Corporate governance practices in developing countries: A case study of Saudi Arabia

Corporate governance practices in developing countries:

A case study of Saudi Arabia

2
Contents
Chapter 3: The Corporate Governance in the Saudi Arabia system..........................................2
1 Introduction......................................................................................................................2
2 The Historical Background and the Legal Structure of Saudi Arabia..............................2
2.1 Introduction................................................................................................................2
2.2 Description of the Background formation and Legal System of Saudi Arabia.........3
2.3 Critical Evaluation of the Background and Saudi Legal System...............................8
3 The Internal Corporate Framework of Saudi Arabia......................................................10
3.1 Description of the Internal Framework.......................................................................10
3.1.1 1965 Company law as Foundation of Corporate Governance..............................10
3.1.2 Major Changes in Saudi Arabia Company Law...................................................11
3.1.3 The Saudi Corporate Governance Regulations 2006-2021..................................14
3.2 A Critical Assessment of the Internal Framework...................................................16
4 The External Corporate Framework of Saudi Arabia.....................................................20
4.1 Description of the External Framework...................................................................20
4.1.1 The Saudi Stock Exchange...................................................................................20
4.2 Critical Evaluation of the External Framework.......................................................23
5 Chapter 3 Summary........................................................................................................25
5.1 Company Law..........................................................................................................25
5.2 Capital Markets and Stock Exchange......................................................................25
5.3 Corporate Framework..............................................................................................25
5.4 History and Background of the Saudi Legal System...............................................26

Chapter 3: The Corporate Governance in the Saudi Arabia system

3.1 Introduction

The main aim of this thesis is to identify how Saudi Corporate governance has developed and

how to improve it while considering that it has some unique cultural, social, and economic

factors. This chapter seeks to bring in the legal framework of Saudi Arabia. The legal

framework has an impact on the corporate environment. Studies have shown that in countries

which follow common law, the protection accorded to shareholders differs from countries

that follow civil law. Hence, there is a connection between the legal system and the

fundamentals of the corporate environment. The legal framework, its implementation, and

enforcement directly and indirectly affect the company's structures and the market for

corporate control. The main aim of this chapter is to develop an understanding of the legal

framework of Saudi Arabia and develop the legal dimensions that are prevalent in influencing

the corporate environment. Further, it seeks to identify ways in which the legal framework

has facilitated the development of C.G. in Saudi Arabia and identify how factors of culture,

social, political, and economics are either supporting or hindering the role of the legal

framework in Saudi Arabia.

3.2 The Historical Background and the Legal Structure of Saudi Arabia

3.2.1 Introduction

The Kingdom of Saudi Arabia is located in Southwestern Asia. It lies north of Yemen, North

and West of Oman and the United Arab Emirates, and south of the Syrian Desert and Iraq. It

is between 756,954 and 899,766 square miles. The largest part of Saudi Arabia is desert and

semi-arid, with only 2% of the land being arable. The country is divided into 13

administrative areas and 118 governorates. The Easter Province is the largest and contains the

largest oil research. The Saudi population is concentrated in the cities. Makkah is the most

populated city, with 265 of the population residing here. This chapter will focus on looking at

the historical background of Saudi Arabia with the aim of understanding how history and

formation have shaped its current legal framework and how this influences corporate

governance development.

3.2.2 Description of the Background formation and Legal System of Saudi Arabia

3.4.2.1 Creation of the Kingdom of Saudi Arabia

The forging of Saudi Arabia occurred under Abd Al-Aziz (Ibn Sa'ud). Saudi Arabia was not

united at first. The Hashimite family controlled the West, and the Al-Rashid family batted

with the Saudis for control of the Najdi Homelands. Further, the Mubarak family of Kuwait

was battling for the Ha'il. As the family were fighting, Abd al-Aziz took advantage of their

distraction. He set out for Riyadh with a force of 40 people. He attacked the Rashid governor

at the Musmak Fortress and recaptured Riyadh in 1902. Through this move, he became

known internationally as Ibn Sa'ud. He embarked on a mission to regain control of his family

territory with his companions, known as brothers, beginning with Najd. He used military,

alliance formations, and negotiation tactics to acquire these territories. By 1913, he had

pushed the Ottomans out of al-Hasa Province. He further forged an alliance with the British,

which enhanced his powers. He signed a treaty of friendship with the British and agreed to

support the British in World War 1 in Mesopotamia. By the end of WW1, Ibn Sa'ud

controlled central Arabia, and he continued to move to other areas, such as Hashemites and

forced other areas to accede. Following this, in 1932, the Kingdom of Saudi Arabia was

formally created.

3.2.2.2 Legal Structure

The Saudi Arabian government is a dynastic and hereditary monarchy that the al-Sa'ud

family heads. There are some critics who claim that it is an absolute monarchy because

political parties are not allowed, and there is no legislation on electing leaders. The others

agree that the king's power is limited because the government relies on consensus and not

authoritarianism; this is because though the king wields ultimate power, he rules together

with a group of senior princes who weigh in on and initiate actions. The king relies on senior

princes who come from different branches of the Al-Saud family to exercise the strongest

decision-making role in Saudi Arabia. Thus, the Kingdom of Saudi government can be

classified as a Consultative Monarchy. This is because it follows Shura (consultation), which

is an Islamic requirement of the government. The king consults and is advised by two main

bodies. The Council of Ministers, who are the principal executive structure of the

government, and The Majlis-al-Shura also advise him. Through consultation, the king betters

serves the kingdom.

The executive plays an important role in the development of laws in Saudi Arabia. The

minister of cabinet office will propose a regulation which must be approved by the council

and finally ratified by the king. When the king approves, the royal decree is published

through an official gazette and becomes law. The king has delegated to ministers and heads

of government agencies the role of issuing administrative or ministerial circulars. These

administrative or ministerial circulars are recognised as laws and carry the same weight as

royal decrees.

The Qur'an and the Sunna largely govern the Saudi legal system, and its main law, the Basic

Law of Governance, largely follows Sharia Laws. King Fahd developed the Basic laws of

Governance in 1992 following the First Gulf War. The Basic Law of Governance (BLG) is

the original legal document that establishes laws in Saudi Arabia. It notes that Islamic Sharia

drawn from the Qur'an and Sunna shall be the foundation for all legal authority throughout

the kingdom. The Basic Law has nine chapters and 83 articles. It is similar to a constitution

because it sets out the basic principles of government and establishes the duties and rights of

various bodies.

Chapter one contains general principles such as declaring the holidays, the sovereignty of the

state, the flag and what defines the state medals. Chapter two contains the law of governance.

It establishes the Morgancy system of government and the governance structure. Chapter

Three focuses on the values of the Saudi system, such as family, unity, and education.

