Rahul Goswami and Zaid Mahayni of Law Firm of Hassan Mahassni in Jeddah look at the changes to Saud Arabia’s corporate governance
1. Background
Around December 2013, the Saudi Arabian Ministry of Commerce and Industry (MoCI) published on its website the draft of a Corporate Governance Guide for Saudi Arabian Family Companies (the “Guide”) and Model [Internal Corporate Governance] Rules(the “Internal Rules”).
The MoCI tied its initiative to the significance of the contribution of family businesses to the national economy and to the importance of respecting their character, preserving their value, and safeguarding their continuation. It was estimated that the investments of Saudi Arabian family companies reached $93 billion in 2012 and that they represent 12% of Saudi Arabia’s gross domestic product (Al Sharq Al Awsat Newspaper, Edition of May 1 2014).
2. Definition of afamily company
The MoCI did not impose any particular definition for family companies. It recognised that the stakeholders in family companies generally consist of the community at large and reaches beyond its shareholders and directors. It also recognised the fact that, following a number of successions and generational changes, a family company no longer gets concentrated around a tight nucleus and that family ties grow wider with time. The MoCI left it for the companies to decide on their own whether to classify themselves as family companies and follow the Guide.
3. Holding structure option
The MoCI recommended that family companies evaluate whether it would be worthwhile to channel investments through a holding structure. The MoCI observed that the relevance of such a proposal is greater in case of diversity in the activities practiced by the group companies or in case that ownership is shared with non-family members.
4. Dissociation of ownership and control
The MoCIemphasised the importance of some dissociation between ownership and control. Owners are generally encouraged to adopt a supervisory role and delegate control to a team of board and executive managers.
5. Relevance of the model internal rules
The MoCI proposed the adoption by family companies of Internal Rules that govern the rights and obligations of all concerned parties. The MoCI acknowledged that the model Internal Rules need to be adapted depending on the realities of each family company. It stressed that the preparation of the Internal Rules requires the participation of and direct input from, all family members concerned.
According to the MoCI, the Internal Rules should take into account the current and future needs of a family company. The MoCI recommended that the Internal Rules be subject to frequent review and that revisions be made in accordance with clear and transparent processes.
6. Sections of the model internal rules
The MoCI stated that, while Internal Rules could be structured and formulated in a great number of ways, these usually share typical and common components.
6.1. Values and objective of the family
For instance, Internal Rules usually describe the values of the family and set these as the guiding compass for future generations of the company. The MoCI observed that, in some instances, value statements may contain social responsibility objectives (e.g. make a charitable contribution, engage in community support, etc.).
6.2. Early involvement of succeeding generations
The MoCI recommended family companies to involve future generations early in the decision-making processes. The MoCI encouraged that all family members be acquainted and familiarised with the internal mechanics of the company so that they can positively contribute to their success.
6.3. Family board
In family companies where family members are numerous, the MoCI recommended the creation of a family board composed of five to nine senior family members.
Amongst other duties that could be assigned to the family board, the MoCI recommended the inclusion of the following: (a) supervising the performance of the board of directors (without interfering with the independence and autonomy of this latter), (b) offering guidance and assistance to the assembly of shareholders, (c) supervising the implementation of the Internal Rules, (d) assisting in the settlement of any differences between family members, and (e) assisting in the preparation of future generations to take over the management and control of the company.
6.4. Policies regarding the employment of family members
The MoCI encouraged family companies to evaluate whether to impose conditions for the occupation by family members of managerial roles. For instance, conditions could include the attainment of certain academic or professional qualifications. Family companies also need to evaluate whether to give preference to family members seeking employment in the company (i.e. over non-family members).
6.5. Dividend distribution policies
In order to avoid friction on the topic between family members, the MoCI recommended that clear conditions be put in place regarding the distribution of dividends. A balance should be struck between the short-term aspirations of individual shareholders and the long-term profitability of the company.
6.6. Share transfers and exits
The MoCI described the topic of share transfers and exits as one of the greatest challenges for family companies. Indeed, the exit of certain key family members could lead not only to the disintegration of the family character, but could also ultimately result in the failure and dissolution of the company.
The MoCI stressed the importance of putting provisions into place to reduce any turbulences resulting from exits. Amongst other proposed solutions, the MoCI encouraged the formulation of a clear valuation mechanism.
7. Conclusion
It is hoped that the MoCI’s initiative will be warmly welcomed by the Saudi Arabian business community. According to an article published in the July 30 2012 edition of Arab News, some SR15 billion were frozen due to disputes between the members of a single family company following the death of its founders. According to the same article, the top 100 Saudi Arabian companies count 45 family companies among them, which collectively employ nearly 200,000 people. Clearly, the devastating effects of the failure of a family company could go far beyond the family members concerned.
Legal Consultant
Law Firm of Hassan Mahassni
Jeddah
About the author
Rahul Goswami was awarded a LLM with Distinction in international, commercial and European law from University of Sheffield and is admitted to the Supreme Court of India.
Rahul Goswami represents leading domestic and international companies in dispute resolution, energy and infrastructure, general commercial law, intellectual property and telecom and technology. He has been working with the firm since 2007.
Legal consultant
Law Firm of Hassan Mahassni
Jeddah
About the author
Dr Zaid Mahayni holds a Bachelor of Law from the University of Montreal, a Masters of Law from the Centre for Energy, Petroleum and Mineral Law and Policy at the University of Dundee, and a Doctorate of Law from the University of Leicester. He is also trilingual and a member of the Canadian and the Quebec Bar Associations.
Dr Mahayni has been working at the Law Office Firm of Hassan Mahassni since 2005. He specialises in general commercial law and is registered with the Saudi Arabian Ministry of Justice as an arbitrator.