Public companies in Palestine (3): board membership and fees that can reach $3,000 an hour

Within the series of articles in which I have addressed the public and private shareholding-company sector in Palestine, of which two articles have been published, I will address in this article another issue, namely membership of boards of directors, how they are chosen, their astronomical remunerations and other related issues.

At the end of the financial year the shareholding companies grant a remuneration to the members of the boards of directors, whose number ranges between 5 and 11 members, in return for their membership of the board and the efforts they exert in running the company's work. The value of the remuneration ranges between 5% and 10% of the profits. So if the value of the net profits of a given company amounted to 30 million dollars, for example, and where the internal regulations stipulate the distribution of 5% of its net profits to the members of the board of directors, that means that each member obtains a remuneration whose value may reach 150,000 dollars (one hundred and fifty thousand dollars a year) in return for his membership of the board of directors and his attendance at the board's meetings during the year, which may average 15 sessions — which means 10,000 dollars (ten thousand dollars) for each session whose duration does not usually exceed 3 hours, that is, more than 3,000 dollars per hour. Many shareholding companies and banks refrain from disclosing the value of the remunerations granted to the members of the board of directors, while some companies indicate their total value without details; for example, the Padico company announced in its annual business report for 2009 the distribution of 300,000 (three hundred thousand dollars) as remuneration to the members of its board of directors and 268,000 to the members of the senior management, without detail.

Given the very enormous financial return of the post of membership of the board of directors of the shareholding companies, without this requiring great effort or investment, membership of the board of directors of private and public shareholding companies has become a field of severe competition among a limited number of individuals who strive hard to win membership of a number of companies because of the high and guaranteed income this achieves without any investment. On the other hand, the major shareholders in private and public shareholding companies deliberately appoint to the board of directors persons who have a high capacity to be in harmony with their decisions and to endorse their decisions without genuine questioning — a simple task compared with the enormous return. Likewise the major shareholders may use the card of board membership to obtain political influence and clout and immunity against any attempts at accountability or at rescinding the contract or amending its terms, by granting membership to those who, or whose fathers, hold influential political and security posts, or to give the illusion that some condition has been met, such as representing Jerusalem or the Gaza Strip on the company's board of directors!!

Some members of boards of directors who enjoy membership of several companies obtain annual remunerations reaching a million dollars in return for their attendance at the sessions of these companies' boards of directors, even though some of them do not attend regularly because of their frequent travel or their almost permanent presence outside the country for most of the year, or because of their presence in a region other than the one in which the company is located, or because of illness and old age.

Meanwhile many shareholding companies deliberately resort to reducing the number of members of the board of directors, 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 still is that some members of the board of directors of a given company are bound by work contracts with the same company or with other shareholding companies whose field of work requires coordination with or supervision of the shareholding company on whose board they sit, which may open the way wide to favouritism, corruption, turning a blind eye, leaking information and practising monopoly — and this represents a glaring violation of the law and destroys the principle of transparency and accountability.

Someone may say that companies have the right to decide the value of the annual remunerations for the members of their boards of directors so long as they are endorsed by the general assemblies of these companies. Such a justification is entirely unacceptable for many reasons, among them:-

These remunerations are in the end loaded onto the consumer, as the cost of providing services to him rises, and they reduce the value of the profits distributed to the small shareholders. And they work to accumulate wealth without right.

Such huge remunerations contribute to distorting the social fabric and making it inconsistent, and demolish the ethical economic principle that balances production with return. These fantastical remunerations contribute to creating what is called the casino economy, that is, “gambling”, where fantastical returns are obtained that in no way accord with the effort expended. They also contribute to creating economic alliances and blocs (clubs of the wealthy) and centres of power with political influence. It has become known in the Palestinian case that there is a very limited number of business owners and wealthy people, around whom are a number of technocrats, who control most of these companies in investment and management, which has created a state of favouritism, the spread of corruption and the absence of accountability.

The issue of the huge remunerations that board members and directors decide for themselves at the large companies has constituted one of the causes of the financial crisis that still batters the world, especially the Western part of it. Many states have intervened in this field with the aim of regulating them, among them the administration of President Obama in America, which is the heart of capitalism, where it demanded that boards of directors and directors at the large companies greatly reduce the values of their remunerations to help in emerging from the financial crisis, because they are partly responsible for creating and deepening the global financial crisis. Likewise all the Gulf states have intervened in this field, where the high value of the remunerations for board members was diagnosed as one of the causes of the crisis in those states. A debate is currently going on about this issue in the Gulf states, where the parliaments of those states have begun to discuss this issue and have begun to enact legislation, laws and controls to set the value of remunerations in a way that does not harm the overall economy.

This matter may be justified in America and Europe or even in the Gulf states, where economic activity in these states is very high and companies achieve high levels of profits and the level of wages in the public and private sectors is high; but these conditions are not available in Palestine. So how can astronomical remunerations be justified amid a wage level not exceeding 1,000 dollars a month and amid very high levels of poverty and unemployment? And how can this phenomenon be justified in the presence of dozens of members of boards of directors at civil institutions who work night and day in the service of their community without receiving any financial return, and who sometimes even donate from their own resources in addition to donating their time and their expertise, which is in no way less than that enjoyed by some members of boards of directors at the shareholding companies? This in no way justifies the fact that many of those who occupy senior executive or administrative posts at some wealthy civil institutions receive very large salaries and remunerations that in no way accord with the slogans their institutions raise. One can imagine the shock that may afflict the young volunteers, women and civil-society activists who have carried out voluntary work for dozens of years as members of the boards of directors of civil institutions concerned with children and people with special needs without receiving any financial return. Here I set out a set of proposals aimed at reform, proposals that many states have begun to apply with the aim of reforming the field of work of the shareholding companies:

Limiting the multiplicity of memberships for a single person to a maximum of membership of two companies, which would work to broaden the base of societal participation in the management of these companies. Likewise the period of membership of the board of directors must be set at five years, for example, with the necessity of renewing half the board each time in order to avoid any negative results arising from the total renewal of the members of the board of directors all at once.

Allocating a proportion of board membership to youth and women in a way that represents a process of qualifying them in the field of managing shareholding companies and of guaranteeing continuity between generations and the transfer of experience. Likewise allocating a proportion to independents, who according to the definition of the companies law are those who are not shareholders or who do not have consultancy work contracts with the companies, in order to guarantee integrity and transparency and to activate oversight; and likewise allocating a proportion to the small shareholders so that they may be able to 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 experience they possess. Many states have set the age of 60 as a suitable age for retirement and relinquishing membership of the board of directors.

Setting the value of the remunerations that may be granted to members of the board of directors not by the measure of proportion only but by value; by way of proposal: shareholding companies may distribute remunerations to members of boards of directors at a rate not exceeding 3% of net profits or 15,000 dollars as a maximum. This is what many states, including Gulf states, have begun to apply. Let us take Mr Warren Buffett, one of the wealthiest businessmen in the world, as an example: Mr Buffett receives a salary estimated at 100 thousand dollars a year, and he occupies the post of chief executive of the company of which he is the largest shareholder. One must note the vast difference here between the size of the companies in which Mr Buffett holds a post and the experience he possesses — two conditions that may not be available to many members of boards of directors in Palestine.

Omar Shaban

Economic expert and head of Pal-Think for Strategic Studies in Gaza

omar@palthink.org

www.palthink.org