Chapter 4 focuses on economic principles- it focuses on taxes, the economic exploitation of

resources and the ownership of private properties. Chapter five provided the rights and duties

of people. These include human rights as per Sharia laws and access to public health. Chapter

six focuses on the authorities of the state. The authorities of the state include the Judicial

Authority, Executive Authority, and Regulatory Authority. Chapter seven deals with financial

affairs. It focuses on the country's revenues and the state's role in adhering to the financial

rules. Chapter eight is Institutions of Audit, which establishes how government offices shall

be audited. Chapter nine introduces how the law shall be enacted, deal with violations and

how it can be amended.

3.2.2.3 Sharia Law

The fundamental tenet of the Saudi Legal system is that there is only one law: Sharia. All

other legal authorities and regulations are not binding if they are found to be inconsistent with

Sharia. To understand this fundamental role of Sharia, it is crucial to acknowledge that Sharia

is not just a law but a major aspect of Saudi Arabia. It is an Islamic Doctrine that forms an

integral part of Saudi culture. As a result, there is a desire and consensus that Islamic beliefs

must be protected; hence, Sharia laws are widely accepted and recognised by the people of

Saudi. The Sharia plays an important role in the development and amendments of laws in

Saudi Arabia. The three main features of promulgating policy in Saudi Arabia. The right to

promulgate applies only to cases where Sharia has left gaps that can be filled through

administrative laws. The regulations are subordinate to Shari, and each regulation must

contain a clause that states so. The regulations should not contradict Sharia. They should not

be issued to regulate any matters that have been sufficiently dealt with by Sharia.

The Sharia is a classical law system that is called a lived practice of law. The most important

source of Sharia is the Quran and the Sunna. The Quran is the principal source of Islamic

laws, and it is taken to be the Supreme Islamic authority. It contains rules which govern the

relations between man and God, between men, and between man and things which were

created. It contains rules through which the Muslim society is organised and governed and

develops ways through which conflicts should be resolved. The Islamic laws are also drawn

from supplementary sources, the Hadith, and the Sunna. These are complementary sources of

law that contain the sayings of the prophet and accounts of his deeds. In these sources of the

law, both the Quran and the Sunna, there are few statements that can be taken as rules of law.

Those statements that can be applied directly relate to family inheritance and a limited

number of offences. Therefore, it is up to theologians and legal scholars to provide an

interpretation of the Quran and the Sunna that can be used in the development of Sharia laws.

The methodology used in developing and interpreting laws is known as al-Fiqh. Al-Fiqh

means the roots of legal knowledge. Al-Fiqh is a complex and sophisticated jurist technique

developed to interpret and develop rules of law. This results in the use of various techniques

to draw legal systems from Sharia laws, which have resulted in significant differences in

various law systems among Muslim countries. There are large schools of law that all differ in

how they apply legal rules. They include the Hafanite schools, which are the most liberal of

the four systems. It is centred on consistency and consensus among recognised jurists. This

school of thought prevails in Pakistan, India, and China. The next one is the Malikite school

of law, which emphasises being traditionalist and conservative. It largely emphasises the

Quran and Sunna and is less liberal in allowing anything not laid down in these sources into

law; it is largely prevalent in North and West Africa. The third one is the Shafite School of

law, a combination of the Hanafite. It is based in Egypt, Jordan, East Africa, Malaysia,

Indonesia, and Sri Lanka. The last one is the Hanbalite school of law. It emphasises that

Sharia should be based on the literal texts of the Quran and the Sunna. It is the school. It is

found in the Arabian Peninsula, and it is Wahhabism. Thus, it is the prevailing school of

thought used in Saudi Arabia. Between these schools of law, there exist many differences in

how the Sunna and Koran are interpreted in the legal system. the impact of this is that there is

less unanimity in legal rules among Muslim countries. Thus, despite Muslim countries using

Sharia law, there exist great differences from country to country, and it is crucial to

understand the school of thought that is used in these countries.

3.2.2.3.1 The Sharia Perspective of Saudi Arabia Corporate Governance

Sharia Corporate Governance is the Islamic version of corporate governance. in normal

corporate governance, there is a focus on shareholders and stakeholders but in Shariah

corporate governance, there is a focus on God, shareholders and stakeholders. The Shariah

corporate governance is based on Islamic law and seeks to distinguish itself from the

conventional rules of corporate governance. Shariah Corporate governance is a concept that

is gaining more attention as the number of Shariah compliant companies is growingthe

concept of Shariah corporate governance is that is based on Islamic teaching. In this case,

corporations should do things that are in line with Islamic teaching and activities such as

gambling are not allowed. Secondly, the corporation must be accountable to God and society.

accountability is a huge part of the Islamic worldview.

According to Hill the conventional models such as Anglo-Saxon are not suitable for Shariah

corporate governance. Shariah corporate governance is based on Shura or consultation. This

system recommends that a two-tier system with a Shariah Board that safeguards Islamic

elements in companies and a Board of Directors which runs the corporation is set up. The

Shariah board would advise the board directors on Shariah matters and Sharia audits should

be monitored to ensure the organisation is accountable to God, shareholders, stakeholders and

society . This is indicated by Dana who notes that a key feature of Shariah corporate

governance are the creation of a Shariah supervisory board in the internal structures of an

organisation. These conventional models are incompatible with Shariah corporate governance

because at the top of Shariah corporate governance is God. The conventional models of CG

are based on worldviews which may be inconsistent with Islamic law. Muneeza and Hassan

recommend the need for the development of a special Shariah governance code. This is

because though there are countries that have developed Islamic corporate governance such as

Malaysia there is no uniform Sharia Governance code. There is a need for a uniform-based

Shariah Governance system that would enable companies to implement a uniform system and

enhance compliance with Islamic elements.

Though Saudi Arabia follows Sharia law, it has not strictly embraced Sharia rule in its

corporate governance. Its corporate governance system is a blend of legal frameworks,

recommendations and best practices borrowed from the US and UK models. The Capital

Market Authority is the main body that develops corporate grievance in Saudi Arabia. The

framework for corporate governance in Saudi Arabia is not based on Sharia is a legal

framework borrowed from Western countries which includes auditing, internal control,

disclosures and transparency and risk management, shareholder rights, and function and

make-up of the board of directors. However, this is not mean that Sharia principles do not

influence the corporate governance. Shariah principles requires that businesses are run in

accordance with Islamic values such as morality, justice, and social responsibility. Under

Islamic perspective companies are placed under more scrutiny because they are supposed to

be accountable to God and to the society. Saudi Arabia has adopted modern rules of corporate

governance with an aim of meeting global standards. In doing so it has moved away from

strictly applying Islamic principles in its corporate governance. The constraints of Sharia law

in corporate governance is being done to accommodate foreign investors. The country is

aiming to develop corporate governance that is in line with global standards to attract foreign

investors and to also access international markets. However, business is still expected to

follow the Islamic rules because in a country governed by Shariah there is no separation

between religion and laws. The fact that Saudi Arabia is using modern legal frameworks, this

thesis will seek to determine if there are any conflicts between modern models and Shariah

perspective and how this may affect the protection of minority shareholders, It will seek to

assess if Shariah perspective of corporate governance can provide better protections to

minority shareholders

3.2.2.4 Court System

The judicial system is usually the backbone of any national dispute settlement. The Saudi

