Before establishing a company, feasibility studies should be carried to gather information about the scope of the business activity that the company intends to engage in. This information should then be thoroughly reviewed to pinpoint the extent of the company’s success as well as the risks involved in addition to projecting the revenue and profits of the company. The competent authorities should review all the studies and information pertaining to the company, especially if the company plans to offer their shares to the public.

A number of companies have been established over the past years. There has often been an overwhelming response from the public to buy shares when these companies launched their initial public offering. However, the allocation of the shares of many of these companies was limited.

One of these companies, established about a quarter of a century ago, has so far failed to distribute any dividends to its shareholders. About ten years after the establishment of the company, a number of shareholders who have a large stake in the company took the initiative to drop the board of directors after it failed to make any profit and selected a new board of directors instead.

Most of the shareholders, especially small shareholders, welcomed this move and expected that it would help improve the financial position of the company significantly so that it could distribute dividends to shareholders, especially those who bought shares at a time when the stock prices were at their peak in the Saudi market. But what happened was that the performance of the new board was no better than the previous one. The new board also failed to fulfill any of the promises made at the time of replacing the previous board. Moreover, the new board sold the headquarters of the company, which was a seven-story building situated in a prime location in the city. The sale was said to be made in order to clear the company’s accumulated debts.

I attended the general assembly meeting of the company last year. After going through the agenda of the meeting, I found no good news for shareholders. I found the usual items, including the report of the board of directors, financial statements, report of the auditor of the company, report to exonerate members of the board for failures and other such routine items. The meeting also witnessed the disclosure of details and explanations of these items in addition to matters related to the remuneration of members of the board.

When some members asked for an explanation about the company’s position, the chairman of the board boasted that they did not have to reduce the capital of the company or increase it, which means that the company’s losses were less than half of the capital. If the losses reached that level, the Capital Market Authority would force them to reduce the capital so that the number of shares owned by each shareholder would decrease in accordance with the percentage of the losses incurred or the CMA would increase the capital by increasing the number of shares on the basis of the percentage of the losses. But in this case, each shareholder would have to provide the value of the increased shares so that trading in the company’s shares would not be suspended and the company would not be declared bankrupt or be liquidated.

What happened to this company and to other such companies that offered shares to the public after studies had been carried out, the required data had been gathered and the necessary permits had been taken from competent authorities? People invested in these companies with the hope of making a profit. Many people, who do not have enough money to invest in land, feel that investing in stocks is an affordable and appropriate means of investment.

It is widely believed that many of those involved in the real estate business are swindlers, and it seems that those in charge of some joint stock companies that are run at loss are little different from those who run such real estate businesses. These people present a rosy image about the scheme to shareholders and promise huge profits for their investments. However, most often the outcome is actually losses that may eat up half of what people have invested, and in some cases those who manage the business may run away with the money and in the end investors lose not only their money but also their time and effort.

It is essential to review the laws governing companies and make necessary adjustments from time to time. No board of directors of any company should be allowed to remain in office for more than two three-year terms, especially if they fail to provide profits to shareholders. There is no logic at all in a board of directors remaining in office for 20 years, especially in the case of companies that continually incur losses.

There should be regulations in place that force them to leave their office and their dismal performance should be investigated. Those people who fail to discharge their duties or who are perhaps corrupt should not be allowed to play with the rights of people.

— Dr. Ali Al-Ghamdi is a former Saudi diplomat who specializes in Southeast Asian affairs. He can be reached at algham@hotmail.com