Governance in the Saudi Financial Market: Foundations, Legislation, and

Governance encompasses a set of rules and principles that govern the management and direction of companies, focusing on ensuring fairness, transparency, and accountability in dealings with all stakeholders. In the Saudi context, governance has gained a strategic dimension with the evolution of the financial market and the increasing number of listed companies, becoming a key tool for protecting shareholder rights, achieving financial stability, and preventing the abuse of power within companies. The Saudi Capital Market Authority (CMA) emphasizes that governance is not merely a legal obligation but a corporate culture that ensures the application of best administrative and regulatory practices, enhancing market credibility and attracting local and foreign investors.

Studies indicate that companies adopting strong governance policies achieve better long-term financial performance, lower risk rates, and increased shareholder satisfaction. For instance, the CMA's 2024 report shows that over 90% of listed companies adhere to basic governance standards, resulting in a 15% increase in foreign investments compared to 2021. Governance also plays a crucial role in addressing challenges such as conflicts of interest, resource misuse, or lack of transparency in financial reporting.

In the Saudi environment, the importance of governance is reflected in supporting Vision 2030, which aims to diversify the economy and enhance the Kingdom's position as a global investment destination. Transparency and effective oversight have become essential requirements for attracting capital and providing a competitive business climate. Thus, governance is the cornerstone for ensuring the sustainability of companies and creating long-term value for all stakeholders, from investors to employees and the broader community.

The Saudi Capital Market Authority (CMA) has established a stringent legislative framework for the governance of listed companies in the financial market (Tadawul), which includes a set of rules and regulations aimed at regulating the relationship between management, shareholders, and other stakeholders. The authority has issued a corporate governance regulation, a binding document that is regularly reviewed and updated, detailing the composition of boards of directors, the formation of committees (such as audit, investment, and compensation committees), financial disclosure, and controls to combat conflicts of interest.

Among the notable regulatory requirements is the necessity for a sufficient number of independent members on the board of directors, with at least two in each listed company. The authority also mandates the formation of specialized committees, such as the audit committee responsible for reviewing financial statements, and the compensation and nominations committee that establishes policies for appointing and rewarding executives. Additionally, legislation requires the disclosure of compensation policies and anti-money laundering measures, and the periodic and transparent publication of financial reports according to international standards.

The year 2022 saw significant updates to governance rules, which were effectively implemented in 2024. These amendments included enhancing transparency requirements, expanding the role of internal auditors, and increasing the focus on risk management. The authority also imposed periodic oversight through inspections and assessments of companies' compliance with the rules, with penalties for non-compliant companies. This regulatory framework aims to entrench principles of transparency, neutrality, and accountability, aligning with national economic trends and the Kingdom's Vision 2030.

Transparency and financial disclosure are among the most important pillars of effective governance in the Saudi financial market, as legislation requires listed companies to publish detailed periodic financial reports according to international standards. Each listed company in Tadawul must disclose its quarterly and annual financial results and provide board reports that outline the company's strategy, financial performance, potential risks, and the governance policies in place. This disclosure enables investors and shareholders to make informed decisions based on accurate and reliable data.

Key practices in financial disclosure include publishing financial statements on Tadawul platforms and company websites, providing details about compensation, remuneration, and any transactions with related parties. The law also requires clarifying profit distribution policies, changes in ownership structure, and any significant events that may affect the company's financial position.

For example, SIGMIX commits to publishing detailed annual and quarterly reports that include sales data, profits, company liabilities, and the performance of the audit and compensation committees. These reports allow any shareholder or investor to access the true financial status of the company. Reports from the CMA for 2024 indicate that 95% of listed companies adhered to financial disclosure deadlines, contributing to increased investor confidence and trading volume.

Financial transparency helps mitigate risks, prevents manipulation or concealment of material information, and provides a strong basis for accountability, allowing shareholders to monitor management performance and hold it accountable when necessary, thus supporting the company's continuity and growth.

The composition of the board of directors is one of the most prominent elements of successful governance, as Saudi regulations precisely define the board's structure, the number of its members, and the role of independent members. CMA rules require that the board of directors of each listed company consists of members with diverse experiences, with at least two independent members who have no commercial or financial ties to the company or its major shareholders. This diversity aims to ensure that decisions are made objectively and independently of personal or familial interests.

Independent members play a pivotal role in enhancing governance, as they are tasked with overseeing supervisory committees such as the audit committee, and are responsible for reviewing financial performance and ensuring the integrity of financial reports. They also participate in setting strategic policies, monitoring plan implementation, and reviewing appointment and compensation decisions. Statistics indicate that companies with a higher proportion of independent membership on their boards achieve higher levels of transparency and have fewer instances of conflicts of interest.

