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If a company in Jordan is generating good returns for its investors, would any body care if it is following sound corporate governance, or if there is a clear and adequate separation between ownership and management, or how the board is organised and how often it meets, or if there are independent directors serving on the board, or if the posts of the chairman and the chief executive officer are separated, or if it has an effective internal audit committee? The answer to these questions is usually no.

However, besides existing shareholders, there are other stakeholders who are keen to know how the board and the management of the company are taking into consideration the interests of employees, depositors, consumers, minority shareholders and potential new investors as well as, the civil society and the economy at large.

The far-sighted boards do recognise that dealing fairly with all groups is consistent with building long-term value for shareholders. Regulators, on the other hand, would like to have in place good corporate governance that will render the domestic market more attractive to local and international investors.

Board members and management are appointed not just to look at today's business but to ensure there will be a business to manage tomorrow.

During the 1980s and 1990s, specially after the collapse of the Soviet Union, market participants started perceiving governments as the problem not the solution and as obstacles not facilitators whose bureaucracies tend to restrict the entrepreneurial spirit of capitalism.

Yet in the few years that followed the collapse of companies like Enron and Arthur Andersen among others, all this has changed. The US corporate model that involved a strong chairman/chief executive, with a compliant board combined with a litigation culture driven by powerful lawyers, has been challenged. Market participants worldwide have been calling on regulators to reform corporate governance.

It is well known that capital markets can function efficiently only if the highest standards of accounting, disclosure and transparency are observed.

Jordan Securities Commission and the country's central bank have been regulating banks and capital markets in an efficient and progressive way. However, the banking debacle associated with Al Shamayleh and the weak performance of several corporates suggest that the authorities should consider introducing additional regulations as part of reforming corporate governance in the country.

Regulatory authorities may want to consider requiring all public and private shareholding companies to have independent members serving on their boards. As independent directors, they should not be major shareholders of the company and should not have significant business relationship with it in order for them to bring an objective view to board deliberation.

Many of the biggest public companies still have large family shareholdings, family representatives among their senior management and strong family representation on the board. There has also been weak protection of the rights of minority shareholders. This will invariably create potential conflict of interest between the companies and the controlling families.

Independent directors alone will not be sufficient to bring about better corporate governance. What is also needed is the separation of ownership and management which implies the separation of the often combined positions of chairman of the board and the chief executive officer (CEO).

It is still common in Jordan to see the chairman of the board to be also the CEO of the company. When the CEO runs his company's board, he will be in effect his own boss and a number of fundamental conflicts of interest can exist. It is much more difficult for a board to monitor and evaluate a chief executive's performance and hold him accountable for results if the CEO of the company is also the chairman.

It is a standard practice in the UK, continental Europe, Canada and Japan that the post of the chairman is separated from that of the CEO. In a recent survey of board members from 500 large US companies, McKinsey & Co. found similar views. Nearly 70 per cent of respondents said a CEO should not serve as the chairman of the board.

Only few corporations in Jordan have effective audit committees as part of the function of their boards, and when such committees do exist they are not formed of independent directors.

Audit committees are expected to ensure compliance with policies, plans, procedures and regulations. They are the first line of defence against mismanagement and financial irregularities.

A well-managed committee insures the reliability and integrity of management and accuracy of financial information that the company produces. The scope of work of these committees includes as well the responsibility to identify suspected acts of fraud or conflict of interests involving the operation of the company.

Today, most members of audit committees of Jordanian companies tend to be major shareholders or represent strong shareholding interests rather than independent professionals. Audit committees typically meet twice to three times a year and only a few committee members bother to review their companies' internal audit reports, let alone understand them.

It is important, therefore, for committee members to be both independent and financially literate and for the audit committees on which they serve to meet at least once every two months and to have unrestricted access to the company's financial records.

If year after year, there are companies who fail to generate profits then the problem has less to do with regional uncertainties surrounding Jordan and lack of sufficient macroeconomic growth and a lot more to do with bad management, absence of vision, leadership and direction. We will never get very far in terms of real change if we take the easy road of blaming outside factors for our mistakes.

Corporates who have been in the red year after year should take a very honest look at themselves and either change their senior management and revamp the board or shut down the company and exit the market. A strict regulation dealing with this issue should be put in place whereby a change in the management of those companies who have been consistently underperforming would become mandatory.

