Jordan has made much progress in the regulatory environment in the 1990s, since the creation of the Jordan Securities Commission (JSC), the Amman Stock Exchange (ASE), and the Securities Depository Center (SDC), according to a 2004 assessment by the World Bank. In general, the assessment found relatively good disclosure practices but the report also indicated that the development of modern board practices is at an early stage and identified a number of areas where basic shareholder rights can be improved. Despite these weaknesses the assessment of the individual Organization for Economic Cooperation and Development (OECD) Principles of corporate governance found a satisfactory level of compliance. The World Bank's key recommendations focused on implementation. The disclosure provisions should be enforced with a focus on the actual review of content; the Company Law should be revised in order for the policy framework to be in greater compliance with the OECD Principles; and the regulatory areas of responsibilities of the three main regulatory bodies relevant for corporate governance monitoring should be reviewed. A national Code of Corporate Governance with a potential focus on the role, duties, and functions of the board of directors has yet to be developed.

General Overview

According to its 2004 Report on the Observance of Standards and Codes (ROSC), the World Bank reported that Jordan had made much progress in the regulatory environment in the 1990s, since the creation of the Jordan Securities Commission (JSC), the Amman Stock Exchange (ASE), and the Securities Depository Center (SDC). The powers of each of the three bodies were strengthened with the Securities Law of 2002 and subsequent regulation. In general, the assessment found little evidence of corporate governance scandal, and relatively good disclosure practices. The report indicated that the development of modern board practices is at an early stage and identified number of areas where basic shareholder rights can be improved.

The World Bank ROSC identifies several key next steps that focus on implementation, including: developing a Code of Corporate Governance that focuses on the role, duties, and functions of the board; focused enforcement of the disclosure provisions, with continued emphasis on a review of content; revision of the Company Law to bring the policy framework into greater compliance with the Organization for Economic Cooperation and Development (OECD) Principles, and a review of the regulatory jurisdictions of the three main regulatory bodies that oversee corporate governance. Together, the assessment argues, these measures would put Jordan at parity with global corporate governance reform reforms and provide new opportunities for issuers to implement international good practice.

As of 2007, there is no voluntary code of corporate governance. A December 2006 document by the European Commission (EC), assessing Jordan's progress in terms of the European Union's (EU) neighborhood policy, states that the current company law is being reviewed to achieve convergence with key principles of international and EU rules, including a code of corporate governance. In its 2005 Annual Report, however, the JSC stated that, in cooperation with international organizations, primarily the National Association of Securities Dealers (NASD), it had begun to prepare a code of corporate governance for companies listed on the ASE. The code is meant to be mainly in accordance with the OECD Corporate Governance Principles. The code's final draft, according to the JSC, was expected to be completed in the first quarter of 2006. In 2004 the World Bank reported that the corporate legal framework has its origins in French civil law. Law 22 of 1997 (most recently amended in 2002) provides basic Company Law. The Securities Law regulates the capital market and provides the framework and supervision of ASE, SDC, and market intermediaries.

The JSC regulates the securities market. As part of its mandate, it must protect investors, as well as ensure fairness and transparency. The World Bank notes that the JSC's powers and authority increased significantly with the SL amendment in 2002. The ASE is Jordan's only stock exchange and is regulated by the Securities Law, the Listing Rules of 2003, the Trading Rules of 2003, and other internal bylaws. The 2004 World Bank assessment reported that as of the writing of the report, the ASE had not played a major role in regulating listed companies. Nonetheless, the ASE's powers were significantly strengthened on April 1, 2004. in order for it to issue warnings and fines, and suspend and de-list issuers. Furthermore, the Controller of Companies, under the Ministry of Industry and Trade, also plays a key corporate governance enforcement role. The Controller has wide information and recourse rights, is present at general shareholder meetings (GSMs), and can dissolve a company's board or revoke its registration. However, it cannot impose fines and must bring cases in court following investigation or use "moral suasion." The World Bank noted that a proposed amendment to the Company Law, under discussion in 2004, would have given the Controller the power to issue fines.

The Investor Protection Index is a subcomponent of the World Bank's 2006 Doing Business Indicators. The Investor Protection Index consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indexes vary between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Jordan scores 5 in the disclosure index against a regional average of 5.8 and an OECD average of 6.3. It scores 4 in the Director Liability Index against a regional average of 4.6 and an OECD average of 5.0 and 4 in the Shareholder Suits Index against a regional average of 3.5 and an OECD average of 6.6.

