New corporate governance rules improving transparency

New corporate governance rules enacted in late 2014 should support stability and transparency in Jordan’s banking industry as well as enhance its activities and relationships in the international arena. The regulations set new standards in critical policy areas, including the structure of boards of directors, family ownership, auditing, disclosure and accountability, all of which should help the industry benefit from enhanced safeguards, maintain its regional competitive advantage by meeting key international benchmarks, and help to prevent potential future crises.

Background

In May 2014 the Central Bank of Jordan (CBJ) announced it was seeking feedback on its proposed new Corporate Governance Instructions for Banks (CGIB No. 58 of 2014). This codified and superseded the principles provided under earlier corporate guidelines, namely the Bank Directors’ Handbook of Corporate Governance and the Corporate Governance Code for Banks in Jordan – both of which issued in 2007. The code contains 23 articles covering 13 areas, from the structure and activities of companies’ boards of directors to conflict of interest, internal audit requirements, external audits, risk management, stakeholders’ rights and transparency.

Earlier corporate governance regulations did not meet a number of international benchmarks, including Basel III. Banks were permitted to disclose their own guidelines and the extent of adherence to them, effectively allowing them to self-regulate. Now, the CBJ reports that its corporate governance standards are in line with the principles of not only the Basel Committee on Banking Supervision but also the OECD and the Financial Stability Board, all of which address weaknesses exposed by the global financial crisis.

Safe & Stable 

The CGIB states that banks’ boards of directors are fully responsible for the financial safety and soundness of their institutions, for safeguarding the rights of stakeholders, and for adopting an acceptable level of financial risk in their operations.

New regulations bar chairpersons from doubling as general managers, with the CBJ stating that no chairman “shall be entitled to consideration for the day-to-day management of the bank”. They also frame the relationship between ownership and management, and set standards to qualify as a board member. According to the CGIB, at least four members of any board of directors must be “independent” – stipulating, among other things, that they have not been an executive director of the board within the last three years; that they have not been an employee of the bank within the last three years; that they are not related (up to the second degree) to any other board member, qualifying shareholder or senior executive management; and that they not be a partner or employee of the bank’s external auditor. The CGIB also requires that salary schemes not negatively affect the reputation and soundness of banks, that they be linked to risks and performance levels, and that all details of financial remuneration for bank staff be disclosed. On unveiling the proposed regulations, the CBJ emphasised the importance of hiring independent external auditors of banks’ accounts, and stressed that independent board members should be appointed in order to enrich discussions and deliberations during meetings.

Reception

The government is keen to reduce exposure to future banking crises, and the CGIB have been met with a largely positive reception. Though the regulations were formally enacted in September 2014, banks were granted a grace period of up to 120 days to comply with them. As law firm Al Tamimi & Company noted in a February 2015 analysis of the CGIB, “The requirements and expectations of the global market dictate that in order for Jordanian banks to be able to compete on an international level, certain safeguards are necessary to ensure the continued prosperity and sustainable growth of the relevant banks and the Jordanian financial market as a whole.”