particular the size and complexity of the company and the nature of the risks and challenges it faces.
•   Ministry of Industry and Commerce (MOIC). The MOIC is the governmental body with responsibility for administering the Company Law and this Code as well as the closely-related Audit Law. The MOIC will actively exercise its monitoring and penalty powers under the Company Law and will work closely with the CBB and the BSE.
•   Central Bank of Bahrain (CBB). As the body responsible for licensing and regulating the BSE and for supervision of financial institutions, the CBB will also have an important role in monitoring and enforcement of this Code. The CBB's Rulebook covering BSE-listed companies and financial institutions complements and incorporates provisions of this Code.
•   Bahrain Stock Exchange (BSE). Through its authorities to impose listing and delisting standards, its investigation function, and its disciplinary board with specific penalty powers, the BSE will also contribute importantly to enforcement of this Code. Among other things, the BSE's listing rules will require compliance with this Code and/or such more stringent requirements as the BSE shall consider necessary from time to time.
•   Bahrain Courts. Court litigation is often a last resort, but it is available and it can be effective in enforcing the Company Law or this Code. Litigation could take many forms including a lawsuit by shareholders against a company or its directors, a lawsuit by a company (or shareholders acting in its name under the Company Law) against one or more directors, or a lawsuit by the MOIC, the CBB, the BSE or other agencies to enforce orders. In any such case, the court should take account of how well the parties have complied with this Code.
•   Professionals firms including auditors, lawyers and investment advisers. These firms with their expertise and ethical standards can contribute substantially through advice to individual clients and through development of guidelines through professional organizations.

Effective Date. This Code will be effective on 1st January 2011. All companies to which this Code applies should be in full compliance by the year end 2011. At every company's annual shareholder meeting held after January 1st 2011 -, corporate governance should be an item on the agenda for information and any questions from shareholders regarding the company's governance. Where possible, the company should also have corporate governance guidelines in place at that time and should have a "comply or explain" report as described in the Introduction to this Code.