The Saudi Capital Market Authority has issued the Governance Regulations to define the rules and procedures that ensure listed companies are managed effectively in line with the Kingdom’s Vision 2030.

In this article, we will review the relationship between governance and financial sustainability, and compare the Saudi governance regulations with international standards, to clarify the extent to which they are consistent with global best practices.

The concept of governance and its importance in financial markets

Governance is a set of rules and procedures that define how companies are managed in a way that ensures that their objectives are achieved effectively and responsibly. Governance plays a vital role in regulating the relationship between the board of directors, executive management, and shareholders, to ensure that decisions are made that are in the best interest of all.

The governance regulations of the Saudi Capital Market Authority are one of the basic pillars for regulating the work of companies listed on the market, as they aim to enhance the principles of transparency and accountability, and protect the rights of shareholders and stakeholders. The governance regulations come as a legal framework that ensures sound management of companies in accordance with the best international practices, which positively reflects on the performance and stability of the financial market.

Why is governance necessary?

Governance is essential for several reasons, including:

Achieving justice among shareholdersThe governance regulations ensure that all shareholders have equal rights to access information and make decisions.

Promote transparency and disclosureThe governance regulation requires companies to disclose their financial and administrative data periodically, which reduces the risks of corruption and manipulation.

Increase investor confidenceCompanies that implement good governance attract investments easily because they provide a stable business environment.

There are several systems related to the governance regulations, including:

Saudi Companies System: It establishes the legal framework for establishing and managing companies in the Kingdom.

Financial Market System: Regulates financial market operations to ensure fair trading and protect investors’ rights.

CMA Governance Regulation Standards

The Capital Market Authority sets strict standards within the governance regulations to ensure compliance with sound practices in corporate governance. These standards include the following:

First: Structure of the Board of Directors

• There should be a clear separation between the position of Chairman and CEO.
• Companies are required to appoint a certain number of independent members to ensure objective decisions are made.
• The board should have specialized committees such as an audit committee and a remuneration and nominations committee.

Second: Rights of shareholders and stakeholders

• The right to attend General Assembly meetings and participate in decision-making.
• The right to receive dividends in accordance with the company's policies.
• Protecting investors’ rights through full disclosure of any material transactions affecting their ownership.

Third: Disclosure and Transparency

• Requiring companies to publish accurate and regularly updated financial and administrative reports.
• Providing all data related to the executive management and its rewards.
• Report any material transactions that may affect the market.

Challenges Facing the Implementation of Governance Regulations

Despite the great benefits of the governance regulation, there are some challenges facing its implementation, the most prominent of which are:

Resistance to change by companies

Some companies may find that compliance with regulations may increase their administrative burden, leading them to resist adopting some principles on the grounds that they are complex or unnecessary.

Lack of awareness of the concept of governance

Companies' failure to recognize the importance of governance can lead to its application in a formal manner without real commitment to its core principles.

Technical challenges in disclosure

Governance requires advanced technical systems to ensure accurate and timely disclosure of financial data, which can be a challenge for some companies that do not have the necessary infrastructure.

The role of technology in enhancing governance

With the development of modern technologies, it has become possible to improve compliance with governance regulations through specialized systems, such as:

Electronic Document Management Systems: Such as DocSuite, which provides integrated solutions for document preservation and smart data governance.

Blockchain Technologies: which ensures immutable financial records, enhancing transparency.

Intelligent Analysis Systems: which relies on artificial intelligence to detect potential violations and report them immediately.

The governance regulations of the Saudi Capital Market Authority are a fundamental pillar to ensure effective corporate management and protect investors’ rights, as they are based on the principles of transparency, justice, and accountability. With the development of digital tools and technical systems, the application of governance has become more efficient and effective, which contributes to the stability of financial markets and enhances the attractiveness of the Saudi economy to local and international investors.

The relationship between corporate governance and financial sustainability

Good governance is one of the key factors in ensuring the financial sustainability of companies, as it contributes to building a strong management structure, and enhances transparency and accountability, which leads to more sustainable financial and investment decisions. In light of economic challenges and rapid changes in markets, companies that apply governance standards become able to adapt to financial crises and economic fluctuations more efficiently, which ensures their continuity and sustainable growth.

Governance affects financial sustainability by:

Improve financial risk management

• Governance helps in establishing strict control systems to assess and manage financial risks, thus protecting the company from potential crises.
• Ensure that financial contingency plans and effective hedging strategies are in place to mitigate the effects of economic fluctuations.

Enhancing investor and financier confidence

• Companies that follow the governance code easily attract investors, due to their reliability and transparency in publishing financial statements.
• Increase the confidence of banks and financial institutions in companies committed to governance, making it easier for them to obtain financing at lower costs.

Achieve higher operational efficiency

• Governance reduces administrative corruption, promotes a data-driven decision-making environment, and improves the efficiency of operational processes.
• Relying on modern technology such as digital document management systems enhances compliance with governance regulations and reduces operational costs.

Ensuring long-term financial sustainability

• Governance contributes to the creation of financial strategies that are based on long-term planning rather than focusing on short-term gains.
• Applying the principles of transparency and accountability leads to a fair distribution of profits, which enhances the stability of the financial market.

Global companies such as collapsedEnron and Lehman Brothers collapsed due to poor governance, causing investors to lose billions of dollars.

Saudi companies such as Aramco and SABIC that strictly follow governance standards, making them among the most stable and profitable companies in the long term.

Comparison between Saudi governance regulations and international standards

The Saudi governance regulations issued by the Capital Market Authority are based on the best international practices in governance, taking into account the specificity of the economic and legislative environment in the Kingdom. Despite the great similarity with international standards, there are some fundamental differences that distinguish the Saudi governance regulations.

Similarities between Saudi governance regulations and international standards

Disclosure and Transparency

• The Saudi regulation requires listed companies to publish their financial and administrative data periodically, which is similar to the standardsOECD and US governance standards (SEC & SOX).
• Disclosure of executive directors’ and board members’ remuneration to ensure transparency.

Separation of powers within the company

• The need to separate the positions of Chairman of the Board of Directors and CEO, which is a key requirement in the European Union and American standards.
• The presence of a percentage of independent members on the board of directors, which is a common requirement in developed financial markets.

Shareholders and Stakeholders Rights

• Protecting investors’ rights to vote on major decisions and attend general assemblies.
• Ensuring equal access to financial information is a basic standard in all international systems.

Differences between Saudi governance regulations and international standards

Which is more effective?

• The Saudi regulation is in line with the local economic environment and gives priority to national strategic objectives.
• International standards such asThe OECD offers a general model that can be applied globally, but it does not take into account the specificities of each market precisely.
• It can be said that the Saudi governance regulations provide an ideal balance between global compliance and local flexibility, enhancing the efficiency of companies in the Kingdom and making them more attractive to international investors.

Governance directly impacts the financial sustainability of companies, helping them achieve financial stability and enhance investor confidence, ensuring sustainable growth. The Saudi governance regulations are in line with global best practices, but they are flexible in supporting Vision 2030 and encouraging digital transformation, making them an advanced model that is compatible with the future of financial markets in the Kingdom.

The governance regulations in the Saudi financial market represent an advanced model that combines international standards and local market requirements, contributing to building a safer and more sustainable investment environment. By enhancing disclosure, transparency, and responsibility, governance helps companies achieve sustainable growth and attract investors, making it an essential element in the success of financial markets.