To conclude, Jordanian corporates, especially those listed on the region's stock exchanges, need stronger independent board members, able to devote proper attention to the audit committees they serve on.

It may be difficult to find good candidates to serve as independent board members, nevertheless companies should draw on retired directors, former CEOs, academics, expatriate professionals and public officials. We also need a well functioning audit committees, and a separation of the positions of the chairman of the board and the CEO.

If the regulatory authorities do not introduce more effective corporate governance and enforce compliance with these rules, they will be encouraging market participants to look elsewhere for investment. Capital will always go to those markets where the rules of investing are most transparent and where there is a sound system of corporate governance that protects the interest of minority shareholders and other stakeholders.

(Source: Jordan Times, 04-04-2004; By Henry T. Azzam )

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A recent survey of more than 200 senior financial services industry executives suggests that changes in corporate governance have been driven by the desire to comply with regulations, rather than to improve institutions' management tools, and that companies aren't reaping the potential strategic advantages of improved governance, PricewaterhouseCoopers reported.

The study, "Governance: From compliance to strategic advantage," found that 69 percent of respondents agreed that they now had a more systematic process of managing risk in place and most felt that the tone at the top of their organization had changed to reflect a greater emphasis on corporate governance. However, PwC said “a noticeably lower proportion” of respondents agreed that the board had access to more forward-looking information than before and that there had been a substantive change in the quality of data and metrics available to management.

In addition, PwC said financial institutions "do not appear to have improved the quality of their dialogue with the stakeholders they picked out as critical -- customers and shareholders." Respondents identified auditors and regulators as the two groups where improvements have been most significant, reflecting increased activity by those two stakeholders. Meanwhile, nearly half of those surveyed admitted that their dialogue with customers had not improved over the past two years and 43 percent of respondents did not regard their employees as critical stakeholders.

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Most top media executives these days routinely embezzle company funds at any opportunity. Or, at least, so you would think, judging from the prominence given to corporate governance issues in the financial pages at the moment.

Two hot topics in media companies have been executive pay and the role of the chairman.

Executive pay has found itself on the agenda at both ITV and WPP. At ITV, this was mainly because of the performance related package of Michael Green, as disclosed in Carlton’s recently published 2003 annual report. Carlton’s remuneration committee had clearly gone to great lengths to devise a scheme that ensured rich rewards for Green if, and only if, Carlton’s performance against its peers was strong. Shareholders had approved this scheme in early 2001. For Green to win the star prize, Carlton needed to outperform both the FTSE 100 and other large media companies over substantial periods of time.

Curiously enough, it did.

Sceptics will snigger about the ill-fated ITV Digital which was unceremoniously yanked off air in April 2002. Couple that with the unexpectedly kind bounceback in the TV airtime sales market and it is little wonder, the doubters will say, that Carlton’s post-2002 performance looked good. But that slightly misses the point: the real reason for Carlton’s strong performance was the good deal Green negotiated for its shareholders in the merger with Granada.

Sir Martin Sorrell has form when it comes to facing shareholders down over complaints about the size of his package. He only just managed to squeak through his bumper deal in mid-2003 and on 7 April, shareholders are due to vote once more for (or against) renewal of WPP’s grandly titled Leadership Equity Participation Plan. At the time of writing, it looks like Sir Martin will run home by a whisker, but there certainly won’t be universal support.

(Incidentally, cynics will not be surprised to hear that by its own measurements, WPP has been consistently outperforming its peers. In calculating Green’s bonus, Carlton put WPP near the bottom of the media pile, but these performance measures are notoriously, shall we say, fluid.) In the United States, the corporate governance topic du jour is the question of the separation of the roles of chairman and chief executive – as illustrated at Disney.

It is a well-established practice to split the roles of chairman and chief executive in the UK, as suggested by the voluntary code of practice for companies on the London Stock Exchange.

The practice is less common across the Pond, but experts there have been pointing regularly to the UK as a good example.

Institutional Shareholder Services, a global company which provides advice to shareholders about how to vote on these issues, was one of the prime movers in getting Michael Eisner to relinquish his chairmanship at Disney, saying: “if there were ever a case for separating the roles of chairman and CEO, this company is the poster child.”

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