Corporate Governance and Performance of Saudi Arabia Listed Companies
CHAPTER ONE: BACKGROUND
- Introduction
This study is aimed at investigating the influence of the Corporate Governance on the Performance of the registered Saudi's listed Firms. Today corporate governance has grown to be an essential study subject, which deals particularly with distinct governance plans that are utilized in controlling corporates with the aim of increasing shareholders wealth (Dalwai, Basiruddin & Abdul Rasid, 2015). Corporate governance is in this context useful for creating accountability among firms in Saudi Arabia. Research reveals that poor corporate governance standards result in poor performance and less value for the stakeholders. Effective corporate governance should fully guarantee value to all the involved shareholders by promoting the suitable utilization of organizational resources that enabling capital access and enhancing the confidence of the investors (Dalwai, Basiruddin & Abdul Rasid, 2015). Much research regarding corporate governance have been performed with respect to the developing countries such as America but little is understood in regard to the Middle Eastern region where firm and diverse cultural and economic deliberations exist. Fueled by the increasing accounting and transparency issues, corporate governance holds the utmost importance in the economic world. Saudi Arabia implemented policies in 2006 aimed at improving corporate governance in general (Abdallah and Ismail, 2017). There is an established connection amid corporate government and performance of the registered corporations in Saudi Arabia.
1.2. Theoretical Framework
This research applies agency theory as the primary theory along with stakeholder and stewardship theory to explore the association between corporate governance the performance of registered companies in Saudi Arabia. These theories are mainly centered on shareholder’s interests by minimizing agency issues which in turn result in value intensification. In this context, agency, steward and shareholder theories offers a direct connection between corporate governance and revenue generation within the registered companies. Thus, with the view of investigating this dissertation’s objective in regard to corporate government effect on performance, the narrowed description is essential since it offers a more direct connection amid performance and corporate governance. Both descriptions of corporate governance and that of the three theories provides theoretical justification for the connection amid Corporate Governance and performance. This permits the testing of the hypothesis in regard to distinct governing strategies in regard to improved performance.
1.3. Research Questions
To address the theme, the researchers will focus on the following research questions:
- How does board size affect the performance of listed corporations in Saudi Arabia?
- What impact does board independence have on the performance of listed firms in Saudi Arabia?
- What is the relationship between the size of the audit committee and the performance of listed firms in Saudi Arabia?
1.3. Study Significance
Saudi Arabian setting is suitable for this study grounded on several reasons. To begin with, the study might help in improving the existing understanding in regard to corporate governance in the middle eastern region particularly Saudi Arabia listed corporations. Secondly, Saudi Arabia has experienced significant growth in the recent, thus the results of the study might benefit other nations in similar situations relating to cultural, economic, and political status. Lastly, with the implementation of corporate policies, the findings can help in strengthening the process in Saudi Arabia. Thus, these transformations are likely to enhance the financial environment in Saudi Arabia which will in turn increase performance.
1.4. Research Approach
The approach adopted by this specific research is not a new one. The objectives of the theoretical study are to clarify the utilized theoretical strategy as recommended by agency theory. On the other hand, the empirical literature has been analyzed to highlight the knowledge state in regard to everything that has been created empirically.
CHAPTER TWO: THEORETICAL FRAMEWORK
2.1 Introduction
This chapter offers numerous descriptions of corporate governance as instituted by diverse research academics then it evaluates the theoretical framework of the research. Agency, steward, and stakeholder are the primary theories that are used in this research, as the theoretical guideline to establish the impact of corporate governance on the performance of the Saudi Arabian listed companies. Lastly, literature relating to distinct corporate governance.
2.2 Corporate Governance Description
Corporate governance is a phrase that has gained much importance in the recent based on differing perspectives. More so, it is based on the rising alarm of corporate fraud and deceitful financial scandals that the concept has acquired popularity both in the developed as well as developing countries. There is a significant discussion in regard to the actual description of corporate governance among academics and researchers. In reference to its definition, it is classified either on the narrow or the extensive scope. The narrow scope descriptions are those that seek to satisfy the needs the involved shareholders while the extensive one seeks to focus on the interest of the shareholders in general.
