Corporate Governance Role in Reassuring Investors in Saudi Arabia

Introduction

For many years, Saudi Arabia has been relying on revenues from oil. The Kingdom has had plans to reduce its over dependence on crude oil. The plans have been catalysed by the slide of about 50% in oil prices (Capital Markets, n.d.). As a result, there is urgency to attract foreign investors. In order to woo the investors, Heenetigala (2011) noted that “there is the need for an approach for reform and a new mechanisms that enhance the integrity of financial transactions, by setting parameters that serve the public interest and stakeholders’ rights” (p.15).

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In line with the statement, Saudi Arabia’s market regulator initiated strategies to ensure that all companies adhere to good corporate practices that enhance the confidence of investors. The following paper is a proposal to investigate how corporate governance influences management, share price performance and profitability and the role in reassuring investors in Saudi Arabia.

Significance of the Study

The role of corporate governance in many countries is to promote the confidence of the investors and enhance trust in the management (Arora & Dharwadkar 2011). These aspects are critical to the economic development of a country. In Saudi Arabia, the capital market regulator has put in place laws to deal with errant companies (Jones 2015). However, the efficacy of the laws and their implications in building the confidence of the investors has not been investigated.

The study will be designed to provide a detailed description of the development impetus of corporate governance in Saudi Arabia. It will include an overview of the socio-economic and political environment, which have a significant influence on the policy formulation and the share prices of the local and foreign investors. Therefore, the study will provide comparative information that will be important for the current investors and those aspiring to invest in Saudi Arabia. In addition, it will provide information that can be used by the regulatory body to understand issues that affect investors.

Rationale

Saudi Arabia is the largest economy in the Middle East (Krichene 2012). The need to diversify from the over reliance on oil to other sectors of the economy is a move that has excited many investors. However, studies across the globe show that investors are wary of entering the market where there are no clear guidelines on how their shares will be protected. Therefore, for successful restructuring and development, the Kingdom of Saudi Arabia requires an efficient capital market that can mobilise both the domestic and external investors to invest in the country. In order to achieve such a platform, there is the need for good corporate governance (CalPERS 2009).

The various studies conducted by business scholars have shown that corporate governance plays a critical role in building confidence and reassuring investors of the safety of their investments (Miles & Goulding 2009). Therefore, the main aim of the study will be to provide information on how corporate governance reassures investors in Saudi Arabia.

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Research Questions

The research questions will form the basis for guiding the data collection process in order to understand and to resolve the current corporate governance challenges in Saudi Arabia. Therefore, the researcher will be answering the following questions:

  1. Is the corporate governance framework in Saudi Arabia structured to meet the international needs of investors?
  2. Do provisions of Islamic Law influence the principles of corporate governance in Saudi Arabia and are they in tandem with the worldwide corporate governance framework?

Review of the Literature

Corporate governance determines the responsibilities and rights of all stakeholders (Abhayawansa 2008). It has a significant role in the growth prospects of any economy. According to Reddy, Locke and Scrimgeour (2010), good corporate governance practices are crucial for attracting the investment capital, boosting the confidence of the investors and enhancing performance of companies.

Across the business world, there is a common perspective that good corporate governance protects the interests of the shareholders (Nmai 2014). This perspective has increased the attention of global investors when choosing countries for their investments (Klapper & Love 2004). Abhayawansa and Johnson (2007) noted that the organisation of the corporate governance is affected by the country’s economy, political and social contexts.

Corporate governance attracts a great deal of attention due to its paramount role in the growth prospects of companies (Slahudin 2008). Coles, McWilliams and Sen (2009) pointed out that corporate failures across the globe have led to market regulators putting in place measures that promote sound governance and clamping down companies that are potentially wayward. A research conducted by Razaee (2009) found that proper corporate governance practices attract investors and restore their confidence. Similarly, Ghazali (2008) found that good corporate governance practices promote effective management and appropriate allocation of resources.

