Improving Corporate Governance in Saudi Arabia - Research Proposal Example

Improving Corporate Governance in Saudi Arabia Introduction Corporate governance is a system in which there is direct control of companies. This banking law proposal relating to improving cooperate governance in Saudi Arabia; it involves regulating and improving the relationships between the banks management, shareholders, the board, and other stakeholders1. Corporate governance is also revolving around mitigating or preventing conflicts of interests among different stake holders. Leading philosophers oblige law makers to impact corporate governance through customs, processes, institutions, laws, and policies. The key theme in cooperate governance is the nature and the extent of accountability of individuals in the banking sector, and the tactics they use to suppress principal-agent problem2. Background Information Saudi Arabia is the 2nd largest state in the western Asia in relation to the area. It is also the second largest Arab world after Algeria3. The state has a large economy in reference to other nations in the region with a GDP of over US$450 billion. It has the capability to maintain its economy, with sustained economy4. Saudi’s banks are among the leading banks in the GCC banking sector. Their average annual return is between 14% and 31%. This is as a result of a favorable banking environment prevailing in the region. In the recent years, banks analysts in the regions propose the use of Basel II as it will impact the growth and development of the industry. However, the banking sector has different challenges regarding to governance and transparency. This calls for amendments of the structure of banking governance of the banking sector as this will impact on the growth, and development of the banking industry5. Research question The proposal gives possible solution in Saudi’s banking system, as it has reluctant corporate banking principles. The sector is deteriorating, as a result of reluctance on the part of the law bodies, leading to neglect of some key principles in banking world. This is evident from the fact that board members are engaging in activities, which compromise their role. Shareholders have not been playing their roles because they have been taken up by the management. This calls for change to enhance growth in the sector. Research Objectives The proposal aims at giving suggestions, which will improve corporate banking in Saudi Arabia. This will impact the growth and development of the sector as it will attract investors both locally and internationally. The changes will motivate shareholder as they will trust the board members and the management at large. Methodology Corporate governance is an international issue; it calls for ideas from all areas of study. The proposal recommends the incorporation of both qualitative and qualitative research methodologies to enhance the reliability of the results. Detailed research is also significant. Empirical studies will also enhance in designing the most appropriate model of dealing with banking corporate governance in Saudi. Such research includes debates on the same issues in different nations, changes adopted by other nations, as well as, suggestions from bank analysts. Below are some of the areas targets, in the process of changing corporate banking governance. 1. Principles of banking corporate governance It is advisable for the banking sector to adopt the suggestion put forward in the Sarbanes-Oxley Act of 2002-2003 in USA, Cadbury Report of 1992 in UK, and the principles of Corporate Governance of 1998-2004 (OECD). 2. Corporate governance guidance in reference to Asian Policy Brief These are important guidelines put across to ensure that banking in Asia get to another level. It entails different suggestions which will impact on changing corporate governance in Saudi Arabia. 3. Banks’ board and management should perform their duty in relation to their fiduciary duty This entails the duty of care. The board together with the management should ensure that they respect that duty. They should be keen on ensuring that shareholders rights are respected in all undertakings. 4. Exercise of independent and objective judgment The management should act independently and represent the shareholders accordingly. By so doing, they act as representatives of the shareholders. Their decisions should be should be affected by any external forces. In Saudi, research shows that there is high level of corruption in relation to decision making, and judgment. This is because the board interferes with the undertakings in the banking environment. 5. Establishment of specialized committees These bodies act as stakeholders watchdogs. Their duty is to ensure that the board members together with the management play their roles without bleaching the terms and conditions. The research targets board members because they have they manipulate the management in their favour. An ideal example of such committee is the audit committee. Literature Review Principles of banking corporate governance Reliable discussions and proposals relating to corporate governance tend to trace the principles set in three documents since 1990. These principles have been creating impacts in improving banks’ corporate governance. These discussions include the Sarbanes-Oxley Act of 2002-2003 in USA, Cadbury Report of 1992 in UK, and the principles of Corporate Governance of 1998-2004 (OECD). The OECD and the Cadbury reports avails the general principles which organizations should follow to ensure proper governance prevails. On the other hand, the Sarbox or the Sox has an attempt of recommending the OECD and the Cadbury report6. If the government and law society of Saudi can implement the proposals below, corporate governance can attain a new face. This is by ensuring that:- 1) There is equitable treatment of shareholder From experience, it is evident that the bank’s management hardly respects the right of shareholders, as well as other stakeholders. This principle will ensure that, the board members respect the right of everyone. This principle also gives proposals in which banks will suppress the issues. This is through delegation of duties and emphasis on job description7. 2) Interests of other shareholders Banks’ management should understand that all stakeholders have contractual, legal, market, and social obligation to non-shareholders. These include investors, employees, customers, policy makers, local communities among others8. 3) There is a clear definition of responsibilities and roles of the board The board members should have all relevant qualifications. Their responsibilities and job description should be emphasized to avoid collisions. 4) There is an observation of integrity and ethical behavior Board members are to have a sizeable proportion of commitment and independence. The selections of employees should follow the basis of award by merit so as to attain a high level of performance. 