Judicial authority compromises the Shari Courts, the Board of Grievances, and the Quasi-

judicial Committees. The Sharia Courts are divided into four levels. The limited or summary

courts, the general courts, the court of appeal, and appellate court, and the Supreme Judicial

Council. As the highest court, the Supreme Judicial Council reviews legal decisions and also

approves sentences for serious crimes, such as those who receive capital sentences,

punishment by amputation or stoning. The Board of Grievances was originally established to

deal with cases against the government, but over time, it has developed and handled most

commercial disputes. The Law of the Board of Grievances sets jurisdiction on matters that

the Board of Grievances adjudicates over. They include cases related to civil service and

government entities, tort cases, contract cases, administrative disputes, and any disciplinary

cases filed by the competent authority. The Quasi-Judicial Committees have also been

established to support the roles of the Board of Grievance in adjudicating matters that are

seen to be beyond the jurisdiction of the Sharia laws. The quasi-judicial committees enjoy

independence from Shari courts and use rules and regulations. Examples of quasi-judicial

committees include the Banking Dispute Committee, the Committee for the Resolution of

Securities Disputes, and the Labour Disputes Committee.

The development of the Board of Grievances and Quasi-Judicial Communities has been

promoted by the concerns of applying civil law principles on issues which are non-Islamic.

The expansion of civil jurisdiction has been seen as a threat to Sharia laws and courts.

Moreover, Sharia courts have continuously rejected to enforcement of certain laws and

regulations because they are non-Islamic. For example, laws governing banks and insurance

agreements that are against Islamic principles. This has necessitated the need to fill the gaps

and led to the establishment of quasi-judicial committees.

3.2.3 Critical Evaluation of the Background and Saudi Legal System

3.4.3.1 Analysis of Legal Framework

The term constitution is not outright in the Basic Law of Governance, and this is because it is

dependent on Sharia, and this means that a strict sense legislative body is absent in Saudi

Arabia. This law is based on the book of God and the Sunna, which is based on Muslim

beliefs that these religious sources are of higher regard than any written rules by humans,

including constitutional law. Thus, it will be hard to draw from foreign laws in Saudi Arabia

because the law of Saudi Arabia differs from the Western system in that it largely relies on

Islamic teaching. Compared to the U.K. and U.S., it lacks a strict sense aspect where it

clarifies that it is dependent on Islamic teaching. The BCG keeps referencing Islamic

teaching and disclaimers that if a law violates the Sharia laws, it will be superseded by

Islamic teaching. This is unlike other systems where laws are strict, such as the Constitution

of the U.S., which supersedes other laws, and the same case with the U.K., where its laws

created by parliament are supreme because it has a doctrine of parliament sovereignty. On

this basis, as corporate governance codes are being borrowed from foreign contexts, this must

be done in a manner that respects the Sharia laws because any violations will make laws lack

the legitimacy needed to promote compliance. Therefore, the laws of Saudi Arabia are largely

dependent on Islamic laws and norms, and even as any laws are being developed, they must

always respect Islamic teachings.

For a long time, the Muslim states relied on classical interpretations of Sharia, where Sharia

law is that it is considered complete, and it becomes hard to introduce new laws once in a

while. The interpretation of the Quran had been closed to interpretations, which prevented

modern laws that reflect the current state from being developed. As a result, for a long time,

Islamic states have relied on legal systems, some of which have been overtaken by time. It

was only in the 19th century that the interpretation was reopened for scholars to create a path

to the modernisation of the legal system. Today, the total application of the classical system

of laws does not exist, and Muslim countries are showing a willingness to implement new

laws provided that it does not conflict with Sharia. This is a principle known as Siyasa, which

has enabled the modernisation of law. The Siyasa principle states that everything necessary to

execute God's plan is regulated, provided that it does not violate or conflict with Sharia. It

allows the legislative authority to develop laws that cover areas which the Quran and Unna

do not cover, provided such laws do not conflict with Sharia. This is implied de facto, where

there is some form of separation between religious and secular powers in Islamic kingdoms.

The development of the system has enabled national law in Muslim countries to draw from

other laws in parts of the world, such as from common law or civil law structures, for as long

as this does not violate the Sharia laws. This has led to the development of private contracts,

contract laws, bankruptcy laws, intellectual property laws, general administrative laws, and

education laws, among others, in Islamic states.

Despite the development of the Saudi Legal Framework, there exists some criticism. One is

that the lack of a strict and clear constitution means that some individual rights have not been

protected by law. Moreover, the rule of law doctrine requires that laws be applied equally and

treated people are treated equally. Sharia law does not meet this concept of rule law because

there is the differential treatment of men and women in Muslim countries. Women's

entitlements, including voting rights, are different from men's. This form of inequality has

far-reaching consequences even in corporate governance systems, where it is noted that there

is virtually no representation of women in board systems.

It has been established that there are different schools of thought that are used to interpret

Sharia into laws. Due to these differences in interpretation, it becomes hard to draw rules

from one Muslim country to another, unlike in Western jurisprudence, where some level of

consistency is visible, and countries comfortably use the legal rules and doctrines from other

countries to enhance the legal system. another difference is that Western jurisprudence has

been developed by practising jurist based on the practice of law, unlike Sharia which has

been developed by Scholars and theologians who are based on precepts and beliefs. The

problem with relying on beliefs and presents is that individuals offer their own interpretations

of laws and can be comfortable deviating from the formal law. This has been visible in

Muslim countries such as Pakistan and Egypt, where religious movements hijacked some

sections of the city and imposed their version of Sharia laws. It creates a space for the

practice of informal laws, especially in areas where state apparatus has collapsed, such as in

countries such as Afghanistan and Iraq. This can be a hindrance to the development of the

required legal framework. Thus, as Saudi Arabia seeks to develop corporate development, it

must find a balance between policymakers and Sharia Scholars so that it can develop laws

that will be clear and consistent.

3.4.3.2 Analysis of Court System

The Saudi court system has tried to reduce the dilemma created by Shari Law, where some

matters are not enforceable in-laws, by creating a Quasi-Judicial committee. However, there

are still some issues that still exist that impact the effectiveness of the Quasi-Judicial

committees. Quasi-judicial committees are many, and currently, there are over one hundred.

All these quasi-judicial committees have been established by Royal Decree and placed under

the authority of a specific ministry. This makes the application of laws on matters that are

non-Islamic very fragmented because each quasi-judicial committee operates under a

different legal framework. The fragmentation of these committees makes it hard to develop

the legal system, which requires centralisation and consistency. It also leads to disparities in

judicial decisions.

The Quasi-Judicial Committees lack the right of independence required in the development of

judicial decisions. The Sharia court judges are well recognised by the Sharia laws and

provided with independence; the same has not been accorded to the quasi-judicial

committees. For these committees, the specific minister holds broad authority over

committees, which interferes with the independence of the committees. Though the

Committees are empowered to adjudicate over matters, they have not been given the

protection and independence that judges in Sharia Courts are given.

