Governance is a fundamental pillar that ensures the sustainability and continuity of companies, helping them achieve their long-term goals. It revolves around how companies are managed, the decision-making process, and performance monitoring mechanisms to guarantee transparency and protect the rights of all stakeholders, including shareholders, the board of directors, and employees.

This article will explore the concept of governance, how to implement internal and external governance, and its impact on companies.

What is meant by corporate governance?

Corporate governance refers to the rules that regulate the interests and relationship between the board of directors and business stakeholders. These rules are established by the government or through an agreement between the board of directors and the company's stakeholders. Therefore, each company has its own governance system, but the goals of governance remain the same: achieving transparency, accountability, and oversight to ensure business continuity.

 Corporate Governance in Saudi Arabia

Since this article discusses corporate governance in Saudi Arabia, it is essential to clarify the regulations and legislation governing internal and external corporate governance in the Kingdom. These include:

• The new Companies Law issued by Royal Decree No. (M/132) of 1443 AH.
• The Corporate Governance Regulations issued by the Capital Market Authority under Resolution No. (8-16-2017). Most provisions of these regulations are guidelines for companies listed on the parallel market (Nomu), with the exception of a specific number of articles that the regulations mandate for these companies.
• The Capital Market Law issued by Royal Decree No. (M/30) of 1424 AH.
• Financial institutions (such as banks and finance companies) are subject to a specific and detailed governance framework issued by the Saudi Central Bank (SAMA).

What are the implications of implementing corporate governance?

Governance is a vital and pivotal element in the success and sustainability of companies. Its importance lies in achieving the following:

- Enhancing Transparency

Good governance contributes to providing investors and stakeholders with the necessary and reliable information, helping them make informed decisions based on accurate data.

- Achieving Accountability

Governance ensures that all parties are held accountable for their performance and decisions, significantly reducing errors and transgressions.

- Improving Performance

Governance contributes to raising the efficiency of operational processes and reducing risks and errors through the mechanisms it employs in management and oversight.

- Increasing Trust

When companies implement governance and adhere to its standards, it increases the trust of shareholders and customers, strengthening the company's reputation in the market and among competitors. - Achieving Sustainability

Governance aims to manage company resources responsibly, thereby achieving sustainable development.

Internal Corporate Governance

Internal governance refers to the policies and organizational framework established by a company to regulate internal relationships, which includes the following:

- The Board of Directors and its Committees: The Board of Directors is considered one of the most important pillars of corporate governance. It plays a pivotal role in guiding the company, setting its strategies, and determining its management methods.

- Disclosure and Transparency Policy: This refers to the company's periodic disclosure of all financial and non-financial information to ensure transparency and protect shareholders' rights. It is a fundamental part of the company's internal policy.

- Internal Control Systems: These are a set of procedures implemented to verify the accuracy and reliability of financial reports and prevent errors or fraud.

- Internal Committees: Governance requires companies to establish an audit committee, a compensation committee, and a risk assessment committee to assist the Board of Directors in making sound and informed decisions.

- Governance Culture: This requires the company to cultivate a governance culture within the company, encompassing ethical standards and values, and promoting transparency and accountability. It is worth noting that all these elements are included in the Corporate Governance Regulations issued by the Capital Market Authority Board Resolution No. (8-16-2017), which obliges companies to prepare internal policies that ensure their compliance with governance principles.

External Corporate Governance

External governance refers to the regulatory framework imposed on companies by regulatory bodies in Saudi Arabia, such as the Ministry of Commerce, the Capital Market Authority (CMA), the Zakat, Tax and Customs Authority,

. External governance is implemented through the following:

- Financial Disclosure: Companies are required to provide reliable financial reports to investors and stakeholders.

- Compliance with Standards and Regulations: Companies are obligated to comply with Saudi regulations as well as international laws.

- Relationships with Investors: Building strong relationships with investors enhances investor confidence.

- External Audit: Independent firms are engaged to conduct financial audits to ensure the accuracy of financial data and verify compliance with applicable standards.

- Dealing with External Parties: This involves effectively managing relationships with regulatory bodies.

Finally, if you wish to implement governance in your company accurately and systematically, contact Mohammed Alkhliwi Law Firm to handle all governance procedures for you and professionally implement both internal and external corporate governance.

Disclaimer: The above content does not constitute legal advice, and the author of this article assumes no legal responsibility. For legal advice, please contact us.