For instance, SIGMIX's board consists of seven members, three of whom are independent and chair the audit and compensation committees. This supervisory distribution ensures neutrality in decision-making and reflects the company's commitment to CMA standards. Additionally, the presence of independent members enhances the board's ability to represent the interests of all shareholders, especially minority ones, and reduces the risk of power concentration in the hands of a few executives or major shareholders.

Global and local experiences confirm that the effectiveness of the board of directors primarily depends on the competence and independence of its members, which directly reflects on the company's performance and sustainability in a competitive business environment.

Committees arising from the board of directors form one of the essential pillars of the governance system in Saudi companies, as regulatory regulations mandate the formation of specialized committees to ensure effective oversight and distribution of responsibilities. Among these committees are the audit committee, investment committee, and compensation and nominations committee.

The audit committee is responsible for reviewing financial statements, verifying the integrity of accounting operations, and ensuring the company's compliance with international financial reporting standards. The committee also monitors the work of internal and external auditors and reviews periodic reports to detect any violations or potential manipulation. This oversight reduces the risks of financial manipulation or misleading reports and provides additional assurance to shareholders and investors.

The investment committee focuses on studying new investment opportunities, assessing risks, and reviewing expansion or diversification plans. The committee plays a key role in supporting the company's long-term strategy and ensuring that investments align with shareholder objectives and market requirements.

On the other hand, the compensation and nominations committee oversees employment and appointment policies for senior positions and establishes standards for executive compensation and incentives. The law requires that the majority of the members of this committee be independent, ensuring the neutrality of appointments and preventing conflicts of interest.

In SIGMIX, these committees are formed according to CMA requirements, with the audit committee consisting of three independent members, and the compensation committee reviewing wage policies annually. Experiences have shown that the presence of these committees enhances governance efficiency, strengthens internal oversight, and supports sound strategic decision-making that benefits all stakeholders.

Conflicts of interest represent one of the biggest challenges facing the effective implementation of governance in companies, especially in environments where families or government entities dominate ownership structures. To ensure transparency, the Saudi Capital Market Authority requires listed companies to establish strict policies to combat conflicts of interest, including mandatory disclosure of any transactions between the company and its board members or senior executives or related parties.

Companies must document all transactions with related parties and publish their details in annual reports, stating whether they were conducted on fair commercial terms. Board members and executives are also required not to participate in voting on decisions that affect their personal interests. In the event of a potential conflict, the company must take immediate steps to mitigate its impact, such as appointing a neutral party or reviewing the decision through an independent committee.

Additionally, Saudi companies are committed to implementing strict anti-money laundering and counter-terrorism financing controls, according to the directives of the CMA and the Saudi central bank. This includes conducting periodic checks on the sources of funds and reporting any suspicious transactions. The authority imposes penalties on non-compliant companies, which can reach financial fines or temporary trading suspensions.

For example, SIGMIX documents all transactions of its board members in its annual reports and subjects its policies to periodic review by the audit committee. CMA reports for 2024 indicate a 30% decrease in reported conflicts of interest compared to 2021, reflecting the effectiveness of regulatory controls and enhancing integrity in the Saudi financial market.

Risk governance is a pivotal element of the corporate governance framework, aiming to identify, assess, and manage risks that may affect the achievement of the company's objectives and sustainability. In the Saudi financial market, the CMA has included specific requirements for risk management, mandating listed companies to establish clear policies and processes for monitoring operational, financial, and strategic risks, with specialized committees continuously following these aspects.

The internal auditor plays a key role in the risk governance system, tasked with reviewing internal operations, verifying compliance with policies and procedures, and providing recommendations to improve the effectiveness of control measures. The internal auditor prepares periodic reports presented to the audit committee and the board of directors, including an assessment of risk levels and necessary corrective actions.

Risk governance in Saudi companies includes reviewing emergency plans, assessing business continuity, analyzing the impact of unexpected events, and ensuring a rapid response system for any potential crisis. The authority also requires companies to publish a summary of risk management policies in their annual reports, mentioning key challenges and the steps taken to mitigate them.

In the case of SIGMIX, the company updated its internal risk management policies in 2024, particularly regarding fluctuations in energy prices and production costs. The internal auditor reviews resource utilization efficiency and ensures that all departments comply with control measures. Statistics highlight that companies adopting effective risk governance achieve greater financial stability and experience fewer instances of sudden losses or operational crises, supporting their market position and enhancing investor confidence.

Saudi governance rules in the financial market have witnessed significant developments in recent years, with substantial amendments aimed at keeping pace with global best practices and achieving the aspirations of Vision 2030. In 2022, the CMA issued extensive updates to the corporate governance regulation, which were practically implemented starting in 2024, including raising transparency standards, enhancing the independence of boards of directors, and expanding the role of supervisory committees.