The current problem in the incapability of Sharia being applied to resolve commercial

disputes is caused by the Sharia scholar's failure to allow any foreign laws to be introduced in

Sharia Courts. This is partly caused by the differences between Western and Islamic cultures.

The Sharia laws focus on social welfare and justice, whereas Capitalism principles largely

drive western culture. The differences between these created a reluctance among Sharia

scholars to accept the introduction of foreign laws. The colonisation of Islamic countries by

European countries, which has been viewed as a way of imposing Western cultures on

Muslim countries, has further made Sharia scholars reluctant to accept foreign laws. The

dominance of Western countries has been met with resistance, and this has created resistance

among Sharia scholars to accept foreign legislation which can tamper with the Islamic beliefs

of the country. The resistance by Islamic scholars makes it hard to establish some foreign

principles in law, and it has caused civil and commercial matters not to be recognised in the

Saudi Arabian system to some extent. This results in weak enforcement of laws that deal with

corporate governance. Hence, Saudi Arabia must find a way of resolving the concerns that

exist among Sharia scholars for it to develop appropriate regulations that meet modern

demands while still considering the Sharia laws.

3.3 The Internal Corporate Framework of Saudi Arabia

3.3.1 Description of the Internal Framework

3.3.1.1 1965 Company law as Foundation of Corporate Governance

Saudi Company Law is critical in corporate governance. This is because it is the main law

governing all companies in Saudi Arabia. Unlike Western countries, which have statutes

specifically governing limited liability companies, Saudi Arabia regulates all types of

companies under one act, the Saudi Company Laws. The development of the oil industry in

Saudi Arabia led to the development of the first company's regulations in 1965. This is

because the development of the oil industry affected various aspects of life, including trade

diversity and a number of urban projects. There was a development in business that ranged

from the financial, technical, and administrative business that focused on managing oil

projects at various levels. Thus, the company development became urgent to develop a

comprehensive regulation that would regulate commercial business and offer protection to

investors.

The 1965 company law was enacted through the Royal Decree. The law was based on the

British companies act of 1965. The 1965 company was the first legislative law that attempted

to establish corporate governance principles in Saudi Arabia. It regulated commercial

companies, partnerships, joint-stock companies, liability companies and limited liability

companies. The 1965 law saw the report cards for businesses where businesses were required

to issue balance sheets, profit and loss accounts and financial positions of the business. The

1965 law detailed shareholder rights, some of which are still accorded to shareholders today.

The shareholders were provided with rights such as receiving a proportion of profits through

dividends, rights to take shares in case of liquidation, rights to general meetings, the right to

vote, and the right to supervise the board.

3.3.1.2 Major Changes in Saudi Arabia Company Law

The 2015 law replaced the old company laws. It was issued on the 9th movement of 2015 by

the Council of Ministers of the Kingdom. The new law reflects the growth of the Saudi

Arabian economy, which necessitated the development of a new law framework that was

compatible with the more complex business environment. The factors that necessitated the

development of this law reform include the growth of foreign direct investment, Saudi Arabia

joining the World Trade Organisation in 2004, the growth of the Saudi Arabia stock market

and being open to foreign investment, the diversification of the Saudi Arabian economy and

establishment of new industries above the traditional oil-based industries, the growing role of

small and medium enterprises in the country needed the support of a regulatory environment.

This is because they will build the private sector, which is expected to play a role in the

economic development of Saudi. Another factor that may have simulated these changes is

that Saudi is part of the G20, and it had to make these changes in line with the G20/OECD

Principles of Corporate Governance 2015 Edition.

The 2015 law made some changes that impacted on corporate governance of Saudi. The first

change is changing the types of companies. In the old law, only cooperative companies,

partnerships, and variable companies were allowed. The new laws for new entities include

limited liability and joint-stock companies. LLC (Limited liability company) and JSC (joint-

stock company) also become holding companies in articles 182-183. The most significant

change is allowing for the formation of an LLC with a single shareholder, which replaces the

requirement for a minimum of two shareholders. Further, JSC can have two shareholders,

which was reduced from a minimum of five.

Another major change is the prohibition of combining the post of board chairman with the

executive position. Under Article 81, the law prohibits the chair of the board from holding

any executive position in the company. The 2015 law further improved minority

shareholders' rights through the introduction of cumulative voting. Article 95 indicated that

cumulative voting would be used in the election of the board of directors, where there would

be a vote per share. Each shareholder casts a vote in proportion to the number of shares they

own. The use of this method will increase the opportunity for minority shareholders to be

represented on the board of directors. Another way that the new law has strengthened the

minority shareholders is through the requirement for JSC to appoint an audit committee that

is separate from the board of directors. Moreover, it allowed shareholders to bring actions

against the board and require investigation even for a shareholder who represents at least 5%

of the shareholding.

The new law has focused on compliance and clearly defined penalties for some types of

violations. The officer, auditor, liquidator, and board members provide false and misleading

financial information. Any misuse of authority, votes, or funds contrary to the company's best

interest. Another type of violation is the failure of the manager, officer, and director to call

for a meeting when the company loses 50% of its capital.

The 2017 company law was enacted as per the law reform procedures of Saudi Arabia. The

table below highlights the main issues that were changed that are likely to impact corporate

governance. The changes were identified through an analysis conducted by Amer Al Amr

Law Firm.

Articl

Changes made Implications

12 The 2017 law clarified the requirement

for companies to have articles of

association in written form at

incorporation.

The clarification indicates that many

companies that do not have

documented articles of association

will face enforceability issues.

The amendments mean that

companies' incorporation and

amendments to the association will

only come into effect once they meet

the Ministry of Commerce and

Investments requirements.

71 The article deals with the conflict of

interest in board members who may have

a direct or indirect interest in

transactions or contracts completed for

the company's benefit. It retains

requirements for the board member to

report to ordinary ad general assembly; it

also retains the requirement for the

matter to be reported in minutes and

voting, including the affected board

member. However, it raises the

thresholds if board members are liable

for conflicts of interest. It notes that the

board member shall bear liability for

damages from the transaction and

contracts with interest in the transaction

or contract. The remaining board

members on transactions and contracts

are executed in violation of provisions of

this article where a conflict of interest

caused to harm is rove.The law further

adds that members of the board of

directors who dissented from the

resolution and can prove that their

objections were expressly noted in the

minutes of the meeting will be expelled

from the liability. Further, being absent

from the meeting shall not release the

board member from liability unless they

prove that the absent member was not

informed about the resolution.

These sections increase the liability of

board members with respect to

conflict of interest. The law will

expose board members to conflict of

interest if it can be proven that they

did not properly handle the treatment

of conflicts of interest. The

development of this law ensures

corporate governance. Saudi Arabia

complied with, and companies also

observe company laws.

72 The law previously required directors to

get prior authorisation from the ordinary

general assembly to participate in any

business competitive with the company,

but this has been changed to board

members to get authority from the

general assembly but does so in

accordance with the competent authority.

Further, it states that companies must

make a claim before a competent judicial

authority when a director’s action harms

the company.

