Descriptive Statistics of the SCGI based on the Full Sample

As discussed in Chapter Five, the current study developed a corporate governance index to examine the level of compliance among a balanced sample consisting of 80 Saudi listed firms from 2004 to 2010. The SCGI consists of 65 corporate governance provisions, which were derived mainly from the SCGC. As shown in Figure 6.1, the level of compliance has improved over the sample period. For example, as shown in Panel A of Table 6.1, the aggregate corporate governance score for the SCGI is 17% in 2004, and significantly increased up to 73% in 2010 (a 56% improvement), with an average level of compliance over the seven years of 44%. This percentage is consistent with the finding of Al-Moataz and Lakhal (2012). They report that the level of compliance with corporate standards among Saudi listed firms is 53%.

Figure 6.1: Level of compliance with the SCGC between 2004 and 2010 using computed means

0 10 20 30 40 50 60 70 80 2004 2005 2006 2007 2008 2009 2010 All M ean of S CG I % Level of compliance Increase in level of compliance %

Also, this result is consistent with studies conducted in other emerging countries. For example, Tsamenyi et al. (2007) report a level of compliance with voluntary corporate governance standards of 52% among Ghanaian listed firms. Similarly, Garay and Gonzalez (2008) and Price et al. (2011) find that 40% of Venezuelan and 46% of Mexican listed firms complied with the local corporate governance codes. In addition, Ntim et al. (2012a) report that 61% of South African firms complied voluntarily with the King II Report.

The improvement in the level of compliance over the sample period can be traced to corporate governance reforms in Saudi Arabia.51 The introduction of the SCGC improved corporate governance disclosure and brought about a reduction in information asymmetry (Hussainey and Al-Nodel, 2008; Al-Abbas, 2009; Al-Nodel and Hussainey, 2010; Alshehri and Solomon, 2012). Nevertheless, some studies cast doubt on the ability of a voluntary compliance regime to improve corporate governance practices in developing countries (Aguilera and Cuervo-Cazurra, 2009). This improvement may prove the feasibility of adopting a UK style ‘comply or explain’ of corporate governance in the Saudi context.

In line with Chen and Zhang (2014), Panel B in Table 6.1 reports results of the paired sample t-test to examine voluntary corporate governance disclosure pre- and post- 2006, when the SCGC was introduced. It has been found that the null hypothesis suggesting equality of the average of compliance among listed firms pre and post introducing the governance code is rejected at the 1% level of significance. However, the average corporate governance scores for 2009 and 2010 are higher than the averages for 2006 and 2007, which is consistent with theoretical expectation. In this regard, Ntim et al. (2012b) argue that corporate governance reforms, such as introducing the SCGC, take time to reflect in good corporate governance practices.

Conyon (1994) investigates 400 UK listed firms during the period 1988-1993. He reports that the level of compliance improved over the study period. Similarly, Alves and Mendes (2004) find that the level of compliance with governance standards increased after the Portuguese Corporate Governance Code was released in 1999. In the same vein, Ntim

et al. (2012a) examine the influence of the King II Report on good corporate governance

practices using 169 South African listed firms from 2002 to 2006. They report that the level of compliance generally improved over the five years examined. Specifically, the level of compliance increased from 47% in 2002 to 69% in 2006.

51

As discussed in detail in Chapter Two, Saudi Arabia started corporate governance reforms in 2003, when the Capital Market Authority (CMA) was established. The CMA released the important corporate governance regulation known as the Saudi Corporate Governance Code (SCGC) in 2006, which encouraged firms to improve corporate governance standards.

