Introduction

"Corporate governance, a term that scarcely existed before the 1990s, is now universally invoked wherever business and finance are discussed" (Keasey et al. 2005). Corporate governance has become a global phenomenon. The financial scandals and crises that have hit most countries pave the road for ongoing corporate governance interest. Governments worldwide are continuously developing corporate governance codes and guidelines or refurbishing those in existence (Mallin 2006).

The main sources of corporate governance legislation in Jordan are the Companies Law, the Securities Law, the Banking Law, and several Instructions and Regulations issued by the Jordanian Securities Commission and the Central Bank of Jordan.

The banking sector in Jordan is heavily regulated. Much attention by regulators and market commissioners was directed to this sector, for example, the "Bank Directors Handbook of Corporate Governance" issued in 2004, the "Corporate Governance Code for Banks in Jordan," issued in 2007, and the "Corporate Governance Instructions for Banks" issued in 2014 (Cigna and Sigheartau 2016).

Jordan authorities have developed additional national corporate governance codes for listed companies; the Corporate Governance Code for Shareholding Companies listed on the ASE, issued in 2008. According to this law, companies must comply with its articles based on "comply or explain" principles or on a compulsory basis according to the law's requirements (See, Cigna and Sigheartau 2016 and OECD Investment Policy Reviews: Jordan 2013).

Jordan lacks an index for corporate governance that can reflect the degree of governance applied inside listed companies and give vital information to stakeholders. Overall corporate governance of companies in Jordan is lost information. No comprehensive measure exists to evaluate the degree of corporate governance used by policymakers, ASE, SDC, CBJ, and other participants in the capital market. JCGI is the first comprehensive corporate governance construction exercise conducted in Jordan. JCGI will judge how corporate governance reforms are working (Sarkar et al. 2012). It will help investors (local and foreign) evaluate the risk associated with deviating from proper corporate governance practices and determine their investment decisions. JCGI can rank companies in Jordan according to the degree of adopting best governance practices. Finally, the JCGI can be used for research purposes and international ratings and rating agencies.

For these reasons, we build the first JCGI for 191 listed firms in the corporate sector for the years 2018 and 2019 using four crucial corporate governance mechanisms: board structure, board procedure, disclosure, ownership structure, and minority shareholder rights. We also build the Corporate Governance Index by Sector (JCGIS) and corporate governance sector by company. The elements of each sub-index reflect Jordan-specific norms and institutions.

The remainder of this paper is organized as follows. Section "Literature review" summarizes the relevant literature review; section "Methodology and data" describes data and methodology. Section "Results" discusses the empirical results, and section "Conclusions and policy implications" has conclusions and policy implications.

Literature review

The literature on the importance and effect of corporate governance is vast, but literature on constructing a comprehensive Corporate Governance Index is limited. The work of Ararat et al. (2016) and Black et al. (2019), Black et al. (2012), Balasubramanian et al. (2011), Cheung et al. (2010), Cheung et al. (2007), Beiner et al. (2006), Black et al., 2006, Bebchuk et al., 2005, and Gompers et al., 2003, is some of the main works in this area.

Black et al. (2019) find that well-constructed, country-specific "corporate governance indices" can predict higher firm values in emerging markets. Black et al. investigate four major emerging markets (Brazil, India, Korea, and Turkey) and build an overall country-specific governance index. The overall index includes five subindices: disclosure, board structure, ownership structure, shareholder rights, board procedure, and control of related party transactions. The main findings are: (i) disclosure (especially financial disclosure) predicts higher market value across all selected countries, (ii) board structure (principally board independence) has a positive coefficient in all selected countries and only significant in two countries, (iii) ownership structure, shareholder rights, board procedure and control of related party transactions indices do not predict firm value.

Ararat et al. (2016) study the Effect of Corporate Governance on Firm Value and Profitability in Turkey from 2006 to 2012, relying on hand-collected data covering the vast majority of listed firms. They build a Turkey Corporate Governance Index (TCGI), composed of five sub-indices for board structure, board procedure, disclosure, ownership, and shareholder rights. Ararat et al. main findings are that TCGI predicts higher market value (with firm fixed effects) and higher firm-level profitability with firm random effects. The disclosure sub-index is the principal sub-index that predicts higher market value and profitability and drives the Index results.

