Background of Corporate governance in Saudi Arabia
Corporate governance in Saudi Arabia was entrenched in 1985, when the ministry of commerce and industry enacted the disclosure and transparency standard. Al-Mulhem (1997) explains that corporate governance was strengthened in Saudi Arabia through this standard, owing to the fact that disclosure and transparency is viewed as one of core factor of corporate governance best practice. Al-Mulhem (1997) restates that the enactment f this standard in Saudi Arabia was an important decision that enhanced accounting and reporting in the country. Before, 1985, disclosure requirements in Saudi Arabia were awfully low. Advancement in corporate governance was made in 2006, when developed code of corporate governance. This code was developed to harmonize the standards of Saudi Arabia with international standards of corporate governance for example, the OECD code. The Saudi Arabia code of corporate governance comprises of three sections, Al-Janadi, et al (2013, 26) names them as “the rights of shareholders, the general assembly, disclosure and transparency and board of directors”.
Board independence
Past empirical studies have found a positive relationship between board independence and corporate voluntary disclosure. One such study was carried out by Forker (1992), which found a positive relationship between the number of external directors on the boards and comprehensiveness of the financial disclosure given. Similar findings have been reported by Laksamana (2008); Boesso and Kumar (2007) and Arcay & Vazquez (2005). Some studies have attempted to explain this positive relationship. For instance, Klein (2002); Beasley (1996) both established that the possibility of corporate managers to manage earning and engage in fraud is reduced when the number of non-executive directors on board is high. More so, Gul and Leng (2004) assert that a larger number of independent directors enhance the role board monitoring and increases the degree of corporate transparency.
On the contra, some empirical studies have found a negative relationship between external directors on boards and the degree of voluntary disclosure. For example,
Eng and Mak (2003) and Hoitash, et al (2009) found this negative relationship. similarly some studies such as Ho and Wong, (2001); Haniffa and Cooke, (2002)have found insignificant difference between independence of boards and voluntary disclosure.
According to Rashidah, and Yaseen, (2006) the board independence indicates the level of the independence of the board from the management of the company. The independence depends on the number of external board directors. Al-Matari et al (2012) note that including independent external directors is a critical tool to help the board of directors in overseeing the activities of the management of the company. Abbott et al (2004) explain that the OECD code of corporate governance (2004) outlines that independent board members have the ability to contribute considerably to the decisions taken by the board. Independent board directors are thought to be more objective in examining the performance of the management. More so, these independent directors play a crucial function in areas where the varying interests of the management, the shareholders and the company may differ, for example on succession, corporate control, audit function and executive remuneration.
Understanding that significance of having a high number of independent directors on the board of directors is important for a company. Indeed, as stated before, a numbers of researchers have found a positive link between board independence and shareholder interest. In addition, the proportion of independent or external directors on the board is usually used to assess the board independence. According to Al-Matari et al (2012) past findings have consistently reported that the number of independent directly has a positive relationship with the monitoring and financial reports. Instance, Beekes et al., (2004) in their study found that companies with a comparatively high percentage of external directors on the board, increased the conservativeness of these boards. Similar findings have been reported by Kiel and Nicholson (2003) who investigated the link between board demographics and corporate performance in selected Australian big public traded companies. Their study also revealed that there exists a positive link between the number of external directors and the performance of the company.
