There have been various developments recently in Saudi Arabia
towards increasing the effectiveness of the Corporate Governance
framework. The Saudi Capital Market Authority ("CMA")
announced the amendment of Article 9 of the Corporate Governance
Regulations (CGR) 1 to regulate the remunerations and
compensations paid to the members of the Boards of Directors of
companies listed on the Saudi Stock Exchange "Tadawul".
The insertion of the definition of the expression
"Remunerations and Compensations", is a step by the CMA
to strengthen the principles of corporate governance applied to
joint stock companies. The amended Clause (e) of Article 9
stipulates that the report of the Board of Directors which is
appended to the annual financial statements of the company shall
include: "Details of compensation and remuneration paid to
each of the following:
1. The Chairman and members of the Board of Directors.
2. The top five executives who received the highest compensation
and remuneration from the company; the CEO and the CFO shall be
included if they were not among the top five.
For the purposes of this paragraph, "remunerations and
compensations" shall mean salaries, allowances, profits and
any of the same; annual and periodical performance-related bonuses;
short or long-term incentive schemes; and any other rights in
rem" 2 .
For the purpose of the above, the Board of Directors is also
required to establish a committee to be named "Nomination and
Remuneration Committee". Based on CMA resolution No.
(1-10-2010) dated 30/03/1431H. (corresponding to 16/03/2010G.), the
provisions of Article 15 of the CGR in connection with the
appointment of the Nomination and Remuneration Committee, its
duties and responsibilities shall be mandatory on all listed
companies effective from 01/01/2010G.
Further, in order to foster transparency in the Saudi Capital
Market and to develop standards of Corporate Governance, the CMA,
by its decision No. (1-20-2008) dated 14/5/1429H. (corresponding to
19/5/2008G.), endorsed an amendment to Clause (a) of Article 18 of
the CGR to read "A Board member shall not, without prior
authorization from the General Assembly, which must be renewed each
year, have any interest (whether directly or indirectly) in the
company's business and contracts. The activities to be
performed through general bidding shall constitute an exception
where a Board member is the best bidder. A Board member shall
notify the Board of Directors of any personal interest he/she may
have in the business and contracts that are completed for the
company's account. Such notification shall be entered in the
minutes of the meeting. A Board member who is an interested party
shall not be entitled to vote on the resolution to be adopted in
this regard neither in the General Assembly nor in the Board of
Directors. The Chairman of the Board of Directors shall notify the
General Assembly, when convened, of the activities and contracts in
respect of which a Board member may have a personal interest and
shall attach to such notification a special report prepared by the
company's auditor".
These steps would help protect the rights, investments and savings
of the company, the investors and the shareholders. However, this
is only a small step and there is need for completely overhauling
the system to develop the corporate sector, in particular, and to
ensure effective Corporate Governance in KSA.
Saudi Law
Saudi Arabia is a religious country governed by Islamic Law
(Shariah). Under Shariah law, a government may issue regulations
provided that these do not conflict with established principles of
the Shariah. Therefore, all legislation is intended to supplement
Shariah law and must adhere to its principles.
The Islamic guiding principles of accountability, trust, fairness
and transparency serve as strong motivations for the company
directors in Saudi Arabia to ensure that they protect the interest
of their shareholders and fulfil their duties and obligations
within best of their abilities. On the other hand, there is need to
implement these Islamic principles in terms of laws and regulations
to ensure compliance. Since these principles are based on Islam and
Shariah, they would gain widespread acceptance and
compliance.
There is no published single comprehensive code of Corporate
Governance in Saudi Arabia, although there is a code issued by the
CMA which the companies are advised to follow. Nevertheless, the
enforcement of this code is yet lacking in terms of putting strict
compliance requirements 3 .
- The Companies Law, and its subsequent amendments, covers the rules for the formation and operation of business entities in Saudi Arabia. The Saudi Companies Law lays down the basic duties and responsibilities of the Directors individually and their collective duties as Board of Directors.
- Corporate Governance Regulations: these relate to the management of joint stock companies listed on the Saudi Stock Exchange "Tadawul" to ensure their compliance with best governance practices that ensure the protection of shareholder rights.
- Capital Market Law: provides general rules covering a variety of areas, including but not limited to, establishment of the CMA and the Saudi Stock Exchange, issuance and trading of securities, manipulation and insider trading, sanctions and penalties for violations of this law and its implementing regulations.
Directors Duties in the Kingdom
Board of Directors is a key element of the governance mechanism
of any company. The directors are regarded as persons with the
information, the will and the power to act, within a corporation to
protect shareholders and stakeholders alike. Therefore, their role
is very important and crucial in the development of an effective
corporate governance framework in any jurisdiction.