Among the most notable updates is the increase in financial disclosure requirements, as companies are now obliged to publish more detailed reports on risks, operational performance, and governance policies. The amendments also mandated companies to appoint an independent internal auditor and expanded the powers of the audit committee to review all aspects of financial and administrative work. Penalties for non-compliance have also been tightened, with a monitoring points system adopted to evaluate listed companies.

These updates have enhanced the regulatory authority's ability to monitor the market, as a periodic inspection system for companies has been introduced, along with annual reports measuring companies' compliance rates with governance rules. Mid-2024 data indicates that over 85% of listed companies complied with the new amendments, leading to improved transparency levels and increased investor confidence.

These developments reflect the Kingdom's strategic direction towards building a developed financial market that meets international standards and provides an attractive and secure business environment. These updates also support government objectives to enhance the competitiveness of the national economy, achieve financial sustainability for listed companies, and expand the base of local and foreign investors.

The CMA places significant importance on monitoring the level of commitment of listed companies to governance rules, relying on quantitative and qualitative indicators to measure the effectiveness of applying regulatory principles. Mid-2024 statistics indicate that the number of companies listed in Tadawul reached approximately 200, distributed across various sectors such as industry, banking, services, and petrochemicals. CMA reports show that 92% of these companies met basic governance requirements, such as having independent members, forming audit committees, and periodic financial disclosure.

Periodic reports are published on the authority's website, including companies' compliance rates, independence ratios in boards of directors, and the average number of board meetings annually (which reached an average of 6 meetings per company in 2023). The number of reported conflicts of interest is also tracked, along with disclosure rates for compensation policies and companies' compliance with risk management.

For instance, SIGMIX recorded a high compliance rate with governance standards, as the 2024 general assembly report showed the complete presence of independent members, the formation of strong supervisory committees, and the provision of accurate financial disclosures. Conversely, the authority noted some challenges in family-owned companies, where the independence ratio in boards of directors dropped to only 60%.

Data indicates that the most compliant companies achieve better financial performance and attract larger foreign investments. Additionally, increased disclosure and transparency rates have contributed to reducing disputes between shareholders and management, raising the level of confidence in the Saudi market at both regional and international levels.

SIGMIX (Symbol 3001) is a real-world model for applying governance principles in the Saudi market, as the company adheres to all regulatory requirements imposed by the CMA. Established five decades ago and listed on the main market (Tadawul), the company is subject to strict oversight regarding board composition, committee formation, and financial disclosure.

SIGMIX's board consists of seven members, three of whom are independent, and the company has effective audit, nominations, and compensation committees. Governance and compensation reports are published annually on the Tadawul website, including details about board meetings, committee decisions, and conflict of interest policies. The company also commits to publishing quarterly and annual financial reports according to international standards, clarifying financial performance, profits, and dividend distribution ratios.

Financially, in 2024, SIGMIX's market value reached approximately 3.0 billion Saudi Riyals, with a price-to-earnings ratio of 20 times. The company did not announce cash dividends in 2023 and 2024, preferring to reinvest liquidity for growth and production line development. This approach demonstrates the company's commitment to sound governance and risk management amid market fluctuations.

SIGMIX's experience underscores the importance of governance in enhancing investor confidence, improving financial performance, and ensuring the company's sustainability. It also reflects the ability of Saudi companies to keep pace with international best practices and achieve a balance between the interests of all stakeholders.

The cement sector is one of the strategic sectors in the Saudi market, given its importance in supporting major infrastructure projects such as NEOM, Qiddiya, and the Red Sea Project. The sector includes about 20 medium and large companies competing for market share locally and regionally. Despite the growth in demand due to national projects, the sector faces challenges such as production surplus, fluctuations in raw material prices, and rising operational costs.

Governance plays a crucial role in distinguishing leading companies from others in the sector, as transparency and financial disclosure allow investors to assess the actual performance of each company. For example, companies like Qassim Cement (3002), National Cement (3003), and Eastern Cement (3007) stand out with strong board compositions, active audit committees, and effective conflict of interest policies. These companies enjoy greater investor confidence and achieve relatively stable profitability levels compared to less governance-compliant competitors.

Financial performance comparisons for 2023 indicate that SIGMIX recorded lower total profits than some competitors due to its lower production capacity, but it managed to reduce operational expenses by adopting environmentally friendly technologies and efficiently managing costs. Moreover, its commitment to governance has enhanced its ability to withstand market fluctuations and provide a strong foundation for future growth.

The current focus on governance in the sector drives all companies to improve their management practices and develop innovative products such as low-carbon cement, enhancing the competitiveness of the Saudi market and attracting more local and foreign investments.