Sarkar et al. (2012) construct a corporate governance index for the largest 500 listed firms in the Indian corporate sector from 2003 to 2008. They use the information on four crucial corporate governance mechanisms: the board of directors, ownership structure, audit committee, and the external auditor. They document an increasing trend in the governance index of Indian companies. They further examine the relationship between the Corporate Governance Index and companies' market performance and find a strong relationship between the two with companies with stronger corporate governance structures earning up normal returns.

Balasubramanian et al. (2011) provide a detailed "case study" of firm-level governance practices in India, based on an extensive survey in 2006 of 506 Indian public companies’ firms. They build a broad overall Indian Corporate Governance Index (ICGI) and find a positive association between ICGI and firm market value with a stronger association between ICGI and smaller firms. They also investigate particular aspects of governance, such as board structure, in predicting firms' market values. They identify 49 firm attributes that are often believed to correspond to "good" governance; each element is coded "1" if a firm has the attribute; "0" otherwise. They group these elements into five main indices of Board Structure, Disclosure, Related Party Transactions, Shareholder Rights, Board Procedure. They find that most firms meet the board independence rules under Indian law and that Indian companies are more likely to comply with audit committee requirements. Related party transactions are common, but approval requirements for them are often weak. Only about two-thirds of companies disclose annual reports on their websites. Executive compensation is modest by US standards, but CEOs face only a small risk of dismissal. Only about 75% of firms allow voting by mail, even though this has been legally required since 1956. Government enforcement actions against firms are almost non-existent. They find a positive and statistically significant association between ICGI and firm market value in India. The association is more significant for more profitable firms and firms with higher growth opportunities. A sub-index for shareholder rights is individually significant, but subindices for board structure, disclosure, board procedure, and related party transactions are not significant.

Cheung et al. (2010) construct a corporate governance index (CGI) to evaluate the Fortune 100 largest Chinese listed companies' corporate governance practice progress during 2004–2006. They construct the CGI Based on the Revised OECD's Principles of Corporate Governance (Gompers et al. 2003) and develop a corporate governance index consisting of 86 questions classified into five OECD corporate governance principles: rights of shareholders; equitable treatment of shareholders; the role of stakeholders; disclosure and transparency; and board responsibilities. Cheung et al. found that Chinese companies have been making progress in corporate governance reform. They also find a positive relationship between market valuation, as measured by Tobin's Q and market-to-book ratio (M/B), and overall corporate governance practices, as measured by the CGI.

Chen et al. (2007) test the relationship between ownership/leadership structures and stock returns for firms listed in Taiwan. They built a Governance Index based on four different aspects of the company's governance structure: CEO duality, the size of the board of directors, managements' holdings, and block shareholders' holding. They consider this index as a proxy measure of the effectiveness of the corporate governance mechanism in Taiwan. Chen et al. (2007) find a strong relationship between the governance index and stock performance.

Durnev and Kim (2005) have found out that firms with growth opportunities that are expected to be financed externally, usually practice a higher-quality form of governance, and this practice could possibly affect the company’s market value positively.

Love and Klapper (2003) have studied and analyzed corporate governance (CG) rankings across 14 emerging markets by constructing a corporate governance index that included 6 main categories (Discipline, Transparency, Independence, Accountability, Responsibility, and Fairness), and they have found that the positive corporate governance is significantly correlated with a better operating performance and market valuation mainly in countries with weak legal environments.

Cheung et al. (2007) examine the relationship between corporate governance and firm value using one-year data of major listed companies in the Hong Kong Stock Exchange. They construct a corporate governance index (CGI) for Hong Kong listed companies to capture good corporate governance practices and the variation in these practices' quality. One of their major findings is that a company's market valuation is positively related to the overall CGI score and a composite measure of a firm's corporate governance practices.

Black et al. (2006) build Korean corporate governance index based on a spring.

2001 hand-collected data survey of some corporate governance practices by the Korea Stock Exchange (KSE). Black et al. classify corporate governance element five subindices: Shareholder Rights (5 elements); Board Structure (4 elements on board structure and composition); Board Procedure (26 elements); Disclosure (3 elements); and Ownership Parity sub-index. They conclude that an overall corporate governance index is an important and likely causal factor in explaining Korean public companies' market value.

