The gap between documentation and execution in Saudi companies.
Introduction
Corporate governance is no longer merely a regulatory requirement imposed by supervisory authorities; today, it has become one of the most prominent criteria for assessing a company’s readiness for growth, investment, and a public offering in the financial markets.
In light of the rapid transformations the Saudi economy is witnessing within the framework of Vision 2030, and the growing momentum of domestic and foreign investment, investors and investment funds have become more precise in evaluating the internal structure of companies before making any decision. It is no longer sufficient for the numbers to look good; the more important question has become: How are decisions made within this company?
Our direct field experience with a number of Saudi companies at different stages reveals that the gap between written governance and applied governance is wider than perceived. This report aims to shed light on this gap through a practical perspective grounded in the reality of the Saudi market, and to provide a clear framework for anyone seeking to build genuine governance.
| Index | Percentage | Source |
|---|---|---|
| of Middle Eastern companies are family-owned | 90% | IFC / World Bank |
| of institutional investors pay a premium for good governance | 80% | McKinsey & Company |
| Valuation premium for companies with strong governance in emerging markets | 28% | McKinsey & Company |
The Current Landscape: The Reality of Corporate Governance in Unlisted Saudi Companies
In recent years, the Kingdom of Saudi Arabia has witnessed a tangible legislative leap in the corporate governance framework, manifested in the Capital Market Authority’s amendments to governance regulations in January 2024, which introduced new mandatory requirements including compulsory training for board members and executive management, strengthening the role and authority of internal audit committees, alongside certain areas of relief such as combining the roles of board chair and chief executive.
Family businesses constitute 90% of companies in the Middle East, and fewer than 12% of them survive to the third generation. Source: IFC / World Bank — Family Business Governance Handbook.
| Index | Percentage | Source |
|---|---|---|
| of family businesses survive to the third generation | Less than 12% | IFC / World Bank |
| Many family businesses do not survive to the third generation. | 95% | IFC Family Business Report |
| Generation | Survival Rate |
|---|---|
| Founder Generation | 100% |
| Second Generation | 30% |
| Third Generation and Beyond | 12% |
This reality does not necessarily constitute a violation of any specific provision, as the Companies Law and its regulations do not require unlisted companies to implement specific standardized governance, nor do the Capital Market Authority regulations apply to governance practices in unlisted companies. However, it is worth noting that most unlisted companies are immersed solely in operational activities, without attention to the core support functions essential to the business—including actual corporate governance in terms of regulating the relationship between ownership, the board of directors, and executive management, and establishing a clear organizational structure for the entity.
Key Patterns in Practice:
- Formal Governance: Documents such as articles of association, internal bylaws, and meeting minutes exist, but they are often rigid and fail to reflect the actual operational mechanisms. Decisions are made through informal channels, and documents are prepared to justify past actions rather than to guide future ones.
- Lack of separation between ownership and management: In family businesses in particular, the owner simultaneously holds the roles of shareholder, board member, and CEO. This overlap weakens internal controls and makes strategic decision-making dependent on one individual rather than on a system.
- Related Party Transactions: The 2024 IMF report highlighted the absence of clear boundaries for related party transactions across several sectors, with some institutions exceeding established limits. This trend raises fundamental questions for any serious investor during due diligence.
- Gaps in financial statements: Governance gaps are reflected directly in the financial statements through inconsistent accounting treatments, undocumented line items, or internal financial arrangements that were not handled in accordance with the standards, which undermines the reliability of the figures for both the auditor and the investor.
| Index | Percentage | Source |
|---|---|---|
| Among the top 100 companies that disclosed sustainability in 2024 | 65% | OECD + CMA 2025 |
| 2023 Disclosure Rate (up 7 points) | 58% | OECD + CMA 2025 |
In summary: A company that reaches the public offering or investment stage while carrying these patterns does not face regulatory challenges alone; it faces a crisis of trust—the hardest to overcome.
Dysfunction in Decision Management
In a sound model, the company operates through an integrated system with clearly defined roles: the General Assembly owns and decides on major matters, the Board of Directors sets strategy and oversees, and Executive Management executes and is held accountable.
Family businesses play a pivotal role in Middle Eastern economies; however, overlapping roles complicate governance and reinforce the need for clear structures. Source: IFC — Advancing Corporate Governance in the Middle East.
First, the General Assembly: a purely formal attendance and pre-packaged resolutions. In family-owned and closely held companies, general assemblies are often convened to document decisions that were made in advance, not to discuss them. Minority shareholders rarely have sufficient information to vote in an informed manner, with the result that the General Assembly loses its genuine oversight role and becomes a routine administrative procedure.
Second, the Board of Directors: between independence and dependence.
- Dependence on the principal owner: The founding owner informally dominates board decisions even if they are not its chair, as other members signal implicit approval to avoid embarrassment rather than out of conviction in the decision.
- Absence of genuinely independent members: Independent members are often appointed to meet a regulatory requirement, rather than to add real value.