Governance plays a pivotal role in attracting foreign investments to the Saudi financial market, as global investors seek a business environment characterized by transparency, fairness, and easy access to reliable information. Saudi governance rules set clear standards for financial disclosure, protecting shareholder rights, and enabling investors to participate in decision-making, reducing investment risks and enhancing confidence in listed companies.

Data from the CMA indicates that the volume of foreign direct investments in the Saudi market increased by 15% between 2021 and 2024, driven by improved levels of disclosure and governance in major companies. Foreign investors prefer companies that publish transparent financial reports, adhere to conflict of interest policies, and provide effective mechanisms for monitoring management performance.

For instance, SIGMIX's adoption of international governance standards has contributed to attracting investment funds from Asia and Europe, as the company provides detailed reports on business results, general assembly decisions, and profit distribution policies. Additionally, having independent members on the board and forming strong audit committees gives foreign investors confidence that their funds are managed prudently and fairly.

Governance also contributes to enhancing the Saudi market's position as a regional financial hub, making Saudi companies a preferred choice for long-term investments. As governance levels rise, positive evaluations of companies by credit rating agencies and international financial analysts increase, raising stock values and boosting economic growth.

Despite significant progress in adopting governance rules, Saudi companies still face several challenges in the practical application of standards, some related to ownership structures, corporate culture, and others stemming from market complexities and changing regulations. Among the most prominent challenges is the difficulty of achieving board independence in family-owned or government-controlled companies, where power may be concentrated in a limited group of shareholders or executives.

The industrial sector, such as cement companies, faces additional challenges related to managing environmental risks, disclosing environmental impacts, and adhering to safety standards. Some companies also struggle with high disclosure and periodic reporting requirements, imposing administrative burdens and additional costs, especially on medium and small companies.

There are also challenges in promoting a governance culture among board members and executive management, as it requires continuous training and developing members' capabilities to understand changing regulations. CMA reports indicate that some companies are slow to update their internal policies or face difficulties in appointing highly qualified independent members.

Moreover, intense competition in the market puts pressure on companies to achieve quick profits, which may lead some to bypass certain governance controls or reduce transparency in some aspects. The CMA continues to monitor these challenges and provides support and training programs for companies to enhance compliance and develop a governance culture as an essential part of the institutional framework in Saudi Arabia.

The Saudi Capital Market Authority (CMA) plays a pivotal role in establishing and implementing governance rules, as it is the primary regulatory body that issues regulations and monitors companies' compliance. The authority develops the corporate governance regulation and updates it periodically to keep pace with global best practices, oversees inspection operations, monitors financial disclosure reports, and imposes penalties on violators.

The authority also works to raise awareness of governance culture by organizing workshops, training courses, and issuing guidelines for companies and executive board members. It provides technical and advisory support to companies facing challenges in implementation and facilitates effective communication channels to report any irregular practices.

On its part, Tadawul plays a complementary role in enhancing governance by providing electronic platforms for publishing financial reports, general assembly results, and internal policies of listed companies. The Tadawulati platform allows shareholders easy access to official documents, tracking board decisions, and reviewing details of voting and appointments.

This integration between the authority and the exchange has contributed to increasing companies' compliance rates with governance and enhancing transparency in the financial market. CMA reports for 2024 indicate that the percentage of companies meeting all governance requirements rose to 92%, reflecting the effectiveness of the regulatory and advisory role of regulatory bodies in the Kingdom.

Governance in the Saudi financial market is witnessing a rising trend towards continuous updating, expanding the application of international standards, and enhancing transparency and digital oversight. The CMA is moving towards developing more flexible regulations that keep pace with economic and technological transformations, such as digitization, artificial intelligence, and environmental, social, and governance (ESG) reporting.

In the coming years, it is expected that environmental and social sustainability standards will be integrated into governance reports, requiring companies to disclose the environmental and social impact of their activities and adopt stricter policies for managing environmental risks. Efforts are also underway to enhance the roles of independent members and develop performance evaluation systems for boards of directors, linking rewards to achieving sustainability and governance objectives.

Studies indicate that the widespread adoption of digital technologies, such as electronic disclosure platforms and big data analysis, will increase the authority's ability to quickly monitor violations and analyze trends in companies' governance compliance in real-time. These trends will also facilitate shareholder participation in decision-making and enable investors to access information easily and effectively.

With the continuation of major national projects and the expansion of the base of local and foreign investors, governance will remain a central focus in developing the Saudi financial market. It is expected that competition among companies to improve governance practices will increase, leading to higher quality corporate performance and enhancing the Kingdom's position as a modern and reliable investment environment in the Middle East.