supervisory and regulatory corporate rule: governance … paper - corporate govern… ·...

SUPERVISORY AND REGULATORY RULE:

CORPORATE GOVERNANCE

APPLICABLE LEGISLATION: SIA, 2011

IFA, 2003

FCSPA, 2000

DATE ISSUED: 31 JULY 2012

REFERENCE NUMBER: SPR5-0712

GREEN PAPER ON THE PROPOSED GUIDELINES ON CORPORATE GOVERNANCE FOR REGULATED ENTITIES

PROPERTY OF THE SECURITIES COMMISSION OF THE BAHAMAS

PROPERTY OF THE SECURITIES COMMISSION OF THE BAHAMAS PROPOSED CORPORATE GOVERNANCE RULE (SPR5-0712) JULY 2012

ISSUED FOR PUBLIC CONSULTATION 2 | P a g e CONSULTATION PERIOD ENDS 1 OCTOBER 2012

Table of Contents I. INTRODUCTION ................................................................................................................ 3

II. EXECUTIVE SUMMARY .................................................................................................... 3

III. DEFINITION ....................................................................................................................... 4

IV. PURPOSE ...................................................................................................................... 4

V. APPLICABLE LAW ............................................................................................................. 4

VI. APPLICABILITY ............................................................................................................. 5

VII. CORPORATE GOVERNANCE REQUIREMENTS ......................................................... 5

A. THE ROLE OF THE BOARD .............................................................................................. 5

a) Responsibilities of the Board .............................................................................................. 6

b) Responsibility of Board Members ....................................................................................... 7

c) Board Structure and Composition ....................................................................................... 8

B. ROLE OF SENIOR MANAGEMENT..................................................................................12

C. RISK MANAGEMENT .......................................................................................................12

D. ROLE OF THE AUDIT COMMITTEE .................................................................................13

a) Audit Functions .................................................................................................................13

E. GROUPS AND AFFILIATE STRUCTURES .......................................................................14

F. DISCLOSURE AND TRANSPARENCY ............................................................................15

G. SPECIFIC REQUIREMENTS FOR PUBLIC ISSUERS ......................................................16

A. Annual General Meetings (AGM) .......................................................................................16

B. SHAREHOLDERS RIGHTS AND THE ANNUAL GENERAL MEETING (AGM) ................17

H. REQUIREMENTS SPECIFIC TO COLLECTIVE INVESTMENT SCHEMES (CIS) ............19

I. ROLE OF THE COMMISSION ..........................................................................................20

ANNEX I ...................................................................................................................................21

DEFINITIONS ...........................................................................................................................21

ANNEX II ..................................................................................................................................22

ANNEX III .................................................................................................................................24

ANNEX IV .................................................................................................................................25

ANNEX V ..................................................................................................................................27

ANNEX VI .................................................................................................................................29



I. INTRODUCTION

The Securities Commission of The Bahamas (“the Commission”) is responsible for the administration of the Securities Industry Act, 1999 (the SIA) and the Investment Funds Act, 2003 (the IFA), pursuant to which it supervises and regulates the activities of the investment funds, securities and capital markets. The Commission, having been appointed Inspector of Financial and Corporate Service Providers on January 1, 2008, is also responsible for administering the Financial and Corporate Service Providers Act, 2000 (FCSPA, 2000). The Commission’s mandate is to advise the Minister on all matters relating to the capital markets and its participants; maintain surveillance over the capital markets and ensure orderly, fair and equitable dealings in securities; foster timely, accurate, fair and efficient disclosure of information to the investing public and the capital markets; protect the integrity of the capital markets against any abuses arising from financial crime, market misconduct and other unfair and improper practices; promote an understanding by the public of the capital markets and its participants and the benefits, risks, and liabilities associated with investing; create and promote conditions that facilitate the orderly development of the capital markets; and perform any other function conferred or imposed on it by securities laws or Parliament.

II. EXECUTIVE SUMMARY

Following the Asian Financial Crises (1997) and the significant market collapses experienced in the early 2000’s linked directly to governance breakdowns, policymakers and regulators began introducing corporate governance principles and guidelines to improve investor confidence and strengthen the integrity of markets. The Organization for Economic Co-operation and Development (the OECD) principles on Corporate Governance were revised in 2004 and have been accepted as the international standard for corporate governance and are one of the 12 key standards for sound financial stability.1 The International Organization of Securities Commissions (IOSCO) 2 members acknowledged the link between strong corporate governance and strong financial markets. They form the basis for the standards proposed by the Commission. The OECD principles3 encapsulate the following six key areas of corporate governance:

i. Ensuring the basis for an effective corporate governance framework thus promoting transparent and efficient markets, be consistent with the law and clearly identify the division of responsibility among supervisory, regulatory and enforcement authorities;

1 Corporate Governance: An IOSCO Perspective, OECD-SDBI 8

th Round Table, 2006, Australian Securities & Investments

Commission 2 Corporate Governance: An IOSCO Perspective, OECD-SDBI 8

th Round Table, 2006, Australian Securities & Investments

Commission 3 OECD Principles of Corporate Governance, 2004



ii. The rights of shareholders and key ownership functions thus protecting and facilitating shareholder rights;

iii. The equitable treatment of all shareholders, ensuring the opportunity to obtain effective redress for violation of their rights;

iv. The role of stakeholders in corporate governance should be recognized; v. Disclosure and transparency thus ensuring timely and accurate disclosure of

all material matters; and vi. The responsibility of the Board which should ensure strategic guidance of the

company, effective monitoring of board management and the accountability of the board to shareholders and the company.

III. DEFINITION The Commission has adopted the definition as defined by the OECD which incorporates the principles of transparency, accountability, fairness and responsibility.

Corporate Governance4 is defined as:

“A set of relationships between a company’s management, its Board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the Board and management to pursue objectives that are in the interest of the company and shareholders and should facilitate effective monitoring, thereby encouraging firms to use resources more efficiently.”

IV. PURPOSE

The Commission seeks to further strengthen the integrity of the Bahamian financial services industry while improving the confidence of national and international investors in this jurisdiction. In this connection, this paper sets out the Commission’s policy with respect to the minimum standard that registrants, licensees and public issuers (together known as “supervised entities”) are expected to adopt and will therefore form the basis by which the Commission assesses the effectiveness of the Governance framework.