In addition to any obligations arising out of Shariah principles,
the Directors' general duties and liabilities include the
following:
a. Duty to avoid Conflict of Interests 4
: A director may not have an interest whether directly or
indirectly, in any transactions or contracts made for the account
of the company, except with an authorisation from the General
Assembly, to be renewed annually.
b. A director owes the duty of disclosure of personal interest to
the board in any transaction made for the account of the company
and such interested Director shall refrain from voting on the
resolution to be adopted in this respect.
c. The Chairman of the Board of Directors is required to
communicate to the General Assembly when it convenes the
transaction and contracts in which any director has a personal
interest. Such communication shall be accompanied by a special
report from the company's auditor.
d. Duty not to participate in Competing Business
5 : A director may not, without authorisation
from the General Assembly meeting, participate in any business
competing with that of the company, or engage in any of the
commercial activities carried on by the company, otherwise the
company has the right either to claim damages from him or to
consider the operations he has conducted for his own account as
having been conducted for the account of the company.
e. Duty not to take loan 6 : A
corporation may not grant any cash loan whatsoever to any of its
directors, nor may it guarantee any loan contracted by a Director
with a third party. Banks and other credit companies shall be
excepted from this provision, for these may, within the limits of
their objects and under the same terms and conditions as they apply
to their transactions with the public, grant loans to or open
credits for their Directors or guarantee loans contracted by them
with third parties. Any contract concluded in violation of this
rule is considered null and void.
f. Duty to keep Confidentiality: A director owes
the duty of confidentiality and must not disclose any information
to the shareholders outside a general meeting as may have come to
his knowledge by reason of his position as a director 7
.
g. Duty to adhere to core Ethical Values 8
: A director must carry out his duties in a responsible
manner, in good faith and with due diligence and he represents all
shareholders and not just a group of shareholders.
h. Duty to be accountable 9 : Directors
are jointly responsible for damages to the company or its
shareholders or third parties, arising from their misadministration
of the company's affairs or their violation of the provisions
of the Companies Law or of the company's memorandum of
association or by-laws. Joint liability arises in case of a
wrongful act arising from a resolution adopted by a unanimous vote,
but where resolution is adopted by a majority vote and dissenting
directors objection is expressly recorded in the minutes, a
dissenting director is not liable. Absence from the meeting at
which such resolution is adopted shall not constitute cause for
relief from liability, unless it is established that the absentee
was not aware of the resolution, or, on becoming aware of it, was
unable to object to it. The company may institute an action in
liability against its directors for wrongful act: that cause
prejudice to the body of stockholders. The resolution to institute
this action shall be made by the Ordinary General Assembly meeting,
which shall appoint a person (or persons) to pursue the case on
behalf of the company. If the company is adjudged bankrupt, the
institution of this action shall rest with the receiver, and upon
the dissolution of the company, the liquidator shall institute and
pursue the case after obtaining the approval of the regular General
Assembly meeting 10 .
Except in cases of fraud and forgery, the right of instituting the
action in liability vested in the company shall be extinguished by
the Ordinary General Assembly meeting exonerating the Board of
Directors from responsibility for its administration. In all cases,
such action shall be barred after the lapse of one year from the
date of such exoneration 11 .
i. Duty to Act within Powers 12 : Under
the law the Board of Directors enjoy full powers in the
administration of the company. It is entitled within the scope of
its competence, to delegate one or more of its members or others to
perform an act or certain acts. Nevertheless, the Board of
Directors may not contract loans for terms exceeding three years,
or sell or mortgage the real property or the place of business of
the company, or release the debtors of the company from their
liabilities, unless it is authorized to do so by the company's
articles of association and by-laws. If the company's by-laws
and articles of association do not contain any provisions to this
respect, the Board may perform the above acts only with an
authorization from the General Assembly meeting, unless such act
fall by virtue of their nature within the scope of the
company's objects.
j. Duty to submit annual report 13 :
The Directors have the duty to submit report to the Ordinary
General Assembly meeting. It must include a comprehensive statement
of all the amounts received by directors during the financial year
in the way of emoluments, share in the profits, attendance fees,
expenses, and other benefits, as well as of all the amounts
received by the directors in their capacity as officers or
executives of the company, or in consideration of technical,
administrative, or advisory services.
k. Accountability towards Shareholders: Under the
law every stockholder shall have the right to institute the action
in liability against Directors on behalf of the company if the
wrongful act committed by them is of a nature to cause him personal
prejudice. However, the stockholder may institute such action only
if the company's right to institute it is still valid and after
notifying the company of his intention to do so. lf a stockholder
institutes such action, he shall be adjudged (compensation) only to
the extent of the prejudice caused to him 14 .
Penalties for breach of directors duties or abuse of position are
severe and include:
1. liability to company, to its shareholders and
to third parties; and
2. imprisonment for a maximum of five (5) year;
and
3. a fine of between Saudi Riyals ten thousand and
one hundred thousand (SAR 10,000 and SAR 100,000).
Footnotes
1 Issued by the Board of Capital Market Authority
pursuant to Resolution No. (1/212/2006) dated 21/10/1427H.
(corresponding to 12/11/2006G.) based on the Capital Market Law
issued by Royal Decree No M/30 dated 2/06/1424H. (corresponding to
31/07/2003G. )
2 As amended by CMA Resolution No.(1-1-2009) dated 8/1/1430H
(corresponding to 5/1/2009 G.)
3 In its annual report dated 2008, the CMA stated that it will
create an independent department to monitor compliance of listed
companies with the corporate governance regulations. According to
the CMA annual report of 2009, 6 companies failed to comply in 2009
with disclosure in their board of directors' reports for the
preceding year, in accordance with the requirements of the
"Corporate Governance Regulations", as compared with 11
companies in 2008.
4 Article 69 of the Companies Law and Article 18 of CGR.
5 Article 70 of the Companies Law and Article 18 of CGR.
6 Article 71 of the Companies and Article 18 of CGR
7 Article 72 of the Companies Law and
8 Article 11 of CGR
9 Article 76 of the Companies Law
10 Article 77 of the Companies Law
11 Ibid
12 Article 73 of the Companies Law and Article 11 (h) of CGR.
13 Article 9 of CGR
14 Article 78 of the Companies Law
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