According to Valenti, Luce and Mayfield (2011), the aspects enhance corporate performance and contribute to company’s share price. In the emerging markets, there has been increased monitoring of corporate governance practices by the institutional investors in order to ensure that companies comply with the standards of the world. Klapper and Love (2004) pointed out that in developed countries that have sound governance; the investors are more willing to enter such markets. Similarly Abhayawansa and Johnson (2007) note that emerging markets that have good corporate governance attract more investors.

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Brown and Caylor (2009) stated that corporate governance is a complex mosaic made of laws, politics, code of ethics and professional associations. The framework differs from one to another. For instance, the social and political orientations of some countries have resulted in some of the detailed structures of the governance missing (Heenetigala 2011). This limits the confidence of the investors in the markets.

Most of the studies have evaluated the phenomenon in the developing and developed countries. However, there have been few studies in the Middle East. Therefore, the study will focus on Saudi Arabia in order to provide knowledge about the roles of corporate governance in Islamic countries. It is worth noting that the socio-economic and political orientations in Middle East are different from the European and other Asian countries where studies have been conducted.

Method and Design

The study methodology will be a comparative analysis of the changes to the corporate governance in Saudi Arabia from 2009 to 2014. According to Denk (2010), the comparative analysis helps in the identification of relationships and trends.

Sampling and Sample Selection Criteria

The sampling process will involve purposive and simple random sampling procedures. Selection criteria for the study participants will be limited to the scope of the study, i.e. only listed companies will be studied. This will ensure that the researcher gets right answers to the study questions.

Simple random sampling

The simple random sampling is non discriminatory. Every unit in the study population has an equal chance of being included in the sample. In order to arrive at a representative sample, the population being studied should be clearly defined. This entails clear specification of the sampling frame, the method to be applied and the sample size (Sans 2011). In this case, the intended sample size will comprise of 30 corporate companies. To constitute the sample, the inclusion criteria will be all the companies with functioning board of directors and listed in the Saudi Stock Exchange. This will form the sampling frame.

Random numbers will be used to get the proposed sample. Each unit within the frame will be given a random number that will then be entered in a computer application that generates random numbers. The generated numbers will be used as basis for choosing the thirty companies.

Purposive sampling

According to Sans (2011), purposive sampling is discriminatory as it gives the researcher the discretion to identify the subjects to be included in the study. As a result, there is the possibility of personal bias in the identification of the study participants. However, the method is paramount when specific information required can only be achieved from specific people. Therefore, the inclusion criteria for investors to be interviewed will be those who have been investing in Saudi Arabia for at least five years. They must be investing in one of the listed companies included in the sample. The investors must not be citizens of Saudi Arabians. The directors to be interviewed must be executive directors of the sampled companies. Only the directors who have served for at least three years will be interviewed.

Sources of Data

The sources of data to be used in the study will be both the primary and secondary sources. The primary data will be collected through the use of interview schedules. This will be done via teleconferencing. The secondary data source will entail reviewing the corporate governance frameworks for the 30 companies. Authorisation by the managers of the company will be sought in order to provide the required data. Thus, quantitative and qualitative data will be obtained.

Data Analysis

The collected data will then be analysed using SPSS, Spearman’s correlations and variances to determine the significance of corporate governance in Saudi Arabia over the stipulated time and the changes that have been witnessed during the period. The data will then be examined against the international corporate governance standards. A standard corporate governance model will be used as the basis for determining the right practices.

Corporate Governance Model

There are different corporate governance models. Examples include the Anglo-American Shareholders’ Model, Continental European Stakeholders Model and Family Owned Businesses Model. In this study, the analysis of the frameworks will be based on Anglo American Model of corporate governance. According to Palmer (2011) the model is internationally considered as standard measure for evaluating corporate governance for countries and devising ways to organise their governance structures. The model emphasises on legal structures, diffused ownership, disclosure requirements, corporate control, more powers for non-executive board members, corporation control by the executive board of directors, and diffused ownership structures.