V. APPLICABLE LAW

The Corporate Governance guidelines (CGG) are issued pursuant to Section 149 of the SIA, 2011 and Section 13 of the FCSPA, 2000 sets out the duties to maintain professional conduct. Additionally, Section 106 of the SIA, 2011 provides for the prescription of requirements regarding the governance of public issuers.

4 OECD Principles of Corporate Governance, pg 11



VI. APPLICABILITY

This rule applies to all supervised entities (namely persons registered pursuant to the SIA 2011, all Public Issuers, persons licensed under the Investment Funds Act 2003 (IFA 2003) and persons (firms) licensed under FCSPA. Registrants of another regulatory authority (such as the Central Bank of The Bahamas and the Insurance Commission of The Bahamas) must also comply with the Corporate Governance guidelines issue by their regulatory body. However, in the event that a disparity exists between the standards set by the Commission and the other regulatory authority, the higher of the standards must be met. Of particular relevance are the sections related to shareholder protection and disclosure that must be complied with by all Public Issuers whether or not they are also that are also registrants or licensees of any other regulatory authority.

CAVEAT Some supervised entities may need to have frameworks that may differ, to some degree, from the requirements included in these guidelines in order to incorporate sector and enterprise specific requirements. These differences should not contradict the intent or spirit of the CGG and should be in the interest of all clients, stakeholders and shareholders. Supervised entities requiring frameworks that deviate from the CGG must seek prior approval from the Commission. Where such permission is given, entities are required to disclose the nature of the deviation and provide an explanation for them in the annual report (on an ongoing basis).

VII. CORPORATE GOVERNANCE REQUIREMENTS

A. THE ROLE OF THE BOARD

The Board of Directors (the Board) of a company maintains ultimate responsibility for the company. The duties of the Board and officers of the company are set by the corporate bylaws but may also be set by the laws of the jurisdiction where it is incorporated. The Board has the responsibility of loyalty, care and confidentiality. To function effectively, there must be a balance of independence, skills, knowledge, experience and perspectives among directors. The Board must implement, guide and enhance the company’s strategic direction thus fostering the long-term success of the company. The Board’s fiduciary responsibility extends to the decisions it makes with regard to corporate assets, the rights of shareholders (investors) as well as its obligations to its regulatory authorities. Therefore it is important that the Board remains independent in order to monitor and exert its authority over the executive leadership, provide long-term strategic direction and set the appropriate governance tone.



a) Responsibilities of the Board Every company should be headed by an effective Board, which works with the Management team to ensure that the goals of the company are achieved. The Board has the overall responsibility for the operation of the company, acts on behalf of the shareholders to make overall policy decisions and provide oversight. The Board has responsibility for ensuring quality corporate governance. The primary duties of a Board are:

1. Act as Fiduciary and in the best interest of the shareholder. Aspects of the fiduciary responsibilities include:

Avoiding conflicts of interest; o Directors must also avoid the appearance of conflicts of interested. Where such

conflicts exist or appear to exist, they must be disclosed.

Communicating honestly with shareholders;

Acting in good faith for the best interests of the company and shareholders rather than its member’s personal interest;

Performing duties with the diligence of a reasonable person in similar circumstances;

Ensuring that all the company’s business conforms with legal requirements; and

Making decisions to protect the assets of the company. Every entity’s Board should have a written code of ethics that sets out explicit expectations for ethical decision making and personal behaviour of its directors/board members.

2. Setting of the Mission and Vision

The Board is responsible for setting the mission and the vision of the company.

3. Oversight

The Board sets the company’s overall policy develops policies required by law, as well as other policies that help guide specific areas of operations, based on the company’s mission and vision. The Board is responsible for the monitoring of operations and policies which include the development of reports needed for its monitoring and also conducts audits which include guidelines for the auditing responsibilities and annual auditing requirements. As a part of its oversight function, the Board must review the actions of corporate officers and executives to ensure compliance with developed policies. Additionally, the Board should ensure that provision is made for appropriate action to deal with extraordinary events; i.e., contingency plans.

4. Hold Annual Meeting or Extraordinary Meeting

The Board is required to hold the Annual General Meeting (AGM) before the end of each fiscal year, declare annual dividends, where applicable, oversee the election of corporate board



members, elect or appoint officers and key executives, and amend the bylaws, if required. Proxy documents are to be sent to each shareholder of record prior to the annual meeting.

5. Additionally the Board must:

Define and document its role vis-a-vis management;

Provide guidance and leadership and set the strategic direction of the company;

Ensure that Directors understand their roles and set forth their duties and obligations to the company through training and direction;

Oversee the selection and monitoring of competent Senior Management to manage the day-to-day operations of the company and determine the appropriate level of compensation;

Review the financial position of the company and provide a balanced and understandable assessment of the company’s performance position and prospects to all of its stakeholders;

Assure itself of the integrity of the company’s accounting and financial reporting systems, including independent audit and financial statements, the integrity of relationships with customers and suppliers, and the integrity of relationships with other company stakeholders;

Maintain and facilitate constructive relations between the Board and Senior Management. This should include appropriate processes to ensure that the Board and Senior Management has access to timely, accurate and relevant information, prior to meetings and on an ongoing basis;

Ensure that the organisational structure lends itself to effective management and the achievement of the organisational goals;

Assess and approve the organisational goals, policies and corporate values;

Understand and monitor the risks facing and embedded in the organisation and approve policies for the management/ mitigation of these risks. This includes ensuring that appropriate systems of control are in place;

Ensure that there are processes in place to preserve, improve and maintain the integrity and reputation of the company, and maintain compliance with law and company policy. This includes monitoring and managing potential conflicts of interest;

Ensure that there is a process for Directors to receive adequate training or seek independent consultation on issues to fill any knowledge gaps; and

Oversee the process of disclosure and communications (internal and external). This should include ensuring that all required reports and disclosures are made in a timely and efficient manner so as to guarantee that all shareholders have equal access to relevant information. All actual or potential conflicts of interest should be known to its shareholders and in the company’s annual audited financial statements.

b) Responsibility of Board Members Directors are elected to direct the affairs of the company and should be held legally accountable to the shareholders and the company for any failure of their fiduciary responsibility. The company may indemnify Directors for legal expenses and judgments.



