INCUMPLIMIENTO A LAS OBLIGACIONES PACTADAS EN EL ANEXO ¿SSPA¿

The Saudi Corporate Governance Code (SCGC) is considered to be a main driver in implementing good corporate governance practices across Saudi listed firms. As discussed in Chapter Five, the SCGC was the main source for constructing the compliance index used in this study. Therefore, this subsection reviews the SCGC and presents its provisions in detail. The SCGC mainly consists of four parts: (i) preliminary provisions; (ii) shareholders’ rights and the general assembly; (iii) disclosure and transparency; and (iv) board of directors.

The first part presents the preliminary provisions by providing the necessary definitions and the relationship between the SCGC and other pieces of legislation. Article 1 outlines the main purpose of releasing the SCGC, which is to regulate and improve compliance with corporate governance standards among Saudi firms. Article 1b indicates that the code constitutes the main guiding principle for all public firms listed on the Saudi stock market. To demonstrate the level of compliance with the code in annual reports, the regulator requires companies to explain any non-implemented provisions.

The second part of the SCGC discusses shareholders’ rights and general assembly provisions. Specifically, the main issue concerning the rights of public shareholders is facilitating the exercise of their rights and access to information. Article 5a states that the general assembly should be held within six months of a company’s financial year end. The date, location and agenda of the general assembly meeting shall be announced at least 20 days prior to the date of the meeting. Furthermore, an invitation to the meeting shall be published on the Saudi stock market’s website and also the website of the respective company. Article 5e requires the company’s management to facilitate the participation of the largest number of shareholders in the general assembly. However, shareholders have a right to appoint any other shareholder, who is neither a board member nor an employee of the company, to attend the general assembly on their behalf. Article 5f puts emphasis on the right of shareholders to participate in the formulation of the general assembly meeting agenda. Therefore, the board of directors shall discuss topics proposed by shareholders who own at least 5% of the company’s shares.

To reduce asymmetric information, Article 4b asserts that the board and company management should ensure full access to information by shareholders, enabling them to exercise their rights properly. This information must be regularly provided and updated every six months. In doing so, the company must use the most effective ways of communicating with their shareholders (Article 4b). Article 5j indicates that the stock exchange shall be immediately informed of the results of the general assembly meeting

through the Tadawul website. Therefore, a company can be penalised if such announcements, especially price sensitive information, is delayed.

In order to maximise the participation of small shareholders in making important decisions, such as the nomination of board members, the code recommends applying a one-share-one-vote policy13 (Article 6b). Similarly, the right of shareholders regarding receiving dividends is clearly stated in the SCGC. Moreover, Article 7 asserts that the dividends policy should be discussed with shareholders during the general assembly. It is noteworthy that the provisions relating to shareholders’ rights and general assembly were included in the constructed Saudi Corporate Governance Index (SCGI), representing 12% of the total provisions (i.e., 8 out of a total of 65 corporate governance provisions).

Part Three of the SCGC focuses specifically on enhancing corporate transparency and voluntary disclosure. It is noted that the provisions mentioned in this particular part are deemed complementary to the Tadawul’s Listing Rules (Article 8). To enhance the board’s independence, Article 9 requires that the board’s composition should be disclosed in a firm’s annual report. Specifically, it requires corporate annual reports to include a clear classification of board members into executive directors, non-executive directors and independent non-executive directors. Similarly, a brief description of the jurisdictions and duties of the board must be provided. The firm also has to disclose the board sub- committees, such as audit, nomination and remuneration committees, indicating the names of their chairmen and members, and information about their meetings. The Saudi Code also considers the board’s compensation as an internal corporate governance mechanism. Article 9e requires listed firms to provide details of compensation and remuneration paid to each member of the board of directors and each of its top five executives, including the CEO and CFO. The SCGC does not put a ceiling on board compensation and remuneration. Article 17 points out that such payment may take the form of: (i) a fixed salary; (ii) an attendance allowance; and/or (iii) a certain percentage of the corporate profits.

