The current proposal has been conceived mainly to write a dissertation on the role of corporate governance in determining the fair price of shares in the Saudi stock market. In more detail, the proposed research will inquire about the nature of the Saudi stock market, examine the factors that condition the development of this market, take a look at the corporate governance policies adopted in Saudi Arabia, and assess the role of those policies in shaping fair share prices. The data for the research will be collected mainly from secondary sources. During this research process, I will collect data, analyse them, and make conclusions that would allow answering the research questions and reacting to the research hypotheses.
Aims and Objectives
The aims and objectives of the proposed research are both focused on the analysis of the research problem. In particular, these aims and objectives will be achieved by answering the major research question and the set of minor sub-questions presented in the following:
The main research question will concern the role of corporate governance in determining the fair price of shares in the Saudi stock market.
Following on from the achievement of the aim and objectives of the proposed research there will be two hypotheses derived from the topic of this study. The first hypothesis is:
- H1. The role of corporate governance in fixing the fair price of shares in the Saudi stock market.
This hypothesis is developed as an assumption that the corporate governance policies carried out by the Saudi Arabian government and the World Bank might have a considerable effect on fair share prices in the local stock market. It is necessary to collect and analyse data to be able to either confirm or reject it. Accordingly, the alternative hypothesis (H2) can be formulated as a point that contradicts the first one:
- H2. Corporate governance does not affect the process of influencing the fair price of shares in the Saudi stock market.
Obviously, it is impossible to either confirm or reject this null hypothesis, and to ensure the objectivity of the proposed research the two opposite hypotheses are developed.
Rationale for Research
Further on, there is a complex rationale for the proposed study on the theme of “corporate governance” and the Saudi stock market. This rationale consists of three major components:
- The great emphasis put on corporate governance policies by the World Bank;
- The lack of adequate research on the topic of corporate governance and the Saudi stock market.
Accordingly, the current research is proposed because the Saudi stock market has gone through considerable developmental issues, and it is necessary to study what role in the latter has been attributed to the heavily promoted World Bank corporate governance policies. Also, not much research has been carried out on the research hypothesis and the proposed study will have a broad field of development.
This research will be carried out and its results will be expressed in the dissertation paper between June and September, 2010. The preliminary timescale of the proposed research is as follows:
|Development of the research proposal||June, 2010|
|Refining and perfecting the research proposal||June, 2010|
|Conducting the literature review||June, 2010|
|Analysis of the Saudi stock market history||July, 2010|
|Study of corporate governance basics||July, 2010|
|Analysis of current share prices in the Saudi stock market||July, 2010|
|Study of current Saudi Arabian corporate governance||July, 2010|
|Comparative analysis of past and present figures||August, 2010|
|Making conclusions from the research||August, 2010|
|Writing and submitting the final dissertation||September, 2010|
The review of the literature on the selected topic is a rather challenging task. As has been stated above, there has not been much research, particularly on the role of “corporate governance” in determining the fair prices of shares in the Saudi stock market. In particular, considerable attention of researchers has been aimed at examining the importance of corporate governance as one of the major World Bank policies. Further on, researchers have taken their time to discuss the peculiarities of the Islamic stock markets in the context of corporate governance, and attributed much importance to the violations that corporate governance is ideally designed to fight.
Thus, the notion of corporate governance is theorised by Fremond and Capaul (2002), who argue that it is the World Bank that promotes and supervises the development of “corporate governance” polices round the globe (p. 1). Being the means to protect the equal rights of all parties to stock market transactions, corporate governance is thus viewed as the shield for “property rights of shareholders and the mechanisms of exercising such rights” (Fremond and Capaul, 2002, p. 1). Other scholars move further to discuss the practical implications of the World Bank’s policies.
For example, Sabri (2003) and Alatiki (2003) consider the topic of share repurchases as the twofold phenomenon that, on the one hand, is often used to stabilise the market, but on the other hand, can become a tool for illegal increase of share prices of certain companies in the stock market (p. 445). Sabri (2003) especially stresses the danger of cases when companies repurchase their own shares, thus reducing their number in the stock market and increasing their prices respectively. Although, arguing for the freedom of such repurchases, Sabri (2003) notices the considerable need for effective corporate governance to regulate repurchase transactions and protect all parties to the latter (p. 446). In my opinion, share purchase will offer higher prices to the existing shares as after repurchase, there will be lesser number of shares thereby increasing its market capitalisation.
Moving closer to the specific topic of the proposed research, it is possible to find interesting points in the article by Hearn, Piesse, and Strange (2008) who focus on the peculiarities of Islamic finance and stock market functioning. Comparing Islamic finance to traditional Western finance, Hearn et al. (2008) conclude that in Arabic countries corporate governance should be subordinated to the notion of Muslim solidarity to become effective because the power of tradition is still great in the Islamic world.
Further, great importance was attributed to proper corporate governance in the Islamic world when the countries of the so-called Gulf Cooperation Council (GCC) experienced drastic increases in the stock markets’ incomes and stock indexes (Abumustafa, 2007, p. 135). According to scholars such as Abumustafa (2007, pp. 137–8) and Rao (2007, p. 14), the years between 2002 and 2005 were the time when, for instance, the Saudi Arabian stock market saw over 50% increase of its indexes.
This happened to a great extent due to the combination of favourable conditions including increasing oil prices, growth of governmental spending, the development of the private sector, and the subsequent increase in the number of investors. At the same time, Abumustafa (2007) and Natto (2009) stress that in 2005 the risk of losses was still high for investors in Islamic stock markets and what the governments of countries such as Kuwait and Saudi Arabia did was to implement strong corporate governance. Although the effectiveness of this step was doubted after the 2006 stock market crash in Saudi Arabia, Abumustafa (2007, p. 138) claims that 2006 was the period when the importance of corporate governance in the stock market became clear to the government and became one of the priorities of the national financial policy.
The report of the annual Organization of the Islamic Conference (OIC) meeting organised in Istanbul in 2008 shows that other Islamic countries admit the importance of corporate governance similar to Saudi Arabia (OIC, 2008). At the same time, although the statement about the need for stricter regulation of stock market operation was supported by all OIC members including Saudi Arabia, it is still unclear from this report whether corporate governance can, or does, have any essential impact in determining fair share prices in the Saudi stock market.
The analysis of the Saudi stock market as such is also rather interesting in the light of the topic selected for the proposed study. The article by Al-Suhaibani and Kryzanowski (2000) allows the first, and in-depth, idea about this stock market to be determined. As well, Al-Suhaibani and Kryzanowski (2000) and Alkhathlan (2009) manage to present good reasons explaining the introduction of governmental regulation and corporate governance in Saudi Arabia. The point is, according to Al-Suhaibani and Kryzanowski (2000, p. 1326), that this relatively new stock market (founded in 1954) was regulated by private brokerages at the initial stages of its development. However, the failing experience of the Kuwaiti stock market that collapsed in 1984 made the Saudi government introduce seemingly more proper control measures.
