Saudi Arabia Approves New Corporate Governance Regulations

The Capital Market Authority (the CMA) of the Kingdom of Saudi Arabia (the Kingdom) has approved new corporate governance regulations for joint stock companies listed on the Saudi exchange (Tadawul) (the Regulations)¹. Replacing the 2006 version, the Regulations provide shareholders and board members with improved rights, greater clarity and more transparency as to their respective roles and responsibilities. 

Why now? 

The publication of the Regulations is driven by the continued effort to attract additional foreign investment into the Kingdom and to harmonize the CMA’s own rules with those of the newly revised Companies Law², as overseen by the Ministry of Commerce and Investment. By enhancing the regulatory oversight of listed companies, the CMA seeks to bring its standards in line with those of other leading global exchanges. But the publication’s timing is of critical importance. Preparations are currently underway for the listing of Saudi Aramco’s shares on Tadawul pursuant to a planned IPO³. This is one of several measures the Kingdom is pursuing in line with its Saudi Vision 2030, a royal decreed initiative to help diversify the country away from its heavy reliance on declining oil revenue. 

Enforcement 

The Regulations replace the previous set that were in effect since 2003 (and modified in 2006). Published in mid-February this year, they formally come into effect on 22 April 2017. Some of the provisions however, such as those requiring corporate governance policies to be drafted and published, will only come into force on 31 December 2017. 

Objectives of these Regulations 

Pursuant to Article 3, the main objectives of the Regulations can be summarized as: 

• enhancing shareholder rights; 
• clarifying board, committee and executive management roles and responsibilities, including their decision making mechanisms; 
• achieving greater openness, competitiveness, transparency and disclosure; 
• avoiding and disclosing conflicts of interest; 
• improving accountability and control over employees; 
• protecting shareholder rights; 
• overseeing corporate actions; and 
• raising the professional standards of listed joint stock companies. 

Summary of the Key Provisions 

Shareholder Rights 

Key rights are set out in Articles 4 to 15 of the Regulations and include: fair and equal treatment among shareholders, non-discrimination among shareholders of the same class, fair distributions, equal rights related to access of corporate information and communications, rights to attend and vote in general assemblies and board and audit member selections. There are now also clear mechanisms for the distribution of dividends and insolvency payouts. 

Board of Directors 

Detailed rules and principles governing board of directors (which also include that of the chairman, independent directors and the secretary of the board) (together, the Board) are set out Articles 16 to 41 of the Regulations and cover matters including: board formation, composition, appointment, conditions of membership, termination, responsibilities, main functions, independence, distribution of competencies and duties (including vis-à-vis those in executive management positions), agenda setting, meeting procedures, auditing, and training. Furthermore, the Regulations enshrine the fiduciary duties to adhere to the principles of truthfulness, honesty and loyalty. 

Conflicts of Interest 

The Regulations also cover the Board’s avoidance, assessment and disclosure of (and dealings with) conflict of interest situations⁴. There is a need to establish policies and procedures in relation to related party transactions, conflicts scenarios (with or for the company or its competitors), conflicted persons, accepting gifts, and complying with the authorization, renewal and termination of the board and its members, as per the Companies Law. 

Committees 

Provisions dealing with the formation, composition, membership, powers, procedures, responsibilities, policies, meetings and announcements of committees for remuneration, risk management, audit, corporate governance and nomination are set out in Articles 83 to 88 of the Regulations. 

Audit and Internal Control 

Also outlined are the requirements as to the composition, appointment, roles and responsibilities of internal and external auditors⁵. Listed companies should have internal control systems in place, along with audit plans and regular published reports. Listed companies must also maintain policies on effective corporate governance, and have an internal corporate governance committee regularly review compliance. 

Stakeholders 

Boards of listed companies are now required to produce policies on their dealings with various stakeholders, including employees and incentives given to them⁶. These drafted policies should describe how to protect their respective rights, deal with complaints, confidentiality of information, professional conduct, social contributions, treatment of employees, and dealing with non-compliance with these policies and procedures. Employee incentive schemes and payouts must be documented. Separate policies governing professional and ethical corporate standards, social responsibilities and social initiatives are also to be made available. 

General Disclosures and Transparency 

There is a general requirement to disclose and make available up-to-date and accurate information to the company’s various stakeholders⁷. The board must maintain policies on information disclosure, and provide a regular board report along with that of the audit committee’s report and regularly maintain information on the company’s website. Remuneration of board members and the executive management must be disclosed pursuant to a standard template, as set out in the Regulations. All records of the company must be maintained for a period of ten years, or longer if, any potential claims are pending. 

Impact of Changes

The impact of the Regulations is likely to be significant, especially when compared with the old corporate governance regime. However, the obligations and responsibilities to which listed companies in the Kingdom will be subject to once the Regulations come into force is barely (if at all) more onerous than those applicable to such entities in other more traditional listing jurisdictions. This should serve, in equal parts, to give comfort to international investors and to encourage sponsors to support the local listings regime, both of which will be equally necessary in order for the domestic market to grow as intended. 

Footnotes 

_{1) The Corporate Governance Regulations (the Regulations), as issued by the board of the CMA pursuant to its resolution number (8-16-2017) dated 16/5/1438H (corresponding to 13/2/2017G) are intended to comply with the revised Companies Law, as issued by Royal Decree No M/3 dated 28/1/1437H (corresponding to 10/11/2015G).
2) The Companies Law (1437H/2015G), published in the Saudi Gazette (Um Al-Qura) on 4 December 2015, and effective from 02 May 2016.
3) See “UPDATE 2-Saudi Aramco IPO unlikely to require rule changes says regulator” Reuters, December 6, 2016.
4) Part 3 (Articles 42 – 49) of the Regulations.
5) Part 5 and 6 (Articles 73 – 82) of the Regulations.
6) Part 7 and 8 (Articles 83 -88) of the Regulations.
7) Part 9 and 11 (Articles 89 -93 and 96) of the Regulations.}