Saudi Corporate Governance Regulations — Compliance Guide for Listed Companies (Capital Market Authority) | Nova Legal

The Regulatory Framework for Governance in Listed Companies and the Scope of Application of the Regulations

The regulatory framework for governance in the Saudi financial market rests on an integrated legislative pyramid headed by the main laws and followed by the regulations and regulatory rules issued by the supervisory authorities. At the top of the pyramid comes the Companies Law issued by Royal Decree No. (M/132) dated 1/12/1443H, which laid down the general rules for establishing and managing companies and forming their boards of directors, followed by the Capital Market Law issued by Royal Decree No. (M/30) dated 2/6/1424H, which established the Capital Market Authority and defined its supervisory powers, then come the Corporate Governance Regulations issued by the Board of the Capital Market Authority by Resolution No. (8-16-2017) dated 16/5/1438H corresponding to 13/2/2017AD, and amended by the Resolution of the Authority's Board No. (8-5-2023) dated 25/6/1444H corresponding to 18/1/2023AD, based on the provisions of the new Companies Law.

The Corporate Governance Regulations are the regulations organizing governance practices in listed joint stock companies, and together with the Offering of Securities and Continuing Obligations Rules and the Listing Rules, they constitute the integrated regulatory framework that defines the continuing obligations of listed companies toward the Capital Market Authority, the market, and shareholders. The regulations have taken into account the gradation in binding force between the main market and the parallel market, as Article Two thereof provides that the provisions of the regulations are mandatory for companies listed in the main market except for the provisions expressly indicated as non-binding (guidance), while the regulations as a whole are non-binding for companies listed in the parallel market except for a specific number of mandatory provisions on them, namely paragraph (c) of Article Thirteen, paragraph (b) of Article Fifty, paragraph (a) of Article Fifty-One, Article Fifty-Two, Article Fifty-Six, and Article Eighty-Eight.

Listed companies must precisely understand which provisions are binding on them and which are non-binding, as confusing these concepts may lead to incomplete compliance or to assuming unrequired obligations. Nevertheless, best practices recommend that companies also apply the non-binding provisions whenever possible, given that they reflect the international standards of sound governance and raise the quality of management and the degree of investor confidence in the company.

The Concept of Corporate Governance and Its Definition under the Corporate Governance Regulations

The Corporate Governance Regulations, in its first article (Definitions), defined corporate governance as "rules for leading and directing the company, comprising mechanisms for organizing the various relationships between the board of directors, executive management, shareholders, and stakeholders, by setting specific rules and procedures to facilitate the decision-making process and confer on it a character of transparency and credibility, with the aim of protecting the rights of shareholders and stakeholders and achieving justice, competitiveness, and transparency in the market and the business environment." This official definition summarizes the essence of governance: it is not merely formal procedures, but an integrated system for organizing relationships and distributing powers among the parties of the company in a manner that ensures balance, oversight, and accountability.

The regulations, in its first article, also listed basic definitions that determine the scope of its application and the content of its obligations, the most prominent of which are: the company, which is the joint stock company listed on the market, and the board of directors, which is the board of directors of the company, and the executive member, who is the member of the board of directors who is full-time in the executive management of the company and participates in its day-to-day business, and the non-executive member, who is the member who is not full-time in managing the company and does not participate in its day-to-day business, and the independent member, who is a non-executive member of the board of directors who enjoys complete independence in his position and decisions and to whom the independence impairments provided for in Article Nineteen do not apply, and stakeholders, who are everyone who has an interest in the company such as employees, creditors, customers, suppliers, and the community, and major shareholders, who are everyone who owns (5%) or more of the company's shares or its voting rights.

The importance of these definitions lies in the fact that they precisely determine who is subject to the provisions of the regulations and what his obligations are, as the regulations rely in many of its provisions on the distinction between the executive, non-executive, and independent member, and expand the scope of responsibility to include major shareholders, relatives, and related parties, which requires each company to align its terminology and internal policies with these regulatory definitions.