The amendment enhances the role of a

competent authority, which in this

case is the Minister of Commerce and

Investment, in approving any

competing business that the member

board is engaged in. By replacing the

words shall with have, the new law

indicates that companies will now be

obliged to bring a claim against the

board member, unlike in previous laws

where it was done under the

company's discretion.

80 Adds a new paragraph that allows

shareholders to bring a claim against the

company if it fails to comply with

relevant laws, and the company will be

charged for these expenses incurred by

the shareholder. This will happen if the

shareholder files the claim in good faith,

submits to the company the reasons for

filling the clean and does not receive a

reply within thirty days.

The new addition makes it easier for

shareholders to bring a claim against

the company. The aim of this is to

drive a compliance culture in Saudi

Arabia.

This new law has been criticised for

failing to be clear about recovering

expenses when one files a claim

against the board members. It only

outlines claim against the company

without mentioning claims against

directors. It may not be clear how

claim expenses against directors and

the company will be reconciled.

91 Extends the period of serving general

meetings to 21 days from the previous

ten days. It further adds the mandate to

publish the agenda in a daily newspaper

distributed in the whereabouts where the

main company office is located.

The main aim of extending the days to

serve a general meeting and increasing

the distribution of the agenda is to

enhance the protection of

shareholder’s rights.

104 The article has increased the timeframe

for the board of directors to submit

copies of reports audited from 10 to 21.

The main aim of this change is to

build on the extended timelines of

article 91 indicated above. It builds on

protecting shareholders' rights by

requiring that audited reports be

provided in adequate time before the

meeting.

The 2017 company law changes have had a critical impact on corporate governance. This is

because they made some changes that were necessary to improve corporate governance in

Saudi Arabia., It highlighted the importance of protecting minority shareholders. Minority

shareholders were now provided with the ability to be reimbursed for claims. It further

enhanced corporate governance of matters such as dealing with conflicts of interest

provisions which relate to joint stocks. Additionally, the company law upholds the culture of

being consistent and compliant with corporate governance. This is in line with the key aims

of Saudi Arabia under vison 2030, which include embracing transparency, being responsible

and easing doing business in Saudi.

3.3.1.3 The Saudi Corporate Governance Regulations 2006-2021

2006 marked a critical period in the development of corporate governance in Saudi Arabia; it

was the year that the Saudi capital market experienced a financial crisis, promoting the

development of stronger corporate governance. The Saudi Capital Market Authority

(SCMA), which was established in 2004, adopted some of the international accounting

standards, such as OECD principles. It announced the first code of Saudi Corporate

Governance Regulations (SCGRs). However, the first SCGRs were optional and became

compulsory in 2010 when all listed companies were required to demonstrate adherence to

SCGRs on a comply and explain basis. These regulations were made mandatory due to

international pressure, where Saudi needed to comply with international practices in

corporate governance. This international pressure was the need to ensure uniformity in

corporate governance practices.

Further, in line with Saudi Arabia's need to attract foreign investment and meet its 2030

strategy of diversifying the economy, the Capital market authority issued new regulations in

2017. The new SCGR 2017 provided shareholders and board members with better rights. It

enhanced transparency and disclosures. The main highlights of the SCGR 2017 include the

following.

The 2017 SCGR provided new rules that govern the board of directors. It changes the board

formation, conditions for memberships, responsibilities, competencies, and appointments.

Before the SCGR2017, the company was not obliged to provide names of the board members

to the authority, but with the new SCGR, companies must nifty the authority the names of the

board with a description of membership within five days of the appointment. Further, the

2017 regulation introduced a requirement for board members to be competent, to have

knowledge and skills and to be physically fit to hold the positions.

The SCGR provided a framework for the independence of the board, which had not been

provided in the previous SCGR. The law states that the board should assess the members'

independence and make sure there are no connections that may affect their independence.

Further, under article 28 chief executive is prohibited from being appointed board chairman.

The chairman of the board is prohibited from holding any executive position in the company.

Moreover, the chief executive in the first year following the end of tenure should not serve as

chairman of the board.

The 2017 SCGR introduced a number of new rights of shareholders that had not been

explicitly provided in the previous SCGR 2006. The laws are indicated in the table below.

Right Article

fair and equal treatment among shareholders Article 4

right against discrimination among shareholders of the same class Article 5

equal rights related to access to corporate information and

communications

Articles 6 & 7

rights to attend and vote in General Assemblies and Board and Audit

member selections

Articles 8-15

Rights to the distribution of dividends and insolvency pay-outs Article 9

Conflicts of interest were limited to the board of directors under the 2006 SCGR. In the 2017

reforms, it was extended to include executives, employees of the company, or any other

stakeholder dealing with the company. Any conflicts of interest must be disclosed. Further,

companies must have policies and procedures that relate to transactions where there is a

conflict situation.

Companies are expected to reveal information to stakeholders as per companies and capital

market law. The remuneration of the board members and executives should be disclosed.

Further records of minutes, reports and documents should be stored for a period of ten years

and longer if there are appending cases.

3.3.2 A Critical Assessment of the Internal Framework

3.2.2.1 Company Reforms in Saudi Arabia Corporate Governance.

The reforms of company law over the years indicate that Saudi Arabia has made progress in

the development of corporate governance. The reforms have focused on addressing some of

the issues that previous laws faced. The main changes to company law are in line with Saudi

Arabia's plan to become less reliant on oil and attract other investments. As indicated, the

laws have changed from 1965 to 2015 and then in 2017; one can argue that the changes are

focused on enhancing the compliance culture with commercial laws in Saudi Arabia. This is

one way of improving Saudi Arabia's commercial environment to make it more attractive to

foreign investors. The primary goal of these changes is to promote and facilitate foreign

investments; hence, the laws are making the board of directors more liable for actions, and

the company can be held liable by shareholders to enhance the compliance and enactment of

these laws.

However, the company law has been criticised for failing to protect minority shareholder

rights effectively. According to Al-Zahrani, it empowered majority shareholders to the point

that they could cause injustices without any liability. This is because it did not allow

shareholders to bring liability on behalf of the company, and shareholders filing a liability

suit that threatened the controlling shareholders were not allowed. Further, the fact that the

company law of 1965 terribly failed in protecting minority shareholders has influenced the

development of subsequent laws that have focused on improving such areas. Despite these

improvements, there are some key issues that are yet to be fully dealt with in the development

of these laws.

Despite making these major amendments, the company law in Saudi Arabia has yet to

address the limitations to the satisfaction of shareholders and foreign investors. One of these

areas on the protection of minority shareholders. So far, the company law has attempted to

enhance the protection of minority shareholders by establishing a liability action where

shareholders can bring a claim against the company if it is found to have harmed the

shareholder's positions. However, as indicated, these rights are not clear on whether

shareholders can bring actions against directors directly. Further, shareholders can only bring

such claims if they have informed the company, and no action has been taken. The minority

shareholders are still limited because the complaint system limits the actions they can take

against the board of directors. Further, if minority shareholders seek a review of any

behaviour or actions, they are not allowed to take any further action once the review is

completed. This leaves minority shareholders with no recourses, especially in cases where the

review sides with the company or shareholders. The fact that minority shareholders are not

given powers to hold directors’ accountable means that even in cases where abuse of power is

obvious, the majority shareholder can intervene in the internal operations of a firm. Another

challenge is that Saudi Arabia shareholders can legally include clauses and terms they may

wish if the laws do not conflict with the relevant company laws. These shareholder

agreements protect them when they are disputatious issues; however, the problem can arise

when agreements are not well crafted.