It is the responsibility of Directors to:

Ensure that they have the knowledge or/and skills necessary to understand the nature and risks involved in the business and the responsibilities associated with the position;

Commit to the company, with interest in the business and its continued well being;

Dedicate sufficient time and energy to Board matters, and where appropriate, to relevant Board Committees. Attendance at, preparation for and participation in meetings is critical;

Notify the Board, prior to the meeting, if they are unable to attend meetings;

Take decisions in the interest of the company;

Ensure integrity and lack of a conflict of interest;

Develop and regularly update a management succession plan; and

Exercise independent judgement. Directors should ask questions and ensure that they fully understand recommendations and issues before them, and that decisions taken are in the best interest of the company and all shareholders. Where there is dissent, Directors should ensure that the minutes accurately reflect their positions.

c) Board Structure and Composition

1. Membership There should be a clear and transparent process for appointment to and removal from the Board. This process should also include clear and immediate remediate and disciplinary steps to be taken in the event that a director is convicted of a criminal action. This may be facilitated through the use of a Nominating Committee to make recommendations to the Board on all board appointments and removals. Additionally, the Nomination Committee should ensure that there is a process which identifies all interlocking relationships during the nomination process and a policy in place to disclose such relationships. Appointments to the Board should be for a specified period; such appointments should be staggered to ensure continuity.

2. Size of the Board The size of the Board shall be determined by a Board resolution in conformity with the company’s Bylaws. However, the Commission requires that the Board be large enough to adequately provide direction to the entity, but small enough to facilitate active engagement and contribution from each director. There must be a sufficient number of Directors so that changes to the Board’s composition can be managed without undue disruption, and to allow for effective monitoring of risk. As a best practice, the Board needs to periodically review its size to make sure that it is small enough to work effectively as a group, but large enough to contain an appropriate mix of skills and perspectives. Notwithstanding the above all Boards consist of a minimum of three (3) directors.

3. Composition of the Board The Board should be composed of Directors of sufficiently diverse backgrounds and experiences so as to contribute to the effective governance of the company and maintain the



integrity of the decision making process. Such individuals should meet the fit and proper criteria5 as set out in the Guidelines on the Fitness and Propriety Criteria of Applicants for Regulated Activities for the “determination of fit and proper”. Additionally all Boards must have an adequate number of Independent Non-Executive Directors (INED). The ratio of INEDs to normal directors should be at a minimum, one third. Directors must be honest and competent, possessing as a group skills in areas such as accounting or finance, leadership and business experience, industry knowledge and strategic planning, so as to ensure that the Board has knowledge of all areas of the corporation’s business. Critically important, is the ability of Directors to devote the required attention to the governance of the institution. The Board should also make an assessment based on the individual’s ability and capacity to carry out the duties of a Director taking into consideration non-Board related work and other Directorships. As a minimum standard, no individual shall chair the Board of two or more supervised entities that are directly or indirectly in competition with each other or are in the same industry. Additionally supervised entities consider the difficulties and risks associated with interlocking directorships and seek to limit such structures. Where these relationships exist, policies should be developed to ensure that the associated risks are managed and disclosed.

4. Role of Independent Non-Executive Director (INED) INEDs provide checks and balances to ensure that supervised entities operate in a safe and sound manner and that the interests of the entity are protected. INEDs should meet independent of Board meeting to discuss issues related the entity. Additionally INEDs should meet (in the absence of senior management) at least annually, with the external auditor and the heads of the internal audit, compliance and legal functions. This can strengthen the ability of the regulated entity’s Board to oversee management’s implementation of the Board’s policies and to ensure that a regulated entity’s business strategies and risk exposures are consistent with risk parameters. INEDs ensure that the board can effectively carry out its best judgment for the sole benefit of the company, which is not clouded by real or perceived conflicts of interest. No group or individual should be allowed to dominate meetings. INEDs may be required to meet with representatives of the Commission to give their view on the entity’s performance or indicate concerns. Definition of Independence The Commission views an “independent director” to be a person who has no direct or indirect material relationship with the company, its related company6 or its officers beyond his/her directorship, which could negatively impact on his/her ability to discharge assigned duties and exercise independent business judgement in the best interest of the company. The Commission is sensitive to the challenge of sourcing independent directors in such a small financial

5 Determination of Fit and Proper, Regulation 3, Securities Industry Regulations, 2012

6 A related company refers to a subsidiary of the company, a fellow subsidiary, parent company or an affiliate as defined under the

Companies Act, 1992.



environment. Regulated entities should be aware that the Commission places the onus on the Board to explain the reasons why it considers a director independent, notwithstanding the existence of relationships or circumstances which may suggest otherwise. In light of this, the Commission suggests that companies employ a check-list approach to identify the conditions under which individuals would not be considered independent7. The Board should make and publicly disclose its independence criteria for each director when the director is first elected to the Board and annually thereafter for all nominees for election as directors. All directors, including INEDs are encouraged to make contact with the Commission to discuss matters of mutual concern. Further, upon resigning from the board, all directors, including INEDs are encouraged to inform the Commission and provide an explanation for the decision, either by way of written correspondence or in person, by scheduling a meeting with the Commission.

5. Chairmanship The position of Chairman of a supervised or regulated entity should be separated from that of the Management of the company. No director of a supervised or regulated entity may hold the role of member of the Executive Management and Chairman, simultaneously. Any material relationship between the CEO and the Chairman should be disclosed in the Annual Reports. The Commission is of the view that the concentration of the decision making process in one individual may give that individual too much influence over the affairs of the corporation. The separation of the Chairmanship role provides the appropriate counterbalance and check to the power of the Executive Management. The division of responsibilities between the two positions must be clearly established, documented and agreed by the Board. Consideration of one person performing the dual role of both chairman and CEO may be given if:

The majority of the company’s capital is owned by such CEO or chairman;

The clients are members of the same family and have agreed to the structure; or

It can be established by the Board that the company can perform more efficiently by combining the two positions. In such situations, prior approval from the Commission is required.

The chairman is required to, inter alia:

Lead the Board;

Ensure that directors are adequately informed and that information is received in a timely manner;

Facilitate communication between the Board, Management and the shareholders; and

Promote high corporate governance standards.

