On 19 Rajab 1437 (26 April 2016)1, the Ministry of Commerce and Investment ("MoCI") and the Capital Market Authority ("CMA") published the draft Corporate Governance Regulations ("Draft CG Regulations").2 The MoCI and CMA (together, the "MoCI/CMA") invited the public to submit comments on the Draft CG Regulations by 19 Shaban 1437 (26 May 2016).

The joint efforts of the MoCI and CMA towards the preparation and publication of the Draft CG Regulations constitute an extremely positive precedent for collaboration between Saudi government entities. Such efforts may help consolidate, simplify, and clarify the Kingdom's overall legal framework.


The Draft CG Regulations are not the first initiative on the subject. The CMA had previously issued the Corporate Governance Regulations ("Existing CMA CG Regulations"),3 which regulate the management of listed Saudi Arabian companies. The Draft CG Regulations appear to be the expression of a desire to renew, emphasize and prioritize corporate governance regulations in a more practical manner.

In the introduction to the Draft CG Regulations, the MoCI/CMA emphasize the importance of corporate governance in ensuring the proper investment of a Company's resources, with a clear statement of its objectives and of the rights and obligations of Stakeholders. The MoCI/CMA state that the rewards reaped from proper corporate governance would extend beyond individual companies and would benefit the Saudi Arabian society and economy as a whole.

The MoCI/CMA stress the importance for companies to encourage fluid and regular interactions internally at all levels in order to achieve their best interests. Recognizing that Shareholders ordinarily do not follow a company' day-to-day activities, the MoCI/CMA underline the need to regulate the relationship between, on one hand, the company's Shareholders and Board of Directors and, on the other, between its Board of Directors and its Executives. The MoCI/CMA further emphasize the need to regulate individual conduct at all levels to ensure the application of high professional and moral discipline.

The MoCI/CMA reiterate the importance for companies to adopt clear, efficient and sound decision-making processes. First and foremost, these processes help protect Shareholders and Stakeholders. In addition, however, they also serve to advance companies' competitiveness and transparency on capital markets. According to the MoCI/CMA, imposing greater transparency requirements on corporate managerial bodies would enhance companies' performance since they will be left accountable to all capital market participants, including investors, brokers and market analysts.

The Draft CG Regulations seem to have been inspired in part by other jurisdictions' corporate governance models. In preparing the Draft CG Regulations, the MoCI/CMA took into account, amongst other things, the corporate governance recommendations articulated by the Organisation for Economic Cooperation and Development4, the Basel Committee on Banking Supervision5, the International Corporate Governance Network6, the Institute of International Finance7, the Financial Reporting Council8, other Gulf Cooperation Council member states, and by the Saudi Arabian Monetary Agency in respect of banking institutions9 and insurance companies.10

Thus, for example, the MoCI/CMA praise the effectiveness of the "comply or explain" regulatory approach adopted in other jurisdictions in the field of corporate governance. The MoCI/CMA express the desire to adopt a similar approach, to closely monitor the proper implementation of CG rules and to adapt such rules as deemed required. Likewise, from a high level perspective, the MoCI/CMA now clarify that:

  • the Executive Management is to handle the Company's daily operations and recommend strategies for the Board of Directors' approval;
  • the Board of Directors shall delegate day-to-day work functions to the Executive team and shall oversee the proper performance by such team of the duties assigned to it; and
  • the Shareholders have the right to influence the decisions of the Company and should take an active role in the formulation of strategic objectives.


The Draft CG Regulations bifurcate the regulatory jurisdiction to oversee their implementation: the MoCI shall be responsible for the implementation of the Draft CG Regulations by closed joint stock companies, while the CMA shall be responsible for the implementation of the Draft CG Regulations by public joint stock companies.


4.1 The Term Corporate Governance

The Draft CG Regulations define corporate governance as a methodology for steering and operating companies, which shall include mechanisms for regulating the relationships between the Board of Directors, the Executive Management, Shareholders and Stakeholders. The Draft CG Regulations state that the protection of the rights of Shareholders and Stakeholders and the achievement of fairness and competition at the level of capital markets is correlated to the simplification and transparency of decision-making processes.

4.2 Levels of Executive Management

The Draft CG Regulations distinguish between 'Executive Management', the 'Executive Members' and 'Senior Executives'. Executive Management means those individuals vested with the daily management of the Company. Executive Members refer to any member of the Board of Directors that are members of the Executive Management and receive a salary for such role. Senior Executives refer to any person with authority to propose and/or implement strategic decisions, such as for instance the Chief Executive Officer (the "CEO"), her/his deputies and the financial director.