Thus, though the company law reforms make significant changes to ward the protection for

shareholders, they are still insufficient because they fail to address the key aspects of the

rights of shareholders in listed organisations. As a result, corporate governance in Saudi fall

behind international standards. Further, the company law's failure to address this issue is not

in line with the Saudi government's privatisation strategy. This is because it impacts foreign

investors who will not be confident with the business environment in Saudi Arabia.

3.2.2.2 Company Law and minority Shareholders in Saudi Arabia GC

The lack of adequate protection for minority shareholders indicates that the existence of

shareholder's rights in detail under the company law does not necessarily mean that they are

being exercised effectively in Saudi Arabia. The rights of shareholders are not assured

because of several factors. The factors include the company's ownership structure, the legal

system, the political atmosphere, and cultural and religious traditions.

One significant fact that prohibits this law's compliance to the fullest is the ownership

structure. The ownership structure plays a major role in influencing the shareholder's rights.

There is a high concentration of government or family-owned companies. Most listed

companies are government-owned, where government hold a high percentage of shares in

publicly traded companies. Two reasons why government ownership is highly concentrated

in PLCs. One is the rise in privatisation, where the government is privatising some companies

but retaining a large number of shares. The second one is the tendency of the Saudi

government to invest treasury funds in listed companies, which increases the percentage of

government ownership.

Moreover, the concentration of family ownership is hindering the development of minority

shareholders. According to Alfordy, controlling families monitor top management and the top

management is composed of the same controlling families. Further controlling families do

not support these legal reforms and are found to lobby against such reforms. This results in

poor legal protection of minority shareholders.

The legal system used in Saudi Arabia could also be affecting the way shareholders are

protected. Research has shown that the common law legal system plays a better role in the

protection of minority shareholders than the civil system. Jurisdictions that use the common

law, such as the U.K. law, have been found to offer better protection. In contrast, civil law

countries such as Saudi Arabia and France have been found to offer less protection to

minority shareholders. According to Themistokles, the civil legal system and other legal

systems will not offer the same protection common law offers minority shareholders. Thus,

Saudi Arabia's reliance on civil law is likely to witness the same weakness being experienced

in other jurisdictions using the same system to protect minority shareholders.

Religion influences the protection that minority shareholders are getting in Saudi. Sharia

principles principally govern the Saudi legal system; hence, any regulation adopted must be

considered if it is in line with the Shariah basis. As a result, adopted international laws are

scrutinised under the Shariah microscope. Further, courts with an Islamic principal

orientation decide disputes related to corporations. Judges will not enforce something that

does not contradict Sharia. Thus, the court system will not aid minority shareholders when

the Saudi court system settles disputes with an Islamic orientation.

However, economic factors correctly exist in Saudi support that it is necessary to protect

minority shareholders. As Saudi Arabia is lowering trade barriers and attracting foreign

investors, it must also afford the right protection to these foreign investors. Whether domestic

or foreign, investors must feel confident that firms are being transparent, honest, and

efficient. Thus, it needs a system that crucially protects minority shareholders. This is

because minority shareholders can be vulnerable in the Saudi Arabian system. This is because

family and government ownership characterise it; in such cases, majority shareholders can

display strengths to obtain personal benefits without the concerns of minority shareholders.

It could be considered whether the international standers in the OECD principles would fit

well with Saudi Arabia's corporate system. The OECD principles of corporate governance

hold that all shareholders should be afforded the following rights: the right to transfer new

shares, acquire pertinent information regularly, be active and vote in meetings, remove and

elect board members, share profits, and have safe ownership registration processes. It further

includes two rights reserved for minority shareholders: the right to take legal action against

majority shareholders and directors for abuse of power and the right to an understandable and

fair exit procedure.

3.2.2.3 Concerns in the Corporate Framework

The C.G. of Saudi Arabia has been amended several times since it was issued in 2006. These

further amends have improved certain aspects of corporate governance, including the board

of members, conflicts of interest, disclosure, transparency, and independence of various

committed. The changes made have been in line with the OECD standards of corporate

governance . The presence of these SCRGs has promoted the corporate disclosure practice. In

the absence of these regulations, companies would not find it necessary to disclose financial

information.

However, C.G.'s practices are still weak in Saudi Arabia, and a number of factors may cause

this. One is the insider-dominated boards, which are common features in the Saudi Arabian

corporate sector. In this type of corporate system, there is concentrated ownership. This

results in conflict between controlling shareholders, known as block holders, and minority

shareholders. In Saudi Arabia, most listed companies are owned by family members. This is

because most of the businesses began as family businesses and later became public

companies’. As a result, families directly or indirectly own a very high percentage of equity

shares and retain majority control. The result is that independent and executive directors

sometimes come from the same family or lineage. Under such a case, two critical aspects of

C.G. are compromised. One is the ownership and board structures that directly affect the

appointment of people into committees. Two, the level of control over management is

compromised. This is because, from an agency perspective, the board of directors is expected

to serve as a disciplining mechanism and deal with agency problems. However, when the

board and executives come from the same family and lineage, this compromised monitoring

role does not occur. The lack of a clear definition of an independent director in the SCGR

remains a persistent problem. It is not clear who an independent director especially when the

directors come from the same family. This is better explained by Hill et al., who noted there

is no clear definition of who a relative is in corporate governance., given that family members

impact the independence of the board. The law only defines a relative as a first-degree

relative, father, mother, spouse, and child. This definition neglects the cultural system in

Saudi Arabia, where family and closely linked and woven with extended families, including

uncles, siblings, cousins, and aunts; failure to consider these strong family relations, which

are strong like a family business, undermines the level of independence that is needed for a

board to perform its key functions.

Thus, Saudi Arabia's corporate governance has improved since it was adopted in 2006.

However, social, and cultural factors are still hampering the compliance and implementation

of the corporate governance framework. Despite these challenges, globalisation and the need

for foreign investment have necessitated the Saudi government's state-making regulations to

promote good corporate governance. However, the presence of these concerns is an

indication that corporate governance. Saudi Arabia is still developing. The experience in

business and trade in Saudi Arabia is still limited; hence, it can learn from the expertise and

knowledge of other countries. When formulating laws, Saudi Arabia can benefit from

drawing some inspiration from developed laws such as those of the U.K. to enhance

corporate governance further.