5) There is fairness, disclosure and transparency in the banking industry Clarification and publicity is essential in leadership. All management roles should have a clear definition to avoid abuse of power. Employees both senior and junior should aim at proceeding with independence, while safeguarding integrity9. Corporate governance guidance in reference to Asian Policy Brief The policy brief identifies the issue of corporate governance as an undertaking that affects the banking sector in the region. The issues affect the tendency where borrowed money from depositors, fails to recover leading to monetary loss. Lawyer suggests that there should be protection on the part of depositors, because of such reasons among others. Various stakeholders such as the Task Force propose that, the significance of banks’ corporate governance should be different from those of other organizations and requires exceptional attention. One of the key suggestion, which will give the Saudi’s banking industry a new look is that bank management should consider external stakeholders such as depositors. In reference to the history economic growth and development in Saudi, most of the jurisdiction does not offer material room, for institutional infrastructure. This encompasses focus, experience, know-how, and sufficient resources necessary for efficiency in enforcement of the banking corporate governance policy framework. Saudi Arabian banks play the dominant role in national finance as a result of immature capital markets. Saudis policy makers should have the information that efficient corporate governance of banks will never develop the banking industry without handling institutional weaknesses and constraints10. Banks’ board and management should perform their duty in relation to their fiduciary duty In reference to the constitution of Saudi, fiduciary duties of the banks’ board members as well as the management include both the duty of royalty and duty of care. These fiduciary responsibilities of banks’ board members are highly significant than those other organizations because banks accepts public money inform of deposits. Therefore, the attitude of “healthy skepticism” is crucial in all their undertakings regarding banks’ strategies processes, and policies. The target group will meet these requirements by attending workshops and training programs, that emphasis on the fiduciary responsibilities. Promoting and maintain both professionalism and integrity of board members in the banking industries is indispensable, as they have to work properly and efficiently11. Integrity, qualifications, and competence of prerequisites of effective board members The government of Saudi should design personal test to ensure that the individual is fit in reference to integrity, qualifications, and competence. The conduction of these examinations will be by external boarding to facilitate professionalism. All bank supervisors play a significant role, which need strict monitoring. There should also be illustrations on the plans, which will impact on the development and improvement of the corporate governance. Candidates should be individuals willing to comply with the regulatory measures other than supervision12. Exercise of independent and objective judgment This is an essential tool in enacting and monitoring managerial performance balancing competing demands, and preventing conflicts. This means independent and objective in reference to control of shareholders and management, with significant implications for the structure and composition of the board. However, this is a requirement in all companies around the world, but especially in Asian banks. This is because it is the only region in the world with highly dependent directors. One of the main reasons behind the need of cautious directors is the consequence related to abusive of position in the industries. This independence should also be present when controlling shareholders13. However, mandatory separation of the CEO and the chairman is not common in Saudi Arabia, but the Task Forces argue that the separation of the two posts will lead to delegation of power. This improves performance and accountability in the board’s capacity to make decisions, in an independent ground14. Establishment of specialized committees Independent bodies such as audit committee or other equivalent bodies also overlook the duties, in different fields in the banking industries. Areas of concentration include the accounting and the auditing sectors to ensure that they meet the standards. They also ensure that the end results of the accounting practice are true and fair. The competence of the management is also a field of concern to the auditing committee. The banks’ internal auditors have a duty to report to the committee in matters relating to implementation of controls systems and policies. Such bodies encompass independent directors, who are professionals in the financial and banking sectors15. This job delegation is a tactic that will improve the banking corporate governance. The bodies also impact on the independence of the decision making as they are part of the decision makers in the industry. Other bodies, which need concentrations and formulation is risk assessment bodies, as it will help in the implementation of the risk policy on the banking environment. In short, these are bodies of independent checks16. Jurisdiction in Saudi should evaluate whether the current firewall requires reinforcement in order to ensure that:- 1) All transactions take place on an arm’s length 2) There is a professional distance between the borrowers and the credit decision of the bank This ensures that there is sufficient monitoring of all transactions. This will impact on safeguarding transactions, and facilitate truth and fairness. There are also recommendations that, transaction signatories should be more than one party. This will bar fraud and other misrepresentations17. Conclusion From the law proposal, it is evident that the backing industry of Saudi deserves changes in reference to culture and structure. This is because it has been violating different laws put in place to safe guard stakeholders in the banking sector. The industry needs to follow the guide lines in the proposal to ensure fairness prevails in the industry. Recommendation in different discussion such as the Cadbury Report should also be put into considerations. Neighboring nations such as UAE should help in the transformation process, as it has been performing perfectly all through. The issue should be addressed within the shortest time to avoid scaring potential investors. Bibliography Caprio, G. Jr., Levine, R.Corporate Governance of Banks: Concepts andInternational Observations, Financial Sector Governance: The Roles of the Public and Private Sectors, Washington DC: The Brookings Institution, 2002. Central Bank of Kosovo, Monthly Bulletin, November 2008. www.bqk-kos.org/ Bowen, Wayne H. (2007). The history of Saudi Arabia. pp. 69–70.Central Bank of Kosovo, Annual Reports 2000-2008. Diamond D.W., Dybvig, P.H. Bank runs, deposit insurance, and liquidity, Journal of Political Economy, 91 (3), pp. 401–419, 1983. Lannoo, K. Regulation creates gaps between EU countries, Financial News [internet], 23 February. Available at:www.efinancialnews.com/homepage/comment/content/1053418953 [Accessed 23 March, 2009] Levine, R. The Corporate Governance of Banks: A Concise Discussion of Concepts and Evidence, Discussion Paper No. 3, Global Corporate Governance Forum, 2003. Macey, J. R., O’Hara, M. The Corporate Governance of Banks, Economic Policy Review, 9 (1), pp. 91–107, 2003. Riinvest (September 2008): Socio-Economic Situation in Kosovo: Advancing Governance and Increasing Investment Attractiveness, www.riinvestinstitute.org. Riinvest: SMEs Surveys 2004, 2005, 2008. Shull, B. Corporate governance, bank regulation and activity expansion in the United States, 2007. Trayler, R., A survey of corporate governance in banking: characteristics of the top 100 world banks, 2007. Clarke, T. 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