Publication
Omar Shaban Ismail · Sama News Agency · 2011
Omar Shaban examines how board members are selected in Palestinian public shareholding companies and argues that their remuneration has become excessively high relative to the work involved, encouraging concentration, favoritism, and weak accountability. He notes that board bonuses often range from 5% to 10% of profits; in a company earning $30 million net, this could mean up to $150,000 annually per member, or about $10,000 per meeting and more than $3,000 per hour. He also warns against multiple board memberships, reduced board sizes, nondisclosure, and conflicts of interest created by employment or business ties. He proposes limiting memberships to two companies, setting five-year terms, reserving seats for youth, women, independents, and small shareholders, establishing a retirement age, and capping bonuses at no more than 3% of net profits or $15,000.
Omar Shaban, January 2011: Board bonuses in Palestine are excessive and require caps, safeguards, and broader representation.
## On Board Membership and Their Remuneration, Which May Reach $3,000 Per Hour ..
Within the series of articles in which I have addressed the sector of public and private shareholding companies in Palestine, and in which two articles have been published as part of this series, I will address in this article another issue, namely board membership, how members are selected, their astronomical remuneration, and other related issues.
At the end of the fiscal year, shareholding companies grant remuneration to members of the board of directors, whose number ranges between 5 and 11 members, in return for their membership on the board and the efforts they exert in running the company’s business.
The value of the remuneration ranges between 5% and 10% of profits. Thus, if the value of a company’s net profits reaches, for example, $30 million, and the bylaws stipulate the distribution of 5% of its net profits to the members of the board of directors, this means that each member may receive remuneration amounting to as much as $150,000 (one hundred and fifty thousand dollars annually) in return for his membership on the board of directors and his attendance at board meetings during the year, whose average may reach 15 sessions, meaning $10,000 (ten thousand dollars) for each session, which usually does not exceed 3 hours in duration, that is, more than $3,000 for each hour. Many shareholding companies and banks refrain from disclosing the value of the remuneration granted to members of the board of directors, while some companies indicate their total value without details. For example, PADICO announced in its 2009 annual report that it distributed $300,000 (three hundred thousand dollars) in remuneration to members of its board of directors and $268,000 to members of senior management, without detail.
Given the very large financial return from the position of board membership in shareholding companies, without requiring major effort or investment, membership on the boards of private and public shareholding companies has become an arena of intense competition among a limited number of persons who strive hard to win membership in a number of companies because this yields high and guaranteed income without any investment. On the other hand, major shareholders in private and public shareholding companies appoint to the board persons who have a high ability to harmonize with their decisions and approve their decisions without real accountability, which is a simple task compared with the huge return. Likewise, major shareholders may use the board membership card to obtain political influence and power and immunity against any attempts at accountability, contract termination, or amendment of its terms, by granting membership to those who themselves, or whose fathers, hold influential political and security positions, or to create the impression that some condition has been met, such as the representation of Jerusalem or the Gaza Strip on the company’s board of directors!!
Some board members who hold memberships in several companies receive annual remuneration reaching one million dollars in return for attending the board sessions of these companies, although some of them do not attend regularly because of frequent travel, or because they are present almost permanently outside the country for most of the year, or because they are located in an area other than that in which the company is located, or because of illness and old age.
While many shareholding companies deliberately resort to reducing the number of board members, with the aim of ensuring control over the company’s management and keeping the door closed to any new memberships on the one hand, and with the aim of raising the value of the remuneration for each member on the other. More dangerous is that some members of a company’s board of directors are linked by employment contracts with the same company or with other shareholding companies whose field of work requires coordination with or supervision over the shareholding company on whose board they hold membership, which may open the way wide to favoritism, corruption, turning a blind eye, leaking information, and practicing monopoly. This constitutes a flagrant violation of the law and destroys the principle of transparency and accountability.
Some may say that companies have the right to decide the value of the annual remuneration for members of their boards of directors so long as it is approved by the general assemblies of these companies. Such a justification is absolutely unacceptable for many reasons, including: · In the end, this remuneration is passed on to the consumer, as the cost of providing services to him rises; it reduces the value of the profits distributed to small shareholders; and it works to accumulate wealth unjustly.