3.4 The External Corporate Framework of Saudi Arabia

3.4.1 Description of the External Framework

3.4.1.1 The Saudi Stock Exchange

Saudi Stock Exchange is known as Tadawul. It was established in 2003 through the Capital

Market Law, and it is the sole entity that acts as a security exchange in Saudi Arabia. The

Tawadul was established in 2007 by the Saudi Council of Ministers. The main duties of the

Tawadul are to ensure fairness and transparency, establish professional standards for brokers,

enforce standards for brokers, and establish a framework that protects securities under the

control of brokerage companies. The Tawadul is controlled by the board of directors, who are

appointed by the Council of Ministers. The Board consists of nine members representing the

Ministry of Finance, Ministry of Commerce and Industry and Monetary Agency. It is also

composed of four members who are representatives of brokerage companies and two

members who represent the joint stock companies listed on the stock exchange. The Tawadul

Board of Directors chooses an executive manager who manages the stock exchange. The

Board further proposes regulations and rules to the CMA that would make the stock exchange

operation more efficient.

The success of the Saudi Stock Exchange has played a major role in its development. Before

the stock exchange was officially recognised, it informally operated for 40 years. Despite

Saudi Arabia having an informal capital market which lacked a legal framework, the capital

market had developed and thrived. By 1996, there were seventy Saudi Companies that were

actively trading. The total market capitalisation in 1996 was $45.9 billion. The capitalisation

made the Saudi Arabian capital market the largest in the Gulf region and the thirteen largest

developing market. The success of Saudi Arabia's market necessitated the development of

capital market growth because there was more demand for growth; this is because as the

capital market grew, there was a high demand for finance, yet the large-scale enterprises

reached a limit of their ability to obtain finance. In Saudi Arabia, due to Sharia banking

models, there are restraints on banks' investments that make it hard for large-scale

organisations to obtain loans, and at the same time, some companies have become too large

to qualify for financial support from the government. The absence of a bond market created a

shortage in the supply of finance in the market, and this necessitated the development of

capital market regulations that would enable companies to access finance through bond

markets.

Thus, the success of the informal stock exchange largely led to the development of laws that

have established the current Saudi stock exchange. The development of the Capital Market

Law of 2003 enhanced the role of the stock exchange. Chapter 3 of the law focuses on the

Saudi Arabian securities exchanges. This chapter authorises the existence of only one formal

stock exchange in Saudi Arabia. This is crucial because centralising the stock exchange

simplifies the task of regulation and oversight. It ensures that the stock exchange is well

regulated and monitored to support development and improve investors' confidence.

3.3.1.2 Capital Market Authorities

The capital market authority (CMA) was unofficially started in the early fifties, but it was

recognised and promulgated by the government in 2003 through the Royal Decree. The

Capital Market Authority (CMA)is a government organisation that is independent. It reports

directly to the president of the council of ministers. The Capital Market Law developed the

Capital Market Authority in 2003, a Law that contained sixty-seven articles. The Capital

Market laws were expected to develop a capital market regulation, establish an independent

market regulator, mandate public disclosure, and regulate brokers. With the development of

CMA and Capital market Law, Saudi Arabia developed a good foundation for setting rules

that would govern the capital market. Chapter 2 of the Capital Market Law establishes the

capital market authority. The law stipulates that the CMA is governed by the Board of the

Capital Market Authority. The Board has full-time members who must have the right

professional qualifications and be natural Saudi Citizens. The board members are only

allowed to serve a five-year term, renewable only once. Further, the Royal Order appoints the

Board members and determines their salaries and benefits. The main aim of the capital

market is to develop an appropriate environment for investment and boost the transparency

and disclosure standards of listed companies. The CMA focuses on protecting investors from

illegal acts in the market. The CMA has a number of duties: to regulate and develop the

capital market by promoting appropriate standards, to protect investors and the public from

unfair and unsound practices such as insider trading fraud, manipulation, and deceit, to

maintain transparency in transactions of securities, to develop appropriate measures to lower

risks involving transactions of securities and regulate and monitor the disclosure of

information related to securities and issuers.

According to Beach (2005), the development of CMA in 2003 was necessitated by some

factors that existed within the country. In 2002, Saudi Arabia faced a huge national debt,

which was in excess of $10 billion dollars. This excess debt made it unattractive for foreign

capital investments, and the problem was that the country was still reliant on oil, with 80% of

national income from oil, and without foreign capital investments, it could not get capital to

expand to other sectors. Thus, the development of a capital market that would encourage

greater participation of foreign investments was needed to develop the Saudi economy and

reduce its reliance on oil. Moreover, the country was faced with a high unemployment level.

At the same time, the population that would soon enter the workforce was over 42%,

meaning that the unemployment problem would continue to grow. Consequently, the capital

market will be required to grow to alleviate these unemployment problems.

From when the CMA was started, with the support of the Capital Market Law, has played a

central role in the development of corporate governance in Saudi Arabia. The Capital Market

Authority is the primary regulatory body representing the government and the People of

Saudi Arabia. The authority has been provided independence and the capacity to take all the

necessary actions to conduct its responsibilities and functions. The most vital law is the one

that provides the authority with the power to make necessary rules to achieve its objectives.

The law provides the CMA with the authority to make necessary regulations that will enable

it to accomplish its mission. The law grants the CML full power to draft and issue official

rules. This is critical because it enables the authority to develop laws that adapt to the

growing needs of the Saudi economy. It develops a system that allows the organisation to

routinely upgrade regulations to meet unforeseen demands and help the country adapt to any

growing demands quickly. Providing CMA with such powers has enabled it to develop

various codes of Corporate Governance which are in use in Saudi Arabia today. It will enable

the authority to continue improving corporate governance codes as new demands arise in

Saudi Arabia.

Another crucial role that the CMA has played in the improvement of corporate governance is

in improving commercial disputes. Before CMA, commercial disputes were decided by Saudi

Arabia's Islamic courts, and these courts were unsuited to tackle and settle disputes

concerning commercial disputes and market regulations. This is because the court system has

not been developed with modern capital markets in mind but uses Sharia guidelines, and this

can lead to problems in disputes involving the capital market. The establishment of CMA has

enhanced the dispute resolution that involves capital markets. The CML establishes the

Committee for Resolution of Securities Disputes (CRSD). The CRSD has the power to decide

on lawsuits or complaints involving securities. It can also impose fines, imprisonment, or any

other punishment on anyone who violates the set conditions.

3.4.2 Critical Evaluation of the External Framework

3.3.2.1 Challenges that CMA Faces in Duties

The biggest challenge that CMA faces lies in the fact that Saudi Arabia largely recognises

Islamic laws; hence, it is recognised as an administrative body and not one with judicial

powers. Thus, despite the CMA being allowed to have powers over commercial disputes, it is

still viewed as an administrative body, not a judicial. As a result, its decisions are considered

administrative decisions and not judicial duties. CMA decisions are criticised because it does

not have judicial powers. For example, the final resolution on the Mohammad Al Mojil

Group Company case, where it imposed 5-year imprisonment on the chairmen of the

company and a fine of 1.5 billion Saudi Riyals, was criticised on the basis of whether an

administrative body can issue such a hefty fine.

