Regulators need to clamp down on the abuse of board of directors’ travel expenses.
By Jawad J. Abbassi
Jordan’s Corporation Law sets clear compensation guidelines for board of directors in publicly traded companies. Directors can receive a maximum of JD5,000 annually in bonuses, providing the total doesn’t exceed 10 percent of the company’s net profit. In companies under establishment, a director’s maximum bonus is JD1,000. Bonuses for directors in loss making companies are capped at JD600.
The law, however, doesn’t set a limit on travel expenses. In article 162, it merely states that each company must have a special bylaw governing the travel allowances of its board. One would implicitly expect travel compensation to reflect actual costs of travel. In practice, however, a significant number of publicly traded companies have used this provision in the law to circumvent and bypass the law’s cap on director 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 randomly reviewed the annual reports of six companies. Five had abused the provisions of the law governing director travel expenses. In these five companies, travel expenses per director ranged from JD3,600 to a shocking JD23,318, just to cover around six board meetings held in Jordan. In the case of one firm, all of its directors live and work in Amman, and all six board meetings are held in Amman. Even so, each director received JD1,000 as travel costs for each board meeting.
Directors’ travel expenses to attend board meetings held in Jordan—not outside—constituted 10 percent of the net profit of two of the five companies I looked at. While in the remaining firms it was 5 percent, 3 percent, and 1 percent of their net profits. Total directors’ travel compensation to attend board meetings totaled JD574,550 for the five companies for around 30 board meetings in total. So this works out at an average of JD19,151 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 the Kingdom 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 in to stop the abuse. More importantly, shareholders should object to this abuse. In one company, the directors travel costs to attend six board meetings would have increased the dividend yield to shareholders in 2013 by 11 percent. One could assume that angry shareholders can also object to such abuses by lodging lawsuits against the directors.
And just a final word on the law itself. Capping directors’ pay at JD5,000 or 10 percent of profit is ludicrous, as a JD5,000 cap for experienced directors is quite low, and 10 percent of net profit as a director’s compensation is way too high. Better to cap compensation to 1 or 2 percent of net profit without a cap on the amount. A company that generates JD100 million in profit can justify paying its deserving board of directors a total of JD1 million. And the board of directors of a company that barely makes JD400,000 in profit shouldn’t really get more than JD4,000 to JD8,000 in total compensation. The current situation whereby, in one example I came across, the board of directors’ compensation and car expenses for the attendance of board meetings totaled 20 percent of the net profit of the company is simply outrageous.