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The role of the Saudi Capital Market Authority Essay

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Updated: Jul 22nd, 2021

Executive Summary

The discussion reveals the role of the Saudi Capital Market Authority (CMA) in governing trading companies. It is claimed that the primary document regarding the mentioned issue is the Saudi Regulations on Corporate Governance (SRCG) 2017 that serves a foundation of the Saudi corporate governance. The CMA’s role regarding the governance of the Saudi firms is estimated crucial and beneficial. The recommendations provided in this work are as follows: reducing companies’ accountability to the CMA, continuing the policy of open market, and restricting family administration of firms.

Introduction

Each country pursues its economic and political interests through various policies. Approaches that governments apply are founded on specific historical and cultural characteristics, which dictates the way authorities form an economy. Nowadays, Saudi Arabia is attractive country for investments and long-run business cooperation. However, Saudi Arabia has several critical peculiarities related to corporate governance, which might be an essential aspect to discuss. In this work, the role of the CMA through the prism of SRCG 2017 will be discussed.

Discussion

The corporate governance system might be defined as an organizational model that is designed to regulate the relations between firm administrators and their owners. Then, it aims to coordinate the goals of various stakeholders, ensuring the efficient functioning of companies. For the successful implementation of the strategic objectives of the corporation, it is necessary to conduct a timely, comprehensive, and exhaustive assessment of the quality of corporate governance.

It is possible only under the conditions of functioning of a system of reasonable and relevant indicators. The quality of corporate governance is the extent to which the actions of the management system correspond to the diverse interests of stakeholders. Among them are employees of a company, shareholders, and a state and society as a whole, dynamically changing under the influence of internal and external factors. In the modern economy, corporate governance might be a crucial factor in the development of the entrepreneurial activity, investment attractiveness, and competitiveness.

It might be suggested that Saudi Arabia tends to follow current international principles of corporate governance and has developed legislature regarding the aspect mentioned. The Saudi Capital Market Law 2003 is the legal foundation of the Capital Market Authority (Algoere and Hasani, 2019). However, the CMA was functioning illegally in the middle of the 20th century before the Saudi Government accepted it. The CMA has full legal, financial, and governing power that is accountable to the Prime Minister. The crucial aim of the organization is the regulation and improvement of the Saudi capital market by issuing laws that control the Saudi Stock Exchange. Hence, the CMA is an essential elememt of the Saudi economy with a diverse range of responsibilities and capabilities.

The CMA has issued a plethora of laws regarding corporate governance in the country. The main reason why the government recognized the necessity of such rules was the substantial crash of the Saudi stock market in February 2006 (Algoere and Hasani, 2019). It was a significant step forward to the principles of the internationally accepted corporate governance concept. It might be assumed that the CMA successfully adopted the rules of protecting shareholders and other stakeholders. The Saudi Regulations on Corporate Governance 2006 contributed to the more open market economy of the country, which resulted in many positive economic shifts (Algoere and Hasani, 2019). Thus, the CMA’s activity has a beneficial influence on the state of the art of Saudi Arabia.

The modern economy is not a static and passive mechanism – it is rather a developing, modifying, and unified organism that has inherent features of interdependence and interaction of its elements. In order to adapt to the changing conditions, countries should constantly improve their policies and founding principles. To the aim mentioned, the CMA issued the new SRCG in 2017 (Corporate Governance Regulations, 2017).

Algoere and Hasani (2019) state that “the SRCG 2017 provides better rights to shareholders and Board members and transparency towards their respective duties and responsibilities” (p. 233). However, it might be suggested that the new provisions contain the too great extent of accountability of companies to the CMA, which may lead to inappropriate business actions due to wrong and forced decisions.

Another negative point is that conflicts of interest caused by the presence of members from one family simultaneously at crucial company’s positions may arise. Regarding the argument above, Algoere and Hasani (2019) reasonably notice that “Family relationships are strong in Saudi Arabia, making companies still look like family businesses” (p. 237). The SRCG 2017 does not provide enough regulation and restriction on the family approach to entrepreneurship in Saudi Arabia, which does not follow international principles. Hence, the CMA still maintains the outdated approach in governing trading companies – it may severely hinder the further development of the country’s economy.

Recommendations

The stock market of Riyadh may be of interest to industry investors who want to diversify their portfolio of shares on an intercountry basis. It should be emphasized that when making an investment decision, market participants take into account the comparative characteristics of financial multiples of similar companies from all over the world. A change in the status of the stock market amid the multiple growths of its capitalization may increase the interest of international index providers in the Kingdom’s stock market.

In turn, this will ensure the inflow of additional liquidity from private and institutional investors and reduce the volatility of trading. Thus, it might be necessary for the CMA to follow its current policy of corporate governance concerning the continuation of opening the market and protection of companies’ stakeholders.

In the future possible amendments to the SRCG 2017, the CMA might reduce the accountability of a company to provide it with more independence. Such an approach might be more favorable for potential investments in the Saudi trading firms. Furthermore, the CMA might develop restrictions on the governance of a company by a high number of representatives from one family, which may lead to a diversified and profitable business environment.

Conclusion

In conclusion, it seems reasonable to state that the Saudi Capital Market Authority has a crucial and significant role in governing trading companies. The CMA issues different laws, rules, and regulations to achieve transparent and beneficial corporate governance in Saudi Arabia. It was claimed that the organization has mostly a positive impact on the economic affairs of the country. It fosters the implementation of international principles and protects companies’ stakeholders.

Then, the crucial legal act providing the regulation of firms is the Saudi Regulations on Corporate Governance 2017. It was suggested to reduce the accountability of the Saudi enterprises to the CMA and make amendments to the SRCG 2017 regarding family administrating of companies. The other recommendation was to continue and maintain the policy of opening the capital market to foreign stakeholders and investments.

Reference List

Algoere, T. and Hasani M. (2019) ‘Saudi Arabia Regulations on Corporate Governance’, International Journal of Asian Social Science, 9(2), pp. 229–239.

Corporate Governance Regulations. (2017) English Translation of the Official Arabic Text. Board of the Capital Market Authority.

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1. IvyPanda. "The role of the Saudi Capital Market Authority." July 22, 2021. https://ivypanda.com/essays/the-role-of-the-saudi-capital-market-authority/.


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IvyPanda. "The role of the Saudi Capital Market Authority." July 22, 2021. https://ivypanda.com/essays/the-role-of-the-saudi-capital-market-authority/.

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IvyPanda. 2021. "The role of the Saudi Capital Market Authority." July 22, 2021. https://ivypanda.com/essays/the-role-of-the-saudi-capital-market-authority/.

References

IvyPanda. (2021) 'The role of the Saudi Capital Market Authority'. 22 July.

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