The Capital Market Authority of the Kingdom of Saudi Arabia has issued the “Corporate Governance Regulations” to ensure the application of best management practices, achieve financial stability and enhance confidence in the markets, in line with the Kingdom’s Vision 2030.

This article aims to explain what corporate governance is, its importance, and its development.

What is corporate governance regulation?

The Corporate Governance Regulations represent the regulatory framework that aims to regulate the relationship between the board of directors, shareholders, and executive management within companies, to ensure the effective achievement of their objectives, and to enhance the principle of transparency and integrity in their financial and administrative operations. The Corporate Governance Regulations are considered one of the most important foundations that help improve the business environment, reduce risks, and increase investor confidence, which is positively reflected on the economy as a whole.

Corporate governance is defined as a set of principles and laws that determine how companies are managed in a responsible and accountable manner, and ensure the protection of the rights of shareholders and all related parties.

These rules include regulatory mechanisms that require companies to disclose their financial statements and material decisions that affect investors, and prevent any conflict of interest that may lead to unfair exploitation of managerial power.

The importance of corporate governance regulations

The importance of corporate governance regulations is multiple, including:

Promoting transparency and accountability: By requiring companies to accurately disclose their financial and operational data, giving shareholders and investors a clear view of their performance.

Reduce financial and administrative risksGood governance helps identify potential risks and develop effective strategies to manage them.

Attracting investments and increasing market valueCompanies that follow strong governance standards attract more investors because of their confidence in their financial stability.

Enhancing corporate sustainabilityRegulations ensure long-term sustainable operation, supporting the continuity of companies even in economic crises.

Evolution of corporate governance system

Corporate governance has witnessed major developments over the past decades, especially after global financial crises such as the 2008 crisis, which revealed weak internal controls in some major companies. This prompted governments and regulatory bodies to put in place strict legislation to enhance governance and reduce risks.

In the Kingdom of Saudi Arabia, the Capital Market Authority issued the “Corporate Governance Regulations” in 2017, and these regulations underwent several amendments until they reached their current form in 2023, with the aim of improving the efficiency of companies listed on the financial market, and enhancing the competitiveness of the national economy in line with the Kingdom’s Vision 2030.

Pillars of the Basic Corporate Governance Regulation

There are several pillars of corporate governance regulations, which are:

Shareholders' RightsThe corporate governance regulation ensures the protection of shareholders’ rights, including participation in material decisions and obtaining sufficient information about financial and administrative performance.

Board of Directors Structure: It specifies the rules for the formation of the Board of Directors, defining its responsibilities to ensure that strategic decisions are made impartially and efficiently.

Disclosure and TransparencyCompanies are required to disclose their financial and administrative performance periodically, to ensure that administrative authority is not exploited for personal purposes.

Risk Management and Internal ControlThe regulation sets out specific mechanisms for dealing with financial and administrative risks, including internal and external audit.

Professional Conduct and Social ResponsibilityThe regulation emphasizes the need for companies to adhere to ethical practices and implement social responsibility programs that support sustainable development.

Challenges in implementing corporate governance regulations

Despite the great importance of corporate governance, there are challenges facing its implementation, including:

Resistance to changeSome executives may be reluctant to adopt stringent governance practices because of concerns about increasing constraints on their decisions.

High implementation costsImplementing corporate governance requires investments in technology systems, legal and administrative advice, which can be costly for startups and small businesses.

Lack of awareness of governance cultureIn some companies, there is still a lack of understanding of the long-term benefits of governance, leading to its under-implementation.

Reliable Systems for Implementing Corporate Governance

To implement effective governance, companies can benefit from some systems and regulations, such as:

Corporate Governance Regulations issued by the Saudi Capital Market Authority, which provides a regulatory framework for governance practices in listed companies.

International standards such as the OECD Principles (OECD) Corporate Governance Framework, one of the most widely recognised systems in the world.

The Saudi Companies Law, which sets out the basic rules and regulations for establishing and managing companies in the Kingdom.

The impact of corporate governance regulations on the national economy

Strong governance contributes to enhancing economic growth, as it helps build a stable and attractive financial market for investments, and reduces the possibility of financial crises resulting from weak oversight and transparency. In addition, the application of governance standards contributes to enhancing the business environment and improving the Kingdom’s ranking in global economic indicators.

With technological developments, digital systems have come to play an important role in implementing governance principles, providing technical solutions that help enhance compliance and internal control.

Corporate governance regulations are a vital tool to ensure sound corporate governance, transparency, accountability, and financial sustainability. Despite the challenges facing their implementation, adherence to them strengthens companies and makes them more competitive in local and global markets. Therefore, adopting governance practices is no longer an option, but rather a necessity to ensure the success of companies in the future.

The role of modern technology in supporting compliance with corporate governance regulations

In light of the digital transformation witnessed by the business sector globally, modern technology has become an essential role in enabling companies to achieve full compliance with the requirements of the Corporate Governance Regulation, as digital tools and electronic systems have become an effective means of implementing the principles of transparency, disclosure, and controlling administrative performance.

The most prominent of these tools are electronic document management systems such as the systemM-Files, Laserfiche, Microsoft SharePoint, and DocSuite enable companies to organize and save documents, quickly access periodic reports, and document meeting minutes, which enhances compliance with the disclosure requirements of the regulation. ERP systems and risk management software also help enhance internal control and monitor financial performance on a regular basis, so that the financial reporting process becomes more accurate and transparent, in line with global accounting standards.

Artificial intelligence applications also contribute to analyzing big data and discovering any administrative or financial violations that may threaten the interests of shareholders, while electronic signature and digital voting systems provide effective tools that ensure shareholders’ participation in decision-making, in line with the principle of protecting shareholders’ rights.

In short, technology is not just a time-saver, it has become an essential element in ensuring compliance with governance regulations, reducing human errors, and providing a transparent and efficient work environment.

Corporate Governance Regulations for Small and Medium Enterprises

Despite the prevailing belief that corporate governance is limited to large entities, small and medium-sized companies have found in the governance regulations a framework that supports their growth and sustainability. Applying the principles of disclosure and transparency makes these companies more attractive to investors and financiers, who are looking for projects with sound management and low risks.

In addition, creating a clear administrative structure and defining the powers of the board of directors and executive management helps avoid internal conflicts, which are one of the most prominent reasons for the failure of small projects.

Commitment to preparing periodic financial reports, as stipulated in the regulations, gives startups greater credibility with donors and banks, making it easier for them to obtain the necessary funding for expansion. In addition, internal oversight and the formation of review committees within these companies reduce cases of financial corruption and enhance the ability to detect any operational errors early.

In the era of digital transformation, these companies are now able to use technical solutions such as cloud governance systems and task management programs, which help them implement the regulation at the lowest cost, enabling them to focus on expansion plans, in a stable and secure administrative environment.

It cannot be overlooked that Saudi Vision 2030 has placed governance as a key part of plans to attract foreign investment, and the Kingdom has already succeeded in raising its ranking in global competitiveness indicators, largely due to the development of corporate governance regulations. Therefore, foreign investors now see the Saudi market as a safe destination, in which they can invest in the long term, without worrying about the risks associated with weak oversight or administrative corruption.