Corporate Governance - Quantity Versus Quality - Middle Eastern Perspective. Saleh Hussain

      Duty of Good faith

      The duty of good faith demands that the director is reliable, trustworthy, acts with integrity and does not seize corporate opportunities for his own self-interest. It further requires the director to act in the best interest of the company at all times and to avoid any action that causes or can cause any conflict of interest with the company. The shareholders and related stakeholders must be confident that the director will at all times deal with the affairs and decisions of the company in good faith and unquestionable trust. Without good faith and trust, no director has any business serving on the board of a company.

      Duty of Care

      Duty of care places the responsibility upon the director to apply serious attention to the details and matters at hand. His or her stewardship must be unquestionable. The duty further demands transparent communication with board members, management and any other stakeholders of the company. Protection of the company's reputation, assets and property are further requirements under the duty of care. The director becomes a custodian of the reputation and assets of the company and must hold these high at all times.

      Duty of Skill

      The duty of skill deals with the necessity of demanding from the management timely, accurate and complete information and data relating to the affairs of the company. The director's skill and knowledge must be used and applied in the analysis and evaluation of information and reports. Right decisions demand the honest application of brainpower and the most appropriate ways of conduct.

      Duty of Diligence

      The duty of diligence makes the director's knowledge of the industry in which the company is operating a prerequisite for his selection to the board. The director must use such industry knowledge to pay attention to the details of all proposals referred to the board for consideration. Part of the details that need to be considered to arrive at board resolutions are the company's relationships with its stakeholders. Those resolutions might be received by shareholders and stakeholders. The other dimension that must be looked at by the director in a diligent manner is the impact of the company's business and decisions on others - what kind of precautions he needs to consider to mitigate any negative impact on others. 'Others' here include customers, service users, competitors and the society within which the company operates. The social responsibility of the company's business must be respected and protected.

      Corporate Governance Qualitative Issues

      The CG qualitative side receives the lowest level of attention compared with the quantitative side. It's our strong belief that many corporate collapses are attributed to the lack of adequate attention to qualitative corporate governance. This aspect of CG deals with the most important element of governance - the human beings or, as modernly called, human capital. The human capital associated with corporate governance includes shareholders, directors of the board, executive management, regulators and internal and external auditors.

      Directors and Senior Executive Management

      The selection methodology of directors and executive management is the key and deciding factor in their success in discharging their duties to the corporation they serve. These questions highlight the importance of the selection process:

      •Does the company have a written policy on the way the selection of directors and executive management is made?

      •Are skills, qualifications and experience of directors and executive management prerequisites to suit the requirement of the corporate for these talents?

      •Who handles the selection - shareholders, board members or consultants?

      •How the appraisal of performance of the directors and executive management is handled?

      •Are compensation schemes adequate and within market guidelines in which the corporate operates?

      •Are directors aware of the requirements of corporate governance in the company? Are there any training and development programs for the directors?

      •What is the role of shareholders in all the above? Do they exercise any activism to protect their rights and the rights of other stakeholders?

      The directors of the board and executive management play the most important and vital role in directing the company's business. Unless the company has in place comprehensive governance policies that are implemented and monitored with audit and control units that give the shareholders a level of assurance of the soundness of these policies, the company runs the risk of disappointment or even failure.

      Regulators

      The regulators' role in corporate governance is important and complicated. It's important in that they issue the quantitative CG regulations. They also give guidelines on best practices and expected qualitative measures but not as much as they do for the quantitative side. Some regulators, in assuming their role towards issuance of CG regulations, tend to import these regulations from other countries and regions and expect companies to apply them "as is" in their ready-made status. Due to globalization the world is becoming standardized on major regulations, such as international accounting standards, anti-money laundering and others. We cannot say the same for corporate governance as yet.

      Countries such as the United States and those in Europe are at a different and higher level of sophistication in terms of civil, commercial and company law. The Gulf region still needs many years to catch up. Hence, regulators need to reach out more to companies and introduce CG regulations that take into account international best practices and local requirements. The gradual introduction of CG regulations along with pertinent laws will be more beneficial and practical. To its credit Bahrain follows such an approach, and it's hoped other GCC countries follow suit

      Several questions that regulators can benefit from are

      •Do regulators have adequate human capital with the right knowledge of requirements of CG?

      •Are such resources' training and knowledge continuously upgraded?

      •Is the human resource adequately compensated and motivated?

      •Is compliance with CG issued regulations monitored? How frequently?

      •Is there a statement of compliance requirement issued by the Chairman and CEO of companies?

      •Is there any recognition of those companies that comply?

      Qualitative Issues – Transparency & Disclosure

      For transparency and disclosure of information to have value and quality, clarity of the purpose of disclosure is a must. Information and data disclosed need to be clear, complete, accurate and timely. Investors, the press, shareholders, stakeholders and the public at large need to come to decisions based on disclosed information. Therefore the quality and accuracy become crucial. We look at some of the issues relating to disclosure and how they relate to good governance practices.

      •What to disclose is the first question to ask, and Why is the second. Responses to these two questions help to establish the information the corporate needs to disclose and for what purpose.

      •Periodical and corporate annual reports give various information and data: lists of shareholders, board members, names of executive management, financial highlights including balance sheet, cash flows and profit and loss account, operational reports for the year ended and the external auditor's report. These are mostly quantitative disclosures that deal with past periods. They are history that is dead and provide very little benefit to readers to base meaningful qualitative decisions. In particular, decisions to invest in the stock of the reporting company or even to enter into new business with it are not addressed. What would make the information disclosed of value is the amount of information about the future plans of the company. Major changes