CURRENT PRACTICES OF SAUDI CORPORATE GOVERNANCE: A CASE FOR REFORM A Thesis Submitted for the Degree of Doctor of Philosophy in Law By: Faleh Salem AL KAHTANI 0900120 School of Law, Brunel University April 2013 Declaration I declare that the work presented in this thesis is my own except where it is stated otherwise. Faleh Salem ALKAHTANI I Table of Contents Declaration……………………………………………………………………………………I Table of Contents……….……………………………………………..………………..…...II Abbreviations Used………………………………………………..………...….……...…VIII Abstract……………………………………………………….………...……….…………..IX Acknowledgments……………………………………………………………..……..………X Chapter One: Introduction 1.1 Preamble………………………………………………………………………………….1 1.2 Research Significance……………………………………………………………………2 1.3 Research Problem……………………………………………………………………..…4 1.4 Research Methodology…………………………………………………………………...5 1.5 Research Aims……………………………………………………………………………8 1.6 Research Questions………………………………………………………………………9 1.7 Research Scope and Limitation…………………………………………………………9 1.8 Research Structure……………………………………………..……………………….10 Chapter Two: Background to Saudi Arabia and the Saudi Legal Structure 2.1 Introduction………………………………………………………..……………………12 2.2 Common Overview of Saudi Arabia……………………………….….……………….12 2.3 Basic Law of Governance………………………………………………………………13 2.4 The State’s Authorities…………………………………………………………………15 2.4.1 Executive Authority……………………………………………………………15 2.4.2 Legislative Authority…………………………………………………………...17 2.4.3 Judicial Authority………………………………………………………………19 II 2.5 Summary………………………………………………………………………………...21 Chapter Three: Corporate Governance: Definitions, International Standards, Models, and Theories 3.1 Introduction……………………………………………………………………………..23 3.2 Definitions of Corporate Governance…………………………………………………23 3.3 International Efforts for Establishing Corporate Governance Standards………….30 3.3.1 UK Corporate Governance Committees………………………………………..30 3.3.2 The American Public Company Accounting Reform and Investor Protection Act……………………………………………………………………………………34 3.3.3 OECD Principles of Corporate Governance…………………………………...36 3.4 Corporate Governance Models………………………………………………………...37 3.5 Corporate Governance Theories……………………………………………………….41 3.5.1 Agency Theory…………………………………………………………………41 3.5.2 Shareholder Theory…………………………………………………………….44 3.5.3 Stakeholder Theory and Corporate Social Responsibility……………………..46 3.6 Summary………………………………………………………………………………...53 Chapter Four: Corporate Governance from the Islamic Perspective 4.1 Introduction……………………………………………………………………………..55 4.2 Definitions of Islamic Legal Sources…………………………………………………...56 4.2.1 The Qur’an (Muslims’ Book of God) …………………………………………58 4.2.2 The Sunna (Prophet Mohammad’s Traditions and Customs) …………………59 4.2.3 The Ijma (Consensus of Opinion)………………………………..…………….59 4.2.4 The Qiyas (Analogical Deduction)…………………………….……………….60 III 4.3 Islamic Objectives (Maqasid Al Shari’a)…….………………………………………...61 4.3.1 Islamic Objective of Wealth (Mal) …………………………………………….61 4.3.1.1 Undertaking of Contracts…………………………………………….61 4.3.1.2 Paying of Alms (Zakat) ……………………………………………...63 4.3.1.3 Prohibition of Usury or Interest (Riba)………….…………………...65 4.3.1.4 Prohibition of Gambling (Qimar)…………….……………………...67 4.3.1.5 Prohibition of Uncertainty (Qharar)…………………………………68 4.3.2 Islamic Objective of Unity with God (Tawheed)………………………………68 4.4 Islamic Values…………………………………………………………………………...70 4.5 Do the Principles of Corporate Governance Supplemented in Islamic Law Attain their Purpose?…………………………...…………………………………………………..76 4.6 Evidence from Saudi Arabia…………………………………………………………...80 4.7 Summary………………………………………………………………………………...83 Chapter Five: Development of the Saudi Corporate Governance Framework 5.1 Introduction……………………………………………………………………………..84 5.2 Evolution of the Saudi Corporate Governance Framework…………...…………….84 5.3 Corporate Governance Code between the Pilot and Assessment……………………88 5.4 Duplication of Applications between the Company Law and the Corporate Governance Code…………………………………………………………………………...91 5.5 The Role of the Listed Corporations’ Self-Regulatory Corporate Governance Policies for Developing Saudi Corporate Governance Framework……………………..95 5.6 Summary…………………………………………………………………..…………...100 Chapter Six: The Saudi External Institutional Framework for Corporate Governance IV 6.1 Introduction……………………………………………………………………..……..101 6.2 Capital Market Authority………………………………………..…………………...102 6.2.1 The General Department of Corporate Governance……………………..……105 6.3 Committees for the Resolution of Securities Disputes………………………..……..106 6.3.1 Committee for the Resolution of Securities Disputes (CRSD).