7 Annex III, Examples of relationships that would not be considered independent.



d) Board Committees The Board should use committees where this would improve its effectiveness in key areas while maintaining Board responsibility. This allows the Board to maximise the use of limited resources and ensure that key officers with the requisite skills are focussing on significant oversight areas. The Board should determine the number and type of committees that would best meet its needs, at a minimum, there should be an Audit Committee; however, the Commission reserves the right to mandate that the Board establishes additional Board committees. The following represents the Commission’s minimum expectations for the formation and functioning of Board Committees:

The Board should develop a charter for each committee established, documenting the responsibilities, authority and powers of the committee. The charter should also detail the size, function and composition of the committee, the frequency of meetings and reporting requirements and the processes for the functioning of the committee including quorums and practises;

All committees should report frequently to the Board on issues reviewed, providing recommendations for discussion and approval by the full Board;

Minutes of Committee meetings should be filed in the company records and be made available to the full Board as soon as practicable after meetings;

Committees should be able to obtain resources from the company, including access to employees and advisers to the company;

The Committee should also be entitled to obtain independent professional or other advice of their choice to assist with the discharge of their responsibility at the reasonable cost of the company; and

Details on the type, number and members of Board Committees, together with attendance by Directors should be disclosed in the annual report.

1) Board Meetings

The Board shall meet quarterly or more frequently as dictated by the size, nature and complexity of the company. Meetings should be used to review, inter alia:

The performance of the company including the financial condition and earnings;

Risks facing the institution and other matters that may materially impact the organisation;

Issues, including reviewing recommendations and decisions, arising from sub committees;

Compliance with regulatory standards and laws;

Audit and regulatory reports;

Performance of directors;

Factors affecting the future direction of the company; and

Policies or processes to be approved or implemented in the organisation. All Board members are strongly encouraged to attend each Board meeting and Board Committee meetings to which they are appointed (at least 75% of the meetings), either in person, by means of telephone or video conference or by other means in which Board members



can communicate with each other. In doing so, Board members should review the agenda and any other materials distributed in advance of the Board or Committee meeting and attend meetings ready to discuss the business presented. Upon request, the Board may summon company personnel and/or independent advisors to answer any questions a Director may have about the business presented at a meeting or any other aspect of the company’s business. The number of Board meetings and the aggregate attendance by Directors must be disclosed in the annual report.

2) Board Minutes

The Board is required to maintain complete records8 of all matters discussed at Board and Committee meetings, showing the substance of the discussion, the decisions taken, and noting any dissenting view or abstentions and the reasons given.

B. ROLE OF SENIOR MANAGEMENT

The senior management is responsible for the day-to-day operations of the regulated entity, serving as a link between its staff and the Board. Senior management is responsible for:

a. Implementing the regulated entity’s strategic plan; b. Keeping directors adequately informed about the performance of the regulated entity

through financial and management reports and the reports prepared by internal auditors, external auditors and the compliance officer;

c. Advising the Board on the appropriate organizational structure, and ensuring that the regulated entity has the capacity and staff to carry out all tasks, including internal audit and compliance;

d. Implementing and maintaining risk management systems relevant to the size, nature and complexity of the regulated entity;

e. Clearly defining and documenting the areas of responsibility for each staff member. Ensuring that the reporting lines are clear and appropriate in the context of the size, nature and complexity of the regulated entity;

f. Communicating the entity’s strategic direction, reporting lines and risk tolerances throughout the organization; and

g. Overseeing management information systems to enable timely and accurate distribution of information to the Board and regulators.

C. RISK MANAGEMENT

The conduct of the business of a regulated entity involves the management of strategic, business, and process-level risks throughout the organization on a consolidated basis. The Board should, on a regular basis, set the policy, monitor and verify that the appropriate

8 These records should include all Board papers and documents presented at Board and Committee meetings



processes that identify and manage potential and relevant risks are in place. Depending on the specific types of activities conducted by individual regulated entities, such risks9 may include:

a. credit risk10 b. liquidity risk11 c. market risk12 d. interest-rate risk e. fiduciary risk f. reputation risk g. operational risk h. technology risk i. compliance risk j. settlement risk k. legal risk l. other risks (e.g., country risk and transfer risk) that are identified as material to the

particular business of a supervised entity.

D. ROLE OF THE AUDIT COMMITTEE

1. Audit Committee

The Audit Committee is appointed by the Board and should consist of a majority of independent Directors. It assists in the oversight responsibility of the Board including assessing the integrity of the financial reporting process, internal controls systems, and the financial statements and reports of the company. The Committee also has the responsibility of overseeing the company’s internal audit function, assessing the qualifications, independence and performance of the independent external auditor, the scope and effectiveness of the external audit, following up on any issues emanating out of the internal or external audit and ensuring that the company is in compliance with legal and regulatory requirements. The committee should make recommendations to the Board on the appointment or removal of the external auditor, the terms of engagement of the audit and the level of remuneration. The Audit Committee is to consist of a majority of independent Directors and should include at least one Certified Public Accountant, Certified Financial Analyst or financial expert to serve as chairman. The Board should ensure that the committee has the skills and authority to discharge its responsibilities and to investigate matters under its terms of reference. The Committee should meet at least annually with the external auditor and the heads of the internal audit, compliance and legal departments.

a) Audit Functions External Audit The External Audit is required to examine the accounting records of the companies, review the internal control environment and provide the Board with an assessment of the control environment and the financial condition of the company. The Board must assure itself that the

9 A description of some key risks is provided in Annex IV

10 See Guidelines on the Management of Large Exposures and Regulatory Capital Rule

11 See Liquidity Risk Guidelines

12 See Regulatory Capital Rule



External Auditor has no relationship with the company or any related person that could compromise the independence of the auditor, and should require confirmation of this. It is the responsibility of the Board (often through the Audit Committee) to ensure that an appropriately skilled and staffed external auditor is appointed and the nature of the review is appropriate for the size and complexity of the business and the purpose for which the audit is under taken. The Board should ensure that the Auditor has full access to the information and individuals required to undertake the review. Moreover, the Board should ensure that the External Auditor has access to the Board to report on its findings and discuss related issues. Finally, the Board should ensure that management letters and appropriate action plans to address deficiencies identified are provided within a reasonable time frame. It is the Board’s responsibility to follow up on the action plans and ensure that deficiencies are corrected in a timely manner. External Auditors should be encouraged to attend the AGM to answer shareholder questions about the conduct of the audit and the contents of the auditor’s report. In such cases, the company should provide its auditor with a notice of the AGM along with other documents that the shareholder is entitled to receive 30 days in advance. The auditor is also entitled to attend the AGM and to be heard on any item that concerns them in their capacity as auditor. This strengthens the role of the auditor and makes him/her more accountable to the shareholders. Internal Audit Where the size, nature and complexity of the organisation dictates, the Board may establish an Internal Audit unit to oversee and review the effectiveness and appropriateness of systems of controls for the management of risk within the company. This unit should report directly to the Audit Committee, where one is established, or directly to the Board in its absence. The Board should be actively involved in the selection and oversight of the Head of Internal Audit. Additionally, the Board should:

Ensure that the Audit function is appropriately sized and staffed and is independent of the operations under review;

Satisfy itself that the work program is reflective of the nature of the risks faced by the institution; and

Review and approve the mandates and organisational structure.