In order to disclose directors’ interests in other companies, Article 9b states that firms’ annual reports should include the names of other listed firms in which a director holds additional directorships. Also, Article 18 asserts that board members cannot participate in any activity that runs counter to the company’s interests. The SCGC also

13 _{A number of developed countries apply a one-share-one-vote principle (e.g., the UK and the US).}

Theoretically, this may increase the opportunity of small shareholders to appoint their representatives to the board (Adams and Ferreira, 2008). In Saudi Arabia, the MCI issued a resolution in January 2012 to mandate listed firms to apply a one-share-one-vote principle during board elections (Al-jazirah, 2012).

requires companies to declare any punishment, penalty or preventive restriction imposed by the CMA or other regulatory, supervisory or judiciary body (Article 9). The code puts emphasis on the importance of firms’ internal control systems and evaluates the role of the system in enhancing corporate governance practices (Article 9g). The provisions discussed in this section represent about 34% (i.e., 22 out of the total of 65 corporate governance provisions) of the total corporate governance provisions contained in the constructed Saudi Corporate Governance Index.

The fourth part of the SCGC focuses on corporate governance provisions relating to the board and directors. The primary role of a board of directors is to represent the interests of shareholders (Berle and Means, 1932; Davidson et al., 1996). As a result, the code extensively discusses the role of the board of directors in five subsections: (i) main functions of the board; (ii) responsibilities; (iii) composition; (iv) board sub-committees; and (v) board meetings.

First, the code explains that the board’s main role is to reduce agency costs and maximise the firm’s value for shareholders. These functions include: (i) laying down a comprehensive strategy for the firm; (ii) establishing risk management policy and identifying areas of risk; and (iii) reviewing and updating corporate strategies and policies. Additionally, the board should supervise the implementation process and hold management accountable when objectives are not met. Article 10b recommends that listed firms draft their own corporate governance code, which should not contradict the provisions of the SCGC, in order to activate governance structures. In addition, Article 10e focuses on the behaviour of executives and employees, which should be monitored by the board to ensure adherence to proper professional and ethical standards. Furthermore, the code requires that public listed companies develop a written policy regulating their relationship with stakeholders in order to protect their rights.

Second, the code has outlined the responsibilities of the board of directors. It suggests that representation of shareholders’ interests by the board is the most important responsibility of the board. It indicates that board members must strive to achieve whatever is required to ensure the general welfare of stakeholders, not just the interests of a minority of privileged shareholders. The board chairperson is expected to ensure equal and timely access to information by all board members. Most importantly, non-executive and independent board members must be enabled to have effective and complete access to information to perform their duties and responsibilities. It can be noted that the SCGC indicates that the responsibility for running the company ultimately rests with the board, even if some of its powers are delegated to appropriate board sub-committees or third

parties (Article 11a). Therefore, Article 11b states that responsibilities of board members must be clearly stated in the company’s articles of association.

Third, the SCGC focuses on the composition of the board. In Article 12, the code recommends that the size of the board should be not less than three and not more than eleven members. On the other hand, the number of independent members of the board shall be not less than two members or one third of the members, whichever is greater. In addition, the majority of board members shall be non-executive directors. Board members are expected to be appointed by the general assembly, provided that the duration of the appointment does not exceed three years. Additionally, the general assembly holds the power to dismiss all or some of the board members. Also, when any member resigns from the board, the company shall promptly notify the CMA and Tadawul and specify the reasons for such resignation or termination (Article 12g).

To enhance the role of the board in monitoring firm performance, the Saudi Corporate Governance Code recommends splitting the roles of CEO and chairperson. Specifically, Article 12d recommends that the board chairperson should be a non-executive director. To ensure that directors devote sufficient time to performing their roles, the code specifies that a board member shall not act as a board member of more than five listed firms at the same time (Article 12h).

