Academic journal article Australasian Accounting Business & Finance Journal

Corporate Governance and Firm Performance: Evidence from Saudi Arabia

Academic journal article Australasian Accounting Business & Finance Journal

Corporate Governance and Firm Performance: Evidence from Saudi Arabia

Article excerpt

Introduction

Corporate governance is a combination of policies, laws and instructions influencing the way a firm is managed and controlled, it consists of a framework of rules to grant transparency and fairness in the relationship between the firms and its shareholders, the framework of corporate governance consist of both external and internal contracts between employees and the shareholders it includes distribution of rewards and responsibilities and conditions to avoid conflicting interests.

OECD in 2001 has published a broader definition of corporate governance written by Iu and Batten, "Corporate governance refers to the private and public institutions, including laws, regulations and accepted business practices, which together govern the relationship, in a market economy, between corporate managers and entrepreneurs (corporate insiders) on one hand, and those who invest resources in corporations, on the other", which simply indicates that corporate governance means establish a set of rules and actions that facilitate the shareholders decision making process. In recent years, the focus on corporate governance has increased due to the increased in number of bankruptcies caused by fraud or errors in financial accounting, the reason behind those cases was the absence of corporate governance regulations in the organizations; this resulted in the implementation of different accounting practices, increased in personal interest and biased reporting (Ioana, 2014).

Saudi Arabia has witnessed several reforms in governance. This started with special attention being given to internal control systems. Thus, Saudi standard-setters issued internal control standards in 2000. Saudi companies are required to design their internal control system based on these internal control standards, corporate governance codes were also issued in 2006, which became compulsory for all Saudi listed companies in 2010 (Al-Janadi, et al, 2016). Saudi Arabia was the second country to adopt corporate governance for the public companies in the Gulf region after Oman. The main objectives of Saudi's Corporate Governance Regulations was to provide a universal guideline of rules, regulation and practice for those companies listed in TADAWUL as well as for their investors; this was a stage to improve the level of protection for all investors, specifically for the minority shareholders and to provide legal devices that assist the investors to practice their rights and to found any injustice practices by the majority shareholders. The story of corporate governance in Saudi backed to 1965 with the beginning of The Companies Law. The Companies Law was about rules concerning the establishment of private and public companies. In 2006, the Saudi stock exchange market was crashed, and its general index tumbled to 25% as a result of this and other circumstance causing a loss of shareholders confidence. The Capital Market Authority (CMA) issued rules and regulations to prevent more crises in the future; it was announced a first code of the corporate governance regulation in Saudi, all of these rules were voluntary until the beginning of 2009.

In December, 2009, 145 companies were voluntary listed on TADAUWL. In 2010 Corporate Governance-4t became compulsory for listed companies in Saudi Stock Market. The role of Capital Market Authority (CMA) was to operate the stock market, adopted Corporate Governance Regulations (CGR's) and monitor the adherence to specific provisions that are now required in all Saudi's listed companies, in line with the principles of Organization for Economic Co-operation and Development (OECD, 2004).

The impact of corporate governance is expected to affect the firm's performance which is one of main issues for the stakeholders as it' helps them to identify the factors that affect the performance and to consider those factors as indicators for firm's success or failure. Fallatah and Dickins (2012) investigates the relationship between corporate governance characteristics and firm performance in Saudi-listed companies. …

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