In more detail, Al-Suhaibani and Kryzanowski (2000) and Essayyad and Madani (2003) argue about three major measures. First, the control over the stock market was transferred to the investment banks. Second, the electronic trading system called ESIS was introduced to the Saudi stock market. Third, the higher degree of state regulation and the legislative basis for corporate governance were provided (Al-Suhaibani and Kryzanowski, 2000, pp. 1235 – 1236). Thus, the works by Al-Suhaibani and Kryzanowski (2000) and Alkhathlan (2009) also provide a theoretical background and explain the reasons for implementing stricter corporate governance, but one still cannot understand whether the price of shares in the Saudi stock market is conditioned by these steps.
At the same time, Al-Twaijry (2007) provides a detailed account on one of the most impressive economic downturns in the whole chronicle of the stock market of Saudi Arabia. The so-called 2006 stock market crash can be regarded, although with certain limitations in respect of scholarly support, as the result of the inefficient work of corporate governance policies implemented after the 1984 Kuwaiti stock market collapse. In more detail, Al-Twaijry (2007) argues that in 2006 the stock index of the Saudi market saw the largest decrease in its history. After a week of staying at its highest mark ever, 20,000 points, the stock index fell by 50% over the next 2.5 years (p. 9). In addition to the numeric data, all statements made in the article by Al-Twaijry (2007) are well documented and supported by visual aids.
Thus, based on the arguments presented by Al-Twaijry (2007), one can see no obvious relation between corporate governance and share prices in the Saudi stock market. The reason for this is the fact that the same corporate governance policies existed in Saudi Arabia during both the period of stock index increase and the 2006 stock market crash. Therefore, one cannot argue that the corporate governance does not determine the stock index, but at least it is possible to state that the article by Al-Twaijry (2007) is another source that does not allow the opposite to be stated.
Corporate governance deals with the methods in which providers of credit loans to companies assure themselves a guarantee that they will receive a dividend or appropriate interest on their investment (Shleifer and Vishney, 1997: 737). Fama and Jensen characterised corporate governance of large companies by the separation of ownership and management (Mimoun, 2009: 6).
Two of the few scholarly publications that allow at least an assumption that corporate governance plays a crucial role in fair pricing of shares in the Saudi stock market are the articles by Haddad and Hakim (2007) and Rahman (2006). These authors, although not mentioning this explicitly, convey the understanding that the stock market of Saudi Arabia, as well as stock markets of other Islamic countries, is associated with insecurity by international investors (Samba Financial Group, 2009, p. 8). As corporate governance, according to The World Bank (2008), is the means to protect the investors, the leitmotif of the works by Haddad and Hakim (2007) and Rahman (2006) is the need to provide such protection. Accordingly, the authors seem to admit the role of corporate governance in determining prices, as security will mean higher prices, but still does not present specific numeric evidence to support this implicit point.
Finally, the most recent scholarly publications regarding the Saudi stock market by Bolbol and Omran (2005) and Baamir (2008) suggest that the global economic recession is causing more problems to stock prices. Moreover, Hanware (2010a; 2010b) presents specific evidence and figures, according to which Saudi stock market share prices fell by 7.31% in February 2010, and although from time to time shares gain 1.5% to 2% of their value, specialists see the risk of more serious share price downturns. From this, it is also possible to assume that corporate governance plays little role in forming those prices, as scholars such as Bolbol and Omran (2005), Baamir (2008) and Hanware (2010a; 2010b) do not associate the two phenomena.
Thus, the topic of the proposed research seemingly experiences a lack of scholarly consideration. Researchers have taken their time to examine theoretical and practical implications of corporate governance, study the peculiarities of the Islamic stock markets, and even consider the history of the Saudi stock market as such. Concurrently, the comprehensive analysis of the part of “corporate governance” in determining fair prices of shares in the Saudi stock market is a research gap, and the proposed study will attempt to eliminate it.
For the issuance of Saudi Arabia’s “corporate governance” rules, the main groups that manipulate the decision are the Islamic scholars, royal family, liberal elites, state functionaries, academics, businessmen and tribal leaders; all of whom have varied interests and different authorities reckoning on the significance of the issue to their interests and affairs (Al-Rumaihi, 1997; Aba-Alkhail, 2001; Al-Amari, 1989; Al-Nodel 2004; Economist Intelligence Unit, 2003).
The legal system of Saudi Arabia, being an Islamic nation, is gained from Islamic law (Sunna Alsharifah and Shariah; Alqur’an Alkareem), and coded laws for a number of precise sectors, such as labour commerce, and tax. Al-Amari (1989) noted that in all legal disputes Islamic law dominates.
Arabic heritage and Islamic values completely influence Saudi society (Aba-Alkhail, 2001; Al-Nodel 2004; Al-Rumaihi, 1997). The Arab Peninsula is the native land of Islam and all Saudis are Muslim; Al-Rumaihi (1997) noted that Saudi society is characterised by the effect of the power and personality of fastidious individuals, the role of friend relationships and family over guidelines, favours given to personal relationships over tasks, and the survival of a great magnitude of secrecy.
The evolution of Saudi joint stock companies can be traced to the mid 1930s as the first joint stock company “Arab Automobile” was incorporated. In the initial stage, it was dominated by family block holdings (Solomon 2007: 218). There were about fourteen public companies by 1975. In the 1970s, there was Saudisation of a fraction of the capital of foreign banks and rapid expansion in the 1970s, which paved the way for the formation of many numbers of large companies and joint stock banks. Until the 1980s, the Saudi corporate market stayed informal. The Saudi Arabian Monetary Agency (SAMA) was established in 1984 to control and develop the securities’ market. In 1989, automated clearing and settlement was introduced in 1989. SAMA was armed with authority and was a governmental body, mainly to monitor and regulate the securities’ market in Saudi Arabia.
The Saudi stock market witnessed tremendous growth with a momentous market capitalisation during recent years. According to Al-Harkan (2005), there were about 80 corporations registered with the stock exchange in Saudi Arabia. About 25% of these listed companies are owned by the Saudi government, whereas about 75% of them are owned by founding families. (AlTonsi, 2003). Although the family concerns have gone for initial public offering and listing, families still control the bulk of the shareholding thereby reiterating their control (Al-Harkan, 2005). One of the research studies reveal that the linkage between the magnitude of intentional dissemination and family control is negative and poignant, intimating that family-controlled companies have either no or little motivation to divulge information voluntarily. The magnitude of intentional dissemination is reduced if the company is a family-owned one. This is coherent with the studies made by both Chau and Gray (2002) and Chen and Jaggi (2000)).
