Monday, January 12, 2015

Board of Directors transportation expenses, a thinly disguised abuse of the law

In quite a few publicly traded companies in Jordan, there is a clear abuse of a provision in the corporations law. Strong action from the company registrar and Amman Stock Exchange is overdue.

Jordan’s corporation law sets clear guidelines on board of directors’ compensation in publicly traded companies. Directors can receive a maximum of 5,000 JDs annually in director bonus provided the total does not exceed 10% of the company’s net profit. In companies under establishment, a Director’s maximum bonus is 1,000 JDs. Bonuses for directors in loss making companies are capped at 600 JDs.

The law does not set a limit on travel expenses. It merely states – in article 162 - that each company must have a special bylaw governing board of directors travel allowances. Implicitly, one would expect that travel compensation will reflect actual costs of travel. In practice however, quite a few publicly traded companies have used this provision in the law to circumvent and bypass the law’s cap on directors’ compensation.

The annual reports of five publicly traded companies, chosen almost randomly, reveal the extent of the abuse. The list is far from exhaustive. For this exercise, I reviewed, randomly, annual reports of six companies and five had abused the provisions of the law in directors travel expenses. In the five reviewed companies, Directors travel expenses ranged from 3,600 JDs per director to 23,318 JDs to compensate directors for around six board meetings held in Jordan! In one company, all directors live and work in Amman, all six board meetings are held in Amman and yet each director received 1,000 JDs as travel costs for each board meeting. In the five companies, directors travel expenses to attend board meetings held in Jordan – not outside Jordan- constituted 10% of the net profit of the company (for 2 companies) and 5% , 3% and 1% of the net profit of the other three companies. Total directors travel compensation to attend board meetings totaled 574,550 JDs for the five companies, for around 30 board meetings in total: I.e. An average of 19,151 JDs for each board meeting to drive directors who reside in Amman to attend a board meeting also in Amman!

That the law did not set a cap on travel costs is understandable. Some companies may have directors residing outside Jordan who will need to travel to Jordan to attend board meetings. These will need air tickets and hotel rooms. Yet the law clearly states that these payments are travel costs. As such, directors and company executives have a fiduciary duty to shareholders not to pay travel expenses above actual costs of travel.

Regulatory bodies _such as the companies registrar and the Amman Stock Exchange_ should weigh and stop the abuse. More importantly, shareholders should object in general assemblies on this abuse. In one company, the directors travel costs to attend six board of directors meetings would have increased the dividend yield to shareholders in 2013 by 11%! One could assume that angry shareholders can also object to such abuses by lodging law suits against the directors.

A final word on the law itself. Capping directors pay at 5,000 JDs (or 10% of profit) is ludicrous. 10% of net profit as directors’ compensation is way too high, and a 5,000 JDs cap for experienced directors is quite low. Better to cap board of directors’ compensation to 1-2% of net profit without a cap on the amount. A company that generates 100 million in profit can justify paying its deserving board of directors a total of 1 million JDs. And the board of directors of a company that barely makes 400,000 JDs in profit, should not really get more than 4,000 to 8,000 JDs in total compensation. The current situation where in one actual example the board of directors compensation and car expenses _to merely attend board meetings_ totaled 20% of the net profit of the company is simply outrageous.

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