4.3 Related Parties

In comparison with the Existing CMA CG Regulations, the Draft CG Regulations contain a more elaborate list of individuals or entities that would be considered 'related parties' for the purposes of identifying and avoiding conflicts of interests. According to the Draft CG Regulations, the following would be considered 'related parties':

  1. Senior executives and their relatives up to the fourth degree;
  2. Establishments owned by any Director, Senior Executive, or any of their relatives (up to the fourth degree);
  3. Companies in which any Director, Senior Executive, or any of their relatives (up to the fourth degree) is a Founder or Shareholder;
  4. Companies in which any Board member, Senior Executive, or any of their relatives (up to the fourth degree) is a Director or Senior Executive;
  5. Companies in which any Director, Senior Executive, or any of their relatives (up to the fourth degree) exerts influence on decisions made, either by way of advice or guidance;
  6. Any person (natural or a corporate body) the advice and guidance of which is influential on the decisions of the Company, its Directors, and Senior Executives; and
  7. Parent or subsidiary companies.

4.4 Relatives

The Draft CG Regulations define 'relatives' as follows:

  • First degree relatives: fathers, mothers, grandparents, grandmothers, their upwards lineage and spouses.
  • Second degree relatives: children and downwards lineage;
  • Third degree relatives: brothers, sisters, half-brothers, half-sisters and their children; and
  • Fourth degree relatives: maternal and paternal uncles and aunts and their children.


The Draft CG Regulations are described as being binding on listed joint stock companies but are only indicative for closed joint stock companies, unless any separate legislation requires otherwise. Government authorities may require joint stock companies to disclose their level of compliance with the Draft CR Regulations, in the annual Directors' report.


6.1 Fundamental Rights

The Draft CG Regulations enumerate fundamental rights of Shareholders. These include, among other rights, the right for Shareholders to:

  • be treated fairly and equally when pertaining to the same class;
  • examine the books and documentation of the Company relating to its activities, its operational and investment strategies. request information;
  • request information, the disclosure of which would not be prejudicial to the Company; and
  • supervise the performance of the Company and its Board of Directors.

6.2 Discussion of the Viewpoints of the Shareholders

The Draft CG Regulations require the Chairman of the Board of Directors (the "Chairman") and the CEO to relay Shareholders' recommendations and observations to the Board of Directors for discussion. Likewise, the Board of Directors must inform its members (especially non-executive and independent members) of the same. In its annual report, the Board of Directors must describe the processes that it has adopted to comply with these duties.

6.3 No Interference

The Draft CG Regulations restrict Shareholders from interfering in the works of the Board of Directors or those of the Executive Management, except by way of the Annual General Meeting and within the scope of this meeting.

6.4 Appointment of the Directors

The Draft CG Regulations require the use of cumulative voting in the election of Directors. Cumulative voting grants each Shareholder a single vote per share owned and the ability to split her/his votes between multiple candidates.

6.5 Dividends Distribution Policy

The Draft CG Regulations require that the Board of Directors puts in place a clear policy regarding the distribution of dividends. This policy must espouse the best interests of the Company and those of its Shareholders. It must be disclosed at the General Assembly and must be referred to in the annual report of the Directors.

The Company's Bylaws must indicate the proportion of the net profits to be distributed to the Shareholders after funding legal and other reserves.

6.6 Ordinary and Extra-Ordinary General Meetings

The Draft CG Regulations mention that General Meetings are the highest controlling 'body' in the Company. The Draft CG Regulations describe and distinguish between the Ordinary and Extra-Ordinary General Meetings. The description and distinction is already contained to some extent in the Companies Law.11

Ordinary General Meetings are necessary to appoint Directors, waive conflicts of interests relating to any particular Director, create an Audit Committee, approve the Company's budget and profit and loss statement, and approve sales of 50% or more of the assets of the Company.

On the other hand, Extra-Ordinary General Meetings are used to amend Bylaws, increase/decrease the Company's capital, or prematurely dissolve the Company. It is possible at Extra-Ordinary General Meetings to decide on issues normally falling within the scope of Ordinary General Meetings, provided that such decisions are issued with the vote of the great majority of the shares represented at the meeting.

The agenda for Ordinary General Meetings must contain, amongst other items:

  • an update report on the level of compliance with CG requirements and an update report by the Audit Committee;
  • a description of any dealings with Related Parties; and
  • a description of any legal violations and sanctions applied as a consequence.