Table 6.1: Summary descriptive statistics for the Saudi Corporate Governance Index (SCGI)

All 2004 2005 2006 2007 2008 2009 2010

Panel A:SCGI for all firm years

Mean 44.61 17.08 21.29 34.10 46.13 55.52 64.98 73.15 Median 66.44 16.92 20.00 35.38 46.15 53.85 66.92 73.85 STD 44.33 4.86 7.04 11.29 13.82 12.21 10.93 8.39 Min 3..3 3.08 7.69 6.15 10.77 16.92 40.00 47.69 Max 7..99 33.85 38.46 61.54 83.08 87.69 90.77 90.77

Panel B: All Firm Years before Releasing the SCGC All Firm Years after Releasing the SCGC

Average Years 04-05 Years 06-07 Years 09-10

Mean 19.18 40.12 69.07 Median 19.23 41.15 69.23 T-test 18.14*** 47.95*** STD 5.40 11.37 8.53 Min 7.69 9.23 46.92 Max 33.85 63.85 90.77

Notes: This table shows descriptive statistics of the aggregate levels of compliance with SCGI based on the complete sample

from 2004 to 2010. In Panel B, the paired sample t-test is used for equality of mean. A mean difference with *** (1% significant level) indicates that the null hypothesis can be rejected assuming equality of means.

Table 6.2 shows the level of compliance with the SCGC. The comparison between the provisions shows that each provision has a range between 0% and 100%. A provision that reported 100% indicates perfect compliance by all 80 firms, for example measuring the right of shareholders to appoint directors (SCSA)52 over the sample period. However, a provision reporting 0% implies no compliance by any of the sampled firms during the study period, for example drafting board policies and appointing committee members (BDPA).

Table 6.2 shows that there are 13 provisions with relatively high levels of compliance (70% or more). This indicates that about 70% of the sampled firms complied with these provisions; for example, the majority of the board is non-executive (BMBD), frequency of board meetings (BFBM), existence of an audit committee (AEX), disclosure of operation performance (DOP), disclosure of the principle activities (DPA) and disclosure of policy of dividends (DPD) all have compliance levels above 70%.

However, 24 of the provisions had compliance scores of 30% or less. Thus, 30% of the sampled firms complied with the provisions, such as the drafting of board policies and appointing committee members (BDPA), disclosure of ownership structure (DOS), disclosure of CEO compensation (DCEOC), narrative on compliance/non-compliance with the SCGC (DCNC), disclosure of firm’s risk (IFR), setting control procedures for company risk management (ICRM) and one-share-one-vote policy (SGAV). Also, Table 6.2 indicates that compliance with 78% of the provisions (51 out of 65) improved significantly during the sample period. It can be noted from the table that there was slight improvement in 12% of the provisions. In contrast, there is no change observed for about 10% of them.

There are three possible reasons for the variation in the level of compliance with the SCGC among the listed firms. First, the provisions with high scores are required by the 1965 Companies Act as well as recommended by the SCGC. For example, the frequency of general assembly meetings (SGFM), which is required to be held at least once a year (SGFM), scored 93%, 95%, 100%, 100%, 98%, 98% and 98% during the years from 2004 to 2010, respectively, and the right of shareholders to appoint directors (SGSA) scored 100% for the entire sample period.

Second, most of the provisions gradually improved over the sample period due to the impact of introducing the corporate governance code in 2006 (e.g., Conyon, 1994; Allegrini and Greco, 2013). Predominantly, the sampled firms’ compliance with the provisions is low during 2004 and 2005, and improved from 2006 onwards. As shown in Table 6.2, the average compliance before the introduction of the governance code for directors’ classification (BDCL), disclosure of directors on other firms’ boards (BMOB) and individual directors’ meeting attendance (BDMA) are 1.25%, 2.25% and 8.13%, respectively. In contrast, compliance with these particular provisions increased after the release of the code, to averages of 81%, 86% and 83%, respectively.

Third, there was a low level of compliance with some of the provisions over the sample period; for example, the disclosure of CEO compensation (DCEOC), one-share- one-vote policy (SGAV) and drafting policies of board and appointing committee members (BDPA). The low level of compliance with these governance mechanisms may be explained by: (i) weak implementation and enforcement by regulatory bodies, such as the Ministry of Commerce and Industry (MCI) and the Capital Market Authority (CMA) (see La Porta et al., 1999; Ararat and Ugur, 2003; Bauwhede and Willekens, 2008; ROSC, 2009); and (ii) unwillingness by firms to comply with some corporate governance provisions. For example, some of the firms pointed out in their annual reports that they are not able to apply a one-share-one-vote policy (SGAV) due to its incompatibility with their articles of association. Furthermore, weakness in external corporate governance mechanisms, such as the market for corporate control, appears to be behind the level of compliance with some governance provisions (Haniffa and Hudaib, 2006; Bozec and Bozec, 2012).