Conclusion

The study will concentrate on the structures of corporate governance, firm performance, and composition of corporate governance and how they influence share price performance, profitability and investors’ confidence. This will be achieved by application of comparative analysis to determine the efficacy of the corporate governance practices in Saudi Arabia. The study will establish how the corporate governance practices influence the company’s accountability.

References

Abhayawansa, S 2008, ‘An overview of corporate governance regulations in Sri Lanka ‘, Law and Society Trust Review, vol. 18, no. 242, pp. 26-46.

Abhayawansa, S & Johnson, R 2007, Corporate governance reforms in developing countries: Accountability versus performance, John Wiley & Sons Australia, Milton, Qld.

Arora, P & Dharwadkar, R 2011, ‘Corporate governance and corporate social responsibility: The moderating roles of attainment discrepancy and organisation slack’, An International Review, vol. 19, no. 2, pp. 136-52.

Brown, L & Caylor, M 2009, ‘Corporate governance and firm operating performance’, Review of Quantitative Finance and Accounting, vol. 32, no. 2, pp. 129-44.

CalPERS 2009, Global Principles of accountable corporate governance, Public Employees’ Retirement System, California

Capital Markets n.d., Corporate governance, Kingdom of Saudi Arabia. Web.

Coles, J, McWilliams, V & Sen, N 2009, ‘An examination of the relationship of governance mechanisms to performance’, Journal of Management, vol. 27, pp. 23-50.

Denk, T 2010, ‘Comparative multilevel analysis: proposal for a methodology’, International Journal of Social Research Methodology, vol.13, no.1, pp. 29-39.

Ghazali, M 2008, ‘Voluntary disclosure in Malaysian corporate annual reports: Views of stakeholders’, Corporate Social Responsibility Journal, vol. 4, no. 4, pp. 504-16.

Heenetigala, K 2011, Corporate governance practices and firm performance of listed companies in Sri Lanka, Victoria University, Melbourne.

Jones, R 2015, ‘Saudi Regulator Gets Tough Ahead of Market’s Opening to Foreign Investors’, The wall street Journal, vol. 1 no. 1, pp. 1-10.

Klapper, L & Love, I 2004, ‘Corporate governance, investor protection, and performance in emerging markets’, Journal of Corporate Finance, vol. 10, no. 5, pp. 703-28.

Krichene, N 2012, Islamic Capital Markets: Theory and Practice, John Wiley & Sons, London.

Miles, L & Goulding, S 2009, ‘Corporate Governance in western (Anglo American) and Islamic communities: Prospects for convergence’, Journal of Business Law, vol. 2, no. 1, pp. 1-23.

Nmai, B 2014, ‘Good Corporate Governance and Employee Job Satisfaction: Empirical Evidence from the Ghanaian Telecommunication Sector’, International Journal of Humanities and Social Science, vol. 4, no. 13, pp. 209-217.

Palmer, C 2011, ‘Has the worldwide convergence on the Anglo-American style shareholder model of corporate law yet been assured? Opticon, vol. 1826, no. 11, pp. 1-12.

Reddy, K, Locke, S & Scrimgeour, F 2010, ‘The efficacy of principle-based corporate governance practices and firm financial performance’, International Journal of Managerial Finance, vol. 6, no. 3, pp. 190-219.

Rezaee, Z 2009, Corporate Governance and Ethics, John Wiley & Sons, Inc, New York.

Sans, W 2011, ‘Sampling methods and market Surveillance’, Economic Quality Control, vol. 26, no. 2, pp. 2-11.

Slahudin, C 2008, ‘OECD principles and the Islamic perspective on corporate governance’, Review of Islamic Economics, vol. 12, no. 1, pp. 29-39.

Valenti, M, Luce, R & Mayfield, C 2011, ‘The effect of firm performance on corporate governance’, Management Research Review, vol. 34, no. 3, pp. 263- 83.

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