Why good governance matters in every Saudi company, large or small
The word “governance” is commonly heard these days, especially since the introduction of Saudi Vision 2030 and its development strategies.
Corporate governance can be defined in a general and simplified way as the rules adopted by a company to regulate the conduct of its board of directors in dealing with shareholders, employees and other stakeholders. The aim is to adopt professional internal policies that contribute to decisions that achieve the desired objectives in a transparent and honest manner. The impact of governance is not limited to the performance of the company and its shareholders, helping them to expand their activities and build trust with stakeholders; good governance has a positive impact on the national economy by developing and strengthening it.
For some corporate managements, however, governance is just another trend, to which they pay only lip service. They use the concept to enhance their corporate image with shareholders and the market, without understanding that the application of effective corporate governance is good for the company’s development.
The Capital Market Authority (CMA) of Saudi Arabia has approved new corporate governance regulations for joint stock companies listed on the Saudi exchange, Tadawul. They replace the 2006 version, and formally came into effect on April 22, 2017. These regulations provide shareholders and board members with improved rights, greater clarity and more transparency as to their roles and responsibilities, such as enhancing shareholder rights, clarifying board, committee and executive management roles and responsibilities, clarifying decision-making mechanisms, achieving greater openness, competitiveness, transparency and disclosure, and improving accountability and control over employees.
With great focus on the interests of shareholders, the regulations aim to guarantee their rights, such as fair and equal treatment, fair distribution, access to corporate information and communications, and rights to attend and vote in general assemblies and board and audit member selections. There are now also clear mechanisms for the distribution of dividends and insolvency payouts.
The regulatory authorities also reviewed conflict-of-interest situations and responded to the need to establish policies and procedures on related-party transactions, conflict scenarios, conflicted persons, accepting gifts, and the renewal and termination of the board and its members, as per the Companies Law.
Moreover, good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring.
With regard to social responsibility, the CMA’s regulation has focused on benefiting society as a whole by including corporate social responsibility within its focus and scope.
The role of a company’s management does not end with the announcement of its rules of governance, and promoting them in the media. It must verify the effectiveness of these rules and their implementation, and measure their impact. In addition, the company must update these rules according to the regulatory requirements, and review the latest applications of governance locally and internationally. Furthermore, the company is advised to establish a governance committee to perform these tasks, connected to the legal administration to ensure the integrity of the rules and procedures, and their conformity with the relevant regulations.
Finally, some may think that the rules of good corporate governance cannot be applied to every company — in particular, that they are not relevant to small businesses. In fact, it is our belief as lawyers that corporate governance applies to any enterprise, whatever its size or scope.
Dimah Talal Alsharif is a Saudi legal consultant, head of the health law department at the law firm of Majed Garoub and a member of the International Association of Lawyers.