Definition of Governance: Principles, Regulatory Frameworks, and Impact on the

The discussion of the definition of governance begins with the conceptual framework adopted by management and economics professionals. Governance, or corporate governance, is the system that regulates how a company or institution is managed, focusing on the distribution of powers and responsibilities among various parties, such as the board of directors, executive management, shareholders, and other stakeholders (employees, customers, regulators, and others). The definition of governance also includes a set of rules and procedures aimed at ensuring transparency and accountability in all administrative and financial operations, managing risks, protecting shareholder rights, and preventing conflicts of interest. In the Saudi financial market, the concept extends to include companies' commitment to disclosing both financial and non-financial information and implementing strict oversight practices, thereby fostering trust among all parties and supporting sustainable economic growth. Governance is not merely a regulatory requirement but an institutional culture that enhances decision-making quality and limits administrative and financial corruption. Thus, governance emerges as a vital factor in corporate success and the stability of financial markets.

Corporate governance serves multiple objectives, aiming to achieve several key goals in the Saudi financial market. Among the most prominent are: enhancing transparency and credibility in corporate transactions, protecting the rights of shareholders and stakeholders, and ensuring fairness in decision-making. Governance also aims to mitigate financial and administrative risks and provide an attractive and reliable investment environment, which helps attract both local and foreign capital. Additionally, governance strengthens internal and external oversight of companies, drives improvements in financial and non-financial disclosure, and reduces opportunities for corruption, abuse of power, or conflicts of interest. In the Saudi context, these objectives align with Vision 2030, which focuses on developing the financial sector, encouraging companies to raise operational efficiency, and adopting global governance standards. Thus, companies' commitment to governance makes them better equipped to face economic challenges and enhances the global ranking of the Saudi market.

Governance is based on a set of core principles that form its ethical and managerial framework. The first of these is transparency, meaning companies must fully and accurately disclose all relevant financial and non-financial information. Next is the principle of fairness, which ensures all shareholders and stakeholders are treated equitably without discrimination. Responsibility and accountability are also fundamental, requiring board members and executive management to be fully accountable for their decisions to shareholders and regulators. Another key principle is the separation of powers within the company, ensuring that authority is not concentrated in a single entity but is clearly distributed among the board, internal committees, and executive management. Governance also emphasizes independence, especially in forming audit and review committees, which strengthens the integrity of internal oversight. Together, these principles create a healthy institutional environment that supports sustainable growth and mitigates risks.

The legal and regulatory framework for governance in Saudi Arabia governs the application of corporate governance rules in listed companies. This framework is based on the Saudi Companies Law, which regulates the relationship between the board of directors, executive management, and shareholders, and defines the rights and obligations of each party. The Saudi Capital Market Authority (CMA) also issues specific governance regulations, such as the Corporate Governance Regulations for listed companies, which clearly outline requirements for forming internal committees, disclosure mechanisms, and annual reporting. The regulations also include rules for securities offerings and ongoing obligations, requiring companies to regularly disclose their financial and non-financial performance. In recent years, this framework has seen significant amendments, most recently in January 2024, mandating listed companies to strengthen internal audit units, develop governance training programs for boards and executive management, and respond to sustainability and social responsibility requirements. This regulatory framework reflects the evolution of the Saudi market and its commitment to implementing international best practices.

Recent years have witnessed important developments in governance rules within the Saudi financial market, with amendments to governance regulations in 2023–2024 to align with changes in the Companies Law. Notable changes include requiring companies to establish an independent internal audit unit, submit regular reports to the audit committee, and enhance the role of internal oversight. Mandatory periodic training for board members and senior executives in governance and risk management has also been introduced. Additional requirements for environmental and social performance disclosure have been added, with the percentage of companies reporting on sustainability practices increasing. The Capital Market Authority seeks to gradually raise governance standards to international levels, focusing on oversight, accountability, and transparency. The authority has also launched a governance regulations development plan for 2024–2026, covering new areas such as governance for non-financial companies, unified reporting development, and increasing women's representation on boards.

One of the most important elements of effective governance in listed companies is the formation of specialized internal committees such as the audit committee, nominations and remuneration committee, and risk committee. The audit committee is responsible for reviewing financial statements, evaluating internal and external audit performance, and ensuring compliance with regulations. The nominations and remuneration committee oversees the selection of board members and determines their compensation, working to prevent conflicts of interest. The risk committee focuses on analyzing and assessing operational and strategic risks. Following the 2024 regulatory amendments, having an independent internal audit unit has become mandatory for all listed companies, which must develop an annual audit plan and report directly to the audit committee. This structure enhances oversight of financial and operational performance and increases companies' ability to manage risks and protect shareholder rights.

