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As the Saudi Arabian economy diversifies, good corporate governance is crucial to attract foreign investment
In November 2020, Saudi Arabia is scheduled to host the G20 leaders’ summit, the first event of its kind to be held in the Kingdom and a reflection of its growing importance in the global economy. The country is certainly undergoing a period of unprecedented change. It is working towards its Vision 2030 commitment to diversify its economy away from reliance on oil during the next decade. But if it is to achieve this, it will need to attract more foreign investment into the region – and with that comes a higher level of scrutiny into commercial and business practices.
Bajis Dodin, dean of the College of Business at Alfaisal University, based in Riyadh, believes that the college is “in the eye of the storm of this change. Its mission emphasises strong partnerships with the community, and it has designed programmes to produce leaders who recognise the change and capitalise on it.” He adds that “the college is home to the university’s Corporate Governance Center in the Kingdom. The centre is led by executive director Mashour Mourad, former CEO of investment bank Merrill Lynch in Saudi Arabia and also a professor in finance teaching classes in corporate governance and business ethics.”
“Corporate governance is definitely more of a nascent focus in Saudi than in Western economies such as the US,” Dr Mourad explains. “It makes economic sense because it will help attract foreign investment. When we invite US and European investors, there’s a question of agency because they’re so far away from their investments. How comfortable are they that their interests are being taken care of?”
Over the past four years, a team at the Corporate Governance Center has built and refined a Corporate Governance Index to monitor and promote good governance practices among companies doing business in Saudi Arabia. It tracks companies listed on the Saudi stock market and scores them against a list of governance principles set by the Saudi Capital Market Authority, the Saudi Arabian Monetary Authority and the Organisation for Economic Co-operation and Development. Points are awarded against different principles and weighted in terms of priority. This might include a review of a company’s board of directors, whether it has a corporate social responsibility policy, levels of public disclosure and how it communicates with and treats shareholders and other stakeholders. The team received an initial grant from the Saudi Arabian General Investment Authority to set up the index, reflecting the importance of embedding good governance principles in the Saudi economy.
The principles are reviewed regularly as regulatory bodies change their own parameters. Businesses can approach the centre for bespoke consultancy and competitor analysis, which it runs on a not-for-profit basis.
“We’re the only institution making this type of information available and it’s been well received by both the regulators and the market,” says Dr Mourad. “What we aim to do is create a culture of good governance, not just of compliance to regulations, where businesses care about stakeholders as well as shareholders. As such, we play an important role that contributes to market efficiency.”
In addition to the index, the centre runs an annual conference on corporate governance that it is scheduled to host for the fifth time in November 2020. The most recent event, in December 2019, was the first with an international focus, attracting global business speakers and academics. Students from the College of Business presented papers on aspects of corporate governance, and top-performing companies in the Index based on their ratings received awards.
Embedding corporate governance into the academic programmes for master’s and undergraduate business administration degrees is core to the mission of the college. One of its core values is personal integrity – that students and graduates “hold themselves to high ethical standards, transparency, and take responsibility for their actions”. Dr Mourad reflects that there are plenty of “live” case studies to consider when discussing these issues with students, such as the recent fall of co-working company WeWork, which had governance issues that turned off investors, or the Wells Fargo cross-selling scandal, where record fines and other penalties are still being met by top executives and board members. “We can learn from their mistakes and help students look ahead to how they might run businesses in the future,” he says.
The teaching and services provided by the Corporate Governance Center must also reflect the changing nature of corporate governance. There has been a rise in so-called “activist” investors, for example, who prefer to direct investment at companies that support causes such as boardroom diversity or action on the environment. “There’s a move to become more stakeholder-centric – companies are moving away from a focus on maximising shareholder value to articulating and incorporating the interests of their employees, their communities and the environment,” adds Dr Mourad. “This is not a zero-sum game of shareholders versus other stakeholders: it has to be a win-win for all.”
In March 2019, the Saudi stock market was admitted to JP Morgan’s suite of emerging market indices, opening it up to billions of dollars’ worth of outside investment. But it is about more than compliance, says Dr Mourad: “Education in corporate governance principles takes companies beyond compliance. It also means there will be less of a need for regulators to come down hard on companies by making certain things mandatory, easing their burden, and helping the market to be as free as possible.” As demand for corporate governance education and support expands, so will the range of services and courses the centre offers. Its team is currently looking to extend its executive education offering to attract more international scholars. It will also continue to offer and improve its advisory service to companies, for example through board evaluations and assessments, which are an annual requirement of Saudi regulatory authorities.
If funding allows, there is also a desire to grow the Corporate Governance Index to cover other Gulf Cooperation Council countries.
Having spent most of his career in the corporate world, Dr Mourad enjoys the working culture at the College of Business, which he believes encourages critical thinking and independent thought in an informal and cooperative atmosphere. “Women are taught alongside men rather than segregated, and our academic team is highly international,” he says. “Coming from the business community, I’m sensitive to the issues that boards and upper management have to deal with, which makes for a more efficient dialogue when advocating for better governance.” As the Saudi economy continues to evolve, the work at Alfaisal University will only become more important.
Find out more about the Corporate Governance Center and learn more about Alfaisal University.