In the initial years, the Saudi stock market was closed to foreign holdings. Due to this factor and to state control and control by families, the Saudi stock market as had been rendered illiquid (Solomon 2007: 217).
In 2003, SAMA was replaced by the Saudi Arabian Capital Market Authority (SACMA) which has released a guidance report that all the listed companies in Saudi Arabia should disclose corporate governance information to the public. SACMA is vested with the responsibilities for issuing directives and rules to the Saudi stock market. Its main task is to develop and regulate a well structured stock market, regulating the trading and issuing of securities, safeguarding the shareholder’s interest from unfair trade practices, trying to accomplish fairness, transparency and efficiency in security transactions and monitoring and regulating dissemination by companies. Thus, by establishing SACMA, the Saudi government wishes to encourage the development of the Saudi stock market, thus enhancing the confidence of investors, and to shore up corporate governance improvement (Solomon 2007: 217).
A research study conducted by Tsamenyi and Uddin (2008) developed a corporate governance disclosure index to evaluate whether corporate governance information as required by SACMA is divulged or not in Saudi Arabia. Tsamenyi and Uddin’s study revealed that the lion’s share of listed companies in Saudi Arabia communicate with their stakeholders through the internet. The research finding also reveals that the magnitude of disclosure differs between sectors and for instance, the banking sector in Saudi Arabia has the highest disclosure in comparison to other sectors. Saudi companies in the service sectors and in industry offer very little data on their websites about corporate governance. The research study result reveals that the extent of control over the sector, the association of government in the management and ownership of businesses and some underlying social factors could have an effect on a company’s gesture to divulge online information about their corporate governance in developing nations such as Saudi Arabia (Tsamenyi and Uddin, 2008, p.43).
Saudi Arabia’s corporate environment is distinct from that of developed and developing nations. For instance, the Saudi company’s contemporary business practices differ entirely from those of developed nations. The Saudi company’s business is family dominated, the government meddles deeply in the private sector and there is the presence of many foreign controlled and owned companies footed on joint ventures with domestic companies (Tsamenyi and Uddin, 2008, p.44).
According to Al-Nodel (2004), just 1.14% of the whole gamut of business in Saudi Arabia is joint-stock companies, and this accounts for less than 40% of the aggregate of the capital of the registered businesses in Saudi Arabia. As per Aba-Alkhail (2001), one other pivotal aspect of the Saudi private sector is the existence of a number of foreign-controlled and owned companies based on joint venture agreements by foreign companies with the domestic companies (Tsamenyi and Uddin, 2008, p.44).
As per Presley (1984, p.27), the classification of the private sector in Saudi Arabia is more ambiguous and is obscured by two significant factors, namely the existence of private-foreign controlled and owned companies functioning in Saudi Arabia, most of which have joint venture agreements with local companies and secondly, by the limited association of the Saudi government in many industries, making the distinction between private and public-sector companies (Tsamenyi and Uddin, 2008, p.44).
Saudi Arabia has an electronic stock exchange system – “TADAWUL” – established during 2007, that assists in online management of shares and electronic investment accounts despite manual customer accounts, and one can now gather and access easy and plentiful information about the stock market and listed companies.
During 2006, the Saudi stock market witnessed a sharp decline which eroded about 45% of its market value and its index dropped to 11, 141, 04 at the close the year 2006 in comparison to 20, 100, 40 at the close of the year 2005. This resulted in significant losses to Saudi investors. Due to this, SACMA strengthened its initiatives to offer fairness in the trading of Saudi stocks. One of the initiatives of SACMA was the release of guidance of corporate governance for listed companies.
SACMA guidance offers recommendations for the best corporate governance practices for listed companies in Saudi Arabia to practise. Saudi’s corporate governance is mainly based on the five main principles of the Organisation for Economic Cooperation and Development (OECD), with emphasis on the following:
- The rights of the shareholders
- The role of stakeholders in corporate governance
- Transparency and disclosure
- Equitable treatment of stakeholders
- Responsibility of the board of directors (Tsamenyi and Uddin 2008:46).
Listed companies in Saudi Arabia are required by SACMA to report on the adherence with the criteria of corporate governance or, if they do not, the reasons for not complying. The report by a listed company in Saudi Arabia consists of the following:
- The responsibilities and functions of board of directors
- The setting up of committees of board of directors such as audit committee remuneration committee and nomination committee
- The details of the meetings of the board, identification and remuneration of board members.
Some past empirical studies on corporate governance in Saudi Arabia are available. For instance, al-Motairy (2003) did an elaborate research on the state of corporate governance in Saudi Arabia. He evaluated different regulations of professions and business such as stock market law, company law, foreign investment law and other professional regulations. He found that there is an imperative need a) for appraisal of these laws to mirror the present practices, b) for the issuance of guidance for best practices for financial and management activities in the companies and c) to set up a separate department to monitor and speed up the espousal of the best practices of corporate governance (Tsamenyi and Uddin 2008:47).
The finding of the above research study reveals that better regulation of Saudi Arabia’s corporate governance is the need of the hour so as to enhance public confidence in the regional financial market. Further, communication of such corporate governance to the stakeholders is pivotal as the main objectives of the regulations would not be accomplished, unless the basics of corporate governance are communicated to the stakeholders whose confidence is vital for the growth of regional financial markets.
About 69 companies were surveyed in 2001 by Tawfik. He found that only six companies had disseminated their financial information on their websites. According to Tawfik, despite corporate governance reporting, information about company products was prominent in Saudi companies’ websites (Tsamenyi and Uddin 2008: 47).
In their research study, Mohammed and AL-Jaber (2003) reported that companies in Saudi Arabia and Egypt gave precedence to their products on their websites and only secondary importance is given to financial information about those companies on their company websites. They concluded that in comparison to western nations, the companies in Saudi Arabia are still lagging behind in reporting financial data through the internet.
Of late, Al-Saeed (2006) researched the practice of online reporting by 46 Saudi companies from three segments – cement, industry and agriculture. He found that only about 40 Saudi companies have websites; cement sector companies were somewhat better compared to the other sectors in employing the internet to disseminate their financial information. He also discovered that Saudi company’s profitability and size determine whether they employ the internet to propagate their financial data on their websites (Tsamenyi and Uddin 2008:48).
The communication of financial information to the stakeholders by the listed companies is of paramount important as the core goal of corporate governance is to enhance public confidence in the financial markets. This cannot be accomplished, unless the basic structures of corporate governance practice are disseminated to stakeholders (Tsamenyi and Uddin 2008:49).
