Establecimiento de objetivos

The aim of this assessment process is to measure the state of overall compliance with corporate governance practices, such as the assessment of the gaps between national laws and regulations and international principles, and the effectiveness of implementation in the vital areas of corporate governance. It also provides a comparative analysis of both the effectiveness and quality of the local legislation for corporate governance. Likewise, it involves understanding to what extent, if any, the legal structure is linked with proper enforcement tools (e.g., sanctions). Furthermore, such an assessment highlights the significant weaknesses that should be addressed by legislators and all related parties, for developing a national framework of corporate governance. In Jordan, OECD (2004), Shanikat and Abbadi (2011), and the European Bank for Reconstructions and Development (2017), have each assessed Jordanian companies’ compliance with the corporate governance principles.

OECD (2004) discussed Jordanian corporate governance, based on the degree of compliance with OECD principles, by classifying these degrees into five categories: observed (5 points), largely observed (4 points), partially observed (3 points), materially not observed (2 points) and not observed (1 point), with the following major findings. Firstly, the assessment of the rights of shareholders was largely observed. Shareholders have the right to investigate the documents and information relevant to the corporation. As well, they have the right to participate, vote and attend general meetings. Secondly, the assessment of the equitable treatment of shareholders was partially observed, although shareholders were observed to have the same rights and obligations. Furthermore, the general manager, directors and employees are not permitted to trade on internal information, or to show it to others with the aim of manipulating the price. Thirdly, the assessment of the role of stakeholders in corporate governance was observed. The stakeholders of Jordanian companies have no specific rights to obtain information or to participate in decision-making. Fourthly, the assessment of disclosure and transparency was largely observed. Jordanian firms have

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fully adopted IFRSs and IASs. Finally, the assessment of the responsibility of the board was largely observed.

As mentioned earlier, Jordanian boardrooms are organised under a one tier system and directors must be shareholders. The functions of the board include working on behalf of the company’s shareholders, appointing management, investing the firm’s funds, making loans and preparing and submitting financial statements.

Shanikat and Abbadi (2011) addressed the assessment of corporate governance in Jordan based on the extent of Jordanian companies’ compliance with OECD principles according to the law and practice (Further details are presented in Table 12). The European Bank for Reconstructions and Development (2017) performed a comprehensive report of corporate governance in Jordan, identifying the strengths and weaknesses of corporate governance in the Jordanian banking sectors. In doing so, the corporate governance framework has been divided into five main areas: board structure and functioning, transparency and disclosure, internal control, rights of shareholders and rights of stakeholders and institutions, each of which was further subdivided. The assessment is based on a five level rating (i.e., strong or very strong, moderately strong, fair, weak and very weak). The score ranges from one point (very weak) to 5 points (strong or very strong), for which definitions follow (See Table 13).

Table 12: The assessment of Jordanian corporate governance

Principles Assessment base Remarks In law In practice The rights of shareholders Widely covered Widely practiced Shareholders participate in most important decisions except main asset sales. Shareholders AGM rights are also mentioned, but there are no standard proxy forms and no provisions for postal voting.

The equitable treatment of shareholders Partially covered Partially practiced

The Controller sometimes acts on shareholders' complaints, but there is no formal complaint-resolution

mechanism. There are solid regulations prohibiting insider trading. Related-party transaction rules are not clear. The role of

stakeholders in corporate governance

Covered Practiced

Stakeholder rights are respected. Stakeholders have a number of legal

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Protections, which are widely covered in the Company Law. Companies typically adopt performance enhancement measures, such as employee savings funds. Employees sometimes share ownership in some companies' issues. The disclosure and

transparency

Covered Practiced Annual and semi-annual reports are provided, but only the annual report is required to be audited externally. Monitoring is limited only to quantity rather than quality of disclosures. There are no comprehensive and mandatory rules for corporate-governance

disclosure. Jordan has fully adopted the IFRS and ISA standards for accounting and audits.

The responsibility of the board

Covered partially

Practiced The board is liable for ensuring compliance with the law. In practice, there is no difference between the management and the board; generally the chairman and CEO are the same person. Stakeholders' duties are not clear. The law and regulations determine specific standards related to functions that the board should fulfil. By the law, directors have a right to access all relevant information.

Source: Shanikat and Abbadi (2011, p. 100)

The strong or very strong rating indicates that corporate governance practices are fit for purpose and conform to best practice. Moderately strong means that company practices are fit for purpose but additional reforms are needed for some aspects of corporate governance. With respect to fair, this refers to some elements of company practices being good practice, however a few critical points suggest that, overall, these should be evaluated, with a view to their reform. A weak rating indicates that companies show few elements which are good practice, and generally, the

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structure is in need of reform, whilst very weak means that company practices offer significant risks and the system is in need of considerable reforms.

Table 13: An overall assessment of corporate governance in Jordan

No. Key groups Rating

1 The board structure and functioning Weak

Board composition Fair/Weak

Gender diversity at the board Very weak

Independent directors Weak

Board effectiveness Weak

Board responsibilities Fair

2 Transparency and disclosure Fair

Non-financial information disclosure Fair/Weak Financial information disclosure Strong Reporting to the market and to shareholders Fair Disclosure on the external audit Fair

3 Internal control Weak

Quality of the internal control framework Fair

Quality of internal and external audit Fair/Weak Functioning and independence of the audit committee Weak Control over related party transactions and conflict of

interest

Weak

4 Rights of shareholders Fair

General shareholders’ meeting Weak

Protection against insider trading and self-dealing Moderately Strong Minority shareholders protection and access to

information

Weak

Registration of shareholdings Weak

5 Stakeholders and institutions Fair

Corporate governance structure and institutions Fair

Corporate governance code Weak

Institutional environment Weak

Source: European Bank (2017)