Innovations in Corporate Governance Mechanism and Its Relation with ReTurn On Assets for Public Listed Companies in Saudi Arabia

...

It was in the year 1998 that the “Organization for Economic Cooperation and Development” came up with the “Principles of Corporate Governance”, and gave the codes to the Corporate Governance that are followed by the company (Robertson, Diyab & Al-Kahtani, 2013). Kingdom of Saudi Arabia case is different from the rest of the world with reference to the improvement of Corporate Governance codes. The first of the Corporate Governance codes in the country were published in the year 2006; they were again reviewed in the year 2009. The idea of the Corporate Governance in KSA is still in quite weak state, it is mainly due to the lack of information available on the concept. However, (Al-Moataz & Hussainey, 2012) stated that the Codes of Corporate Governance that are valid for the organizations working in the western world may not be appropriate for the organizations doing businesses in Saudi Arabia.

Even if the codes are applied, there will be a number of amendments and customizations required for the implementation of the codes. The main business of the companies working in the Kingdom of Saudi Arabia is oil production, extraction, and distribution. Saudi Arabia is one of the most important and most strong members of G20 countries. The economy of Saudi Arabia is one of the richest and healthiest economies among the Gulf countries (Morey, Gottesman, Baker & Godridge, 2009). The economy of the country has started to incline towards the industrialization; there is an increased level of privatization and industrial development in the country. Tadawul is one of the largest upcoming and budding stock market on the globe lie, 2000. Up till the year 2009, there were almost 145 firms indexing on the Tadawul Stock Market.

The Corporate Governance Model followed in the Kingdom of Saudi Arabia is more focused toward the shareholder model or the Corporate Governance model of Anglo-American. It was in the 1970s that the company law in the country was formulated. The law restricted the investments from the foreigners in KSA (Walker, (2009). In the year 2006 the stock market of the Tadawul lost almost 48% of its market value. The year expensed the stock exchange and made it go through the worst times in the history. Then the government of Saudi Arabia intervened, and it invested the reforms in the market so the confidence of the investors, which was at its lowest, could be brought back. CMA capital market economy espouses the CCG known as Code of Corporate Governance (Morey, Gottesman, Baker & Godridge, 2009). As mentioned the Saudi model of corporate governance is one-tier and bear a resemblance to Anglo-American model, however, there is also one key factor that influences the CG of KSA that is Islamic principles and code of conduct.

[pic 2]

[Fig 1: Models of Corporate Governance]

The model of Anglo-American model in Corporate Governance is similar to the model followed in Saudi Arabia. However, the only gap between the two is the model followed by the Saudi organizations is not only focused on the wealth of the shareholders and the strategies of the wealth maximization (Piesse, Strange & Toonsi, 2012). The models followed by the organizations in the Saudi Arabia are more Shariah complied and follow the Islamic principles and the Sunnah models. In other words, it can be said that the model of Corporate Governance in the Saudi organizations is focused on the maximization of the wealth of the investors but in ways that are Shariah complied (Kirkpatrick, 2009). It is, true that these models are not found in any other economy of the world. Therefore, true that the results of the Corporate Governance models and concepts that are evident in the other part of the world may not bring about similar results.

Many studies on Corporate Governance model on Saudi Arabia have found no relationship between the mechanisms of Corporate Governance on firms’ performance (Al-Hussain and Johnson, 2009). According to a report on the observance of standards and codes of corporate governance in Saudi Arabia, 2009, the Corporate Governance awareness needs more attention. It needs more attention because it is still in its growing stage, in the companies. The Capital Markets Authority (CMA) is responsible for reviewing the standard report on both the public and regular companies. The CMA was founded in 2003. Saudi Arabia system of law is based mainly on Islamic law that is known as Sharia law. CMA issued Corporate Governance regulations known as CGR in 2006.

After the issuance, it was mandatory on all public listed companies to comply with the CGR. As reported by Reports on the Observance of Standards and Codes( ROSC), A program established by the World bank to strengthen Corporate governance in member countries, It was observed that in the first year of issuance of CGR there was very limited by the listed companies (Koldertsova, 2011). Orate Governance there is very limited data available on CG and its practices for Saudi Arabia. Knowing that the country is undergoing a lot of reforms and is still in its early stage of implementing the Corporate Governance rules, there lays an ample room to study in this area (Larcker, Richardson & Tuna, 2007). The study on the observation of the current scenario of Corporate Governance in Tadawul listed companies.

1.4 Problem Statement

This study would identify and investigates the 4 major issues that would include :

- Lack of the executional understanding of CG,

- Application of Western CG Model to KSA situation;

- Issues faced in Customization and understanding the impact on Performance

- Limitations of Data Availability on CG practices in KSA.

The case of Kingdom of Saudia Arabia is different from the rest of the world with reference to the development of CG codes. The country published its first CG codes back in 2006 which were reviewed in 2009. Due to the deficiency and lack of know-how in the execution of these CG mechanisms this area of Corporate governance is still frail.

Ihsan(2012) spotted that the codes of CG applicable in the western region may not be applied in the kingdom of saudia Arabia and lot of amendments and customization is required due to the disparity and diversity in culture and the macro environment.Up till now, the relationship of CG with the organizations performance needs attention and the GAP exists.

There is very limited data available on CG and its practices for Saudi Arabia. Knowing that the country is undergoing lot of reforms and is still