In a 2006 IMF paper, Saadi-Sedik and Petri note that, for an emerging market economy like Jordan, the ASE is unusually large in terms of market capitalization (almost 300 percent of GDP). The authors consider the recent performance of the ASE as exceptional, which can be seen as partly reflecting long-standing domestic efforts to promote financial equity markets. The 2006 IMF Article IV consultations report that the equity markets went through a major correction. Since 2000, the average annual increase of the ASE index had been 36 percent compared with the historical average of 13 percent. In the 2006 Financial Indicators of the World Bank, Jordan topped the charts with the 10 largest firms accounting for a staggering 85% of market capitalization.

According to the 2004 World Bank assessment, the listed sector is dominated by banks and insurance companies. All banks and insurance companies are listed, and together comprise over 55 percent of market capitalization. Delisting pressure is not a major issue in Jordan. The report notes that "ownership appears to be less highly concentrated than in many emerging markets; average free float (as measured by the ASE) is about 40 percent. This figure includes blocks of about 5 percent that may be part of the majority group and are held separately or indirectly. Family-owned business groups, centered around a bank, and including an insurance, industrial, and tourism firms, are typical" (p. 1). The main listed companies are controlled by abut 30 percent of the shares, which is usually reinforced by cross-shareholdings and inter-locking directorships. In addition, around 70 firms are controlled by a super-majority, indicating that consent of minority shareholders is not required for fundamental decisions. So far, institutional investors play no significant role and foreign ownership, mostly from Arab countries accounted for around 40 percent of market capitalization.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

II

The 2004 World Bank ROSC states that the corporate legal framework has its origins in French civil law. Law 22 of 1997 (most recently amended in 2002) provides basic Company Law (CL). The public shareholding company (PSC) is the dominant legal form for large and listed companies. All PSCs must be listed by law. A new legal form, private shareholding companies (PrSCs), was created in 2002, as part of the Company Law amendments. PrSCs are designed to appeal to foreign investors, and have very flexible capital-voting and governance rules; they can also be listed. However, the report does not address Jordan's compliance with this principle.

The JSC regulates the securities market. As part of its mandate, it must protect investors, as well as ensure fairness and transparency. The World Bank's 2004 ROSC notes that the JSC's powers and authority increased significantly with the SL amendment in 2002. The Commission (the Chairman, the Deputy Chairman and three commissioners) is appointed by the Council of Ministers, and reports to the Prime Minister. The JSC website notes that the Law prohibits each member from engaging in any other profession or job in both the private and the public sectors. It also obliges them to disclose ownership of securities and their families. Commissioners can be removed without cause. It is self-financing, and has returned excess revenues to the government budget in recent years, according to the 2004 World Bank report. The budget must be approved by the Prime Minister. As of 2004, the JSC had a staff of 90, including ten in the enforcement department.

The ASE is Jordan's only stock exchange and is regulated by the SL, the Listing Rules of 2003, the Trading Rules of 2003, and other internal bylaws. The 2004 World Bank ROSC reported that, as of the writing of the report, the ASE had not played a major role in regulating listed companies. Nonetheless, the ASE's powers were significantly strengthened on April 1, 2004. in order for it to issue warnings and fines, and suspend and de-list issuers. Furthermore, the Controller of Companies, under the Ministry of Industry and Trade, also plays a key corporate governance enforcement role. The Controller has wide information and recourse rights, is present at general shareholder meetings (GSMs), and can dissolve a company's board or revoke its registration. However, it cannot impose fines and must bring cases in court following investigation or use "moral suasion." The World Bank noted that a proposed amendment to the CL, under discussion in 2004, would have given the Controller the power to issue fines.

Principle II: The Rights of Shareholders and Key Ownership Function

EN

In its 2004 ROSC, the World Bank noted that Jordan largely observes three and partially observes another three of the sub-principles of Principle II. Registration with the company's shareholder registry provides formal legal proof of ownership for Public Shareholding Companies (PSCs). Listed shares are freely transferable. Shareholders have the right to participate and vote at general meetings. Directors are elected by secret ballot. The law provides that board representation for government and corporate shareholders be proportional to ownership. However, according to the World Bank's 2004 ROSC, removing directors from the board is difficult -- it requires an extraordinary shareholders meeting (EGM) called by at least 30 percent of shareholders and a 75 percent majority (p. 4). The Annual General Meetings (AGMs) are held within four months of the financial year's end. As the ROSC noted: "In practice, some companies hold meetings up to six months late. Meetings are usually convened by the board Chairman. Voting is allowed in person or by proxy. Shareholders can give the proxy to another shareholder or a notarized power of attorney to any third party. Proxies are company-specific" (p. 6).