Corporate governance from the view of a shareholder can be defined as the inspiration basic to the maximization of value from the corporate perspective in regard to control and management of activities. Governance and management are different aspects that incorporate the development of corporate objectives, regulation, and responsibility. In this context, it is apparent that corporate governance works beyond the narrowed perspective of administration and is made of systematic regulation, policies and company’s governance. According to… corporate governance is about the strategies via which financial providers guarantee themselves of higher gains from their venture. Based on the complexity of creating such guarantees the shareholders depends on the managers to control operations and ensure high returns on their behalf. Corporate governance problems emerge due to the presence of urgent matters and the priority of guarding shareholder’s investments.
2.3 Theoretical framework
Agency, Steward, and Stakeholder theories are the primary paradigms applied in the research as the theoretical guideline to investigate corporate governance effects on listed company’s performance. This section analyses the three theories and justifies corporate governance tools in regard to each theory.
2.3.1 Agency Theory
Agency theory is authoritative to the advancement of corporate governance as well as enhancing reliability transparency within organizations. This theory attempts to highlight the association amid shareholders and managers by highlight the roles of each (Arouri, Muttakin, Hossain, & Al Farooque, 2014). The theory’s concept develops the assumption that guarding the general interests of the shareholders is reliant upon the capacity to assume oversight responsibilities and tasks. In order to enhance the performance of corporate governance within an organization the size of the evaluation committee, size and amount of control owned by the members are important considerations. This notion has been utilized in most settings to establish and evaluate success within public listed corporations globally. In this context, the structural organization of the companies is usually considered (Giannarakis, Konteos & Sariannidis, 2014). Research reveals that the performance of any company relies on the size and control of the appraisal groups.
2.3. Stakeholder Theory of Corporate Governance
Stakeholder theory is employed over encouraging corporate responsibility to the extensive shareholder's range. As a management theory, this model mainly deals with standards and morals needed in the effective management of the organization (Zeitun & Haq, 2015). In that, the theory holds the needs of the shareholders at its center and promotes the notion that for their values to be intensified proper organizational ethics should be applied at all times. According to this model corporate governance mainly entails the relationships amid the involved groups that leads to efficiency (Zeitun & Haq, 2015). The shareholders must, therefore, build ethical relationships with managers in order to support the need for higher gains. Stakeholder approach, therefore, asserts that the structure of the organization is of the essence in determining corporate governance performance. In that, the model is focused on maximizing gains for all the existing groups ranging from shareholders to committee members. The structure, therefore, determines the objective and direction of the company in general (Al-Moataz, & Hussainey, 2013).
2.3.3 Stewardship Theory
Stewardship theory is essential in inspiring better performance and production of a company because it seeks to guard and intensify shareholder’s value (Al-Malkawi, Pillai, & Bhatti, 2014). The main players based on this theory are administrators and executives who are mainly responsible for the guarding of the interests of the consumers and increasing revenue. Contrary to the agency model, this theory is centered on increasing the general success of the company via inspiration and satisfaction (Zeitun & Haq, 2015). In addition, the theory determines the general importance of corporate governance organization which is depended upon in instilling motivation to the stewards based on the present rates of trust which in turn leads to organizational transparency. Based on Abdallah and Ismail (2017) stewardship model offers a guideline that highlights the roles of the administrators and executives, guards the primary concerns of the shareholders and coordinates functionality.
