Corporate governance in Saudi Arabia is governed by a robust regulatory framework that aims to enhance transparency, accountability, and investor confidence. The Capital Market Authority (CMA) and the Ministry of Commerce are the two primary regulators overseeing corporate governance, especially for joint stock companies. With the Kingdom’s Vision 2030 aiming to diversify the economy and attract foreign investment, adherence to good corporate governance practices has become increasingly important. For more information please visit Company formation in saudi arabia

1. Regulatory Framework

Saudi corporate governance rules are primarily derived from:

  • Corporate Governance Regulations (CGR) issued by the Capital Market Authority (CMA).
  • Companies Law issued by the Ministry of Commerce (last amended in 2022).
  • Sector-specific regulations (e.g., Saudi Central Bank for financial institutions).

2. Key Corporate Governance Rules

a. Board Composition and Responsibilities

  • Public joint stock companies must have 3 to 11 board members.
  • At least one-third of the board should be independent directors.
  • The roles of Chairman and CEO must be separated.
  • The board is responsible for strategic guidance, internal control systems, and protecting shareholders’ rights.

b. Shareholder Rights

  • Equal treatment of all shareholders.
  • Right to vote on major company decisions (e.g., mergers, capital increases).
  • Minority shareholders (owning 5%+) can call for a general assembly.

c. Committees

  • Mandatory committees include:
    • Audit Committee: independent oversight of financial reporting.
    • Nomination and Remuneration Committee: handles board appointments and compensation.
  • Optional: Risk and Governance Committees for enhanced oversight.

d. Disclosure and Transparency

  • Companies must disclose financial reports quarterly.
  • Board compensation and related party transactions must be disclosed.
  • Annual reports must include governance disclosures, including committee activities and board evaluations.

e. Internal Controls and Risk Management

  • Companies must implement internal control systems and regularly assess risks.
  • An internal audit function is required, often reporting to the Audit Committee.

f. Code of Ethics and Conflicts of Interest

  • Board members and executives must avoid conflicts of interest.
  • Related party transactions must be disclosed and approved by shareholders.

3. Enforcement and Compliance

  • Non-compliance can result in penalties, board member disqualification, and public warnings.
  • The CMA has the authority to conduct investigations and enforce compliance for listed entities.

4. Special Considerations for Foreign Investors

  • Foreign-owned companies must comply with the same corporate governance rules.
  • Branches of foreign companies have different reporting obligations but must maintain transparency with local regulators.

5. Recent Reforms and Trends

  • Emphasis on Environmental, Social, and Governance (ESG) principles.
  • Encouragement of female board representation.
  • Greater alignment with OECD governance standards.

Conclusion

Robust corporate governance is essential for maintaining investor trust and ensuring business sustainability in Saudi Arabia. With ongoing reforms aligned with Vision 2030, companies operating in the Kingdom must stay updated on the latest regulations and ensure they have the right governance structures in place.