Mitton (2002) is of the view that improved share performance is linked with companies that have greater dissemination norms. He is of the view that excellence in disclosure is a significant constituent of “corporate governance” and laments that dissemination regulations occupy a pivotal part in corporate governance. According to John and Senbet (1998), “corporate governance” denotes those automatic structures and apparatus that function as a deterrent to selfish management demeanour.
The effectiveness and speed of corporate governance reform in Saudi-Arabia are being forestalled by three factors – religion, family ownership and government ownership (Al-Harkan 2005). As already pointed out, Saudi corporate ownership structure is being influenced by family and to a negligible extent, by government holdings. Both government and family ownership symbolise a blocking influence on the magnitude to which corporate governance efforts can be executed efficiently. Thus, in Saudi Arabia, the founding family that holds a block of shares is reluctant to renounce their control to minority shareholders and to discharge the responsibility to other stakeholders. However, the advent of corporate governance that occurs in other nations effectively with insider-oriented frameworks of corporate governance, points to the fact that, despite government and family ownership being limiting factors, they are by no means insuperable (Solomon, 2007:218).
Religion can also be regarded as a limiting factor restraining corporate governance reform in Saudi Arabia. However, Al-Harkan (2005) laments that there is very little real variance between the altruistic foundation of Islamic law (Shariah) and the ethical principles of good corporate governance. It is to be observed that for Saudi companies following the basis of Shariah law, the Shariah Committee is accountable for safeguarding stakeholder/shareholder rights and evaluating both non-financial and financial disseminations. This is actually coherent with OECD principles of good corporate governance, signifying little real confrontation with religion and reforms in the corporate governance sector in Saudi Arabia. There is one startling difference, as Shariah negates payment of interest where corporate governance principles do not. Thus, as with all nations, both culture and religion are required to be taken into account when shaping internationally acknowledged corporate governance principles to an individual nation. However, there exists no blanket code that could be applied to nations, since they are so assorted.
In a survey conducted in Saudi Arabia, many were of the opinion that corporate governance in Saudi Arabia was in the puberty stage and there still existed gaps between corporate practice and company law. Further, many supported the idea of the introduction of corporate governance principles in Saudi companies as a way of supporting further corporate governance reform (Solomon, 2007:220).
SACMA issued new rules in November 2006, which contained articles that elucidated the role of the board of directors and shareholders and intended to enhance the poor disclosures by companies and improve transparency. However, it is to be observed that this rule is not legally binding but will act as guiding principles, although the companies must disclose which rules it adheres to. Moreover, the majority of companies in Saudi Arabia claim adherence and simply use the rules as a marketing mechanism. This corroborates that more is required to be done to enhance transparency and information (Oxford Business Group, 2008:62).
Despite the fact that throughout 2007, financial statements of companies were becoming more explicit, detailed and clear, stricter regulations are needed for the dissemination of data, particularly relating to the regularity and speed of the company announcements and news. For development and education in Saudi Arabia’s capital market, institutions play a vital role. SACMA is presently conducting various work programmes to study the specific measure that should be pursued to encourage their participation. Institutions are vital to the Saudi financial market as they have high standards of disclosure, transparency and corporate governance and will create more research.
By lessening the impact of giant companies’ share price movements, SACMA tries to minimise the panic selling, market volatility and over-reaction to single results or news announcements (Oxford Business Group, 2008:62).
The World Bank, in February 2009, released its report on Saudi Arabia’s compliance with Codes and Standards on corporate governance (ROSC). The review evaluates Saudi Arabia’s execution of each and every Principle of Corporate Governance introduced by OECD. As per the ROSC, the corporate governance regulations, laws and institutions that have been put in existence “broadly mirror global good practice”.
Due to the market corrections and stock market crash in 2006, Saudi market regulators acknowledged the necessity for good corporate governance through institutional and legal reforms and introduced a Corporate Governance Regulation (CGR) particularly for listed corporations, thereby fortifying the supervisory functions all over the financial sector of the nation.
However, the 2009 ROSC observed that introduction of best practices of corporate governance by companies in Saudi Arabia is still in its infant stages, and it made a number of recommendations that would facilitate Saudi Arabia to match their framework on a par with international standards. Some of the advice included better enforcement, adjustments to the CGR and initiatives to twirl the “law on the letter and spirits” to practise. The World Bank report elucidates that the SACMA is in the process of introducing a three-tier approach to enhance corporate governance practices in Saudi Arabia. The final phase will involve corrections to the CGR with a probability of making adherence to some or all regulations mandatory in Saudi Arabia (estandard forum, 2010).
For instance, Al-Motairy (2003) researches the condition of corporate governance practices in Saudi Arabia. He finds that there is a key necessity for (1) a reassessment of these rules to mirror the present usages of corporate governance, (2) the release of guidance for best practices for the financial and management affair in companies and (3) the creation of a separate body to speed up the espousal of best practices of corporate governance.
Various research studies have found that there is a good linkage between firm value and good corporate governance. According to findings by Gompers et al., a corporation with better corporate governance has a better performance than a corporation with inferior corporate governance. Compers et al. evaluated the listed companies in USA and discovered a poignant association between corporate performance measures and corporate governance quality such as share price return. Likewise, Brown and Caylor (2004) revealed a positive association between corporate governance and the basic performance of listed companies, gauged by return on equity (ROE) and return on assets (ROA). Many other research studies corroborate these findings (Kleinschmidt 2007:10).
As regards newly incorporated companies that have not yet ventured into an IPO, the familiarity of the association between firm value and good corporate governance is restricted. Daily and Dalton evaluated the association between performance of entrepreneurial companies and corporate governance. They evaluated it at the angle of board structure, more especially at CEO dichotomy and the proportion and number of independent directors on boards. The research points to modest positive impacts of board independence on performance by firms (Kleinschmidt 2007:10).
Corporate Governance Rating and Share Price Performance in Southeast Asia
|Country’s Name||Overall CG Score||5-year shareprice performance (%)|
The above table indicates the correlation between share price performance and corporate governance ratings. While a spectacular decline in share price mirrors the distressing impacts of the Asian financial debacle, which in part was mainly due to poor corporate governance in some Southeast Asian nations, it points out that investors have also obviously acknowledged the significance of corporate governance and fine-tuned their valuation, consequently (Ho 2005:24).
