corporate governance disclosure practices and protection of shareholders in saudi arabia

226 Pages·2015·1.93 MB·English

CORPORATE GOVERNANCE DISCLOSURE PRACTICES AND
PROTECTION OF SHAREHOLDERS IN SAUDI ARABIA

A Thesis Submitted for the Degree of Doctor of Philosophy in Law

By:
Khalid Saad Al-habshan
0937893

LLB King Abdul-Aziz University
LLM Nottingham Trent University

School of Law,
Brunel University

January 2015
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Declaration

I declare that, except where acknowledged, this work effort is my own, completed with the
direction and advice of my supervisor.

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Short Table of Contents
Chapter One Introduction ................................................................................................... 17
Chapter Two Corporate Governance: Definition, International Standards, Models and
Theories ................................................................................................................................... 27
Chapter Three An Overview of Corporate Disclosure and Transparency ..................... 48
Chapter Four Current Practices and Improvement of Saudi Corporate Governance
Framework ............................................................................................................................. 61
Chapter Five The current rights of minority shareholders in Saudi Arabia ................ 100
Chapter Six Issues Involving Corporate Transparency in the Saudi Capital Market . 141
Chapter Seven Conclusion and recommendations .......................................................... 188
Bibliography ......................................................................................................................... 200

Table of Contents
Declaration................................................................................................................................ 2
Short Table of Contents........................................................................................................... 3
Table of Contents ..................................................................................................................... 3
Abbreviations ......................................................................................................................... 11
Journal Abbreviations ........................................................................................................... 12
Abstract ................................................................................................................................... 14
Acknowledgements ................................................................................................................ 16
Chapter One Introduction ................................................................................................... 17
1.1 Preamble ....................................................................................................................... 17
1.2 General Background .................................................................................................... 18
1.3 Research Significance .................................................................................................. 20
1.4 Research Problem ........................................................................................................ 21
1.5 Research Methodology ................................................................................................ 21
1.6 Research Aims .............................................................................................................. 22
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1.7 Research Scope and Limitations ................................................................................ 23
1.8 Thesis Structure ........................................................................................................... 23
1.9 Chapter Summary ....................................................................................................... 25
Chapter Two Corporate Governance: Definition, International Standards, Models and
Theories ................................................................................................................................... 27
2.1 Overview ....................................................................................................................... 27
2.2 Fundamentals of Corporate Governance .................................................................. 27
2.2.1 Definition and Fundamental Concepts of Corporate Governance .......................... 27
Table 1. Definitions of Corporate Governance ............................................................... 28
2.2.2 Concept of Corporate Governance .......................................................................... 29
2.2.3 Importance of Corporate Governance ..................................................................... 31
2.2.4 Beneficiaries of Corporate Governance .................................................................. 34
2.2.5 Corporate Disclosure and Transparency ................................................................. 36
2.2.6 Corporate Governance Models ............................................................................... 37
Table 2. Shareholder and Stakeholder Models ............................................................... 38
Figure 1. Self assessment guide ......................................................................................... 40
2.3 Theories Associated with the Development of Corporate Governance .................. 41
2.3.1 Shareholder Theory ................................................................................................. 41
2.3.2 Agency Theory........................................................................................................ 42
2.3.3 Stakeholder Theory and Corporate Social Responsibility ...................................... 43
2.4 Development of Corporate Governance .................................................................... 43
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2.4.1 UK-US Corporate Governance ............................................................................... 43
2.4.2 German Corporate Governance .............................................................................. 44
2.4.3 OECD Principles of Corporate Governance ........................................................... 45
2.5 Summary ...................................................................................................................... 46
Chapter Three An Overview of Corporate Disclosure and Transparency .................... 48
3.1 Overview ....................................................................................................................... 48
3.2 Definition of Disclosure and Transparency ............................................................... 48
3.3 Consequence of non-disclosure ................................................................................... 50
3.4 The Role of Disclosure ................................................................................................. 51
3.5 Importance of Disclosure ............................................................................................ 52
3.5.1 Concrete Advantages for the Market ...................................................................... 52
3.5.2 Concrete Advantages for the Company .................................................................. 53
3.6 Advantages and Principles of Disclosure ................................................................... 54
3.7 Information that should be Disclosed According to Company Strategy ................ 55
3.8 To Whom Information should be Disclosed .............................................................. 56
3.9 Financial Scandals and Disclosure ............................................................................. 56
3.10 International Standards ............................................................................................ 58
3.11 Summary ..................................................................................................................... 59
Chapter Four Current Practices and Improvement of Saudi Corporate Governance
Framework ............................................................................................................................. 61
4.1 Overview ....................................................................................................................... 61
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4.2 Background information about Saudi Arabia .......................................................... 61
4.2.1 Basic Law of Governance ....................................................................................... 64
4.2.2 The Saudi Legal Framework ................................................................................... 65
4.3 Institutional Corporate Governance Framework ..................................................... 67
4.3.1 The Capital Market Authority ................................................................................. 67
4.3.2 The General Department of Corporate Governance ............................................... 70
4.4 Committee for the Resolution of Securities Disputes ............................................... 71
4.4.1 Securities Disputes Committee ............................................................................... 71
4.4.2 Securities Conflict Appeal Committee ................................................................... 72
4.5 The Saudi Stock Exchange .......................................................................................... 72
4.6 The Ministry of Commerce and Industry .................................................................. 74
4.7 The Accounting and Auditing Professions and the Saudi Organization for Certified
Public Accountants ............................................................................................................ 75
4.7.1 Accountability from an Islamic Perspective ........................................................... 77
4.8 Saudi Corporate Governance Regulations (2006) .................................................... 78
4.9 Evaluation and Analysis of the Saudi Corporate Governance Framework ........... 88
4.10 Role of Environmental Matters and Auditing in Corporate Governance ............ 92
4.11 Role of Sharia Law in the Business Environment................................................... 95
4.12 Summary ..................................................................................................................... 98
Chapter Five The current rights of minority shareholders in Saudi Arabia ................ 100
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5.1 Outline of Minority Shareholdings........................................................................... 100
5.1.1 Source of Problems and Current Remedies for the Protection of Minority Shareholders
........................................................................................................................................ 101
5.1.2 Necessity of Protecting Minority Shareholders .................................................... 103
5.1.3 Vulnerability of Minority Shareholders ................................................................ 104
5.1.4 Interests and Rights of Minority Shareholders that Require Protection ............... 104
5.1.5 Definition and Scope of Corporate Governance and protection of minority rights106
5.1.6 Minority Shareholder Protection under Saudi Company Law .............................. 114
5.2 Saudi Ownership Structure ...................................................................................... 120
5.3 The Board of Directors in the Institutional Framework ........................................ 122
5.4 The Principal Fiduciary Duties of the Board of Directors ..................................... 122
5.4.1 General Overview ................................................................................................. 123
5.4.2 Duty of Care .......................................................................................................... 123
5.4.3 Duty of Loyalty ..................................................................................................... 125
5.4.4 Conflicts of Interest among Board Members ........................................................ 126
5.4.5 Disclosure of Information by Directors ................................................................ 127
5.4.6 Insider Dealing ...................................................................................................... 128
5.4.7 Board’s Duty to Act within its Powers ................................................................. 129
5.5 Role and Responsibilities within Board Members’ Powers ................................... 130
5.6 Board Membership Categories ................................................................................. 131
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5.7 Board Meetings .......................................................................................................... 132
5.8 Board Sub-Committees ............................................................................................. 133
5.8.1 Audit Committee ................................................................................................... 134
5.8.2 Nomination and Remuneration Committee .......................................................... 135
5.8.3 Board Members’ Compensation ........................................................................... 136
5.9 Corporate Governance and Comparison ................................................................ 137
5.10 Summary …………………………………………………………………………...139