The 2004 World Bank ROSC further states that "fundamental decisions are made by the Extraordinary Shareholders Meeting (EGM). These are held at the request of 25 percent of share capital. A 75 percent supermajority of those present is required to modify the memorandum and articles of association, approve mergers, sell all company assets, dismiss directors, and for liquidations, changes in capital, buy-backs and convertible bonds. The sale of substantial assets does not require shareholder approval unless it involves substantially all assets. There are no statutory pre-emptive rights. This may be problematic in view of recent and expected future share issues due to increases in bank and insurance firm capital requirements" (p. 5). The ROSC notes that institutional investors -- banks, insurance companies, and pension funds -- are either passive, or related to the controlling family. Investment funds do not vote at AGMs.

For this principle, the World Bank's ROSC recommended the enforcement of direct and indirect ownership disclosure, for the JSC to clearly state its tender-offer rules and to facilitate voting by funds.

Principle III: The Equitable Treatment of Shareholders

EN

The 2004 World Bank ROSC reports that Jordan largely observes two of the sub-principles of Principle III and partially observes one. The report notes that in Jordan, "shareholders have a direct action for redress that is not typical for emerging markets. Any shareholder can examine unpublished corporate information through a court order; shareholders holding 15 percent of capital can request the Controller to audit the company" (p. 7). Furthermore, shareholders can "seek redress with the Controller, who has wide investigative and intervention powers. The enforcement powers of the Controller are distributed to the extremes: for example, it can remove directors but cannot impose administrative penalties or fines, which can only be imposed by a court" (p. 8).

However, the World Bank's 2004 report also criticized that the civil court makes the pursuit of shareholder redress burdensome by necessitating tight proof, and the law lacks clarity in defining duties and charges. Further, the court lacks experience in commercial matters and is slow. "An average case lasts two-three years. Expeditious status can be requested in certain cases to shorten the procedure. Due to the slow and uncertain legal process, the Controller rarely sends cases to court" (p. 8). Regarding insider information, the ROSC notes that directors, the general manager and employees are all forbidden to trade on insider information, or to reveal it to others with an aim of manipulating the price. The deal is cancelled, and the insider is subject to a fine and is liable for damages to the company, shareholders, and third parties. "The JSC monitors insider deals electronically, and matches trades with its database of insiders" (p. 8).

Directors and management disclose to the JSC, the board and the Controller their family holdings in the issuer and in companies where the issuer holds shares. According to the 2004 World Bank ROSC: "The Company Law (CL) prohibits Related Party Transactions (RPTs) between directors, the general manager, or any other employees, and the company, including indirect participation, but excluding family members. In practice, RPTs require board approval" (p. 9). The World Bank criticized that the RPT rules were weak and unclear and should be clarified and the enforcement of the rules should become a high priority for both the JSC and the ASE. It was further noted that there is no shareholder approval of large corporate deals, which should be reconsidered.

Principle IV: The Role of Stakeholders in Corporate Governance

FC

The World Bank 2004 ROSC reports that Jordan observes all sub-principles for this principle. Employee rights are specified in the Labor Code and the Company Law (CL). "Employees have the right to join unions, but unions in general are not active. There is a minimum wage of JD 85 (USD 120) per month, but it is not fully enforced. In bankruptcy, employees have priority over creditors." (p. 9).

The ROSC further notes that Creditors can veto capital reductions, and have other rights in line with similar income countries in the region. The bankruptcy framework exhibits heavy court involvement, with both weak creditor and debtor rights, and significant delays, however, outcomes in this area are quite consistent with other economies of the region at similar levels of development. There are no voluntary codes of practice or recommendations on relations with stakeholders.

In addition, according to the 2004 ROSC, "companies can set up an employee savings fund, and some have done so. Employee share ownership plans are also used, although their popularity is limited due to employee preferences for cash pay. Option compensation and other incentive mechanisms are unregulated and uncommon" (p. 10).

