Board of directors committees occupy a pivotal position in the corporate governance system of Saudi companies, as they serve as the specialized supervisory arms that assist the board of directors in performing its tasks: they study the topics, examine the reports, and raise recommendations, before the board makes its decisions. And the precise legal reality -as we will show in this article- is that the Companies Law itself does not create these committees nor determine their formation or competencies, but rather the source of their organization goes back to the Corporate Governance Regulations issued by the Capital Market Authority with respect to listed companies, and to the Corporate Governance Regulations for Non-Listed Joint Stock Companies issued by the Ministry of Commerce with respect to non-listed companies.
And this article focuses on the four main committees that head the committee structure in Saudi companies: the audit committee, the remuneration committee, the nominations committee and the risk management committee. And we will present the formation of each committee, its competencies, its meeting dates and its degree of bindingness, with the literal texts taken from the official sources, with a note on the precise aspects of difference between companies listed on the financial market (where the Authority's regulations apply) and non-listed joint stock companies (where the Ministry of Commerce regulations apply); for these aspects -including the authority to form the audit committee and its meeting dates- are among what many practitioners overlook.
And the preliminary answer can be summarized in one sentence: the four committees, their formation and competencies are entrusted to the two governance regulations, and the number of members of each committee ranges between three and five members, with the requirement not to include executive members in the audit committee, and the presence of at least one independent member in the audit, remuneration and nominations committees, and that the remuneration and nominations committees be composed of independent members with independent chairmanship, as we will detail in the following sections with the official text.
The Legal Framework of the Board of Directors Committees: Who Organizes Them and How?
Contrary to what may be thought, the Companies Law (M/132) -despite its extensive treatment of the topics of the board of directors, its election, its term and its responsibilities- does not contain a text creating the four board of directors committees or determining their formation or competencies, and we have referred to the full text of the law in the Official Gazette (Umm Al-Qura) and in the Laws Portal of the Council of Ministers Experts Commission and we did not find any reference to the formation of the audit, remuneration, nominations or risk committees. So the complete organization of the four committees is confined to two specialized regulatory sources:
- Corporate Governance Regulations issued by the Capital Market Authority (Resolution No. 8-16-2017 dated 16/5/1438H corresponding to 13/2/2017AD, as amended by the Board Resolution No. 8-5-2023 dated 25/6/1444H corresponding to 18/1/2023AD), which detail in its Fourth Chapter (Company Committees) -Articles from (47) to (69)- the provisions of the committees in companies listed on the financial market.
- Corporate Governance Regulations for Non-Listed Joint Stock Companies issued by the decision of the Minister of Commerce and Investment No. (44239) dated 14/8/1439H, which address the same topic in its Fourth Chapter (Company Committees) -Articles from (49) to (71)- for joint stock companies not listed on the financial market, and in a non-binding (guidance) form in origin.
And two regulatory matters that should be adjusted are excepted from that: the first is that the Ministry's regulations for non-listed companies refer in its Article Forty-Nine, when forming committees, to "Article One Hundred and One of the Companies Law" (Article 101) relating to the quorum required for issuing the general assembly decisions by way of passing in non-listed companies, and to "Article Fifty-Three of these Regulations" relating to the formation of the audit committee, which confirms that the formation of committees in the non-listed company is a matter managed by the decisions of the board and the assembly in accordance with the provisions of the law; and the second is that the Companies Law remains the source of the general controls attendant to the work of the committees, such as the provisions on conflict of interest and the duties owed to the company, which the two regulations applied to the chairmen and members of the committees in the core of their texts.
The Common General Provisions: Formation of the Committees, Number of Their Members and Their Meetings
Article Forty-Seven of the Corporate Governance Regulations (Formation of Committees) lays down the general rules for the formation of committees in listed companies, and provides literally that the board of directors -taking into account Article Fifty-One- forms specialized committees according to the company's need, its circumstances and its conditions in a manner that enables it to perform its tasks effectively, and according to general procedures set by the board that include determining the task of each committee, its term of work, the powers granted to it and the way the board supervises it, and that each committee be responsible for its work before the board of directors without prejudice to its responsibility, with three decisive procedural rules: the first is that "the number of members of the committees should not be less than three nor exceed five"; the second is that "the chairmen of the committees or whoever they delegate from among their members must attend the general assemblies to answer the shareholders' questions"; and the third is that "the company must notify the Authority of the names of the committee members and their membership capacities within five working days from the date of their appointment, and any changes occurring to that within five working days from the date of the occurrence of the changes".
And corresponding to it in the Article Forty-Nine of the Ministry's regulations for non-listed companies are almost the same rules: the formation of specialized committees according to the company's need, and the determination of the task of each committee, its term of work and its powers, and the responsibility of the committee before the board, with the rule "the number of members of the committees should not be less than three nor exceed five", and the rule "the chairmen of the committees or whoever they delegate from among their members must attend the general assemblies to answer the shareholders' questions", provided that the non-listed regulations do not include the condition of notifying the Authority of the names of the committees (for there is no financial market authority within its scope), but rather are limited to notifying the Ministry of the names of the members of the board of directors themselves in accordance with what its Article Sixteen decided within ten working days.