Companies, whose size and complexity do not warrant the establishment of an Internal Audit unit, may outsource the internal audit review to a third party that is independent of its external audit process or accounting function. The Board is reminded that while this function may be outsourced, the responsibility remains fully with the Board and it should assure itself of the quality of the reviewer and the appropriateness of the review.

E. GROUPS AND AFFILIATE STRUCTURES

Boards of companies that are part of a large group or affiliate structure should be aware of risks that may impact the company arising from companies within the group or affiliate structure, and ensure that there are processes and practises to mitigate such risks13. Parent institutions bear

13

Guidelines on the Management of Large Exposures



broad responsibility for the performance, governance and management of risks within subsidiaries and this should be reflected in the parent company’s Board’s agendas and discussions. Additionally, given that the parent’s Board has broad oversight, they maintain responsibility for limiting contagion from one portion of the group to other members. Notwithstanding the broad oversight responsibility of the parent’s Board, Boards of individual companies still maintain a fiduciary responsibility for the governance and oversight of their institution and should ensure where Directors overlap, that each institution is given due attention and regard. Further, Boards are reminded that the outsourcing of oversight functions14 within the group or affiliate structure does not absolve the individual institution’s Board from its responsibility for the oversight of the institution and fulfilling the tenets embedded in this guidance.

F. DISCLOSURE AND TRANSPARENCY

Every Board should insist on integrity in its financial reporting and timeliness and balance of disclosures on its ongoing affairs. Disclosure and transparency are a pivotal feature of a market-based monitoring of corporate behaviour and is central to a shareholder’s ability to effectively exercise his/her voting rights. Timely and accurate disclosure is a crucial element in good corporate governance and can help to attract capital and maintain confidence in capital markets. Stakeholders, shareholders and potential investors require complete and transparent information about the company including the company’s corporate performance, ownership, governance, strategy, and any other material foreseeable risk factors in order to properly understand the nature of its business, its current state of affairs and future prospects. This allows the investor to monitor their investments and/or make informed and rational decisions. This is particularly important for supervised entities that are utilising third party funds. All supervised entities are required to disclose any and all material changes that have occurred or are likely to occur as set forth by the requirements in the governing legislation. Additionally Public issuers and others users of third part funds should ensure that such changes are communicated to the investing public and key stakeholders. To facilitate communication supervised entities should consider maintaining an up-to-date company website. The dissemination of information to shareholders shall be balanced, clear and concise and be made in a timely fashion and all supervised entities are required to be in full compliance with all reporting requirements. Key disclosures include material changes such as changes in the holding of voting rights by shareholders, shareholder decisions; and other such disclosures as required by legislation. Disclosures should shall be made English and expressed in plain language. All technical terms should be explained.

14

Guidelines on the Outsourcing of Material Functions



Disclosure in Annual Reports and Audited Statements Annual reports are also a critical tool for assessing supervised entities. All publications shall be made in English, although the company has the option to also publish the annual report in any other language. Supervised entities should follow the relevant legislated requirements for all annual reports, audited statements and interim reports.

The following disclosures should be contained in the annual report.

Explanations for any departure from the CGG;

Company objectives and goals;

Risk management strategy including the identification of the risks faced, the quantum of risk and the internal control or other actions taken to mitigate risk;

Audited financial statements of note;

Sufficient information on the identities, professional background, independence, core competencies, and overall qualification of each director;

The number of Board meetings held during the period along with each director’s attendance;

Sufficient information to ensure that investors and stakeholders are fully informed on the affairs of the company;

Director’s service contracts and interests in competing businesses;

Members of all internal committees along with future, pending and past approvals for the financial year

The Board’s policies on remuneration; and All related party transactions15 and report on the compliance with the related party and large exposure limits.

All annual reports, audited statements and interim financial reports of public issuers should be made publicly available within four months of the end of the financial reporting period.

G. SPECIFIC REQUIREMENTS FOR PUBLIC ISSUERS A. Annual General Meetings (AGM)

The following summarizes key elements that govern AGMs.

Public Issuers must hold an AGM every year.

Public issuers must ensure that written notice, together with the agenda, proxy16 material, proposed resolutions and any other related papers shall be given to shareholders (or proxy) within 30 days prior to the AGM, independent of the location of the person;

15

Guidelines on the Management of Large Exposures 16

Regulation 126 of the SIR, 2012 sets out the required proxy statements to accompany notices of the AGM.



Public issuers/companies must also forward a copy of proxy material to the Commission within 30 days prior to the date of an AGM;

Issues subject to shareholder approval are to be presented individually and unbundled in order to allow shareholders to accurately exercise their voting rights. Where resolutions are bundled companies should provide a rationale and explain any material implications;

A quorum of shareholders must be presented or represented at the AGM, or no business can be conducted that is binding on the company. Unless otherwise indicated by the articles, a quorum may include shareholders and/or proxy holders who are present to the AGM live via modern communication such as internet, telephone etc.;

Companies shall count and take into account all shareholder and valid proxy votes, and except where a poll is called, should indicate the level of shareholder and valid proxy votes for or against each resolution, after it has been dealt with on a show of hands;

A public issuer/company shall ensure that the votes cast are properly received and recorded;

Companies shall not engage in share blocking. Companies can allow for a record date system where the record date is set no earlier than 30 days before the AGM. This would allow only those shareholders who officially own the stock prior to the record date to be entitled to a dividend or the right to vote at the AGM; and

The Board shall be guided by the Companies Act 1992 as for other requirements related to the holding of an AGM

(i) Annual Certification17

Annually, within 60 days of the end of each calendar year, the Board will be required to provide a certification to the Commission as to its compliance or otherwise with the contents of these Guidelines. Additionally, the certification should also state that, using the advice and assistance of management, the Board has independently assessed and documented whether the regulated entity’s corporate governance process is effective and whether it has successfully achieved its objectives. The Board must report any material deficiencies and problems that are identified within the entity, along with action plans and timetables for such correction.