2.4 Corporate Issues in Middle Eastern Countries
Hasan, Kobeissi and Song (2014) argues that corporate governance in the developing markets has in the recent attracted much concentration grounded on the existing flaws of corporate governance in the Middle Eastern countries which are responsible for the occurrence of economic breakdowns. The Middle Eastern region is characterized by a range of external forces that affects the performance of corporate governance such as cultural and economic sensitivity. This features particularly promotes governance malpractices. In the recent, the increase of fraudulent issues within large companies has triggered the attention of public administrators and investors. The region has obtained substantial development in the past owing to globalization but much of its capability is hindered by external sensitivity (Habbash and Alagla, 2016). The Middle Eastern countries are characterized by well-situated financial structures but under-developed corporate management processes which create inefficiency and breakdowns (Habbash and Alagla, 2016). These forces create more threats and uncertainty in regard to how the markets are to be handled.
2.5 Summary
Corporate governance can best be described as the mechanism through which firms are guided and regulated. It mainly addresses the manner in which funds providers can increase the investment gains. The research was mainly seeking to establish the major effects of corporate governance of listed company’s performance. It was established that positive performance is one which accounts for the general needs of the shareholders and seeks to grow them further. The structure of the firm including control held by the committees and its size determines the effectiveness of the process.
Chapter THREE: REVIEW OF LITERATURE
3.1 Introduction
The deviation of objectives which leads to the company’s executives pursuing goals that seek to create individual gain over that of intensifying the value of the shareholders leads to agency issues. The main rationale that motivates the executives to uphold the needs of the company is related to job security and the general performance of the company which generates further costs. This chapter addresses some of the proposed strategies to lowering organization issues.
3.2 Directors Board
3.2.1 Board Size
With the acceptance of the director’s board, it is generally proposed that having a big board is better because it encourages high inclusion of diverse members who combine their different specialties leading to innovativeness and efficiency (Andres et al., 2005). However, a big board normally increase management problems in regard to communication, and organization. In addition, it has globally been asserted that a big board lowers the capability of board director’s to adequately review top administrators and debate in regard to performance (Andres et al., 2005). The agency theory rules that with a big board corporate management is never accounted and the running cost is high.
3.2.2 Board Independence
Board independence is the amount of control that is owned by every board member in a specified group. Independence is significant in accounting for the actions and conduct of every member (Prabowo and Simpson, 2011). In that, if there is no much independence then it is particularly difficult to establish one that is responsible for certain actions which might have impacted performance undesirably. Performance is determined by control which lowers conflict and accountability issues (Yoshikawa, Zhu, &Wang, 2014).
3.2.3 Audit Committee Size
The audit agency is obligated to act independently in guarding the general interests of the shareholders by conducting internal controls (Kim, Sung, &Wei, 2017). In this case, the size plays a critical part in designing transparency and corporate governance. Having a large audit implies that the efficiency of the board is lowered because communication becomes inconsistent thus affecting accountability (Nobanee, & Ellili, 2016). The smaller the size the more suitable it in promoting efficiency and responsibility (Nobanee, & Ellili, 2016).
3.4 Summary
The chapter offers description of the primary interior corporate governance strategies utilized by diverse studies and an evaluation of literature in connection with the influence of corporate governance on performance. Based on the analysis it is clear that having a small-sized board and committee is essential because it promotes efficiency and accountability. A large size creates complexity of managing and coordination since maintaining consistent communication among a high populace is high. Corporate governance needs precise and small structures that promote honesty and responsibility while guarding the welfares of the shareholders.
CHAPTER FOUR: CORPORATE GOVERNANCE IN SAUDI ARABIAN LISTED COMPANIES
4.1 Introduction and Background
In order to research in regard to corporate governance in Saudi Arabian publicly listed companies, there is a need to highlight its background in regard to some essential aspects regarding the economy. Saudi Arabian economy is an oil-reliant one and the government holds the highest control authority over economic operations (Kamal Hassan, and Saadi Halbouni, 2013). In the Middle East, Saudi Arabia is ranked first in regard to owning the biggest economy (Kamal Hassan, and Saadi Halbouni, 2013). However, despite the positive performance that the economy has experienced in the recent corporate fraudulent are on the rise and are significantly affecting the financial performance of the publicly listed companies.