One of the main arguments in support of quarterly reporting is improved transparency, which is fundamental to good corporate governance. Supporters argue that more frequent and regular dissemination paves the way to a good comprehension of the financial and operational activities of the company and through it to a more precise indication of the share price. Armed with a greater level of confidence, investors will remunerate the company that is regarded as better performer compared to their contemporaries or peers. Increasing the magnitude of dissemination will also indicate any bad news more swiftly, thereby facilitating investors to counterbalance their holdings on an informed and timely basis (Ho 2005:40).
No doubt, corporate governance has resulted in an expensive and heavy burden on listed companies and their boards. Shareholders also expect high performance from listed companies through frequent disclosures and by adherence to various norms. Hence, listed companies have to buttress themselves for a succession of stringent exemptions. Listed companies can convalesce from the positive outcomes of corporate governance such as toning-up management, paving to improved performance, which will, in turn, be mirrored in the share price of the company (Ho 2005: xix).
Insider trading is another form of common corporate misuse. On the close of the fall of many financial and securities institutions and banks both before and after the crisis, many shareholders were able to dispose of their holdings to uninformed investors. Although under corporate governance, securities transactions that are handled by insiders need to be revealed to stock exchanges, a very limited number of companies comply with this rule as most insider trading is made clandestinely and through a nominee, mainly to circumvent the law (Ho 2005:207).
Further, occasionally, insider trading issues are closely associated with share price manipulations. To steer share prices in a certain direction, faulty news is occasionally leaked to the media. For instance, information about a probable merger can temporarily make the share price shoot up. Under such scenario, it would be very difficult to substantiate whether the transaction undertaken by an insider is swayed by inside information rather than public hearsay. When a large player in the market engaged in the manipulation of share price so as to increase the price of a specific share, then an artificial demand is created for such stock. In this case, share price may not have correlation with the observance of corporate governance codes. Thailand is the best example of this type of malpractice where share price manipulations have taken place recently (Ho 2005:207).
According to the World Bank Report on the Observance of Standards and Codes (ROSC) released in February 2009, the corporate governance regulations, laws and institutions that have been in operation in Saudi Arabia “normally mirror good practice in international standards”. Due to the stock market crash in 2006, market regulators emphasised the necessity to have better corporate governance through institutional and legal restructuring. The corrective measures initiated by Saudi Arabia included the introduction of a Corporate Governance Regulation (CGR) for listed companies in 2006 and further reinforcement of supervisory structures for the financial sector.
Just before the 2009 ROSC, the International Monetary Fund made an evaluation of corporate governance practice, namely the Financial System Stability Assessment (FSSA) which acknowledged the poignant reforms initiated in Saudi Arabia’s capital market, thus making an official IMF appraisal of corporate governance “premature” (World Bank, 2009:29).
According to the World Bank Report (2010), in Saudi Arabia fundamental shareholders’ rights are in place. Shareholders are entrusted with the right to call for a variety of information from the company and have the clear privilege to partake in the general shareholder meetings (GSM). Thus, a shareholder can either attend in person or through proxy and can even add additional items to the agenda of the GSM. Shareholders also have the right to vote for, to nominate and to remove any director from the board. Now, as a means to nominate directors, cumulative voting has also been recently introduced (World Bank Report 2009:3).
To increase authorised share capital, to make changes in the articles of association of the company, to make large transactions – all need approval of the extra-ordinary assembly (EGM) with a minimum constituent quorum of 50% of the capital of the company and with the approval quorum of 75%. Further, for the new issue of shares, shareholders have a pre-emptive right. However, this can be waived in case of government owned companies and if there is a stipulation in the “articles of association” of the company (World Bank Report 2009:3).
According to the World Bank report, a possible greater issue is faced by the disclosure and approval of related party transactions (RPT). If there is any transaction between a connected individual and the company, then it has to be promptly disclosed to SACMA. Further, if there is any transaction between the company and the “CFO (Chief Financial Officer)”, or with “CEO (Chief Executive Officer)” or with any director, then such transaction should be disclosed in the board’s report. However, the company need not disclose such RPT that comprise the corporate governance report (CGR). Further, there is no other need to divulge RPTs publicly before they are awarded or there are no specific rules for approval of poignant RPTs by the shareholders or the board. Thus, as far as related party transaction is concerned, there is weak corporate governance practice in Saudi, which has to be rectified to strengthen the shareholders’ rights (World Bank Report 2009:3).
According to the World Bank Report, there has been widespread market manipulation and insider trading as perceived by Saudi investors and SACMA is working to sort out these unfair trade practices. The majority of Saudi investors are of the opinion that industry insiders and brokers engage in improper demeanour and exploit their position. These malpractices include inappropriate trading with shares in investor accounts, engaging in insider trading, and market manipulation. To counter this, SACMA, in 2004, made some additions to the insider trading provisions and issued Market Conduct Regulations to illustrate the term “insiders” and banned both indirect and direct insider trading practices and market manipulations. Further, SACMA initiated stringent action against insider trading and the details of such actions have been detailed on its website (World Bank Report 2009:3).
Fast growth in equity markets in recent times has enhanced the significance of a new variety of financial middlemen such as investment bankers, fund managers and research analysts. Now, as a practice of good corporate governance, the fund managers are required to divulge their voting policy in the GSM for corporations in which they invest. Thus, divulging a voting policy by a fund manager can make funds more effective for good corporate governance (World Bank Report 2009:3).
To regularise and control takeovers, SACMA has issued regulations recently and if any shareholder wishes to acquire more than 50% of the shares of a Saudi company they may be required to make a tender offer for all the remaining outstanding shares if SACMA directs so. Tender offers are a unique safeguard mechanism for shareholders, especially in case of minority shareholders. This regulation offers discretionary authority to SACMA to demand tender offers if it so decides. Conversely, this may also contribute to a genuine cause of anxiety for minority stakeholders and a magnitude of market insecurity (World Bank Report 2009:4).
Further, listed companies in Saudi Arabia need to issue both quarterly and half-yearly financial reports, which would contain a P & L statement, a balance sheet and notes to the accounts and audited annual report. The details such as listed company’s business, composition of its board, details about top executives and key staff of the company and a statement by the management of the listed company about the present and future developments anticipated to have a poignant impact on the company’s financial position have to be reported in the listed companies’ annual reports. Further, the majority of Saudi listed companies also publish the same on their websites (World Bank Report 2009:4).
Further, it appears that adherence with non-financial dissemination is weak, although the LR regulations are quite complete and need poignant dissemination. Moreover, adherence with some present non-financial dissemination needs is regarded as fragile by market players, especially with regard to corporate governance-associated information, though companies need to divulge in their board report their main corporate objectives, the composition of the board and their dividend policies; however, their dissemination policies in other provinces such as disclosure regarding beneficial ownership, nomination procedures and board member qualifications remain haphazard (World Bank Report 2009:4).
