Presentar el escrito a que se hace referencia en el inciso C) del numeral 4 de estas Bases, en forma individual por los integrantes de la proposición conjunta.

The first formal attempt to regulate corporate operations and activities was in 1965, when the Companies Act was introduced (Kantor et al., 1995). This Act was extensively amended in 1982 and 1985. Shinawi and Crum (1971) indicate that the primary source of the Saudi Companies Act is the 1948 British Companies Act (as cited by Hussainey and Al-Nodel, 2008). This 1965 Act briefly addresses some corporate governance mechanisms. Particularly, this Act focuses on board characteristics and provisions protecting shareholders. However, it does not address the detailed disclosure and transparency mechanisms that are contained in the SCGC and the Listing Rules and discussed above. Therefore, in this section, the internal corporate governance mechanisms contained in the Companies Act are explained briefly.

First, the section on board structure contains provisions relating to: (i) board size; (ii) the CEO and chairperson’s relationship; (iii) the board’s power; (iv) the annual board report; and (v) the frequency of board meetings. Article 66 of the Companies Act stipulates that the company is managed by the board of directors. The size of the board is determined by the company’s articles of association, but must not be less than three members. The appointment of board members is part of the shareholders’ responsibilities in the general assembly, provided their tenure does not exceed three years. However, in contrast to the SCGC, the Companies Act does not address the board’s composition. For example, it neither specifies whether independent non-executive directors should be part of the board nor the number of independent or non-executive directors that should form a board. Therefore, firms can decide their own structure according to the articles of association. Article 79 allows companies to combine the chairperson’s and the CEO’s positions in one role. As discussed in Chapter Three, this is consistent with the predictions of stewardship theory, which suggest that it is appropriate to combine the positions of the CEO or the

managing director and the board chairperson. Similarly, despite the importance of board sub-committees in ensuring corporate governance practices, the Companies Act does not stipulate the role or the number of board sub-committees that a corporation should have. This was changed in 1994 when a resolution by the Prime Minister mandated companies to appoint an audit committee to oversee and improve internal control systems, with the aim of protecting shareholders.

Second, Article 89 of the Act requires public listed companies to issue annual reports containing a board report, the main financial statements and an external auditor’s report. To ensure such information is available and accessible to the largest possible number of shareholders, the report must be published in any national newspaper issued in the same city as the company’s headquarters. Regarding the frequency of board meetings, Article 80 of the Act points out that the board of directors has to meet at the board chairperson’s invitation. However, regardless of any contrary provision in the company’s articles of association, the chairperson must call a meeting when requested by at least two directors. A board meeting shall be deemed valid if and only if attended by at least half of the board members, provided there are a minimum of three attendees. Directors who are unable to attend the board meeting have the right to delegate other members to vote on their behalf.

In order to mitigate the potential conflict of interest between agents and principals, Article 69 points out that a contract or transaction between the company and directors must be authorised by the general assembly. Furthermore, if such contracts are more than one year in length, the authorization must be annually renewed. Also, members cannot vote on any issue in which they have a vested interest. However, the chairperson, in turn, is responsible for notifying the general assembly about any personal interest of board members. The Companies Act also outlines how directors should be remunerated. Article 74 states that they should be paid a fixed bonus or a certain percentage of the profits, or may combine the two. However, the maximum annual compensation should be either about $53,000 for each director or 10% of the net profits, distributed between the members, whichever is lower.

Finally, the Act also considers shareholders’ rights and how their investments can be protected. Article 87 clearly states that shareholders who own at least 20 shares have the right to attend general assembly meetings. Shareholders have the right to discuss issues relating to the company’s performance during the general assembly. Article 83 of the Act asserts shareholders’ right to appoint another shareholder (non-directors) to attend the general assembly meeting and vote on their behalf. Article 84 points out that the annual

general assembly meeting should be held at least once a year, during the six months following the end of the financial year. To ensure that information is accessible for all shareholders at the annual meeting, the Act states that the annual report must be made available at least 60 days before the meeting.

In order to encourage shareholders to exercise their right to attend the general assembly meeting, Article 88 requests the publication of details of the meeting in a daily newspaper at least 25 days before the meeting. The meeting details should include the meeting agenda, date, time and location.

2.4.4 Difficulties and Challenges Facing the Internal Governance Framework