4.2 Corporate Governance in Saudi Arabia
Saudi Arabia has in the last few decades experienced unimaginable growth over most Arabian countries which has created a more favorable surrounding for economic investment. The country depends on monarchial governance that is restricted to the male gender descendants (Kim, Sung and Wei, 2017). The country is one of the developing states that is characterized by the highest rate of growth. The economic growth in the country has been dominant since the mid-20th century. According to Kamal Hassan, and Saadi Halbouni (2013) corporate governance motivates high investment and the growth of the stock industry which is connected with stable economic increase. The status of corporate governance is crucial in enticing more financial providers since they display the most appropriate signal both to the local as well as the foreign market with respect to the potential threats that might be experienced (Kim, Sung and Wei, 2017).
Corporate governance is additionally essential for the international investors who might be traveling into fresh environments and are in the need for clarification in regard to the available laws that govern the systems (Mallin, Farag and Ow-Yong, 2014). This operation normally strengthens individual confidence by asserting that the investment concerns and rights are properly guarded. Appropriate corporate governance follows are regarded as important in lowering the involved threats including ownership privileges. In addition, they result in high capital attraction as well as complete improvement of the corporation’s performance (Mollah et al., 2016).
Based on Naushad and Malik (2015) despite the fact that Saudi Arabia is a big country that holds similar sizes with developed nations such as Germany and UK it lacks does not possess natural resource like lakes. Actually close to 80 percent of its land is desert based. From being among the most suffering countries globally in terms of economic performance the country is currently enjoying increased growth particularly based on the development of favorable economic policies that are objected at creating economic stability and efficiency (Nobanee, H. and Ellili, 2016). In spite of the country’s stock market is classified as a developing market based on its young operative period and size, it is the leader among all the developing nations. From a survey conducted in 2005, it was established that the stock market of Saudi was worth 649.117 American dollars which have increased since that time (Mollah et al., 2016).
4.3 The Saudi Arabia Stock Exchange
Stocks exchange is popularly regarded as Tadawul in Arabian language (Srairi, 2015). The stock market in the country is mainly linked to the experienced growth in the country. Therefore, for the role played by the market to be more stable, there is a need to stabilize and organize the market. Currently, the market is self-regulated one that is administered by a board made of 9 members as selected by the capital authority (Topak, 2011). Listed companies in Saudi Arabia began their operations in the middle of 1930 (Tilt, 2016). The market existed for years while still informal and less structured despite the experienced growth and trading controls were later employed. The market has experienced privatization in the last decade which led to the rise of listed companies from 80 up to 144 amid 2005 and 2010 (Topak, 2011). With the drastic growth, the market has become particularly impressive to foreign stockholders based on its stability and security. However, there is a need for more focused corporate governance to intensify growth and value.
4.4 Summary
This chapter was centered on corporate governance in listed companies in Saudi Arabia to offer a more detailed definition of Saudi Arabian economic context and corporate governance guideline. The analysis reveals that the stock market in the country has evolved gradually but it remains unorganized which is resulting in the increasing fraudulent cases. The market is in need of a more focused on efficiency and maximization of value because the market has the needed potential for growth.
CHAPTER FIVE: METHODOLOGY
6.1 Introduction
The study was aimed at exploring the effects of corporate governance on listed companies in Saudi Arabia. The study focused on the governance and shareholders view to evaluate the general impacts of board members size and organizational structure on the general performance of the companies. This chapter analyses the methodology approach and design utilized by this study.
6.2 Research Strategy
It is highly asserted that an effective study must settle for an investigative philosophy. This study utilized a positivist philosophy where the patterns were created based on the idea that positive corporate governance leads to high organizational performance. This strategy was utilized to demonstrate the existing issues in the environment as well as anticipation with the implementation of the stated changes. The positivism philosophy seeks to evaluate the undesirable and desirable aspects of the market and propose for measures that would be utilized in transforming the situation.