The General Assembly of Shareholders: The Highest Authority in the Company

The general assembly of shareholders in the listed company is the highest authority that takes the decisive decisions in the company, and the regulations, in its tenth article, affirmed that the general assemblies of shareholders are competent with all matters relating to the company, and that the general assembly convened in accordance with the regulatory procedures represents all shareholders in exercising their powers relating to the company, and performs its role in accordance with the provisions of the Companies Law, its implementing regulations, and the company's articles of association. This text lays down the golden rule of governance: that the ultimate authority in the company belongs to the shareholders who own its shares, and that the board of directors exercises its powers within the limits of the delegation granted to it by the general assembly and the company's articles of association.

The regulations, in Article Twelve, specified the powers of the ordinary general assembly in a detailed manner, stating that it is competent with all the company's affairs, and in particular: electing and removing the members of the board of directors, authorizing a board member to have a direct or indirect interest in the businesses and contracts executed for the company's account in accordance with the provisions of the Companies Law and its implementing regulations, authorizing a board member's participation in any business that may compete with the company, monitoring the compliance of board members with the provisions of the laws and the company's articles of association and examining any damage arising from their violation, reviewing the financial statements and the board of directors report and discussing them, deciding on the board of directors' proposals regarding the method of distributing net profits, forming reserves and determining their uses, appointing one or more auditors and determining their fees and dismissing them, considering the violations committed by the auditors, and approving the sale of more than (50%) of the company's assets whether in a single transaction or in several transactions within twelve months.

The regulations also required, in Article Four, that the board of directors work to protect the rights of shareholders in a manner that ensures justice and equality among them, commit to not discriminating between shareholders owning shares of the same type and class and to not withholding any right from them, and that the company clarify in its internal policies the procedures necessary to ensure that all shareholders exercise their rights. These provisions translate the concept of governance from texts into actual practices that protect the rights of shareholders, especially minority shareholders who do not have actual influence over the management of the company.

The Formation of the Board of Directors and the Conditions of Membership in Listed Companies

The board of directors is the beating heart of the governance system of companies listed on the Saudi financial market, as it undertakes the role of oversight, strategic direction, and monitoring of executive management. The regulations, in Article Sixteen, laid down the basic rules for the formation of the board, where it is taken into account in the formation: that the number of members be proportionate to the size of the company and the nature of its activity, that its majority be of non-executive members, and that the number of its independent members be no less than two members or one third of the board members, whichever is more. This balanced formation ensures the existence of independent oversight over executive management and prevents the dominance of a single category over the board's decisions.

Article Seventeen regulated the appointment of board members, providing that the company's articles of association shall determine the number of board members provided that it does not be less than three, and that the general assembly shall elect the board members for the period stipulated in the company's articles of association provided that it does not exceed four years, with the permissibility of re-electing them unless the company's articles of association provide otherwise. It also required that a board member not hold board membership in more than five joint stock companies listed on the market at the same time, and obligated the company to notify the Authority of the names of the board members and their membership capacities within five business days from the date of the start of the board's term or from the date of their appointment – whichever is closer – and of any changes occurring to their membership within five business days from the date of the occurrence of the changes.

Article Eighteen stated the conditions of board membership, a non-binding (guidance) provision, requiring that a board member be among those of professional competence who possess the experience, knowledge, skill, and independence necessary to enable him to perform his duties efficiently, and taking into account that he in particular possess: the ability to lead, scientific and professional competence and practical experiences relevant to the company's activities or to management, economics, accounting, law, or governance, the ability for strategic direction and decision-making, financial knowledge represented in the ability to read and understand financial statements and reports, and physical fitness. The regulations recommend the general assembly to take into account, when electing the board members, the recommendations of the nominations committee and the availability of these qualifications.

The Independence of Board Members and the Independence Impairments

The independence of board members is one of the most important pillars of sound governance and the most influential in the quality of the board's decisions, as it ensures the existence of neutral voices capable of monitoring executive management and confronting conflicts of interest. The regulations devoted to this topic Article Nineteen, which required that the independent board member be able to perform his duties and express his opinions and vote on decisions objectively and impartially, and obligated the board of directors to conduct an annual evaluation of the extent to which the member's independence is realized and to ensure the absence of relationships or circumstances affecting it.