B. SHAREHOLDERS RIGHTS AND THE ANNUAL GENERAL MEETING (AGM)

Shareholder participation and the exercise of shareholder rights are an essential precondition for effective corporate governance. Shareholders should have the opportunity to participate

17

Annex V



fully and vote, in person or in absentia in AGMs. Companies should seek to improve shareholder participation and facilitate the communication of their views on matters affecting the company. Specifically, for those regulated entities that are public companies, the Commission is particularly concerned with the fair and equitable treatment of minority shareholders and expects that due care and attention will be made in this regard. Public Issuers should observe the following guidelines relating to shareholders and the AGM will promote good corporate governance standards.

(i) The Rights of Shareholders18

All shareholders should have the opportunity for fair and equitable treatment and effective redress for any violation of their rights. The company shall facilitate the personal exercising of shareholder’s voting rights. This shall include:

The right to vote on his/her own behalf or delegate voting responsibility to a proxy as long as a power of attorney (along with formal voting instructions) exists between the shareholder and the proxy on or before the record date of the preceding AGM

The right to exercise his/her voting rights prior to the AGM by post or electronic means;

The treatment of proxy holders equally to shareholders in relation to the AGM, except in cases where a proxy holder acts as proxy to several shareholders and there are conflicting voting instructions, in which case he/she is to be confined to his/her role of voting;

The right to ask questions, add items to the agenda and to table draft resolutions for the AGM. The company should provide an explanation when an agenda item is submitted to be added to the agenda of the AGM was not included;

The right to secure method of ownership registration and to transfer shares; and

Pre-emptive rights to new shares corresponding to their share of equity capital at market price

For the good order of the AGM, one shareholder may only grant one proxy in respect of his or her voting entitlement. However, a proxy holder should be allowed to hold proxies from more than one shareholder and can cast split votes in respect of any resolution in accordance to the voting instructions given to them by the shareholders even if the voting is conflicting. Proxy holders who hold shares for several shareholders can hold such shares in individual or omnibus accounts. Companies should not require those shares held in omnibus account to be separated in individual accounts in order for shareholders to be able to exercise their voting rights. Shareholders shall be granted the right to review voting instructions by the proxy up to five years after voting on a particular resolution has taken place.

(ii) Communication with shareholders Central to the principles governing disclosure and transparency in the financial system is communication to shareholders. Actual shareholders and potential investors should have access to regular, reliable and comparable information in sufficient detail to be able to exercise

18

The Rights of Shareholders …, OECD Principles of Corporate Governance



ownership rights on a fully informed and equitable basis. The following represents the key principles underlying communications.

All shareholders (whether minority or majority) must be treated equally with respect to information.

a. All material information disclosed to financial analysts, investment advisors and similar individuals should be disclosed to all shareholders without delay to ensure fair disclosure so as to prevent information arbitrage. Notwithstanding, the Commission recognises that a company may have a legitimate need to provide some shareholders early notice, particularly in cases where there is a decision to be made about a merger or a future capital increase. However, the shareholders who are privy to this information are prohibited from trading and have a duty of non-disclosure pursuant to the SIR, 201219.

b. Any information that the company discloses internationally in line with corresponding capital market law provisions must also be disclosed domestically without delay.

H. REQUIREMENTS SPECIFIC TO COLLECTIVE INVESTMENT SCHEMES (CIS)

(Collective Investment Schemes (CIS) hereafter referred to as Investment Funds) Corporate governance for investment funds can be describes as "a framework for the organization and operation of investment funds that seeks to ensure that investment funds are organized and operated efficiently and exclusively in the interests of investment funds Investors, and not in the interests of investment funds insiders"20. The role of investment fund operators or directors is primarily to execute investment strategies on behalf of well-informed investors while investors must be able to select the desired level of risks and potential rewards amid a reliable market environment. A robust framework for investment fund governance21 must be designed to capture the unique nature and purpose of investment funds. Therefore, in order to facilitate the effective oversight of investment funds and ensure strong corporate governance, the operators or directors of an investment fund must seek:

1. To protect, through oversight and review, the investment funds assets from loss due to malfeasance or negligence on the part of those that organize or operate the investment funds;

2. To ensure that investors are adequately informed of the risks involved in their investment

and the rewards they can obtain;

19

Regulations 134, SIR, 2012 20

Examination of Governance for Collective Investment Schemes – Final Report – Part I, June 2006 21

Examination of Governance for Collective Investment Schemes – Final Report – IOSCO, 2006



3. To ensure that the investment funds is operated in the investors' best interests at all times;

4. To minimize or otherwise address conflicts of interest;

5. To ensure that the interests of well-informed investors in investment funds are well protected and managed in the best conditions; and

6. To ensure that efficient disclosure requirements, accounting, valuation, reviewing and auditing standards are in place in order to make sure that the risk-performance equation of the investment funds is adequately managed.

I. ROLE OF THE COMMISSION

The Commission maintains ongoing surveillance of its regulated entities, and undertakes periodic inspections of a regulated entity’s management of its business including its corporate governance practises. The regulated entity has an obligation to make specific disclosures to the Commission, to its shareholders and the investing public as is dictated under the legislation and regulatory practises. Areas reviewed by the Commission include but are not limited to:

The composition of the Boards and its Committees, together with the qualifications and performance of members;

Functioning of the Board and relevant committees;

All policies and procedures governing risk management, internal management and internal control of the licensee;

The level and types of reporting between the Board and Senior Management, Board Committees and the parent and subsidiary Boards where relevant; and

Compliance with regulatory and statutory obligations and internal rules and policies. The Board remains ultimately responsible for any acts or omissions of the regulated entity. This includes the responsibility for the compliance with all regulatory and statutory obligations. Regulated entities are required to immediately report any identified breaches. The Commission reserves the right to increase the frequency and nature of regulatory reports to improve the adequacy of its oversight or convene a meeting with the Board to discuss any concerns and issues. The Commission will monitor the Corporate Governance processes and procedures through its onsite inspection and offsite monitoring processes. Per functionary adherence to the guidance will not be sufficient as companies will be required to satisfy the Commission that overall processes appropriate for the company are in place, are integrated into the overall management of the entity and are functioning effectively. The Commission also may choose to meet with independent directors, from time to time, to get an assessment of the overall performance of the company and the Board.