According to Core et al. (1999), there was strong statistical evidence associating bad and poor corporate governance and excessive executive remuneration in the USA. In fact, a poignant negative linkage was found between corporate functioning and share price performance and remuneration arising from ownership and board structure, pointing out that companies fared badly when their board composition permitted an imbalance of power resulting in excessive CEO remuneration. In fact, Core et al.’s research paper made a policy recommendation that US boards should split the part played by the CEO and Chairman in tune with the suggestions of Cadbury, inter alia. Many academic researchers also revealed a poignant association between the style in which members of the board are appointed and CEO compensation. Lambert et al. (1993) was of the view that if the CEO is vested with authority over appointing other board members, the higher their remuneration tends to be (Soloman and Soloman 2007:83).
There has been shareholder activism in the UK as the government introduced a yearly director’s remuneration report to be sanctioned by shareholders in October 2001 as is practiced in the USA. Since then, companies in the UK are under compulsion to link managerial remuneration more closely to the company’s performance. NAPF and the ABI are the two largest shareholder groups in the UK. According to Wendlandt (2003), these two groups targeted Kingfisher as they thought its director’s remuneration package was too far above the industry standard and persuaded the shareholders against it. The shareholder action was triumphant as Kingfisher responded by implementing stricter share option performance targets for the CEO. Some of the director’s pay was lowered due to potential loss of office. Likewise, HSBC also witnessed the same turmoil from shareholders when it wanted to reward higher compensation to a director who was in charge of its US operation. Thus, in the UK, shareholders’ dissatisfaction was evident from the votes cast against companies’ remuneration policy or abstaining from the AGM, which was about 63%.
According to Kitchgaessner (2003), Telewest also witnessed the same situation as it had to take note of the dissatisfaction of shareholders who had criticised the hefty severance pay of £1.4 million. According to Voyle and Tassel (2003), about 40% of Tesco’s shareholders voted in June 2003 against the remuneration policy or abstained. In June 2003, Northern Foods was under severe criticism for sanctioning pay increases of more than 16% to two of its executive directors when the company’s revenue declined sharply and its share price tumbled to a substantial scale in January 2004. The case histories of Northern Food, Kingfisher, Glaxo Smithline, Telewest, and Tesco all demonstrate that there is a close correlation between share price and corporate governance. I strongly recommend that Saudi Arabia should also introduce a regulation such as that which the UK and USA have introduced for getting approval for any hike in the directors and CEO packages as it would enable the shareholders to wield considerable pressure on companies trying to abuse their authority and also serve as good corporate governance practice (Solomon and Solomon 2007:104).
If one applies the simple economic theory of demand and supply to corporate governance practices and if the demand for the socially committed companies is on the increase, then there will be a corresponding increase in their share price and also there will be an increase in the market value of the company. Likewise, if the demand for shares in companies that are not socially committed declines, so will their market value (Soloman and Soloman 2007:222).
Thus, according to Luther et al. (1992:57), if demand for investment in shares in companies with such products is positive, employment policies or “natural cosmetics” may be stimulated. From the financial aspect, increase in such investor sentiment may be anticipated to stimulate profits in shares with a positive ethical rating, and losses on others (Soloman and Soloman 2007:222).
How corporate governance leads to fair share price in Saudi Arabia
According to Mutlag al-monished, an erstwhile chief financial officer of Saudi Basic Industries (Sabic), with a market cap of about $80 billion, Sabic is forging forward with top corporate governance policies as compared to other corporations in the region. It is to be noted that all the subsidiaries of Sabic have independent directors on their boards and also have remuneration and audit committees. Further, each subsidiary of Sabic has a separate board chairman and CEO post.
A research study was carried out by the not-for-profit GCC Board of Directors Institute (BDI) in 2009 with about 200 public listed companies in the GCC. The BDI research study revealed that transparency and disclosure levels in the majority of these companies was low compared to governance standards followed in Asia, North America or Europe. For instance, only 27% of the corporations in the research study divulged the number of board meetings they held each year as contrasted with 100% US and European companies that took part in the analogues study.
The recent financial debacle of AH Algosaibi & Brothers which defaulted on a $1 billion loan instalment in 2008 and ended with the collapse of Dubai World and its disturbed real estate subsidiary Nakheel can be attributed to the feeble corporate governance practices. Due to this, there is a heightened awareness in many Gulf business circles about the significance of pursuing higher corporate governance standards, which include enhanced dissemination about financial track records and financial decision making, with more efficient internal controls and oversight and less dependence on personal relationships, which is the need of the hour.
According to Al-Morished, though Sabic has about a 70% stake in Saudi government, it acts like a role model by inculcating best corporate governance practices in Saudi Arabia.
It is to be observed that Savola Group, a Jeddah based public company, introduced transparency as early as the 1990s by disclosing the pay packages of its chairman and its managing director even though such disclosure was not then mandatory.
Further, the Saudi based listed companies, which have about a 15% government stake introduced in the year 2003 and 2004 a governance charter signed by the board members and senior executives, thereby emphasising some “classic issues” such as policies on accepting gifts, protection of company’s data, and the employment of relatives.
Savola’s ambitious objective is to push for higher transparency on a continuous basis as their financial report divulges the aggregate performance of their individual companies and also of their subsidiaries, as there is a mandatory requirement to disclose. For instance, it is not enough for a plastics subsidiary to mention that it has augmented profit by 25%, but it has to tell the public which of the three plastic subsidiaries made this, which is under-performing and which is over-performing and the reason for the same. This has given investors more transparency about what Savola constitutes, and will definitely trigger the share price. Thus, in Savola, the business heads become more interested in perking up the performance of each sub-unit, since they were aware that it would get public disclosure in the annual report. As a result, this will have a positive impact on the performance of the business and hence on confidence of investors and, thus, Savola’s share price has slightly over-performed the index. Thus, the case study of Savola and Subic indicates that there is a direct nexus between share price movements and corporate governance practices (Knowledge Wharton 2010).
According to an International Finance Corporation report in September 2005 titled “The Irresistible Case for Corporate Governance”, well-grounded corporate governance enhances company valuation by about 20–30% in the financial markets of developing nations and results in enhanced credit ratings and a matching betterment in access to business credit. Thus, various research studies have corroborated that better corporate governance results in better future stock and financial performance.