………………108 6.3.2 The Appeal Committee for the Resolution of Securities Conflicts…………...110 6.4 The Saudi Stock Exchange……………………………………………………………112 6.5 The Ministry of Commerce and Industry……………………………………………113 6.6 The Accounting and Auditing Professions and the Saudi Organisation for Certified Public Accountants………………………………………………………………………...113 6.7 The Saudi National Anti-Corruption Commission………………………………….116 6.8 Summary……………………………………………………………………………….117 Chapter Seven: Current Board of Directors’ Practices in Saudi Corporate Governance 7.1 Introduction……………………………………………………………………………118 7.2 Board Members’ Duties……………………………………….………………………118 7.2.1 General Overview………………………………………..……………………118 7.2.2 Duty of Care……………………………………………..……………………120 7.2.3 Duty of Loyalty…………………………………………….…………………121 7.2.3.1 Conflict of Interest within the Board…………..……………………121 7.2.3.2 Insider Trading………………………………………...……………128 7.2.4 Duty to Act within the Powers…………………………..……………………135 7.3 Board Responsibilities…………………………………………………………………137 7.4 Board Creation Standards…………………………………………….………………141 7.5 Separation of Board Members’ Powers…………………………...…………………143 V 7.6 Board Membership Categories…………………………………………….…………149 7.7 Board Meeting…………………………………………………………………………151 7.8 Board Sub-Committees…………………………………………..……………………153 7.8.1 General Overview………………………………………..……………………153 7.8.2 Audit Committee…………………………………………………...…………154 7.8.3 Nomination and Remuneration Committee………………………...…………159 7.9 Board Members’ Compensations………………………………………….…………161 7.10 Summary…………………………………………………………………...…………165 Chapter Eight: Current Disclosure and Transparency Practices in Saudi Corporate Governance 8.1 Introduction……………………………………………………………………………166 8.2 General View of Disclosure and Transparency………………………...……………166 8.3 Significance of Disclosure and Transparency in the Board Annual Report………………………………………………………………………………………169 8.4 Disclosure and Transparency Prerequisites in the Board Annual Report………………………………………………………………………………………171 8.5 Summary………………………………………………………….……………………180 Chapter Nine: Current Shareholders’ Rights’ Practices in Saudi Corporate Governance 9.1 Introduction……………………………………………………………………………182 9.2 Shareholders’ Financial Rights…………………………………….…………………183 9.3 Shareholders’ Administrative Rights……………………………...…………………186 9.3.1 Corporation’s General Meetings……………………………...………………187 9.3.2 Shareholders’ Rights related to the General Meetings………..………………189 VI 9.3.3 Voting Rights and Applications………………………………………………194 9.3.4 Shareholders’ Rights to Appoint and Remove Board Members……...………195 9.3.5 Shareholders’ Right to Litigate Board Members……………………..………198 9.4 Summary…………………………………………………………………….…………202 Chapter Ten: Conclusion and Recommendations 10.1 Conclusion…………………………………………………………….………………204 10.2 Recommendations for the Reform and Improvement of Corporate Governance in Saudi Arabia………………………………………………………….……………………221 10.2.1 Specific Recommendations……………………….…………………………222 10.2.2 Recommendation on the Definition of Corporate Governance………...……223 10.2.3 Recommendation on Corporate Social Responsibility………………………223 10.2.4 Recommendation on Corporate Governance Self-Regulatory Policies…..…223 10.2.5 Recommendations on Boards of Directors……………………..……………224 10.2.6 Recommendations on Board of Directors Sub-Committees…………...……225 10.2.7 Recommendation on Disclosure and Transparency…………………………226 10.2.8 Recommendations on General Meetings and Voting………………..………226 10.2.9 Recommendations on Shareholders…………………………………………227 10.3 Future Research Avenues……………………………………………………………228 10.4 Contribution to Knowledge………………………………………………….………229 Bibliography……………………………………………………………………….………230 Appendices…………………………………………………………………………………261 VII Abbreviations Used CGC Corporate Governance Code CL Company Law CML Capital Market Law CRSD Committee for the Resolution of Securities Disputes CSR Corporate Social Responsibility UK United Kingdom US United States of America UN United Nation OECD Organisation for Economic Co-Operation and Development VIII Abstract One of the most debated issues is that of corporate governance. The topic has been investigated by scholars from several scientific fields including the legal. Indeed, corporate governance has been examined by a great number of law scholars, with particular regards to the improvement of various aspects. For example, effective corporate governance focuses on protecting and advancing aspects related to shareholders’ rights, the board of directors and corporations’ internal and external audit systems. The main objective of this research is to suggest reformation to the Saudi corporate governance framework in order to achieve satisfactory corporate governance practices. The second purpose of the research is to investigate the current practices involved in Saudi corporate governance arrangements. The final aim is to determine how a Saudi corporate governance framework would most benefit corporate governance from the Islamic perspective. This study intends