· Such huge remuneration contributes to distorting the social fabric and making it unbalanced, and it undermines the ethical economic principle that equates production with return. Such fantastic remuneration contributes to creating what is called a casino economy, that is, “gambling,” where fantastic returns are obtained that are absolutely inconsistent with the effort exerted.
It also contributes to the creation of economic alliances and blocs (clubs of the wealthy) and centers of power with political influence. It has become known in the Palestinian case that there is a very limited number of businessmen and wealthy individuals, and around them a number of technocrats, who control most of these companies in terms of investment and management, which has created a condition of favoritism, the spread of corruption, and the absence of accountability.
· The issue of huge remuneration that board members and managers in large companies decide for themselves by themselves was one of the causes of the financial crisis that is still battering the world, especially its Western part.
Many states intervened in this field with the aim of regulating it, including President Obama’s administration in America, the heart of capitalism, which demanded that boards of directors and managers in large companies significantly reduce the value of their remuneration in order to help exit the financial crisis, because they were partly responsible for creating and deepening the global financial crisis. All Gulf states also intervened in this field, where the rise in the value of remuneration for board members was diagnosed as one of the causes of the crisis in those states. Debate is currently taking place on this issue in the Gulf states, where the parliaments of those states have begun discussing this issue and have started enacting legislation, laws, and controls to determine the value of remuneration in a way that does not harm the macroeconomy.
· This may be justified in America and Europe, or even in the Gulf states, where economic activity in these countries is very high, where companies achieve high levels of profits, and where wage levels in the public and private sectors are high, but these conditions are not available in Palestine. So how can astronomical remuneration be justified in light of wage levels that do not exceed $1,000 per month, and in light of very high levels of poverty and unemployment? And how can this phenomenon be justified in light of the existence of dozens of board members in NGOs who work night and day in the service of their society without receiving any financial return, and who sometimes donate from their own private resources in addition to donating their time and expertise, which are in no way less than those enjoyed by some board members in shareholding companies.
This absolutely does not justify the fact that many of those who occupy executive or senior administrative positions in some wealthy NGO institutions receive very large salaries and bonuses that are in no way consistent with the slogans their institutions raise. One can imagine the shock that young volunteers, women, and civil society activists—who have been doing voluntary work for decades as members of boards of directors of NGO institutions concerned with children and persons with special needs, without receiving any financial return—might experience.
I present here a set of proposals aimed at reform, proposals that many countries have begun applying with the aim of reforming the field of joint-stock companies:
· Limiting multiple memberships for one person to a maximum of membership in two companies, which would broaden the base of societal participation in the management of these companies. Likewise, the term of membership on the board of directors should be set at, for example, five years, with the necessity of renewing half the board each time in order to avoid any negative results arising from the complete renewal of board members all at once.
· Allocating a percentage of board membership to youth and women, representing a process of qualifying them in the field of managing joint-stock companies and ensuring intergenerational continuity and the transfer of expertise. Likewise, allocating a percentage to independents who, according to the definition in the Companies Law, are those who are neither shareholders nor persons who have consultancy work contracts with the companies, in order to ensure integrity and transparency and activate oversight. Also, allocating a percentage to small shareholders so that they can defend the interests of their segment.
· Setting a retirement age for members of the board of directors, at which their membership ends regardless of the value of their ownership in the company’s assets and regardless of the nature of the expertise they possess. Many countries have set the age of 60 as an appropriate retirement age and for relinquishing board membership.
· Setting the value of the bonuses that may be granted to members of the board of directors not only by the percentage measure but also by amount. By way of proposal:
Joint-stock companies are entitled to distribute bonuses to members of boards of directors at a rate not exceeding 3% of net profits or a maximum of $15,000. This is something many countries have begun applying, including Gulf states.
Let us take Mr. Warren Buffett, one of the richest businessmen in the world, as an example. Mr. Buffett receives a salary estimated at $100,000 annually, while he occupies the position of chief executive officer of the company of which he is the largest shareholder.
The vast difference here between the size of the companies in which Mr. Buffett holds a position and the experience he possesses must be noted, both of which are conditions that may not be available to many members of boards of directors in Palestine.
Topic: Palestinian Economy — Corporate Governance · Board of Directors · Transparency · Accountability — Text © Sama News Agency — archived here with attribution to the source. — Original source