Fourth, the establishment of appropriate board sub-committees and their independence are also covered in the SCGC. In order to enable the board of directors to perform its duties successfully, a suitable number of committees shall be set up in accordance with the company’s requirements (Article 13). The code mandates listed firms to establish audit, nomination and remuneration committees. As the presence of non- executive directors is important in corporate governance principles, the code requires the appointment of a sufficient number of non-executive directors in such committees. These committees shall notify the board of their performance, findings and decisions with transparency. In addition, the board shall follow up on committee activities to ensure that the committees are performing their roles as they should.

According to the code, the audit committee shall have not fewer than three members, including a member who is professionally literate in financial and accounting matters. Similarly, executive board members are not eligible to be audit committee members. Article 14c determines that the main functions of the audit committee include the following: (i) to supervise the company’s internal audit and review the internal control system; (ii) to recommend the appointment and remuneration of the external auditor; and (iii) to review the auditor’s opinion on financial statements.

Table 2.2: The Key Corporate Governance Provisions of the UK Cadbury Report and the Saudi Code

Corporate Governance Provisions 1992 Cadbury Report 2006 Saudi Code Board of Directors

Board structure One-tier system One-tier system

Board size Not specified Between three and eleven

Board composition (classification) Executive and non-executive directors

Executive, non-executive and independent directors

Role duality Separate chairperson and CEO

required

Separate chairperson and CEO required

Chairperson Non-executive director Non-executive director

Non-executive A minimum of three directors A majority of directors

Independent A minimum two directors At least one third of directors

Information accessibility Ensure equal accessibility between members

Ensure equal accessibility between members

Directors’ training Provided, especially for newly- appointed directors

Provided, especially for newly- appointed directors

Frequency (number) of board meetings

Not specified (regularly) Not specified (regularly) Board Sub-Committees

Recommended committees Audit, remuneration and nomination committees

Audit, remuneration and nomination committees Audi committee composition Formed by a minimum of three (at

least two non-executive directors)

Formed by a minimum of three (all non-executive directors)

Remuneration committee composition

Formed by the whole or a majority of non-executive directors

Formed by a sufficient number of non-executive directors

Nomination committee composition Formed by a majority of non- executive directors

Formed by a sufficient number of non-executive directors

Disclosure and Transparency

Board and management compensation Recommended to be disclosed Recommended to be disclosed

Ownership structure Not covered Covered

Dividends policy Not covered Covered

Firms’ Social Contributions Not covered Covered, but limited in scope

Narrative on Compliance/Non- Compliance

Recommended to be disclosed Recommended to be disclosed

Internal Control and Risk Management

Effectiveness of control system Provide statement Provide statement

Risk management Not covered Covered, but limited in scope

Narrative on the firm as a going concern

Covered Covered

Compliance or regulation Voluntary or self-regulation Voluntary or self-regulation

Source: Compiled from the 1992 Cadbury Report and the 2006 Saudi Corporate Governance Code.

In a similar vein, the duties of the nomination and remuneration committees are concentrated on: (i) ensuring, on an annual basis, the independence of directors; (ii) drawing up clear policies regarding the compensation and remuneration of board members and top executives; and (iii) determining the strengths and weakness in the board of

directors and recommending strategies compatible with the company’s welfare (Article 15).

Finally, the code addresses board meetings. It asserts that board members shall perform their duties, carry out their responsibilities and endeavour to attend all meetings (Article 16). Furthermore, the board shall hold ordinary meetings regularly. Also, the board shall document its meetings and prepare records of the deliberations and voting. As discussed above, the code heavily focuses on board of directors’ mechanisms due to their importance in corporate governance. As a corollary, the majority of the corporate governance provisions contained in the constructed Saudi Corporate Governance Index relate to the role and duties of the board, directors and their sub-committees. Specifically, 54% (35 out of the total of 65 corporate governance provisions) of the SCGI provisions are related to the board of directors.