Corporate Governance in Jordan

Corporate Governance in Jordan

Around the world, corporate governance is shaped by a set of regulations and rules aimed at ensuring effective oversight and accountability in business operations. Shareholders and board members often encounter the term “Corporate Governance”, but what does it mean, and why is it important?

In this article, I will explore the key aspects of corporate governance, its objectives, and its practical application in the Hashemite Kingdom of Jordan.

First: What is Corporate Governance?

Corporate governance is the system that guides the direction, management, and control of a company. It serves as a framework that defines roles, responsibilities, and decision-making processes within an organization. This system defines who holds authority, who is accountable for decisions, and how those decisions are made to ensure the company operates effectively and ethically. At its core, corporate governance seeks to balance the interests of shareholders, the board of directors, executives, and employees.

Good corporate governance goes beyond mere compliance; it fosters trust by ensuring that a company’s leadership operates transparently, fairly, and responsibly. By establishing clear guidelines and processes, it helps businesses avoid confusion, conflicts of interest, and poor decision-making. Strong corporate governance enables leadership to make informed decisions that support long-term success while upholding accountability and ethical standards.

In today’s competitive business landscape, companies that prioritize corporate governance are better equipped to navigate challenges, attract investment, and maintain their reputation.

Second: Why Is Corporate Governance Important?

Corporate Governance serves several key purposes that contribute to a company’s overall success and stability. Its primary objectives include:

Promote Transparency: Providing clear information and open communication about the company’s activities.
Ensure Accountability: Holding decision-makers responsible for their actions.
Encourage Ethical Conduct: Fostering trust through fair and honest business practices.
Manage Risks: Identifying and mitigating potential threats to the business.
Support Sustainability: Promoting long-term success through responsible practices.

By upholding these principles, corporate governance helps organizations build credibility, enhance investor confidence, and create a stable foundation for sustainable growth.

Third: Corporate Governance in Jordan.

In June 2024, the Ministry of Industry, Trade, and Supply issued new instructions in the Hashemite Kingdom of Jordan titled “Corporate Governance Rules for Shareholding Companies for the Year 2024” (the “Instructions”). This new legislation introduces additional obligations for companies to ensure good corporate governance practices.

In this section, I will address the key topics covered by the above-mentioned Instructions:

Which Companies Are Required to Apply the “Corporate Governance Rules Instructions”?

First of all, it is important to note that the new Instructions do not apply to all companies. They specifically apply to:

Public Shareholding Companies, regardless of the company’s capital, and
Private Shareholding Companies, if the company’s capital exceeds five hundred thousand (500,000) Jordanian dinars.

This means that not all private shareholding companies are required to implement corporate governance provisions. For instance, a private shareholding company in Jordan with a capital of less than five hundred thousand (500,000) Jordanian dinars is not subject to these Instructions. This aligns with the Jordanian Companies Law, which sets the minimum capital requirement for private shareholding companies at fifty thousand (50,000) Jordanian dinars.

What Is the Independent Board of Directors (BoD) Member, And How Many Independent Members Must be Included in the Board?

According to the Corporate Governance Rules Instructions:

If the BoD consists of seven (7) members or fewer, at least one (1) independent member must be included.
If the BoD consists of more than seven (7) members, at least three (3) independent members must be included.

The Instructions also specify the conditions that an independent member must meet, which are:

They must not have any relatives who are members of the board or part of the company’s senior executive management.
They must not have any relatives with interests, business dealings, or relationships that could affect their performance or create a conflict of interest with the company.
They must not have been employed by the company or any of its subsidiaries within the three years preceding the date of their nomination for board membership.
They must not have control over the company through ownership of 5% or more of its capital.
they must not be a partner or employee of the company’s external auditor within the three years preceding the date of their nomination for board membership.

In my view, this provision is essential for several reasons. Independent members help ensure the BoD makes decisions in the best interest of the company and shareholders. They reduce the risk of decisions being influenced by personal interests. Additionally, they provide fresh perspectives and impartial judgment, ultimately enhancing the board’s overall effectiveness.

What Policies and Regulations is the Board of Directors (BOD) Obligated to Issue?

According to the Instructions, the BoD must establish various policies that define the rights and responsibilities of its members. These include:

Policies Governing Transactions with Related Parties: Ensuring transparency and compliance in dealings involving related parties.
Policies on Rewards for Board Members: Establishing guidelines for compensating board members.
Policies for Evaluating BoD Performance: Providing a framework to assess the board’s effectiveness and overall performance.

Additionally, the BoD must issue policies governing the relationship between the company and its employees. Such as:

Code of Professional Conduct for Employees: Defining ethical standards and behavioral expectations.
Policy for Reporting Violations: Providing a mechanism for employees to report violations committed by managers or colleagues that could harm the company’s interests.

The primary objective of these policies is to define the rights and responsibilities of all individuals within the company, fostering transparency and accountability.

What about BoDs Appointed Before the Issuance of the “Corporate Governance Rules Instructions”?

The provisions of the Corporate Governance Rules Instructions apply only to Boards of Directors (BoDs) appointed after their issuance. Consequently, BoDs appointed before the issuance of the Instructions will continue to operate with their existing members until the end of their term or the election of a new board.

In conclusion, implementing the Corporate Governance Rules will positively impact various aspects of a company, including management and financial performance. These rules promote effective oversight, accountability, and transparency, which enhance the company’s overall efficiency and reputation. Furthermore, these rules clearly define the rights and responsibilities of all parties and positions within the company, fostering a structured and balanced working environment. By adhering to these principles, the company can achieve sustainable growth.

Adv. Tariq Al Diri

Head of the Corporate/ Commercial Section – Nsair & Partners Lawyers.