Chapter Six Issues Involving Corporate Transparency in the Saudi Capital Market . 141
6.1 Overview ..................................................................................................................... 141
6.2 Saudi Arabia’s Approach to Disclosure and Transparency .................................. 141
6.3 Disclosure Provisions in the Capital Market Law .................................................. 142
6.4 Disclosure and Transparency in Saudi Arabia ....................................................... 147
6.4.1 Annual Board Report and the Importance of Disclosure and Transparency ........ 149
6.4.2 Disclosure and Transparency Requirements of the Annual Board Report ........... 151
6.5 Problems in Cases of Inadequate Disclosure ........................................................... 157
6.6 Regulations Addressing Market Abuse ................................................................... 158
6.6.1 Market Manipulation ............................................................................................ 159
6.6.2 Irregular Trading ................................................................................................... 161
6.6.3 ‘Name and Shame’ ................................................................................................ 164
6.7 Regulatory Response to the Market Crash of February 2006 ............................... 165
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6.8 Saudi Compliance with the OECD Principles of Corporate Governance ............ 165
6.8.1 Investor Protection ................................................................................................ 165
6.8.2 Disclosure ............................................................................................................. 167
6.8.3 Enforcement .......................................................................................................... 170
6.9 Development of Saudi Regulations ........................................................................... 170
6.10 Other Issues in Saudi Arabia’s Business and Legal System ................................ 173
6.10.1 Duplication in the Company Law and the Corporate Governance Regulations . 173
6.10.2 Segregation of Duties within Board Members’ Powers ..................................... 175
6.10.3 Lack of Competent Professionals in the Capital Market .................................... 175
6.10.4 Implementation of Restrictions, Rules and Punishment ..................................... 176
6.10.5 Lack of Disclosure of Company Information ..................................................... 177
6.10.6 Government Involvement in Business Ownership and Management ................. 178
6.11 Banking and Financial Services as Critical Sectors.............................................. 179
6.12 Enforcing Disclosure: Role of Authority ............................................................... 181
6.13 Amending and Reforming Commercial Regulations............................................ 182
6.14 Guidance from Foreign Experience and International Organisations ............... 183
6.15 Transparent and Accountable Regulators and State Officials ............................ 184
6.16 Summary ................................................................................................................... 186
Chapter Seven Conclusion and recommendations .......................................................... 188
7.1 Conclusion .................................................................................................................. 188
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7.2 General Findings ........................................................................................................ 193
7.3 Recommendations ...................................................................................................... 194
7.3.1 Structural Issues .................................................................................................... 194
7.3.2 Substantive Issues ................................................................................................. 195
7.3.3 Procedural Issues .................................................................................................. 198
7.4 Future Research ......................................................................................................... 199
7.5 Contributions to Knowledge ..................................................................................... 199
Bibliography ......................................................................................................................... 200

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