6.3 Research Methodology
The research utilized a quantitative approach that is dependent on statistics. The acquired data will then be interpreted to generate reliable results in that regard and supporting the study’s hypothesis. Some of the independent variables that were applied include committee size, independence, and size of the board. The control variables included leverage, ownership and organization’s size.
6.4 Population and Data
The general populace for the research incorporated diverse sectors that are listed in the country’s stock industry. This aspect was selected because having more companies are associated with the benefit of generating wealth and substantial details regarding the economic state in the country (Francis, Hasan &Wu, 2015). The study from a number of 174 companies utilized about 65 corporations to offer reliable information regarding the larger populace (Hasan, Kobeissi and Song, 2014). The sample did not incorporate monetary institutions based on the distinction in the regulation procedure. Information sourcing was accomplished via the general utilization of cross-sectional information and data sequence between 2012 and 2016.
6.5 Ethical Considerations and Limitations
Consent to maintain confidentiality of the respondents will be acquired along with project approval from the academic supervisor. Since the study understood a quantitative approach the primary ethical consideration was acknowledging the authors not to plagiarize the report. Some of the limitations of this study included time and a large amount of data. There is little research in regard to corporate governance in the Saudi Arabia but much content was founded in relation to the Middle East (Al-Shuaibi, Zain, & Kassim, 2016). The issue of corporate governance is highly discussed and therefore the large data that was acquired needed effort and organization to narrow down. Based on the given time-frame this was challenging to the researcher who permed the summarization and analysis consistently.
Results and Discussion
It is not arguable that corporate governance is of essence in driving corporate performance. The study found the absence of stable and organized corporate governance in Saudi Arabia leads to inefficiency and low performance. Based on stakeholder, stewardship and agency theory asserts that stakeholder’s value should at all times be upheld. In that, the most effective business is the one that the stakeholders enjoy utmost benefits (Zeitun, and Haq, 2015). In other words, it should be noted that corporate issues usually arise in instances when the stewards are forced on guarding the interests of the company while still addressing agency issues. Corporate governance stimulates high investment and the growth of the stock industry which is connected with unchanging economic increase. The status of corporate governance is crucial in enticing more financial providers since they display the most appropriate indicator both to the local as well as the foreign market with respect to the potential threats that might be experienced (Yoshikawa, Zhu and Wang, 2014)
Despite the fact that Saudi is among the developing nations the corporate governance has not experienced growth due to the lack of organization and supportive regulations because the market has proved to be fully capable (Van, Postma, Ees, &Sterken, 2003). In spite of the country’s stock market is classified as a developing market based on its young operative period and size, it is the leader among all the developing nations. The results proved that the market is in need of effective corporate governance in general (Prabowo, Simpson, 2011). Research discloses that the performance of most corporations counts on the size and control of the evaluation groups. Corporate governance in the rising markets has in the current fascinated much attentiveness based on the surviving faults of corporate governance in the Middle Eastern states which is accountable for the manifestation of monetary failures (Al-Shuaibi, Zain, & Kassim, 2016).
Conclusion and Recommendation
The research sought to offer a detailed analysis of corporate governance in the Middle East and the developing nations, particularly in Saudi Arabia. This study funds knowledge by its provision of a generalized comprehension of the value of corporate governance in the progressing market. The understanding was also boasted in regard to the audit committees and directors existing in the listed corporations specifically relating to their size, schedules, responsibilities, and tasks. Future studies should mainly focus on investigating on distinct aspects of corporate governance to ensure that the economy does not suffer mainly from the loss of responsibility while upholding shareholder’s needs. The study established that board and audit committees serve an integral responsibility in corporate governance. In addition, in the Saudi Arabian listed company’s regulation audit boards being among the essential aspects of positive governance were classified as inactive in the fulfillment of its responsibilities and independence lack. The audit committee cannot be an effective performance drive with the absence of control and individuality which creates accountability.
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