Regarding disclosure requirements by companies to their stakeholders, the ROSC notes that n their annual report, companies must disclose their "organizational structure, hiring policy, number of employees, qualification categories, turn-over ratio, and training programs. Stakeholders have no specific right to access information or take part in corporate decision making processes" (p. 10).

Principle V: Disclosure and Transparency

CP

The 2004 World Bank ROSC reports that Jordan observes one, largely observes two and partially observes one of the sub-principles for this principle. Audited consolidated annual accounts are sent to the JSC within 90 days of fiscal year end, and to the Controller at least 21 days prior to the AGM. The JSC is responsible for disclosure enforcement. Its monitoring team, with a staff of eight, follows the quality of disclosure, but does not extensively review the quality of financial statements. The ROSC notes that "compliance with filing and disclosure standards is generally good. About 40 percent of listed firms make a high-quality disclosure, and all listed firms file their audited financials" (p. 10).

The World Bank's 2004 ROSC also notes that Jordan has fully adopted International Financial Reporting Standards (IFRS). Annual statements are audited and semi-annual statements are reviewed by the auditor. The AGM appoints the auditor upon the nomination by the audit committee. The board of directors appoints auditors, and sets their compensation and the auditor is invited to the AGM to provide clarifications to shareholders. However, the JSC has no staff to enforce high auditor standards. The Association of External Auditors, created in 1991, also does not have enforcement capacity.

The 2004 ROSC notes that, under the law, the audit committee has a number of responsibilities: "to nominate an external auditor and ensure that he fulfills the requirements of JSC, and that he is independent; to monitor corporate compliance with Securities Law (SL) and other regulations; to examine the periodic financial reports; to study the action plan presented by the auditor, and to ensure that all information needed by the latter is available; to review the internal control procedures; and, to prevent conflicts of interest by related parties" (pp. 12-13). As of 2004, according to the World Bank, about 80 percent of listed firms have audit committees.

Information for shareholders on companies is available from four sources: published information kept with the Controller (including company statutes, and meeting minutes), they have a court right to a certified copy of any unpublished information; and, in the words of the 2004 ROSC, "periodic and material disclosure made to JSC is public; the shareholder registry is by law, but not in practice, available at the company headquarters; and there is some information on company websites, including some annual reports" (p. 13). As of 2004, electronic filing systems were under development at JSC and at the ASE. Board minutes are generally not available.

The World Bank recommended to improve the timeliness of annual reports and the creation of an independent accounting oversight board with relevant enforcement powers as a top priority.

Principle VI: The Responsibilities of the Board

EN

The 2004 World Bank ROSC reports that Jordan observes one, largely observes three, partially observes one and materially not observes another of the sub-principles for principle VI. Public Shareholding Companies (PSCs) have single tier boards comprised of an odd number of members, with a minimum of three and a maximum of 13. In the words of the ROSC: "The AGM elects directors for renewable terms of four years and can remove them before the expiration of their term, however, the procedure for removal requires a high threshold. Any director can be elected as general manager. In practice, both boards and management are frequently dominated by the controlling family. The Central Bank has issued detailed provisions for bank boards, e.g. a ban on overlapping directorships" (pp. 13-14).

Regarding the duties of directors, the Civil Code provides a basic duty of care for directors to act in the best interest of the company, they are liable to the company for damages and are also liable for violating the law and company articles, for company default, negligence, for disclosing insider information, for position abuse, and for fraud. According to the 2004 World Bank ROSC, lawsuits against directors are rare or non-existent.

The World Bank ROSC further reports that the audit committee ensures there is no conflict of interest and the board submits financial statements, reviewed by the audit committee. Directors have full access to relevant information, by law. The audit committee has access to any information from any employee of the company. As of the writing of the report, boards did not have responsibility for reviewing corporate governance practices.

In terms of requirements for the independence of board members, the World Bank ROSC reports that there a few. At least three members must be non-executives, to comply with the audit committee requirements. In reality, most company boards suffer from a lack of independence from controlling shareholders and from management.

The World Bank recommended to remove the share ownership requirement for directors, to create a director training program, to attempt to more clearly defined the fiduciary duties of directors, to set best practice recommendations with regards to board functionality and develop the concept of the independent director.