Moreover, the fact that CMA resolutions are viewed as administrative and not judicial

verdicts creates uncertainty about the credibility of litigation in the capital market. It makes it

hard for the body to set precedents. It also affects the consistency of the application of laws,

affecting litigation's credibility. Going back to the decision of the Mohammad Al Mojil

Group Company case, the family of Mohammad Al Mojil claimed that the decision was

flawed and unprecedented. Thus, in the situation where CML is viewed as a mere

administrative body, its decision on disputes is seen to lack merit. This situation does not

favour the current situation in Saudi Arabia, which is seeking to grow the corporate sector

and move away from depending on oil. This is because it may cause foreign investors to

refrain from such a market because dispute resolution may not take the right measures to

protect all parties. Another criticism of the decision and fines imposed by the CML is based

on a regulation that allowed the CML to fund its activities using fines that are imposed. As

per Article 13 of the Capital Market Law, the fines and penalties imposed are deposited

directly to the CMA and can be used as a financial resource. Since CMA relies on fines and

penalties as a source of finance, it would have a conflict of interest in such a case, and this

raises questions about its fairness when it comes to making decisions on these litigations.

Alhamy (2018) questions the independence of CMA at two levels. First, the CMA reports

directly to the minister at the government level. Moreover, the government chooses the CMA

board members and also decides on salaries and benefits. This places the CMA in a position

where it may lack independence and experience a lot of direct government interference when

playing its role, and this government interference weakens the ability of the CMA to conduct

its duties. The second level, the CMA, weakens the independence of the Committee for

Resolution of Securities Disputes (CRSD) by appointing its members and determining their

salaries. Thus, the CMA can potentially influence the members of the CRSD, and a conflict

of interest can occur when cases against the CMA are brought before the committee. This is

evidenced by the 2020 annual report, indicating that out of 15 cases that were filed, 14 cases

were made in favour of the CMA, and only one was made against the CMA. The CRSD

decides a considerable number of cases, but it has been critiqued for favouring CMA in its

decision and questions are raised about independence and the role that CMA is playing in

influencing its decisions.

3.3.2.2 Analysis of the Stock Market

The presence of corporate governance in Saudi Arabia has enhanced the efficiency of the

stock exchange market. According to Al-Faryan and Dockery (2021), measures implemented

by policymakers between 2006 and 2017 have enhanced the efficiency of the Saudi Arabian

stock exchange. The corporate governance laws have made it stricter for managers of listed

companies. The changes in legislation have lowered the information disadvantage that

foreign investors face and facilitated more foreign investment in the stock exchange, leading

to rapid development. In addition, the regulatory changes have also increased domestic

investor participation.

However, there are still informational problems in the Saudi stock exchange. A World Bank

report assessing corporate governance in Saudi Arabia found that informational asymmetry is

still a relevant problem in Saudi Arabia. The report noted that many investors are concerned

that brokers and other industry insiders are engaging in improper conduct and abusing their

positions, and market manipulation still occurs. Thus, despite the efforts to develop stock

exchange and regulations, the market is still facing the challenges of insider trading and

market manipulation. One of the reasons problems relating to insider trading still exist in

Saudi is because the legislation that protects investors and shareholders is still weak in

preventing insider dealing and manipulations. The legislation that currently exists largely

disadvantages minority shareholders, and as a result, they are not strong enough to protect

them from information asymmetry. This supports La Porta et al. (1998) argument that the

legal framework must be well established to support the external frameworks. In a case where

a country develops rules and regulations through external frameworks, but they are not

supported by a legal framework, some gaps will exist. Thus, Saudi Arabia is developing a

strong stock exchange regulation, yet its internal legal framework does not adequately

support minority shareholders and makes them vulnerable to insider trading and market

manipulation, and this undermines the role of the external legal framework.

3.5 Chapter 3 Summary

3.5.1 Company Law

The company law of Saudi Arabia was introduced in 1965, and it was the only law that

existed long ago that regulated companies. It controlled the creation of private and public

organisations. It also regulated the publication of financial statements. Since 1965, the law

has been changed twice, in 2015 and 2017. The 2015 law made some critical changes to the

law of companies. In the old companies, law companies were regulated mainly by MOCI, but

after the new law, MOCI will only regulate companies not listed on the stock exchange,

which will be under the control of the Capital Market Authority. The new law also reduced

the types of companies registered in Saudi Arabia to general partnerships, limited Partnership

Companies, and Unincorporated Joint Ventures. The new law further recognised the concept

of single shareholders companies and holding companies. It also made changes to minimum

shareholders, minimum share capital and board of directors’ requirements. The 2017 new law

was an improvement of the 2015 changes. In this case, it focused on protecting minority

shareholders; the new laws give minority shareholders the ability to be reimbursed for claims.

It also primarily dealt with conflicts of interest provisions. Thus, the changes made in 2017

primarily focused on improving corporate governance matters.

3.5.2 Capital Markets and Stock Exchange

The capital market of Saudi Arabia gets authority from the capital market law. Capital market

law creates a regulated market that is expected to keep pace with the current developments in

international markets. The capital market has the authority to regulate the issuance of

securities and supervise the transactions. It further protects citizens from illegal practices. The

stock exchange is referred to as the Tawadul; it is the only body in Saudi Arabia to act as the

Securities Exchange. It mainly conducts the listing and trading of securities and regulates the

ownership traded in the exchange. The stock exchange gained its powers from the market

laws of 2003.

3.5.3 Corporate Framework

The 2006 regulations enhanced corporate governance in Saudi Arabia. The 2006 corporate

framework indicated that corporate governance is the principal guide to public firms. It

accorded shareholder rights to annual general meetings and voting rights. It further brought

about changes to the disclosure of annual reports. It also limited board directors to a

minimum of 3 members and a maximum of eleven members. Corporate governance has been

revised several times. In 2010, it was made compulsories for all listed companies to follow a

corporate governance framework. It was recently amended in 2017, where shareholders were

given better rights, and it promoted the equal treatment of shareholders in the same class. It

also promoted board transparency.

3.5.4 History and Background of the Saudi Legal System

The history of the legal system of Saudi Arabia dates back to when the Islamic state was

passed to the Caliphs who developed the Shariah laws. The current monarchy foundations of

the legal system were set in 1932 by King Abdulaziz Al Saud, who declared himself the King

of Saudi Arabia. Though the country continued to follow Islamic laws, its legal system as

King became the Supreme Authority.

Saudi Arabia has the Basic Law of Governance, which is the highest enacted law and can be

compared to other countries' constitutions. It is the basic law and divides state authority into

executive, judiciary, and regulatory. The Sharia laws guide the court system, which has three

main parts: the Sharia Courts, the most prominent part. The Sharia Courts are supplemented

by the Board of Grievances, which focuses on cases involving the government. The third part

is the government of minister’s committees, which deal with specific disputes such as labour

issues. Overall, the legal authority of Saudi Arabia comes from legislation, statutes, and

Islamic laws.

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