Article Nineteen specified the independence impairments by way of example and not limitation, which are the cases with which the required independence is incompatible, the most prominent of which are: that the member owns five per cent or more of the company's shares or of the shares of another company in its group or has a kinship relation with whoever owns this percentage, that he has a kinship relation with any of the board members or senior executives of the company or of another company in its group, that he is a member of the board of directors of another company in the group of the company he is nominated for membership of its board of directors, that he works or used to work as an employee during the past two years for the company or another company in its group or that he owns controlling interests in the company or any party dealing with it, that he has a direct or indirect interest in the businesses and contracts executed for the company's account, that he receives amounts of money from the company in addition to the board membership remuneration exceeding (200,000) riyals or 50% of his remuneration in the previous year, whichever is less, that he participates in a business that may compete with the company or trades in one of the branches of its activity, that he has spent more than nine consecutive or separate years in the membership of the company's board of directors, and the Resolution of the Authority's Board No. (1-35-2018) dated 9/7/1439H was issued making the nine-year provision mandatory starting from the board term that commences after 1/1/2019AD.

Article Twenty-Nine also specified the duties of the independent member, obligating him to effectively participate in expressing the independent opinion on the strategic matters, the company's policies and performance, and the appointment of executive management members, to verify that the interests of the company and its shareholders are taken into account and given precedence when any conflict of interest occurs, and to supervise the development of the corporate governance rules specific to the company and monitor the executive management's application of them. These duties grant the independent member a pivotal role in supervising the quality of the company's management and protecting the rights of shareholders.

Board Committees: Formation and Terms of Reference

The committees emanating from the board of directors constitute an effective tool for distributing tasks and powers and enabling the board to exercise its oversight efficiently, and the Corporate Governance Regulations have given them great attention. Article Forty-Seven provided that the board of directors shall form specialized committees in accordance with the company's need, circumstances, and conditions in a manner that enables it to perform its duties effectively, provided that the number of the committee members is no less than three and no more than five, and that their formation is in accordance with general procedures set by the board that include determining the mission of each committee, the duration of its work, and the powers delegated to it, and that each committee is responsible for its work before the board of directors without prejudice to the board's responsibility for those works, and that the board of directors notifies the Authority of the names of the committee members and their membership capacities within five business days from the date of their appointment. The regulations also provided for the permissibility of merging the remuneration and nominations committees into a single committee called the remuneration and nominations committee, which satisfies the requirements of both together and exercises all their powers, provided that it meets periodically at least every six months.

The Audit Committee

The audit committee occupies a special position in the governance system, as Article Fifty-One provided that an audit committee shall be formed by a decision of the company's board of directors, from the shareholders or others, provided that it does not include any of the executive board members, that the number of its members is no less than three and no more than five, that among them there is a specialist in financial and accounting matters, and that among its members there is at least one independent member, while the requirement that the chairman of the audit committee be an independent member and that the number of its independent members be no less than half are two non-binding (guidance) provisions. The regulations also prohibited whoever works or worked during the past two years in the executive or financial management of the company or with the company's auditor from membership of the committee, and required that an audit committee member not hold membership in audit committees of more than five joint stock companies listed on the market at the same time. Article Fifty-Two specified the powers of the audit committee, and it is among the mandatory provisions even for companies listed on the parallel market, and it includes supervising the work of auditing the financial statements, overseeing the internal control and risk management system, and recommending the appointment of the auditor.

The Remuneration Committee and the Nominations Committee

Article Fifty-Seven provided for the formation of a committee called the remuneration committee from the non-executive board members provided that there is among them at least one independent member, and the general assembly, based on a proposal from the board of directors, issues its terms of reference which include the controls, working procedures, duties, rules for selecting its members, their term, and their remuneration. Likewise, Article Sixty-One provided for the formation of the nominations committee from the non-executive members with the presence of at least one independent member, and it undertakes proposing the nominations of the members of the board of directors, the committees, and the executive management and verifying the availability of qualifications, and among its most important powers is preparing its recommendations to the general assembly regarding the appointment of members, with the members of the two committees obligated – in accordance with Article Forty-Eight – to be among the independent board members, with the permissibility of resorting to non-executive members or persons from outside the board members, provided that the chairmen of the two committees be among the independent members.

The Risk Management Committee

Article Sixty-Seven regulated the formation of the risk management committee as a non-binding (guidance) provision, as it is formed by a decision of the company's board of directors, and its chairmanship and the majority of its members are from the non-executive board members, and it is required that its members possess an appropriate level of knowledge of risk management and financial matters. Despite the non-binding nature of this provision, the establishment of a specialized committee for risk management has become one of the expected practices of major listed companies, especially in light of the requirements of disclosing risks and their management policies in the board of directors report.