Table 6.2: The level of compliance with the SCGC provisions among the sampled firms (%)

Pre-2006 Post-2006 (i.e., after SCGC was released) Avg. of 7 Years Saudi Corporate Governance Index (65 Provisions) 2004 2005 Average 2006 2007 2008 2009 2010 Average

Yearly Average of level of Compliance 17.08 21.29 19.18 34.10 46.13 55.52 64.98 73.15 54.78 44.61

1- Board of Directors and Board Sub-Committees

1 Role duality (BDUAL) 51 48 49.38 55 69 84 88 90 77.00 69.11

2 Board chairperson classification (BCP) 9 9 8.75 18 24 31 36 40 29.75 23.75

3 Majority of board is non-executive (BMBD) 50 50 50.00 58 78 93 98 100 85.00 75.00

4 Directors’ classification (BDCL) 1 1 1.25 53 69 88 96 100 81.00 58.21

5 Disclosure of directors’ biography (BDB) 0 0 0.00 0 0 1 1 1 0.25 0.54

6 Drafting policies of board and appointing committee members (BDPA) 0 0 0.00 0 0 0 0 0 0.00 0.00

7 Disclosure of directors on other firms’ boards (BMOB) 3 3 2.50 66 78 91 96 99 86.00 62.14

8 Number of membership of directors in other boards’ firms (BMBN) 3 3 2.50 66 78 90 96 99 85.75 61.96

9 Frequency of board meetings (BFBM) 80 81 80.63 84 94 98 100 100 95.00 90.89

10 Individual directors’ meetings attendance (BDMA) 3 14 8.13 43 79 95 99 100 83.00 61.61

11 Existence of audit committee (AC) (AEX) 20 43 31.25 83 91 96 99 98 93.25 75.54

12 Description of the jurisdictions & duties of AC (ADJD) 3 6 4.38 34 48 64 75 89 61.75 45.36

13 Majority of AC is non-executive (ACOM) 1 3 1.88 20 28 33 41 48 33.75 24.64

14 Identify AC's chairperson (ACP) 1 4 2.50 20 20 29 40 44 30.50 22.50

15 AC's chairperson is independent (can) 6 16 11.25 59 71 78 91 94 78.50 59.29

16 AC's members are three or more (ACNM) 6 26 16.25 73 84 86 94 95 86.25 66.25

17 Disclosure of AC members' names (ADM) 6 26 16.25 66 80 90 99 96 86.25 66.25

18 Frequency of AC meetings (AFM) 5 9 6.88 46 65 79 95 96 76.25 56.43

19 Individual AC members’ meeting attendance (AMMA) 0 0 0.00 5 15 23 35 40 23.50 16.79

20 Existence of nomination committee (NC) (NEX) 0 0 0.00 3 28 45 69 94 47.50 33.93

21 Description of the jurisdictions & duties of NC (NDJD) 0 0 0.00 3 16 28 53 84 36.50 26.07

22 Majority of NC is non-executive (NCOM) 0 0 0.00 0 10 20 33 56 23.75 16.96

23 Identify NC's chairperson (NCP) 0 0 0.00 0 4 5 19 28 11.00 7.86

24 NC's chairperson is independent (NCN) 0 0 0.00 3 25 36 56 84 40.75 29.11

25 Disclosure of NC members' names (NDM) 0 0 0.00 3 25 41 68 93 45.75 32.68

26 Frequency of NC meetings (NFM) 0 0 0.00 1 11 26 60 79 35.50 25.36

27 Individual NC members’ meeting attendance (NMMA) 0 0 0.00 0 5 13 25 35 15.50 11.07

28 Existence of remuneration committee (RC) (REX) 3 3 2.50 5 29 45 69 94 48.25 35.18

29 Description of the jurisdictions & duties of RC (RDJD) 0 0 0.00 3 18 29 53 84 37.00 26.43

30 Majority of RC is non-executive (RCOM) 0 0 0.00 0 10 20 33 56 23.75 16.96

31 Identify RC's chairperson (RCP) 0 0 0.00 0 4 5 19 28 11.00 7.86

32 RC's chairperson is independent (RCN) 1 1 1.25 5 26 36 56 84 41.50 30.00

Table 6.2 (Continued): The level of compliance with the SCGC provisions among the sampled firms (%)