Bebchuk et al. (2005) investigate the relative importance of the 24 provisions followed by the Investor Responsibility Research Center (IRRC) and included in the Gompers et al. (2003) governance index. They put forward an entrenchment index based on six provisions: staggered boards, limits to shareholder bylaw amendments, poison pills, golden parachutes, and supermajority requirements for mergers and charter amendments. They construct the entrenchment index "E index," based on six provisions. Each company in the IRRC database is given a score, from zero to six, based on the number of these provisions the company has in the given year or month. They find that increases in the index level are monotonically associated with economically significant reductions in firm valuation, as measured by Tobin's Q, as well as large negative abnormal returns during the 1990–2003 period.

Gompers et al. (2003) construct a "Governance Index" or ("G") using specific corporate-governance provisions of all firms in Corporate Takeover Defenses of 24 governance rules to proxy for the level of shareholder rights at about 1500 large firms during the period from 1990 to 1998. In building the G-index, they add one point for every provision that restricts shareholder rights for every firm. Thus, the Governance Index ("G") is just the sum of one point for the existence (or absence) of each provision. Gompers et al. construct subindices for each of the five categories: Delay, Protection, Voting, Other, and State. However, this G-index does not accurately reflect the relative impacts of different provisions. They find that firms with stronger shareholder rights have higher firm value, higher profits, higher sales growth, lower capital expenditures, and fewer corporate acquisitions.

Methodology and data

JCGI is composed of five sub-indices, which in turn include 60 elements. Elements suggested by previous literature and fit the Jordanian environment are considered as potential indicators of good governance practices by corporations in Jordan. Most variables are coded as "1" if a firm has the attribute and "0" otherwise.

We construct a JCGI for 191 listed firms in the corporate sector for 2018 and 2019 using information related to four important corporate governance mechanisms, namely, Board Structure, Board Procedure, Disclosure, Ownership Structure, and Minority Shareholder Rights. Then different elements inside each sub-index are determined. The elements of each sub-index reflect Jordan-specific norms and institutions.

JCGI covers all publicly traded Jordanian firms. JCGI is comprised of five equally weighted sub-indices; (1) Board Structure, (2) Board Procedure, (3) Disclosure, (4) Ownership Structure, and (5) Minority Shareholder Rights. Inside each sub-index, elements are given equal weights based on the different elements inside these sub-indices. Table 1 describes the sub-indices and attributes in each sub-index.

Table 1 JCGI Sub-indices and elements
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Methodology of index construction

We construct the Jordan Corporate Governance Index (JCGI) in two steps. In the first step, we construct a sub-index for each of the four corporate governance components selected, namely, (1) Board Structure, (2) Board Procedure, (3) Disclosure, (4) Ownership Structure, and (5) Minority Shareholder Rights. We specify the number of governance requirements according to best practices and the governance guidelines applied in Jordan and existing literature. In each sub-index, we assign equal weight to each element based on each CG component's total number of elements.

In the second step, we average the four sub-indices values to arrive at the overall Corporate Governance Index (CGI). The total JCGI score is an average of the sub-index scores.

Then we repeat this process to construct a CG index by sectors, the Banking sector, the Services sector, the Industrial sector, and the Insurance sector, to stand on the possible differences in CG practices between them. Further, we construct CGI by a company for the 191 listed ones. In constructing the JCGI, we used internationally accepted benchmark (OECD's Principles of Corporate Governance, OECD, 2004, G20/OECD's Principles of Corporate Governance 2015) and followed the Ararat et al. (2016) method and related specifications.

Data sources

We manually collect governance data on corporate governance practices for all companies listed on the Amman Stock Exchange (ASE) in 2018 and 2019.

Information about corporate governance dimensions of Board Structure, Board Procedure, Disclosure, Ownership Structure, and Minority Shareholder Rights is collected manually from the company's annual reports, corporate governance compliance reports, and charters, and the Securities Depository Center (SDC), and the Amman Stock Exchange (ASE).