According to Wilshire Report published in July 2009, this corroborated with statistics that affect good corporate governance on the prices of shares of about 140 public companies. The report demonstrated how the California Public Employees Retirement System (CalPERS) started to invest at the start of 1987 and, henceforth, maintained that the investing companies should peruse corporate governance best practices and policies. In contrast to a yardstick return on a collective basis, the companies in which CalPERS invested on average yielded 3% per year higher or a 5-year excess dividend of about 15.4%. According to Wilshire findings, the CalPERS institutional investment and the improvement of corporate governance was made within twelve months of the “intended poorly performing corporations to underperform by only 1.5% versus a whopping 24% poor performance just one year back”. If we apply the same benchmark to Saudi Arabian companies also, the same will hold good (Morris, 2010).
The disclosure is a significant method for companies to instil confidence among both current and probable investors. Disclosures appear to be linked with corporate governance, i.e. companies with better governance are prone to divulge more information to magnetise a premium on their share price. Despite many previous empirical studies having evaluated the association between a firm’s value and the governance structure, only very limited researches have evaluated the association between the disclosure of information and governance variables (Chen and Jaggi 2000).
According to Abullatif A. Othaman, Saudi Aramco senior vice-president, the investors are willing to pay a premium for good corporate governance, and it is easy to obtain finance on favourable terms for companies whose governance practices intend to reduce the risk and this clearly demonstrates that good governance pays off. Thus, according to Othaman, there exists a formidable correlation between good governance and business success. There is no hesitation on the part of investors to pay a premium for better and enhanced governance (Aramcoexpats.com 2010).
According to McKinsey Global Investor Opinion Survey on corporate governance, 2002 validated through interviews, 2005, about 77% in Middle East have answered that they are willing to pay a premium for better corporate governance.
Further, according to Mckinsey Global Investor Opinion survey, investors in UAE alone are willing to pay an aggregate of about 22% premium for good corporate governance.
Thus, McKinsey, in its “Global investor opinion survey” which involved in excess of 200 institutional investors around the world, first perused in 2000 and updated in 2002, exposed that about 8% of the respondents of the survey would be ready to pay a premium for well-governed corporations. To them, a well-governed company is one which has chiefly outside directors with no management bindings, undertakes a proper appraisal of its directors, and is receptive to requests from investors for info on governance issues. (Crowther and Aras 2009:21).
A research study carried out by Brown and Caylor of Georgia State University in 2004 found that corporations with fragile governance norms functioned more badly than companies with better “corporate governance”. This study observed that corporations with feeble governance norms performed worse. Companies with feeble governance norms have had lower returns on investment in the past three-, five- and one-decade periods than that of companies with good governance norms. For instance, companies in the lower rank of industry-fine tuned Corporate Governance Quotient (CGQ) have five-year returns that are 3.95% below the industry mean whereas companies in the higher rank of industry-fine tuned CGQ have 5-year returns that are 7.91% above the industry-adjusted average. Brown and Caylor 2004:2).
According to Brown and Caylor, IBM (International Business Machines Corp) is the best role model for good corporate governance. It had an industry CGQ of 97 and has three-year returns that are about 12% exceeding the industry mean, a 5-year return of 6% in excess of the industry mean and a ten-year return of 19% in excess of the industry average. Another illustration is Occidental Petroleum Corp which had an industry CGQ of 100%, a three-year return of 25% in excess of the industry average, a five-year return of 10% in excess of the industry average and a ten year return of 6% in excess of the industry average. Sholodge, Inc is an example of poor corporate governance. It had an industry CGQ of 5% and a three-year return of 8% under the industry average and a five-year return of 7% under the industry average. (Brown and Caylor 2004:2).
Further, Tadawul, the official site for Saudi Arabia’s stock exchange offers key information about trading during May 2010 which is listed below:
If one goes through the above table, it can be understood that about 90% of volume of purchases was made by individuals, whereas corporations only made about 6.1% of purchases during May 2010. This shows that Saudi investors have satisfaction over corporate governance of Saudi listed companies and it is assumed that they make their investment decisions on the footage of the dissemination made by the listed companies.
After the stock market crash of 2006, SACMA initiated serious action against infringers of corporate governance codes in Saudi Arabia. SACMA imposed a fine of SR 100,000 on Al Baha Development and Investment Company (ABDI) due to its infringement of Article 45 (c 0 of the Saudi Capital Market Law). ABDI leaked the news of its acquisition of three companies on 30 April 2010 while such was reported to Tadawul website only on 9 May 2010 (www.tadawul.com.sa 2010).
From the sector activities during 2009 in the table above, one can understand that those sectors with vibrant disclosures under corporate governance have a percentage to market. For example, petrochemical industries scored the highest rank of 23.73%, next comes the insurance sector, which scored 15.91% and then Banks and Financial services, which scored about 11.82% and industrial investment scored 7.91%. Thus, it is generally concluded that Saudi petrochemical, insurance, bank and financial institution, and industrial investments performed well during 2009 mainly due to adherence of corporate governance standards in these industries. This corroborates that there is a strong correlation between share price and corporate governance in Saudi listed companies. Those companies with lesser disclosure standards had poor performance during the year 2009. For instance, the energy and utilities and cement industries of Saudi Arabia had a poor share price as their percentage to market value owing to poor corporate disclosures or poor performance due to non-observance of corporate governance standards.
From the above performance sectoral indices for the year 2009, it can be observed that building and construction industry had negative indices and real estate development industry had just a one digit figure of 1.51%, whereas all other Saudi industries had a double digit figures. This implies that in both the building and construction industry and real estate development industry in 2009 in Saudi Arabia, there could be a direct correlation between poor share price and corporate governance.
Based on the above considerations, the methodology for the proposed research will include the combination of the survey and a case study, while the aims of both will be to recognise the part, if any, of governance norms in share price forming. The proposed research will use the method of the longitudinal study to collect and analyse data on the Saudi stock market in different periods of time. The data collection methods will include the review of primary and secondary sources of information regarding the Saudi stock market, as well as observation of the dynamics of its development over a certain period of time. All the findings will be recorded in specially designed forms that allow the stock market changes to be traced and related to potential corporate governance modifications.
Further on, the proposed study will use a mix of qualitative and quantitative research methods to operate equally well with numeric data and qualitative information, i.e. the implications of the quantitative data for the study topic. In particular, a statistical analysis of Saudi stock market share prices will be carried out. The historical analysis of this market will also be implemented to trace the progress of stock indexes over time, beginning with the foundation of the Saudi stock market up to the present day stage of its development.
Under the methodology section, this research employed the content analysis approach to look for the kinds of information that appear in company websites. The justifications for employing this kind of approach are: it facilitates me to look for the availability of current data’s at company’s websites so that I can look into the key aspect of social communication. However , any deviation from director’s report or corporate governance policy will have to be answered by them in the next quarterly or annual review statements. Secondly, it centres on the most common and efficient media of communication between the public and the companies. It also facilitates both qualitative analysis on the subject. Further, it helps to identify the content of each and every company’s website qualitatively and then allows me to arrive at the disclosure score for each and every company to execute a quantitative analysis. Finally, it facilitates me to use the data from targeted Saudi listed companies, which would be more arduous by another device such as interviews (Tsamenyi and Uddin 2008:49).
