With financial services playing such an important role in Bahrain’s economy, it is incumbent on the CBB as regulator to play an active and constructive role in ramping up corporate governance standards.
According to Rasheed al-Maraj, governor of the CBB, the central bank has always been looking to improve and apply best practice.
“But what transpired from the global financial crisis is that there was a need to reinforce and improve the quality of corporate governance,” says Al-Maraj. “It was an opportune time for us to review what was in place and what kind of things we needed to consolidate and to reinforce. It is in line with what has been going on across the globe and something that we in Bahrain have always tried to implement, as well as benefiting from the experience from other jurisdictions.”
According to Al-Maraj, the advantage of introducing tougher corporate governance standards after the financial crisis was that minds were already focused on addressing weaknesses in the system. “The message got across very easily because in that environment everybody knows that failures in other countries’ corporate governance practices is going to affect them. Most firms now acknowledge this is the only way forward,” he says.
Perhaps even more important, says Al-Maraj, is that Bahraini firms recognise that a more transparent company, with full disclosure and better engagement with shareholders, gives them an edge over the competition.
The economic crisis, which affected some financial services hubs such as Bahrain more severely than others, highlighted a clear need to bolster standards. Several bank boards were revealed to lack financial experts, with some individuals recruited to the board on the basis of their connections rather than their knowledge of the industry or their ability to ask the right questions.
In a sense, the crisis was a rallying call for change. “What transpired from the financial crisis was the fact that boards [were] more or less taking a secondary role,” says Al-Maraj. “Instead, management had adopted the leading role on many issues, leaving the board to rubber stamp decisions. What we needed to do was to reinforce the leadership role of the board regarding strategy, the conduct of management regarding examining risk, and whether the type of business — even if it was producing good results in the short term – was necessarily good for the company or the institution in the long term.”
Al-Maraj has ensured a focus on the basic tenets of corporate governance – the contribution of the board members, their commitments to provide the time, and attend meetings.
“We continue to re-emphasise this in monitoring the attendance of board members at meetings, the frequency of the meetings, the role of the sub-committees, and the audit and remuneration committees. These are the issues that were clearly put into the corporate governance code,” says Al-Maraj.
In prudential meetings, the CBB usually requests members of the board to be present with the management, so the interaction between the central bank and regulator is not exclusively with the management. Usually, board members are required to be in attendance to provide a view of what is happening and what issues are being raised with management.
“We also have our inspection reports that are conducted frequently. We ask the board to review this kind of report and give us their feedback on specific commitments on addressing all the deficiencies and the gaps identified,” says Al-Maraj.
“At the end of the day, the responsibilities fall on the board to direct management and steer the business into a safe future. And the idea is that we don’t want the management to be strong in their presence if the board will then find it difficult to challenge them.
“We insist on proper checks and balances within the organisation. This is not to limit the activities of management, but to ensure that the boards are overseeing the activities of management.”
Working with the GCC Board Directors Institute (BDI) and others bodies, the CBB is serious about raising standards across the region.
“In the financial sector, every regulator is very concerned about lagging behind the curve. Everyone wants to impose best practice – so we are part of this wider group that has interests in seeing best practice when it comes to corporate governance,” says Al-Maraj.
At the CBB, corporate governance is now an integral part of its approach, in the same way as it provides quality training to its staff. In this way, best practice can spread wider, says Al-Maraj.
“We feel that if financial institutions are fully compliant with all the corporate governance requirements, they will be in a position to exhibit to their counterparts and their stakeholders that they have checks and balances and are part of a culture that complies with best practices,” he says.
In the final analysis, corporate governance is not just about ticking boxes and complying with regulations or requirements of the regulator, but it is to do with the conduct of management and the board, and the discharging of their duties.
“This is the most important thing for us because people want to see and feel the reflection of all of this within the different levels of the organisation,” says Al-Maraj.
This article is part of the GCC Board Directors Institute report, for more information please visit their website