If a resolution is passed at a General Meeting despite strong dissidence, the Board of Directors must take steps (and clarify beforehand the steps that it intends to take) to understand the rationale behind the dissidence.

Shareholders may appoint proxies to attend and vote on their behalf, provided that the proxy is not a Director or Employee in the Company.


7.1 Composition

The Bylaws of the Company must specify the number of Directors on the Board provided that such number shall not be lesser than three or greater than 11. The Draft CG Regulations list requirements regarding the profile of Directors. These requirements cover the leadership capabilities of the Directors as well as their independence, qualifications, ability to guide, understanding of financial information and physical fitness.

The Draft CG Regulations require that the number of Directors be commensurate with the nature of the activities of the Company, that the majority of them be independent or non-Executives, that there be sufficient representation by Members of the Executive, and that its independent Directors be no lesser than two, or a third of all Directors (whichever is greater).

The Draft CG Regulations specify circumstances in which a Director shall not be considered to be independent. These include, amongst other situations, if the person:

  • owns 5% or more of the shares in the Company or of the shares of an affiliated Company;
  • has worked as a Senior Executive or employee of the Company or any affiliated Company in the previous two years;
  • is a relative (up to the fourth degree) of any other Director or any Senior Executive or any consultant of the Company or any affiliated Company;
  • is a Director in any other affiliated Company;
  • is a Shareholder or Director in an entity which has substantial dealings with the Company;
  • receives remuneration from the Company in excess of what is paid for her/his directorship role; or
  • has acted as a Director of the Company for a period exceeding nine years.

Independent Directors must attend at least 75% of all meetings of the Board of Directors each year and must attend all meetings in which critical decisions affecting the status of the Company are taken.

Directors shall not have the right to hold directorship roles in more than five listed companies. Furthermore, the Chairman and Vice-Chairman shall not have the right to hold executive roles at the level of the Companies.

The Secretary of the Board does not need to be a Director. However, the Secretary must have a university degree in law or finance or accounting or management and must have at least three years of experience.

7.2 Responsibilities and Restrictions

The Board of Directors is not entitled to issue broad delegations or delegations which are not restricted in time.

The Board of Directors must hold at least six meetings each year and must meet at least once every two months. Meetings of the Board of Directors must be attended by at least half of its members (which shall not be lesser than three), at least one of whom must be independent.

7.3 Training

The Company must offer Directors the training needed for them to deepen their understanding of the sectors in which the Company is engaged.

7.4 Evaluation of Performance

The Board of Directors must, based on the recommendations of the nomination committee, put in place mechanisms to measure the performance of the Board of Directors and its individual members and that of the Executive Management. Performance must be assessed each year on the basis of these mechanisms. An external performance assessment must be obtained from a professional consultant every three years.

Non-executive Directors must assess the performance of the Chairman each year.

7.5 Conflicts of Interests

The Board of Directors must establish a clear conflicts of interests policy and such policy must be supported by illustrative examples.


8.1 General

The Draft CG Regulations require the creation of the following committees: an Audit Committee, a Compensation Committee, a Nomination Committee and a Risk Management Committee. The Board of Directors may create any other committees that it deems necessary (e.g., a Corporate Governance Committee).

Committees must be composed of independent Directors. If their number is sufficient, non-executive Directors may also form part of Committees, provided that the Committees are headed by independent Directors.

With the exception of the Audit Committee, the Board of Directors must establish internal work policies for the functioning of all Committees.

The Chairman is restricted from forming part of the Audit Committee or from heading other Committees.

8.2 Audit Committee

The Audit Committee is created by resolution at the Ordinary General Meeting and must meet at least once every three months. Executive Directors and anyone who has acted as an auditor of the Company during the past two years cannot form part of the Audit Committee. The Audit Committee must consist of three to five members and must include individuals who are versed in financial and accounting matters.

The Audit Committee has various duties. Mainly, it must verify the accuracy of the Company's financial statements and reports, and review the Company's compliance with its internal oversight mechanisms.

8.3 Remuneration Committee

The Board of Directors must establish a Remuneration Committee composed of three members. Executive Directors may not be members of the Remuneration Committee. At least one of the members of this Committee must be an Independent Director.

The Remuneration Committee must recommend, for the ultimate decision of the General Assembly, a clear policy regarding the remuneration of the Directors and Executives. Such remuneration must attract and retain talent, and incentivize the Directors and Executives to perform. The Committee must also report on all remuneration disbursed to Directors and Executives.

If the remuneration of a Non-Executive or Independent Director exceeds SR 250,000, a report must be produced by the Remuneration Committee describing whether the remuneration is tied to the performance of the Director and the Company.

