The role of governance in corporate sustainability

Introduction

In a changing economic environment and rapidly evolving market, corporate governance has become a strategic necessity to ensure sustainability and compliance, rather than just a regulatory luxury. This trend is in line with Saudi Arabia's Vision 2030 Which attaches great importance to transparency and institutional oversight in developing the business environment and enhancing investor confidence.

The concept of governance and its importance

Corporate governance refers to a set of rules, regulations, and procedures It aims to regulate the relationship between the company's stakeholders, such as shareholders, the board of directors, and executive management, ensuring transparency, fairness, and accountability. The Saudi regulator defined it in its governance regulations as:

“Rules for guiding and leading the company, in a way that achieves a balance between different interests, enhances the protection of the rights of shareholders and stakeholders, and ensures competitiveness and transparency in the market.”

The importance of governance is evident in the following:

• Improving financial and operational performance
• Reducing systemic and financial risks
• Boosting investor confidence
• Prevention of corruption and mismanagement
• Ensuring fairness between partners and shareholders

Governance as a pillar of sustainability

Governance is the regulatory framework that allows companies to achieve long-term business sustainability, through:

1. Achieving institutional integrity
   By putting in place controls that prevent conflicts of interest and protect the company's assets.
2. Promoting transparency and accountability
   Through timely and accurate disclosure of financial and management information.
3. Enabling internal control practices
   Including the appointment of auditors according to strict controls that guarantee their independence.
4. Encouraging financial and administrative discipline
   To ensure that resources are directed efficiently towards achieving strategic objectives.

The regulatory framework for governance in the Kingdom

Governance in the Kingdom of Saudi Arabia is subject to a number of regulations and systems, the most prominent of which are:

• New Saudi Companies Law (Issued by Royal Decree No. M/132)
• Corporate Governance Regulations (Capital Market Authority Resolution No. 8-16-2017)
• Financial Market System
• Control systems for auditors (including the system of certified public accountants)
• Governance rules for non-profit organizations Issued by the Ministry of Human Resources

Governance in partnerships versus capital companies

First: Personal companies

In this type of company (such as general partnerships and limited partnerships), the importance of governance is highlighted in:

• Determine administrative powers between partners
• Control decision-making mechanisms and avoid conflict
• Activating the principles of transparency among partners
• Regulating withdrawal and exit controls

Second: Money companies

Joint stock companies and limited liability companies are subject to a more stringent governance framework, including:

• Ensuring equal rights for shareholders
• Independence of the Board of Directors
• Mandatory financial disclosure application
• Appointing internal committees such as the Audit, Nominations and Risk Committee
• Pivotal role of the auditor

The Board of Directors and its responsibility in achieving governance

The Board of Directors bears full responsibility for implementing governance within the company. Its most prominent obligations include:

• Developing corporate strategies and plans
• Ensuring financial and human resources to achieve goals
• Monitoring administrative and financial performance
• Ensuring disclosure and transparency
• Risk Management and Compliance
• Disclosure of conflicts of interest, if any

The Capital Market Authority has demonstrated the importance of this role on several occasions, imposing fines on companies and officials who violated these obligations.

The Auditor: The External Eye of Governance

The auditor is one of the pillars of governance in capital companies, and is legally charged with the following:

• Examine the financial statements and ensure their fairness
• Detect any violations or gaps in the financial system
• Submitting impartial reports to the General Assembly
• Keeping company secrets and not disclosing them
• Report any suspicions of corruption or misuse of resources.

His absence or complicity exposes the company to collapse, as some cases in the Saudi and global markets have shown (such as the famous Enron case).

Regulatory penalties for non-compliance with governance

The Saudi Capital Market Law has confirmed that violating any governance provision may lead to:

• Civil accountabilityCompensation for affected investors or partners
• criminal accountabilityFines of up to 5 million riyals and imprisonment of up to 5 years.

These penalties apply to the board of directors, executive directors, and even auditors in the event of proven collusion or gross negligence.

The role of governance in achieving the goals of Vision 2030

Governance has become one of the primary means of achieving the pillars of the Kingdom's Vision 2030, through:

• Enhancing the business environment that attracts investment
• Improving the efficiency of the financial market
• Enabling businesses to grow sustainably
• Raising transparency and combating administrative corruption
• Enhancing women's presence on boards of directors

Recommendations

1. Requiring companies to establish an internal governance unit
2. Linking tax and financing incentives to governance compliance reports
3. Qualifying board members through accredited training programs
4. Enabling auditors to work with complete independence
5. Conducting comparative studies to develop governance standards locally and internationally

conclusion

Governance is the cornerstone of building stable, resilient companies that are adaptable to changing economic and legislative conditions. As the Kingdom continues to implement its ambitious economic reforms, adherence to governance principles becomes increasingly important, not only as a regulatory requirement, but also as a corporate culture that ensures long-term sustainability and success.

We are at Asas Al-Waqaya Company We have extensive experience in the field of governance and provide our clients with integrated services that include:

• Preparing internal policies and regulations
• Assessing current governance practices
• Board of Directors Training
• Establishing internal governance units
• Aligning corporate systems with the regulations of the Capital Market Authority

We always strive to enable Saudi companies to excel locally and compete globally.