The Saudi Central Bank (previously known as the Saudi Monetary Authority, or SAMA) has published the third edition of the Key Principles for Governance in Financial Institutions (the “Guide”), which are intended to enhance management styles, set direct and indirect strategic objectives, maintain stability, and promote the rights of stakeholders.
Emphasis on Corporate Governance and Binding Best Practices
The Central Bank places great importance on corporate governance within financial institutions (“FIs”), and the Guide accords with international best practices on corporate governance promulgated by international organizations such as the World Bank, the Organization for Economic Cooperation and Development, and the Basel Committee on Banking Supervision.
The Guide is binding on FIs, which it defines as “any entity subject to the control and supervision of the Central Bank, except for insurance and reinsurance companies.” This means local KSA banks, as well as finance companies and real estate financing and refinancing companies, must comply with its content. A summary of the key principles is set out below:
- Qualifications of Board Members: board members must be qualified to carry out the work entrusted to them. They must have a clear understanding of their roles and responsibilities and must possess the ability to make decisions impartially and objectively, absent any external influence. In addition, FIs must make the curricula vitae of their board members public, in order for stakeholders to assess their efficiency and professional competence. Principle 1.
- Formation, Appointment of Board Members, and Board Affairs: FI bylaws must specify the number of board members in proportion to its size and the nature of its business. An FI must adhere to the following rules regarding board composition: (i) the number of board members must not be less than five and must not be more than 11; (ii) the number of independent board members must not be less than two members or one-third of the full board, whichever is greater; and (iii) the number of executive board members must not exceed two. Principle 2.
- Responsibilities of the Board: a board must safeguard the interests of an FI, develop its values, and bear ultimate responsibility for its business. However, a board may delegate powers to its committees, or to individuals. Principle 3.
- Responsibilities of Executive Management: the executive management shall monitor and manage the daily activities of an FI, and ensure that those activities are commensurate with the business strategy, risk appetite, and policies approved by the board. Principle 4.
- Committees Formed by the Board: the board must form committees to support an FI to achieve its objectives. In turn, those committees must assist the board to perform its duties and responsibilities, for example by monitoring and reviewing performance. Committees can include executive committees, audit committees, risk committees, and so on. Principle 5.
- Rights of Shareholders: the board must ensure that an FI’s corporate governance policies protect the rights of shareholders, enable them to exercise their rights with ease, and help to provide effective communication channels and various means of contact with all shareholders. Principle 6.
- Disclosure and Transparency: the board shall set out in writing an FI’s disclosure policies in line with the disclosure requirements contained in the applicable laws and regulations. Principle 7.
It is important to note that FIs must read these principles alongside the applicable laws and regulations related to issues of governance. The Central Bank has listed the following laws and regulations as those applicable: (i) conduct and business ethics in FIs; (ii) principles of compliance for FIs operating in The Kingdom; (iii) requirements for appointment to senior positions in FIs that are under the supervision of the Central Bank; (iv) Sharia-compliant governance framework for FIs operating in The Kingdom; and (v) Sharia-compliant governance instructions for Islamic FIs.
These key principles and the applicable laws and regulations in combination constitute another important step by The Kingdom towards the “transparency and accountability,” “effective governance,” and “responsible enablement” anticipated by Vision 2030. It should help to deliver the strategic objectives of His Majesty King Salman bin Abdulaziz and Crown Prince Mohammed bin Salman Al Saud of a “thriving economy” and a “vibrant society” by “creating an attractive environment for local and foreign investment.”