The Remuneration Committee must meet at least once every six months.

8.4 Nomination Committee

The Board of Directors must establish a Nomination Committee composed of three members. Executive Directors may not be members of the Nomination Committee. At least one of the members of this Committee must be an Independent Director.

The Nomination Committee must suggest policies and standards for the nomination of Directors and Executives. Amongst other roles, the Nomination Committee must verify each year the continued independence of Independent Directors, review the skillsets required on the Board, and review the organizational chart for the Executive Management.

The Nomination Committee must meet at least once per year.

8.5 Risk Management Committee

The Board of Directors must establish a Risk Management Committee composed of three members. Executive Directors may not be members of the Risk Management Committee. At least one of the members of this Committee must be an Independent Director.

The Risk Management Committee must place recommendations for the management of risks (such as any risks threatening its continuation during the twelve coming months).

The Risk Management Committee must meet at least once every six months.

8.6 Corporate Governance Committee

The Board of Directors may establish a Corporate Governance Committee. If such a committee is created, it must report every year to the Board on the overall level of compliance with applicable corporate governance requirements and must formulate any recommendations that it deems appropriate.


The Board of Directors must establish an internal audit system for the Company. The system shall assess the policies and processes relating to risk management, the application of corporate governance rules, and conformity with applicable legislation.

The Internal Audit Unit must be composed of at least one member appointed by, and reporting to, the Audit Committee.

The Internal Audit Unit must submit: (i) a quarterly report to the Board of Directors regarding its activities, as well as any recommendations that it may have, and (ii) an annual report to the Risk Management Committee about the Internal Audit Unit's assessment and findings for the year.


The Audit Committee must put forward (through the Board of Directors) for the consideration of the General Assembly a list of three recommended auditors from which to choose.


The Board of Directors must put in place clear policies and processes for the regulation of the relationships between Stakeholders for the purposes of protecting their respective rights. These policies must include mechanisms for:

  • the treatment of any complaint by any of them;
  • the settlement of any differences between Stakeholders; and
  • the compensation of any damages caused to any of them as a result of the breach of any of their respective legal or contractual rights.


The Company must put in place schemes to incentivize employee engagement. For example, committees should be created and workshops should be held to discuss employees' views on important issues. Also, programs must be created for their benefit, either in the form of shares in the profits, shares in the Company, or pension plans.


The Board of Directors must put in place policies regarding:

  • corporate governance, which shall not conflict with the Draft CG Regulations;
  • the conduct of individuals within the Company;
  • the dissemination of corporate social responsibility programs; and
  • transparency and disclosure.


The Draft CG Regulations reflect an obvious effort to integrate best practices in the field of corporate governance. This effort should benefit listed and non-listed companies alike, as well as society as a whole.

The Draft CG Regulations, in their current form, are expected to increase the transparency of listed companies, which should inspire greater investor confidence and promote greater managerial discipline. For non-listed companies, especially sizeable ones, the implementation of the CG rules is expected to elevate their level of professionalism and diligence, in their own interest and that of their Stakeholders.


1. See: http://mci.gov.sa/MediaCenter/News/Pages/26-04-16-03.aspx

2. See: http://mci.gov.sa/LawsRegulations/Projects/Pages/cg.aspx#0

3. See: http://cma.org.sa/cma/RegulationsFB/En-06/

4. See: http://www.oecd-ilibrary.org/governance/g20-oecd-principles-of-corporate-governance-2015_9789264236882-en

5. See: http://www.bis.org/bcbs/publ/d328.pdf

6. See: file:///C:/Users/zaidm/Downloads/ICGN012%20Principles%20Booklet_WEB.pdf

7. See: https://www.iif.com/news/revised-corporate-governance-principles-banks-consultation-paper-issued-basel-committee

8. See: https://frc.org.uk/Our-Work/Codes-Standards/Corporate-governance/UK-Corporate-Governance-Code.aspx

9. See: http://www.sama.gov.sa/ar-sa/Laws/BankingRules/Corporate%20Governance%20%2024-2-2014%20(%D8%A7%D9%84%D9%86%D8%B3%D8%AE%D8%A9%20%D8%A7%D9%84%D9%86%D9%87%D8%A7%D8%A6%D9%8A%D8%A9).pdf

10. See: http://www.sama.gov.sa/ar-sa/Laws/InsuranceRulesAndRegulations/Corporate%20Governance%20Regulation.pdf

11. Enacted by way of Royal Decree No. M/3 dated 10 November 2015.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.