Disclosure and transparency are among the most critical requirements for corporate governance in the Saudi financial market. Laws require listed companies to regularly disclose their financial results, material changes, related party transactions, and governance policies. An annual governance report must be provided, containing detailed information on board structure, committee activities, risk assessment, and sustainability compliance. Companies are also required to immediately disclose material events, such as management changes, capital increases, or dividend distributions, through the official Tadawul platform. These requirements aim to enable investors and stakeholders to make informed decisions and enhance market confidence. In recent years, disclosure requirements regarding sustainability practices (ESG) have been strengthened. Good disclosure reduces opportunities for corruption or deception and strengthens the company's image among local and international investors.

Governance today extends beyond risk management and financial transparency to include environmental and social aspects (ESG). In the Saudi market, the Capital Market Authority has begun encouraging listed companies to disclose their environmental and social practices, such as reducing carbon emissions, energy policies, health and safety, and community development contributions. The percentage of sustainability disclosure among the top 100 companies rose to 65% in 2024, up from 58% in 2023. This trend reflects a progressive move toward integrating social and environmental responsibility into core corporate strategy. Good governance requires companies to be accountable not only to shareholders but also to society and the environment. This development aligns with the Kingdom's international commitments and the achievement of Vision 2030's sustainable development goals.

Governance standards directly affect the attractiveness of listed companies for local and foreign investment. The more a company adheres to governance rules and applies them transparently, the greater investors' confidence in its ability to achieve sustainable performance and manage risks efficiently. This is reflected in the company's and the market's ranking on global indices, such as MSCI and FTSE, which include governance as a core evaluation criterion. Effective governance also reduces the likelihood of companies facing significant legal or financial risks and makes them more adaptable to change. In the Saudi context, continuous development of governance frameworks has enhanced the attractiveness of the Saudi financial market and increased the inflow of foreign capital, supporting economic diversification and financial sector development plans.

Governance requirements differ by sector, depending on the nature of business and associated risks. In the telecommunications sector, such as Saudi Telecom Company (STC), disclosure and transparency are particularly important due to the scale of operations and the number of stakeholders. Companies in this sector are required to provide periodic financial reports, hold regular general assemblies, and establish robust internal committees. In the energy and petrochemical sector, such as Aramco and SABIC, there is a special focus on internal controls and environmental and social reporting, given the significant environmental and social impact. In the financial and banking sector, the Saudi Central Bank (SAMA) oversees a dedicated governance code for banks and financial institutions, focusing on the distribution of powers, independent oversight, and efficient financial risk management. These specialized frameworks ensure that companies adhere to governance standards suited to their business nature and achieve long-term sustainability.

A fundamental pillar of the definition of governance is the protection of the rights of shareholders and all company stakeholders. Saudi laws require fair and transparent treatment of shareholders and the provision of sufficient information for informed decision-making, whether at general assemblies, regarding dividend distributions, or strategic expansion decisions. Governance also establishes mechanisms to prevent conflicts of interest, facilitate the exercise of voting rights, and ensure that minority shareholders have access to information. Protection extends beyond shareholders to include employees, customers, and the community, through the adoption of ethical work policies, ensuring a safe work environment, and providing high-quality products and services. These aspects are ensured by internal governance committees and supported by the annual governance reports published by listed companies. Thus, governance is not merely a legal obligation but an ethical responsibility that helps build trust and sustain the relationship between the company and all stakeholders.

The Saudi Capital Market Authority attaches great importance to compliance with governance rules and has broad powers to impose penalties on violating companies or individuals. Penalties include financial fines that can reach millions of riyals in severe cases, suspension of share trading, and requiring corrective actions. Penalties may also extend to holding executive members personally liable for negligence or dereliction of duty, or banning them from serving on other boards for a specified period. All such actions are subject to a transparent legal framework that ensures the company's right to defend itself if accused. The aim of these penalties is not punishment per se, but to foster a culture of compliance, ensure better application of sound governance standards, and protect the market and investors from risks arising from weak governance.

Despite significant progress in implementing governance rules in Saudi Arabia, future challenges remain that require ongoing development. These challenges include adapting to digital transformation, strengthening data governance, and integrating startups and investment funds into regulatory frameworks. Rapid changes in the economy and international environment also require continuous updates to regulations to keep pace with global standards, especially regarding unified reporting, supporting women's representation on boards, and expanding governance to cover unlisted companies. The Capital Market Authority is working according to a clear plan through 2026 to develop regulations, focusing on sustainability, transparency, and activating digital oversight. The Saudi market is expected to continue advancing in governance, further enhancing its global standing and competitiveness.