Conflict of Interest and Related Parties

The regulation of conflicts of interest and dealings with related parties represents one of the most serious challenges facing the governance of listed companies, and the Corporate Governance Regulations addressed it with extreme care. The regulations, in its first article, defined related parties as: the company's subsidiaries except for the companies fully owned by it, the major shareholders of the company, the board members and senior executives of the company, the members of the boards of directors of the subsidiaries, the board members and senior executives of the major shareholders, the relatives of these persons, and any other company or entity controlled by any of these. This broad definition ensures that the provisions of governance are not circumvented through concluding transactions via related entities or persons.

The regulations, in accordance with its provisions and the Companies Law, require that the large dealings with related parties obtain the approval of the competent authorities, and be subject to the oversight of the audit committee, with a commitment to full disclosure of them in the annual board of directors report, including the nature of the transaction, its terms, its parties, and its amount. The company is also committed to setting written internal policies for the dealings of related parties that determine the procedures, controls, and approvals required, and works to ensure that these dealings take place on fair terms that do not prejudice the interests of the company and the shareholders. We will address this topic in detail in a separate article dedicated to conflicts of interest and related party transactions in Saudi companies.

Disclosure and Transparency and the Annual Board of Directors Report

Disclosure and transparency constitute the third pillar on which the governance system in listed companies rests, as shareholders and stakeholders cannot exercise their rights and monitor the company's performance without accurate and comprehensive information. Article Eighty-Six of the regulations obligated the board of directors to set written policies for disclosure, its procedures, and its supervisory systems in a manner consistent with the disclosure requirements set forth in the Companies Law, the Capital Market Law, and their implementing regulations, provided that they include appropriate disclosure methods that enable shareholders and stakeholders to access the financial and non-financial information, and that the disclosure to shareholders and investors be without discrimination and in a clear, correct, and non-misleading manner, at the appropriate time, and in a regular and accurate manner.

Article Eighty-Seven specified the contents of the annual board of directors report in a precise and detailed manner, as it must include a presentation of its operations during the last fiscal year and all the factors affecting the company's business, and include what has been applied of the provisions of the regulations and what has not been applied and the reasons for that, the names of the board members, the committees, and the executive management and their positions, qualifications, and experiences, the formation of the board of directors and the classification of its members into executives, non-executives, and independents, the methods adopted by the board in evaluating its performance and the performance of its committees and members, the disclosure of the remuneration of the board members and the executive management, any penalty or sanction imposed on the company by the Authority or any supervisory body, the results of the annual review of the effectiveness of the internal control procedures, the details of related party transactions, a statement of the dates of the general assemblies held, a description of any risks facing the company and the policy of their management, a summary of the company's assets, liabilities, and results of its operations in the last five fiscal years, the company's policy for the distribution of stock dividends, and other material data.

Article Eighty-Eight also required that the audit committee report include the details of its performance of its powers and duties and its recommendations and its opinion on the adequacy of the internal, financial, and risk management control systems, and that the board of directors deposit sufficient copies of the report at the company's main office and publish it on the company's website and the market's website when the invitation for the convening of the general assembly is published, and its summary is recited during its convening, and this article is among the mandatory provisions even for companies listed on the parallel market. We will address the requirements of disclosure and transparency in some detail in a separate article dedicated to this topic.

The Practical Compliance Guide for Listed Companies

We provide below a practical step-by-step guide that listed companies and companies seeking listing can follow to verify their compliance with the provisions of the Corporate Governance Regulations issued by the Capital Market Authority, taking into account that the degree of binding force differs between the main market and the parallel market as previously explained:

• Reviewing the formation of the board of directors: ensuring that the majority of the board members are non-executives, that the number of the independent members is no less than two members or one third of the board members, whichever is more, that the total number of members is no less than three, that the membership term does not exceed four years, and that no member holds membership in the boards of more than five listed joint stock companies at the same time.
• Verifying independence: conducting an annual evaluation of the independence of the independent members and ensuring the non-application of the independence impairments provided for in Article Nineteen, and documenting the results of this evaluation.
• Forming the mandatory committees: forming the audit committee, the remuneration committee, and the nominations committee in accordance with the regulatory requirements, and issuing their terms of reference from the general assembly based on the proposal of the board of directors, while considering the establishment of the risk management committee and the combined remuneration and nominations committee wherever appropriate.
• Notifying the Authority of changes: notifying the Capital Market Authority of the names of the board and committee members and their membership capacities within five business days from the date of appointment or the start of the term, and of any changes occurring to them within five business days from their occurrence.
• Adopting written policies: adopting written internal policies that include the disclosure policy, the policy of related party dealings, the dividend distribution policy, the policy of evaluating the performance of the board, its members, and its committees, and the policy of the remuneration of the board members and the executive management.
• Activating internal control and risk management: implementing an internal control system on sound foundations, adopting policies for risk management and its monitoring, and the audit committee's oversight of the effectiveness of these systems.
• Preparing the comprehensive board of directors report: preparing the annual report including all the data required in Article Eighty-Seven, including what has been applied of the regulations and what has not been applied and the reasons for that, and preparing the audit committee report and making it available in accordance with Article Eighty-Eight.
• Managing the general assembly: convening the ordinary general assembly in accordance with the regulatory procedures, presenting the financial statements, the board of directors report, and the auditor's report, and deciding on the items included in the agenda, including the election of members, the distribution of profits, and the appointment of the auditor.
• Documenting compliance: retaining the records, minutes, and procedures proving compliance, and preparing an annual checklist covering all the provisions of the regulations to enable periodic examination by the audit committee and the external legal advisor.

Non-compliance with the provisions of the Corporate Governance Regulations exposes the company and the members of its board of directors to accountability before the Capital Market Authority under the Capital Market Law and the Offering of Securities and Continuing Obligations Rules, and the procedures may include imposing financial penalties, taking corrective measures, and announcing the violations. Hence, the regulations themselves recommend companies to disclose in the board of directors report what has been applied of its provisions and what has not been applied and the reasons for that, making conscious and documented compliance a necessary approach rather than an option.

Official Sources and References

This article relied on the following official regulatory sources, which are the reliable source for all the laws, decisions, articles, and percentages mentioned in the sections above, and reference is always preferred from these official links to view the full texts and the latest amendments:

• Corporate Governance Regulations – Capital Market Authority (the official page of the regulations)
• The full text of the Corporate Governance Regulations (PDF file) – Capital Market Authority
• The Companies Law issued by Royal Decree No. (M/132) – the Official Gazette (Umm Al-Qura)
• The Capital Market Law issued by Royal Decree No. (M/30) – Capital Market Authority
• The announcement of the Capital Market Authority on the issuance of the Corporate Governance Regulations
• The Official Gazette (Umm Al-Qura) – the body publishing the laws and regulations

Methodological note: all the provisions, articles, percentages, and figures referred to in this article are quoted verbatim from the official texts mentioned above (the Corporate Governance Regulations by the Resolution of the Authority's Board No. (8-16-2017) amended by Resolution No. (8-5-2023), the Companies Law M/132, and the Capital Market Law M/30), and it is advised to refer to these sources to verify any updates or amendments occurring to the regulatory texts.

Frequently Asked Questions about the Corporate Governance Regulations in Saudi Arabia

We provide below answers to the most frequently asked questions among listed companies and the members of their boards of directors about the Corporate Governance Regulations issued by the Capital Market Authority:

Conclusion: Toward Sustainable Institutional Compliance

The Corporate Governance Regulations issued by the Capital Market Authority represent the most important reference framework for governance practices in companies listed on the Saudi financial market, and they are in continuous development in line with the best international practices and the requirements of the new Companies Law. The transition to a culture of genuine institutional compliance is not merely formal procedures to avoid accountability, but a strategic investment that enhances the company's reputation, the confidence of investors, and its ability to achieve sustainable growth, and reduces the legal, operational, and financial risks.

We invite all listed companies and those seeking listing to review their governance status periodically and in cooperation with specialized legal and financial advisors, and to adopt a proactive approach in applying the mandatory and non-binding provisions of the regulations alike. At Nova Legal for Law and Legal Consulting, we offer our specialized consultations in everything related to the governance of listed companies, from reviewing the formation of boards of directors and committees, to preparing internal policies, reviewing annual compliance reports, and representing companies before the Capital Market Authority, and we are pleased to accompany you on your journey toward sound and sustainable governance.