- Meetings lacking depth: a packed agenda and short time slots, without sufficient prior analytical reports.
Third, executive management: three problematic patterns.
- Centralization pattern: an expansion of authority without effective oversight, which weakens institutional building.
- Paralysis pattern: avoiding major decisions for fear of accountability, which slows the company down.
- Duality Pattern: Direct owner intervention in daily operations conflicts with the CEO’s authority.
In essence: The flaw in decision governance is fundamentally a problem of trust; investor confidence that their decisions will be honored, partner confidence that their rights are preserved, and market confidence that this company merits the valuation it seeks.
Impact on the Investor and the Offering
How does an investor read governance weakness: When an investor sits before an investment opportunity, they do not look only at the numbers, but search for an answer to one fundamental question: Can I trust the way this company is managed?
80% of institutional investors in emerging markets are willing to pay a price premium for companies with good governance, and this premium averages 28% above the value of comparable companies. Source: McKinsey & Company — Premium for Good Governance.
| Index | Percentage | Source |
|---|---|---|
| of investors pay a premium for good governance | 80% | McKinsey & Company |
| Average Valuation Premium in Emerging Markets | 28% | McKinsey & Company |
| Financial executives are considering a public offering | 74% | EY MENA IPO Report |
How Weak Governance Affects Valuation and Offering:
- Valuation Discount: The investor calculates the future cost of internal infrastructure repair.
- Strict protective provisions: preferential terms, broad veto rights, and restrictions on management decisions.
- Deal postponement: Some investors require governance restructuring before closing the deal.
- Cancel the transaction entirely: upon identifying material governance risks during due diligence.
In summary, the smart investor does not buy numbers; they buy trust. And trust is not built by a convincing financial report, but by a governance framework that demonstrates the company is run with an institutional mindset, not an individual one.
From Paper Governance to Operational Governance
True governance is not built by issuing regulations and policies, but by changing the way the company is managed. The document is a tool, but the impact comes from day-to-day implementation.
Implementing an effective governance framework improves the company’s access to capital, reduces risks, protects against mismanagement, and makes the company more transparent and accountable to investors. Source: IFC — Corporate Governance Methodology.
First, diagnosis before building:
- Where are the gaps in authority and accountability?
- Which transactions could raise questions for an investor or the regulator?
- Do the financial statements accurately reflect reality? Or are there adjustments that require review?
- How ready are the Board of Directors and Executive Management for actual change?
Second, building an effective board of directors: selecting members based on value, not relationships, while activating the audit and risk committees with a substantive agenda and real authority. Most importantly, documenting the discussion, not only the decision, because a sophisticated investor reads the minutes to understand how the board thinks—not merely what it decided.
Third, addressing related-party transactions:
- Complete inventory of all dealings: contracts, loans, services, and informal arrangements.
- Repricing and documentation in line with market conditions.
- Building a sustainable policy: who approves, how disclosure is made, and the limits of what is permitted.
Fourthly, Addressing Deficiencies in Financial Statements:
- Review historical accounting treatments and correct deviations from standards.
- Document adopted accounting policies and apply them consistently.
- Addressing undocumented items and internal financial arrangements.
- Building a transparent relationship with the external auditor makes them an ally, not a watchdog.
In summary: A company that builds genuine governance believes that a well-established institution is built on clear systems and mutual trust—not on a single person, no matter how competent.
Conclusion
To the company owner and shareholders: You built your company with your effort, decisions, and intuition, and this is a true achievement. However, the moment you decide to transition to the next stage—be it a public offering, an investment, or a partnership—the rules of the game change. The investor does not buy your past; rather, they use your past as a key criterion to measure your future, then evaluate this future through one question: Does this company operate as a system or depend on an individual?
Effective governance is not a relinquishment of your authority; rather, it is the smartest way to protect what you have built and maximize its value. Start today, before an investor compels you to begin tomorrow on their terms.
To a board member: Your board membership is not merely an honor; it is a legal and ethical responsibility. You are not there to approve, but to question, analyze, and protect. The moment a gap is uncovered that you should have seen, the argument that you were not aware will not help you.
True independence is not hostility toward management; rather, it is the safeguard that protects the company, shareholders, and you at the same time.
To the investor: Governance is not merely an item on the due diligence checklist; rather, it is the deepest indicator of management quality and institutional integrity. The company that presents you with robust governance before you even request it is the one that deserves a valuation premium. Conversely, the company that surprises you with its shortcomings after your engagement will drain your time and energy fixing what should have been rectified before you arrived.
Make governance a standard for entry, not a condition for survival.
A final word: Companies do not fail suddenly; rather, gaps accumulate slowly within them until a single moment reveals everything. True governance is the proactive choice to confront these gaps before they turn into crises. Ultimately, it is not about regulatory compliance, but about building an institution that deserves trust.
Sources: IFC / World Bank, McKinsey & Company, OECD Corporate Governance Factbook 2025, Saudi Capital Market Authority, IMF Qatar Report 2024, EY MENA IPO Report.