Results

Jordan corporate governance index for all listed companies

Results of the JCGI are reported in Table 2. Table 2 presents the Corporate Governance Index along with its components for the years 2018–2019. The corporate governance index's mean value is 67.80%, nearly two-thirds of its maximum value.

Table 2 Construction of JCGI, 2018–2019
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Sub-index results ranked in descending order (Table 3) show that governance is weakest in both board procedures and disclosures with a mean value of 57.36% and 52.43%, respectively. Governance in Ownership structure is the highest, with a mean value of about 82.29 of the 100-maximum value. Shareholder rights and board structures are 75.67% and 71.26% approximately, accounting for more than two-thirds of the sub-indexes maximum value.

Table 3 JCGI and Sub-indices rankings. Maximum mean values are 100
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When going down into detailed sub-index results, interesting results emerge; the board procedure sub-index shows that most listed firms practice poor governance. About 69% of listed firms have no code of ethics or conduct, 61% do not implement the board performance measurement process, and 63% do not adopt and implement a firm risk management plan. The story is even worse in the disclosure sub-index; results show that all listed companies in Jordan disclose no remuneration policy. Ten percent and fewer listed companies disclose their quarterly financial statements, corporate governance compliance reports, code of conduct of ethics, and association articles. Out of the 191 companies, only 21% disclose corporate governance charter, and 18% disclose internal audit/control information. Within the board structure sub-index, only 18% of the study sample has the policy to specify the board's professional qualifications and training requirements. Results of shareholders' rights show a rigid and non-transparent environment in the enterprises' control structure. A structure does not change based on the shareholders' needs.

Jordan corporate governance index for listed companies by sector (JCGIS)

The mean value of JCGIS is reported in Tables 4, 5, 6, 7, and 8 for the Banking, Insurance, Service, and Industry sectors, respectively. Results show that the Banking sector possesses the highest JCGIS (87.64), followed by the Insurance Sector (72.07), Service Sector (65.34), and Industry Sector (65.22).

Table 4 Construction of JCGIS for the Banking Sector, 2018–2019
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Table 5 Construction of JCGIS for the Insurance Sector, 2018–2019
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Table 6 Construction of JCGIS for the Service Sector, 2018–2019
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Table 7 Construction of JCGIS for the Industry Sector, 2018–2019
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Table 8 Summary results by sub-index by sector
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Sub-index results summary in Table 8 shows that governance is weakest in both board procedures in the Service and Industry sector (52.2 and 51.33, respectively) and for disclosures in Insurance, Service, and Industry sectors (56.23, 48.86, and 49.5, respectively). Governance in shareholder rights is the highest for the Banking sector with a mean value of 76.92 and weakest for the Insurance sector with a value of 72.92. Governance in shareholder rights is also strong for Service and Industry sectors (75.85 to 76.08, respectively). Ownership structure accounts for more than two-thirds of the maximum value of 100 of the sub-indexes. Overall results show that governance is weakest in board procedures and disclosures.

Conclusions and policy implications

We survey all listed firms' corporate governance practices over 2018–2019 on the Amman Stock Exchange (ASE) and construct the first Jordan Corporate Governance Index (JCGI). JCGI comprises five sub-indices for board structure, board procedure, disclosure, ownership, and shareholder rights, including 60 elements. We manually collect governance data on corporate governance practices for all companies listed in 2018 and 2019. The corporate governance index's mean value is 67.80%, nearly two-thirds of its maximum value.

Overall results show that governance is weakest in board procedures and disclosures elements, with a mean value of 57.36% and 52.43%, respectively. Governance in Ownership structure is the highest, with a mean value of about 82.29 of the 100-maximum value. Shareholder rights and board structures are 75.67% and 71.26% approximately. Results of JCGI by sector (JCGIS) show a similar ranking.

The development of JCGI can be used by policymakers, ASE, SDC, CBJ, and other participants in the capital market. JCGI will judge how corporate governance reforms are working and how Investors (local and foreign) can evaluate the risk associated with deviating from proper CG practices and can determine their investment decisions. JCGI can rank companies in Jordan according to the degree of adopting best governance practices. Finally, the JCGI can be used for research purposes and international ratings and rating agencies.