The Saudi Public Investment Fund (PIF) recently organized a workshop titled “Corporate governance of firms in which the PIF has a stake.” According to a report published by Okaz newspaper, the workshop was attended by representatives of the PIF in their capacity as members of the boards of directors of companies in which the Fund has made investments. The workshop, which was held in the presence of Yasir Al-Rumayyan, supervisor of the PIF, was aimed at raising awareness about the role of the PIF as an effective investor seeking to raise the level of corporate governance of the companies in which the Fund has a stake. This is through striving to apply the best local and international standards to achieve the PIF’s objectives of maximizing its assets, launching new sectors and building strategic economic partnerships, in addition to the localization of technologies and knowledge.

The workshop included discussion sessions on the latest developments in corporate governance and the mechanism of its implementation, with the participation of a number of Saudi and international experts and specialists in this field. Yazeed Alhumied, CEO of the Fund, highlighted the achievements of the PIF, in line with its objectives. The Fund’s main efforts are to establish principles and practices of governance consistent with the best local and international standards in all the companies in which it is a stakeholder. Rashid Sharif, head of the General Department for Saudi investments in the Fund, said that the PIF has adopted the highest standards of corporate governance to achieve national goals, with a focus on supporting efforts to develop the management of leading Saudi companies through effective investment in accordance with meticulous governance regulations.

It is not known how many companies the PIF has a stake in, but it is surprising that the companies that were represented in the workshop were only those with which the PIF has a stake. Equally surprising is the non-representation of the Ministry of Commerce and the Capital Market Authority in the event. The workshop should have been beneficial and open for all joint stock companies, irrespective of whether the PIF is their partner or not.

The state and its various institutions are responsible for joint stock companies as a whole. What applies to companies in which the PIF has shares should also apply to all joint stock companies. I suppose that the companies in which the PIF has a stake are controlled by the Fund. It exercises control over the boards of directors and oversees the appointment of both the chairman of the board as well as some of its members, if not all.

The Corporate Governance Law does not refer to companies in which the PIF does not have a stake. Even if there are any references, they are about the breaking of regulations and the irregularities that occur in a company. In the matter of conflicts of interest, the Governance Law does not allow board members to sign contracts between the company in which they are members and any other companies or parties in which they have interests.

However, malpractices occur when a contract is signed between a company and a party in which the member has some interests and then later obtaining approval from the general assembly. It is said that the contract has been made without preferential conditions, and the member who has an interest in that contract abstains from voting on it in the general assembly.

It is a known fact that members of the board exercise control over the General Assembly and that the presence of small shareholders does not affect the outcome of the vote. They have a combined share of not more than one or two percent of the total shares and, therefore, even if they voted against any item, that vote does not have any weight or value.

I have followed the meetings of the general assembly of one of the largest companies that has distributed dividends on a regular basis. But in recent years, the company’s profits declined and eventually turned into losses at the end of the year. I believe the reason for this decline is that the company started signing contracts worth a large amount of money with a company with which the board chairman had a relationship. The matter was exacerbated when members of the board also started concluding contracts with firms with which they had some direct or indirect relationship. Each contract contains the phrase “without preferential conditions,” but there was at least one member of the board that had an interest in it. If any shareholder intervened and pointed out that there were conflicts of interest in these contracts, then members of the board defended these practices saying that they were in the interest of the company and that the law allowed them.

It must be noted that these practices do not exist in all companies, especially those companies in which the PIF has a stake as was shown in their annual balance sheet. If joint stock companies want to be successful by earning profits and attracting domestic and foreign investments, they need to follow the Corporate Governance Law and prevent all practices that involve a conflict of interest, and hence there should be a total review of the selection of members of the boards of directors of joint stock companies.

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