Regulate executive bonuses

The global financial crisis was accompanied by many negative phenomena which came along with the rapid growth of global economies that resulted in wealth accumulation in investment funds and the multiplication of liquidity in global financial markets.

Yet, the huge cash in stock markets and wealth accumulation in investment funds helped cover up these phenomena which appeared when the financial meltdown started.

Now, efforts are being exerted to tackle and set solutions to these negative phenomena.

Among these is the issue of hefty bonuses received by chief executives and board members of companies which exceeded hundreds of millions of US dollars.

For example, Henry Paulson, former Chairman and Chief Executive Officer of Goldman Sachs, received a bonus of $159 million (Dh583.5 million) when he left his post to hold the position of US Secretary of Treasury during the former Bush administration.

The Arab world was not excluded from the issue of hefty bonuses as many examples were mentioned last week in newspapers.

The problem is that these bonuses were distributed by some Gulf joint stock companies at a time they were suffering losses of hundreds of millions of dollars.

European Union countries were the first to sound the alarm bell about the threat posed by immense bonuses to joint stock companies.

Following suit, the administration of US President Barack Obama took practical and serious measures to rationalise and streamline the issue of bonuses through new legislation and laws.

The move, however, was opposed by senior chiefs of companies who created a lobby within the Congress to prevent the passing of this legislation by the Obama administration.

The Obama administration had no other choice but to take quick and serious procedures to put an end to financial violations and protect the rights of shareholders who got affected by the crisis and lost a large portion of their savings, so as to overcome the repercussions of the financial meltdown.

These measures by the US administration encouraged European countries to push ahead with their procedures to eliminate exaggerated bonuses.

Furthermore, there has been a good coordination between these countries to set laws that prevent the reoccurrence of this issue in the future.

This is simply because global markets have become interlinked, as trans-national companies are now working in the world's key markets.

Since Arab markets are part of these global markets and have been severely affected by the economic downturn, similar legal procedures are supposed to be taken by Arab countries to regulate the payment of bonuses in general joint stock companies and set certain conditions and specified rates according to their situations.

Procedures

These procedures must take into consideration the financial conditions of companies, because some of these bonuses were distributed when companies were suffering major losses.

This means that these bonuses are paid at the expense of shareholders' rights, which will add big burdens to these companies, besides there major losses.

This is an accounting and financial mistake which should not be allowed by financial rules.

Besides, the current financial rules do not set certain percentages of these bonuses whether in proportion to achieved profits or salaries.

Without regulating bonuses, this issue will be subject to different estimates, which are exaggerated most of the time.

Taking such steps and introducing laws are very important to complete the proper and practical measures that have already been taken to tackle the repercussions of the financial crisis, and which had positive effects that contributed to overcoming these repercussions fairly quickly.

As we previously mentioned, global financial markets are considerably interlinked and integrated.

If financial markets were to succeed in attracting capital and placing themselves strongly on the world financial map, they have to be transparent.

They must also regulate their activities through laws and regulations that allow companies and financial institutions to streamline their activities and ensure the rights of stakeholders, while giving acceptable and fair bonuses to successful directors and chief executives.

Dr Mohammad Al Asoomi is a UAE economic expert.