Pre-2006 Post-2006 (i.e., after SCGC was released) Avg. of 7 Years Saudi Corporate Governance Index (65 Provisions) 2004 2005 Average 2006 2007 2008 2009 2010 Average

34 Frequency of RC meetings (RFM) 0 0 0.00 3 13 28 60 79 36.25 25.89

35 Individual RC members’ meeting attendance (RMMA) 0 0 0.00 0 5 13 25 35 15.50 11.07

2- Disclosure and Transparency

36 Disclosure of ownership Structure (DOS) 1 1 1.25 5 19 24 34 40 24.25 17.68

37 Director ownership (DBO) 0 1 0.63 9 45 65 78 84 56.00 40.18

38 Detailed disclosure of board’s compensation (DBC) 66 69 67.50 80 88 95 98 99 91.75 84.82

39 Value of board’s compensation (DVBC) 51 54 52.50 69 70 68 74 73 70.50 65.36

40 Disclosure of CEO/MD/GM compensation (DCEOC) 1 5 3.13 9 10 15 13 15 12.25 9.64

41 Disclosure of top management compensation (DTMC) 0 0 0.00 24 34 86 93 99 67.00 47.86

42 Disclosure of operation performance (DOP) 65 65 65.00 84 93 100 100 100 95.25 86.61

43 Disclosure of the firm’s loans (DFL) 16 33 24.38 48 66 75 81 88 71.50 58.04

44 Comparison of five years performance (DPFY) 19 48 33.13 63 89 96 98 100 89.00 73.04

45 Disclosure of strategies and objectives (DSO) 29 36 32.50 58 73 76 84 90 76.00 63.57

46 Description of the principal activities (DPA) 45 50 47.50 63 83 86 88 90 81.75 71.96

47 Disclosure policy of dividends (DPD) 40 51 45.63 71 88 98 96 98 90.00 77.32

48 Disclosure of related party transactions (DRP) 9 24 16.25 46 75 86 90 96 78.75 60.89

49 Retraction/Punishment by supervisory body (DSP) 1 5 3.13 16 35 50 58 71 46.00 33.75

50 Narrative on the firm as a going concern (DGC) 4 23 13.13 45 76 89 90 95 79.00 60.18

51 Narrative on compliance/non compliance with SCGC (DCNC) 1 3 1.88 8 24 36 58 68 38.50 28.04

3- Internal Control and Risk Management

52 Effectiveness of internal control system (ICEF) 1 14 7.50 21 29 39 59 71 43.75 33.39

53 Control procedures for company risk management (ICRM) 3 3 2.50 6 9 16 18 24 14.50 11.07

54 Disclosure of firm’s risks (IFR) 1 3 1.88 3 25 49 61 69 41.25 30.00

55 Firm’s financial report approved (IFRA) 4 16 10.00 28 36 48 56 61 45.75 35.54

56 Applicable of accounting standards (ICAS) 0 9 4.38 21 43 56 65 76 52.25 38.57

57 Drafting firms’ corporate governance code (ICGC) 1 1 1.25 3 6 9 19 30 13.25 9.82

4- Rights of Shareholders and General Assembly GA

58 Frequency of GA meetings (SGFM) 93 95 93.75 100 100 98 98 98 98.50 97.14

59 GA meeting agenda announced before meeting (SGMA) 48 48 47.50 53 50 53 54 53 52.25 50.89

60 Right of shareholders to appointment directors (SGSA) 100 100 100.00 100 100 100 100 100 100.00 100.00

61 One share one vote policy (SGAV) 0 0 0.00 0 0 0 1 4 1.00 0.71

62 GA meeting announced 20 days in advance (SGMN) 68 83 75.00 88 90 95 95 99 93.25 88.04

63 GA meeting results announced immediately (SGMR) 91 95 93.13 98 99 98 99 98 98.00 96.61

64 GA meeting within six months of year end (SGMT) 90 93 91.25 100 99 98 96 98 98.00 96.07