ANNEX I

DEFINITIONS Board The term the “Board” refers to the Supervisory Board or the Board of Directors who is charged with overseeing and advising the company’s executive management. Executive Board Members This term refers to the members of the company’s executive management. Independent Board Members An Independent Board Members refers to an individual who meets the qualifications listed under “Independence”. Company The term refers to the enterprise in which the shareowner has ownership position (whether beneficial or legal) and in which an investor is considering to invest in. Investor The term refers to all institutions and individuals who are considering investment opportunities in shares and other securities of the company. Shareowners The term refers to only those individuals, institutions or entities who are beneficial owners of the common or ordinary stock of the respective company. Shareholders The term refers to all “Shareowners”, legal holders and proxy holders of the common or ordinary stock of the respective company. Stakeholders The term refers to all parties which have an agreement with the company and thus a stake in the success of the company. Proxy holders This term refers to a person authorized to vote on behalf of a shareowner of a company.



ANNEX II

Other Key Specialized Committees of the Board of Directors22

Executive Committee The Executive Committee usually manages matters that require the Board’s review, but arise between full Board meetings. It can relieve the full Board of the responsibility of detailed review of information and operational activities. Generally, all major functions of the organization will be subject to review and approval by the committee, and the work of the other Board committees will be coordinated by it. The committee would usually be composed of both executive and independent23, non-executive directors. The Central Bank recommends that where it is appropriate for a licensee’s Board to be constituted of the following committees, INEDs should have a leading and influential role. Risk Management Committee The Risk Management Committee provides general oversight of senior management’s activities in managing the overall range of risks to which the organization is subject. It monitors and reports to the full Board on the process of risk identification, measurement, monitoring and control. Credit Committee The Credit Committee ensures that the organization’s credit policies are adequate and activities related to extending credit, in all forms and types, are conducted in accordance with established policies and relevant laws, regulations, guidelines, accepted business practices and ethical standards. It also serves a vital role in monitoring credit quality throughout the organization and ensures that the management of the credit process is appropriate and effective. It may also participate in evaluating certain credit applications and making significant credit decisions. Trust/Fiduciary Committee The Trust/Fiduciary Committee ensures that the organization’s activities related to advising on, or holding, administering, managing or investing the assets of clients or other third parties, are conducted in accordance with established policies and procedures and relevant laws, regulations, guidelines, accepted business practices and ethical standards. Asset and Liability Committee The Asset and Liability Committee oversees the organization’s operations relating to interest-rate risk, market risk and liquidity risk and, in particular, ensures that the organization has adequate funds to meet its obligations. Other functions of the committee are dependent on the organization’s lines of business and asset/liability mix.

22

Corporate Governance Guidelines, Central Bank of The Bahamas 23

Members of committees are considered independent if they have no relationship to the organization that would interfere with the exercise of their autonomy from the organization and its management.



Audit Committee The Audit Committee provides direct oversight of the organization’s internal and external audit functions, supervising the quality and integrity of all external financial reporting, and assisting the Board in providing for independent review of the effectiveness of the reporting processes and internal control systems. The Committee may also oversee the activities of the independent risk management function, if any. The majority of the members of this committee should usually be INEDs; managers and staff of the organization should not be included as members of this committee. The committee may also oversee the activities of the independent risk management function, if any. Compliance Committee The Compliance Committee oversees senior management’s activities, through the Compliance Officer, to ensure that the organization complies with all laws, regulations, guidelines, other regulatory and supervisory requirements, accepted business practices and ethical standards. Compensation Committee The Compensation Committee reviews and advises the Board on compensation policies, programs, goals and standards for senior management and reviews the compensation programs established by senior management for other management and staff. This committee should also be responsible for establishing the compensation policy for the Board itself, including appropriate compensation for work on committees of the Board. All of the members of this committee would usually be INEDs. Nominations Committee The Nominations Committee oversees the periodic assessment of the effectiveness of Board members and directs the process of renewing and replacing Board members. The composition of this committee should represent a balance of both executive and nonexecutive directors. The committee should be made up of entirely or predominantly INEDs. The board may also wish to implement term limits for all directors to allow new members to be regularly introduced to the Board. Additionally, the licensee needs provisions in place to handle the smooth transition between the departure of directors whose tenure has expired, and the induction of new board members. Shareholder Committee The shareholders’ committee should consist of independent directors who provide an avenue for shareholders to address all grievances. This committee should foster constructive relationships with shareholders that encourage them to connect with the company. Entities, particularly public issuers/companies should have clearly published policies for shareholder relations and a regular review process, seeking to clearly communicate the goals, strategies and performance of the company. This committee would be the single point of contact for shareholders.



ANNEX III

Examples of Relationships that would not be considered independent

An individual who is, or was, employed by the company or a related company within the past three years;

An individual whose immediate family member24 is, or was, employed as an executive officer of the company or related company within the past three years;

An individual who, or whose immediate family member, has received compensation from the company within the past three years, with the exception of:

a. Fees for Board or Board committee services; b. Payments arising solely from investments in the company’s securities; c. Compensation paid to an immediate family member who is a non-executive

employee of the company or related company; and d. Pension or other forms of deferred compensation for prior service and not

contingent upon continued service.

An individual who, or whose immediate family member is a current partner in, or a controlling shareholder or executive officer of any organization to which the company made, or received payments for property or services in the current or any of the past three years, that exceed 5% of the recipient’s consolidated gross revenue;

An individual who, or whose immediate family member exercises voting control of 10% or more of the share capital of the registrant;

An individual who, or whose immediate family member is, or at any time during the past twelve months, was a partner or professional employee of an accounting firm engaged as the company’s external auditor;

An individual who has obtained a loan from the company under special circumstances or conditions;

An individual who has obtained a loan from the company that has fallen into arrears;

An individual who represents any shareholder; and

An individual who holds cross-directorships or has significant links with other Directors through other companies or entities.

24

Family member means a person’s spouse, parent, grandparent, brother, sister, child or grandchild.



