What is corporate Governance and am I obligated to follow it?

Introduction

Corporate governance comprises the internal policies governing the organisational framework, processes, and persons that protect the interests of shareholders and other stakeholders, including banks, customers, employees, and others, by directing and supervising business management in accordance with objectivity, accountability, and integrity.

International institutions, notably the International Monetary Fund, the World Bank, and the Organisation for Economic Co-operation and Development, have also prioritised the development of legal and institutional frameworks for implementing corporate governance principles in public and private companies, whether listed or unlisted on capital markets.

Corporate Governance in Jordan

The Jordanian legislature has enshrined corporate governance in Article 151(2) of the Jordanian Companies Law, which establishes the principal governance standards from institutional, administrative, and accounting perspectives. The implementation of governance rules is entrusted to instructions issued by the Minister upon the recommendation of the Companies Controller.

In this context, corporate governance requires clarification of the extent to which companies are legally required to observe governance principles. This raises the issue of the legal character of such observance: are these principles merely advisory, or do they give rise to binding legal obligations?

Pursuant to Article 151 of the Jordanian Companies Law, public shareholding companies must comply with governance instructions. Accordingly, the Corporate Governance Rules for Shareholding Companies Instructions of 2024 were promulgated. Article 3 of these Instructions identifies the companies to which they apply, namely:

• • Public shareholding companies; and
  • Private shareholding companies whose subscribed capital exceeds JOD 500,000.

Accordingly, as a general rule, companies are not legally required to observe corporate governance rules; however, the legislature has created an exception for public and qualifying private shareholding companies by making compliance mandatory.

It should further be noted that the Companies Control Department, the authority responsible for securing effective implementation of governance principles, has issued a governance guide in cooperation with the International Finance Corporation, setting out comprehensive mechanisms for the effective implementation, application, and ongoing supervision.

The Independent Director

An independent director operates as a mechanism for balancing authority within the board of directors. Such director is a neutral person who has no administrative or financial interests capable of compromising his or her independence.

The required number of independent directors is determined by the size of the board, as follows:

1. 1. Where the board consists of no more than seven (7) members, at least one independent member shall be appointed.
   2. Where the board consists of more than seven (7) members, at least three independent members shall be appointed.

In both cases, the company's Memorandum and Articles of Association must be observed, as they may prescribe a greater number of independent directors according to the company's need for expertise and competence to protect its interests.

Where this structure is not complied with or compliance is impracticable, the Companies Controller must be notified, together with the reasons for such non-compliance.

Loss of Independence

An independent director shall cease to be independent in the following circumstances:

1. 1. The existence of a kinship relationship with any natural board member, the company's representative, or any member of senior executive management.
   2. The existence of commercial interests, business activities, or relationships, whether of the director or his or her relatives, that may affect the performance of duties or conflict with the company's interests.
   3. Current or previous employment with the company or any of its subsidiaries during the three (3) years preceding nomination.
   4. Ownership of five percent (5%) or more of the company's capital together with control thereof.
   5. Being a partner or employee of the company's external auditor during the three (3) years preceding nomination.

In addition, female representation on the board shall constitute not less than 20% of the total number of board members, with a minimum of one seat.

Candidates for appointment as independent directors must submit a declaration to the Companies Controller confirming that none of the foregoing disqualifying circumstances exists. Independence must be maintained throughout the term of office; if it ceases, the director must immediately notify the board in writing. Where independence is lost after election, the matter shall be referred to the General Assembly, which shall either re-elect and re-vote or declare the candidate receiving the next highest number of votes duly elected.

Additional Duties of the Board of Directors

Having regard to its regulatory and managerial role, the board must discharge the following duties:

1. 1. Adopt internal bylaws regulating financial, accounting, and administrative matters within four (4) months of its election, specifying the duties and powers of the board and committees to be formed, and provide a copy to the Companies Controller upon request.
   2. Establish internal control and risk-management policies, together with whistleblowing policies addressing violations prejudicial to the company's interests.
   3. Adopt a professional code of conduct for employees and ensure compliance therewith, including policies on remuneration and incentives.
   4. Develop mechanisms to evaluate the performance of board members and its committees, and implement training programmes on governance rules.
   5. Prepare an annual report detailing the company's compliance with governance rules and submit a copy to the Companies Control Department within four (4) months after the end of the fiscal year, together with details of senior executive management members, their positions, and any amendments thereto.

Permanent Committees

The Instructions require the board to establish permanent committees, which may comprise board members or external persons, as follows:

1. Audit Committee

Their principal responsibilities include:

• • Reviewing financial statements and accounting policies, verifying their integrity, and recommending their approval;
  • Examining matters relating to the external auditor's work, discussing issues considered necessary, and ensuring the auditor's continuing independence;
  • Establishing policies and strategies to strengthen internal control systems and regulate related-party transactions.

2. Remuneration and Nomination Committee

Their principal responsibilities include:

• • Continuously verifying the independence of board members;
  • Recommending policies governing salaries, remuneration, and incentives;
  • Establishing policies and job descriptions for the Chairperson, board members, and senior executive management.

Each permanent committee must comprise at least three (3) members with the requisite expertise, including an independent member who serves as chair. Resolutions and recommendations shall be adopted by majority vote. Committees must meet periodically, at least once every three (3) months, in accordance with the company's interests.

Permanent committees may obtain legal, financial, or technical advice from external consultants or experts and request clarifications, information, or data from company employees. The company must make all necessary resources available to the committees to enable them to discharge their duties.

Temporary Committees

The board may establish temporary committees, as necessary, to perform specified tasks for a defined period, and shall specify in the formation resolution their duration, powers, and related matters.

External Auditor

An external auditor is a person who has passed the examination prescribed by law, practises the profession independently or on behalf of another, and is duly registered.

Upon appointment, the following conditions shall be observed:

1. 1. The auditor shall not be a founder, direct or indirect shareholder, board member, partner of a board member, or employee of any such person.
   2. The auditor shall not provide other services to the company that could impair independence.
   3. The auditor may not be appointed to senior executive management unless at least one (1) year has elapsed since ceasing to act as auditor.
   4. The auditor may not be elected as the company's auditor for more than four (4) consecutive years.

Disclosure and Transparency

Companies must adopt a disclosure and transparency policy specifying the mechanisms, scope of disclosure, authorised spokespersons, and material company information.

 A copy of that policy must be submitted to the Companies Control Department.

Shareholder Engagement

The board must encourage shareholders to play an active and effective role by facilitating attendance at meetings, selecting suitable venues, enabling discussion and voting on resolutions, and providing all relevant information and documentation concerning matters to be considered at General Assembly meetings.

Invitations to shareholders shall be sent by electronic means, as determined by the board.

conclusions

Corporate governance is therefore not merely a procedural obligation. It is a legal and institutional framework that promotes responsible management, safeguards stakeholders’ rights, supports sound decision-making, and reduces the risk of internal disputes and regulatory non-compliance. Effective implementation of the governance rules enables companies to strengthen investor confidence, preserve their long-term sustainability, and operate with greater transparency, accountability, and integrity.