I carefully evaluated corporate governance dissemination literature to recognise disclosure items that Saudi companies might disseminate through their websites. I have also reviewed some poignant articles on the subject written by Oyelere and Mohamed (2005), and Aksu and Kosedag (2006). (Tsamenyi & Uddin 2008:49).
The majority of the corporate governance information revealed by Saudi companies is about the constituents of its board of directors, data about ownership, and exhaustive data about ownership information. Companies with disclosures between six and eight scores have provided exhaustive information about manager’s team of the company, names of the directors, number of board meetings held and exhaustive data about remuneration of the board of directors. Those companies with an index score of more than eight had provided more details of information about the corporate governance and for instance, if one looks at the Bank Aljazira Annual Report 2005, one can note that detailed corporate governance data have been disseminated (Tsamenyi & Uddin 2008:54).
Only very few companies have a separate section named “corporate governance” on their website. For instance, Zamil Industrial Investment Co, National Arabic Bank and Bank Aljazira have a separate section as “corporate governance” and scored the highest score ranging from twenty to twenty-five.
Many companies have provided a little corporate governance information either in their online annual reports or in the “About us” section. For instance, one can learn about the director’s remuneration in the income statement section of the company and the names of the directors within the first two pages of the annual report (Tsamenyi and Uddin 2008:54).
Resources and Costs Involved
One of the advantages of the proposed research will be its cost-effectiveness and little demand for resources. Basically, all the resources that the proposed research needs are time and effort by its authors. The longitudinal study requires much time to be spent in recording and analysing the Saudi stock market dynamics. As well, considerable time will be taken in the process of putting all the research findings on paper and making it into a completed dissertation work. Concerning the costs of the proposed research, they are minimal, and include only the expenses for potential travel, the use of the Internet, and other minor costs.
Ethical considerations are also vital for any dissertation project. This point acquires special importance when the dissertations focus on topics in which work with people is the main task. However, the currently proposed research deals with figures more than with people. As no surveys are planned and no questionnaires are to be used, the ethical considerations of the proposed study are limited to the notions of the proper use of any confidential financial information and operation with checked and reliable data only. In the light of such a serious topic as the development of Saudi stock market prices, the proposed research will consider only the data from reliable sources and will not disclose any information without the consent of its owners.
Haddad and Hakim (2007) and Rahman (2006) seem to admit the role of corporate governance in price determining, as security will mean higher prices, but still do not present specific numeric evidence to support this implicit point. Scholars such as Bolbol and Omran (2005), Baamir (2008), and Hanware (2010a; 2010b) assumed that corporate governance plays little role in forming those prices. However, Mitton (2002) is of the view that improved share performance is linked with companies that have greater dissemination norms. He is of the view that excellence in disclosure is a significant constituent of “corporate governance” and lament that dissemination regulations occupy a pivotal part in corporate governance.
According to Oxford Business Group, the majority of companies in Saudi Arabia claim adherence and simply use the rules as a marketing mechanism. This corroborates that more is required to be done to enhance transparency and information, according to Ho (2005:26); the table provided on page 23 also indicates the correlation between share price performance and corporate governance ratings in Southeast Asian nations. According to the World Bank report on the Observance of Standards and Codes (ROSC) released in February 2009, the corporate governance regulations, laws and institutions that have been in operation in Saudi Arabia “normally mirror good practice by international standards”. According to Othaman, there exists a formidable correlation between good governance and business success. There is no hesitation on the part of investors to pay a premium for better and enhanced governance. (Aramcoexpats.com 2010). According to the table shown on page 37 (Trading by Nationality during May 2010), Saudi investors have satisfaction over corporate governance of Saudi listed companies and it is assumed that they make their investment decisions on the footage of the dissemination made by the listed companies. In view of the above findings, I fully agree and concede the view that corporate governance plays a significant part in shaping the fair price of shares in the Saudi stock market. From the above performance sectoral indices for the year 2009 as detailed in page 42, it can be observed that building and construction industry had negative indices and real estate development industry had just a one digit figure of 1.51%, whereas all other Saudi industries had a double digit figures. This implies that in both the building and construction industry and real estate development industry in 2009 in Saudi Arabia, there could be a direct correlation between poor share price and corporate governance. Again, from the above, I wish to stress that there is strong and vibrant correlation between share price of a company and corporate governance.
Conclusion and Recommendations
The effectiveness and the speed of corporate governance reform in Saudi-Arabia are being forestalled by three factors: religion, family ownership and government ownership (Al-Harkan 2005). However, Solomon is of the view that despite the fact that government and family ownership may be limiting factors, they are by no means insuperable. Communication of such corporate governance to the stakeholders is pivotal as the main objectives of the regulations would not be accomplished unless the basics of corporate governance are communicated to the stakeholders whose confidence is vital for the growth of regional financial markets. Solomon is of the view that corporate governance is at the puberty stage in Saudi and there still exist gaps between corporate practice and company law. Further, many supported the idea of the introduction of corporate governance principles in Saudi companies as a way of supporting further corporate governance reform. As regards related party transactions, there is weak corporate governance practice in Saudi, which has to be rectified to strengthen the shareholders’ rights (World Bank Report 2009:3). According to World Bank Report, SACMA has initiated stringent action against insider trading and the details of such actions have been detailed on its website. The case histories of Northern Food, Kingfisher, Glaxo Smithline, Telewest and Tesco all demonstrate that there is a close correlation between share price and corporate governance. I strongly recommend that Saudi Arabia should also introduce a regulation as has been introduced in the UK and USA for getting approval for any hike in the directors’ or CEOs’ packages as this would enable the shareholders to wield considerable pressures on companies trying to abuse their authority and it also serves as good corporate governance practice (Solomon and Solomon 2007:104). Despite many previous empirical studies having evaluated the association between firm’s value and governance structure, only very limited researches have evaluated the association between the disclosure of information and governance variables (Chen and Jaggi 2000). It is generally concluded that Saudi petrochemical, insurance, bank and financial institutions and industrial investments performed well during 2009 mainly due to adherence of corporate governance standards in these industries. This corroborates that there is a strong correlation between share price and corporate governance in Saudi listed companies. Those companies that have lesser disclosure standards had poor performance during the year 2009. For instance, energy and utilities and cement industries of Saudi Arabia had a poor share price as their percentage to market value, owing to poor corporate disclosures or poor performance due to non-observance of corporate governance standards.
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