Corporate Governance and its possibility of Application in The Kingdom of Saudi Arabia

by

CHAPTER # 1: INTRODUCTION1

Background of the Study1

Problem Statement1

Purpose of the Study3

Rationale for the Study3

Research Hypothesis3

Significance of the Study4

CHAPTER 2: LITERATURE REVIEW5

Corporate Governance5

Theoretical Framework for Corporate Governance6

Agency Theory6

Stakeholder Theory7

Preventive Actions for Corporate Governance in the Kingdom of Saudi Arabia8

Summary9

CHAPTER # 3: RESEARCH METHODOLOGY9

Research Design9

Research Approach10

Data Collection and Variables of the Study11

Data Analysis11

Validity and Reliability11

Summary12

REFERENCES13

CHAPTER # 1: INTRODUCTION

Background of the Study

During 2007, the market capitalization of the listed commercial banks of Saudi stock exchange constituted about 29.97%. It indicated that Saudi Arabian commercial banks play an essential role in the economy of the county. To evaluate the performance of bank and monitoring their financial positions are important for stockholders, potential investors, creditors, customers, regulators and employees. In the academic literature there has been a considerable amount of discussion of the principal agent problem which arises from the partition of the ownership and control (Deli and Gillan 2000).

Problem Statement

After the crisis of 2005 the importance of corporate governance was realized and applied in Saudi Arabia before 2006. This quantitative correlational research study addresses the problem of corporate governance in Saudi Arabia. This research study also addresses the problem of the application of corporate governance in the kingdom of Saudi Arabia. It is a fact that without fundamental knowledge, the whole concept of modern corporate governance is hard to understand. In Saudi Arabia until 2006, there had no uniform standards of corporate governance. In a similar manner there were no well defined code could be enforces in the kingdom of Saudi Arabia. In the present era Saudi Arabia facing problem in this area because of large cultural differences and misunderstanding of the concept of corporate governance.

In Saudi Arabia the concepts of corporate governance is misunderstood not only by managers and directors but also by legislators, stockholders and the public. The Saudi capital market authority (CMA) has issued a corporate governance code in November 2006 in Arabic language. This code is issued because CMA believes that it's their duty and mission to carry out the financial market development. In order to measure the regularity and efficiency of the Saudi financial market mechanism the principals of the corporate governance are important. As, it enhance the market and maximize the attractiveness of the traded securities.

From the above viewpoints that have given by various researchers it is clear that the corporate governance is a set of systems, laws and institutions that are linked together with the corporate world for the purpose of not only protecting the stake of share holders (owners) but also for entire class of stake holders (employees, management, tax departments, suppliers, potential investors, creditors and the entire society). The concept of corporate governance is to provide the confidence to the stake holders as well as to protect their stakes (Goodwin and Kent 2006).

Corporate governance is a new governance tool but this tool is also linked with the previous two tools such as accounting and auditing (Hoitash and Bedard, ...