ANNEX IV

Key Risks25 Credit Risk The risk to earnings or capital arising from the potential that a borrower or counterparty will fail to perform on an obligation. Liquidity Risk The risk to earnings or capital arising from the potential that an organization will be unable to meet its obligations as they come due because of an inability to liquidate assets or obtain adequate funding, or that it cannot easily unwind or offset specific exposures without significantly lowering market prices because of inadequate market depth or market disruptions. Market Risk The risk to earnings or capital resulting from adverse movements in market rates or prices, assessed based on consideration of the interaction between market volatility and the organization’s business strategy. Interest-Rate Risk The risk to earnings or capital resulting from adverse movements in interest rates. Fiduciary Risk The risk to earnings and capital resulting from a breach of duty in advising on, or in holding, administering, managing or investing the assets of a client or other third party. Reputation Risk The risk to earnings or capital arising from the potential that negative publicity regarding an organization’s business or ethical practices will cause a decline in the customer base, costly litigation or revenue reduction; such risk often arises from the mismanagement of other risks. Operational Risk The risk to earnings or capital arising from the potential those inadequate information systems, operational/transactional problems in service and product delivery, breaches in internal controls, fraud, failure to adjust properly to changes in the operating complexities of the markets, or unforeseen catastrophes will result in unexpected losses. Settlement Risk The risk to earnings or capital arising when the completion or settlement of a financial transaction fails to take place as expected. Settlement risk is often associated with credit risk, liquidity risk, market risk, operational risk and reputation risk. Technology Risk The risk to earnings or capital arising from inadequate, obsolete, or mismanaged technology or from a failure or interruption in technology caused by events within or outside the organization.

25

CBoB’s Guidelines on Corporate Governance



Outsourcing/Third-Party Relationship Risk The risk to earnings or capital arising from a decline in service quality, accuracy, security or response time on the part of a third party that provides products and services that the organization would otherwise provide for. Compliance Risk The risk to earnings or capital arising from violations, or non-compliance with, laws, regulations, guidelines, other regulatory directives, prescribed business practices or ethical standards. Legal Risk The risk to earnings or capital arising from the potential that unenforceable contracts, lawsuits or adverse judgments may disrupt or otherwise negatively affect the operations or financial condition of the organization. People Risk The risk to earnings or capital arising from the inadequacies in the competencies, capabilities or performance of an organization’s personnel, failure to provide for management succession or staff back-up, or human error, negligence or misconduct. Strategic Risk The current and prospective impact on earnings or capital arising from faulty business strategies and decisions, improper implementation of strategies and decisions, or lack of response to industry changes. Country Risk and Transfer Risk Country (or Sovereign) Risk is the risk to earnings and capital arising from the effects on business activities of trends and movements in the economic, social, and political conditions in a country. Country Risk is a factor often associated with the evaluation of Credit Risk. Transfer Risk focuses specifically on the availability of foreign exchange to service cross-border obligations.



ANNEX V

[Name of Institution] Board of Directors’ Annual Certification To the Securities Commission of The Bahamas [The objective of these Corporate Governance Guidelines is to reassert the role of the Board of Directors. The purpose of the certification described below is to reinforce accountability at the Board level, but to leave the certification sufficiently non-prescriptive so that the Board and senior management approach the certification from a high-level analytic viewpoint versus a mechanistic approach that may not cover all aspects of corporate governance. The written certification, required annually, within 60 days of the end of each calendar year, shall contain the following:]

a. A statement to the effect that the Board is familiar with the contents of the applicable Commission guidelines and acknowledges its role and responsibilities under those guidelines;

b. A list showing the names of all independent directors indicating whether the Board considers that each independent director continues to meet the requirements for independence set out in Section VI of these Guidelines. Where, for any individual, there is a change in categorization from the previous year, a brief explanation for the change should be provided. In the instance where the independent director has received or receives additional remuneration from the company apart from a director's fee, it should be disclosed along with the rationale;

c. A statement indicating whether the Board is performing its functions and fulfilling its

responsibilities under these Guidelines;

d. A statement indicating whether the Board has carefully considered the reporting of senior management and other information relevant to forming an opinion as to whether the organization is following these Corporate Governance Guidelines;

e. A statement indicating whether the Board has implemented policies and procedures in

compliance with these Corporate Governance Guidelines;

f. Where the Board is of the opinion that the organization is not following the Corporate Governance Guidelines or that the organization is following the Corporate Governance Guidelines except for identified deficiencies, it should provide:

i. An explanation of the reasons for the opinion that relate to deficiencies; ii. A statement confirming that an action plan to correct those deficiencies has been prepared and is being implemented; and iii. A statement confirming that a copy of the action plan has been or will be submitted to the Commission;



g. A statement confirming that the Board is satisfied that the recovery strategies adopted in the regulated entity’s Business Continuity Plan (BCP) are still valid, and that the regulated entity’s BCP management team and/or an independent party have properly tested the BCP during the period;

h. A statement confirming that the Board is performing its functions and fulfilling its obligations under the Guidelines for the Outsourcing of Material Functions (the Outsourcing Guidelines) and that any deficiencies in respect of these Guidelines have been noted and an action plan to remedy these deficiencies has been prepared and submitted to the Commission;

i. A statement confirming that the Board has taken account of their obligations to comply

with the Guidelines For Licensees/Registrants On The Prevention Of Money Laundering & Countering The Financing Of Terrorism (AML/CFT Guidelines) and that any deficiencies in respect of these Guidelines have been noted and an action plan to remedy these deficiencies has been prepared and submitted to the Commission and indicating whether the necessary remedial action has been taken;

j. A statement indicating whether an internal audit has been completed and whether the

issues identified have been implemented or corrected;

k. Regulated entities that have undergone an on-site examination should include a statement that an action plan to remedy the deficiencies stated in the regulated entity’s Report of Examination has been prepared and submitted to the Commission and that the agreed remedial action(s) has(have) been taken;

l. A statement confirming that the Board is satisfied that the regulated entity has

appropriate policies, procedures, processes and controls in place to ensure that inherent business risks [including that of market, credit, liquidity, operational, reputation/KYC/AML legal, and human resources risks], where they exist, are effectively managed; and

m. A statement confirming that the Board has reviewed its large exposure policy statement

and that it considers it appropriate to the regulated entity’s operating circumstances.



ANNEX VI

BIBLIOGRAPHY Session 4, Corporate Governance: an IOSCO perspective, 2006 Policy Brief, OECD Observer, 2004, The OECD Principles of Corporate Governance Governance Principles, General Electric Company OECD Principles of Corporate Governance Corporate Governance in New Zealand – Principles and Guidelines Corporate Governance Guidelines, Central Bank of The Bahamas

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