And Article Forty-Eight of the Authority's regulations (Committee Membership) determines the controls governing the membership of committees, as it provides that "a sufficient number of non-executive board members must be appointed to the committees concerned with the tasks from which cases of conflict of interest may arise, such as ensuring the soundness of the financial and non-financial reports, reviewing related party transactions, nominating for membership of the board of directors, appointing senior executives, and determining remuneration", with the obligation of the chairmen and members of these committees to the duties of care and loyalty and the presentation of the interest of the company and the shareholders. Then it imposes the most important rule that is repeated in the two regulations: "the company should take into account, when forming the remuneration and nominations committees, that their members be from the independent members of the board of directors, and it may enlist non-executive members or persons from outside the board members whether they are from the shareholders or others, provided that the chairmen of the two committees referred to in this paragraph be from the independent members". And paragraph (c) of Article Forty-Eight prohibits the chairman of the board of directors from being a member of the audit committee, and permits his participation in the other committees "provided that he does not hold the position of chairman in the committees stipulated in these regulations". And Article Fifty of the Ministry's regulations corresponds to it literally in its essence, with the formal difference in the formulation of the first rule in the non-binding (guidance) "should" form in the two positions.
As for the system of the committees' meetings, it is organized by Article Fifty of the Authority's regulations (whose paragraph (b) the second article of the regulations provided is mandatory even in the parallel market), as it requires the attendance of the majority of the members for the validity of the meeting, and the decisions are issued by the majority of the votes of the attendees with the side of the meeting chairman being given precedence in case of a tie, and it obliges documenting the meetings in minutes that include the discussions, deliberations, recommendations and the results of the voting, signed by all the attending members, with the prohibition of the attendance of the non-members of the committee at its meetings except the secretary unless requested by the committee. And Article Fifty-Two of the Ministry's regulations corresponds to it with the same controls. And the committees may also enlist whomever they see fit of the experts and specialists from inside the company or outside it within the limits of their powers, provided that this be recorded in the meeting minutes with the mention of the name of the expert and his relationship with the company or the executive management, in accordance with Article Forty-Nine of the Authority's regulations and Article Fifty-One of the Ministry's regulations.
"The number of members of the committees should not be less than three nor exceed five" - paragraph (4) of Article Forty-Seven of the Corporate Governance Regulations, and what corresponds to it in paragraph (d) of Article Forty-Nine of the Ministry of Commerce regulations
The Audit Committee: Its Formation, Competencies and Powers
The audit committee is considered the only committee that received the highest degree of regulatory firmness, as Article Fifty-One of the Corporate Governance Regulations (Formation of the Audit Committee) required in listed companies that "an audit committee be formed by a decision of the company's board of directors from the shareholders or from others, provided that it does not include any of the executive members of the board of directors, and that the number of the audit committee members should not be less than three nor exceed five, and that among them be a specialist in financial and accounting affairs", and that "there must be at least one independent member among the audit committee members", and the Authority's regulations permit in its paragraph (e) the issuance by the general assembly -based on a proposal of the board of directors- of a work charter for the committee that includes the controls and procedures of its work, its tasks, the rules of selecting its members, the way of their nomination, their membership term, their remuneration and the mechanism of their temporary appointment in the event of the vacancy of one of the seats.
And the regulations prohibit with two precise paragraphs: the first that "it is not permissible for one who works or has worked during the past two years in the executive or financial management of the company, or at the company's auditor, to be a member of the audit committee"; and the second that "it is required that the audit committee member not hold membership of audit committees in more than five joint stock companies listed on the market at the same time". And it is observed that the Authority's regulations made two paragraphs of the paragraphs of this article non-binding (guidance), marked in the margins of the official text published in the Official Gazette: paragraph (c) which provides that "the chairman of the audit committee must be an independent member", and paragraph (d) which provides that "half of the number of the audit committee members must be from the independent members or from those to whom the independence impairments contained in Article Nineteen of these Regulations do not apply", while paragraphs (a) and (b) relating to the obligation to form the committee and the requirement of at least one independent member remain mandatory provisions.
And Article Fifty-Two of the Authority's regulations (The Committee's Competencies, Powers and Responsibilities) was amended by the Resolution of the Board of the Capital Market Authority No. (8-5-2023) in its sub-paragraph (3) of paragraph (b) relating to internal audit, effective as of 19/6/1445H corresponding to 1/1/2024AD. And the article provides that the audit committee "is concerned with monitoring the company's business and verifying the soundness and integrity of the reports and financial statements and the internal control systems therein", and its tasks include in particular four pillars: the financial reports by studying the preliminary and annual financial statements before presenting them to the board of directors, expressing opinion and recommendation in respect of them, expressing technical opinion on the fairness and balance of the statements, studying the important or unusual matters, verifying the material accounting estimates, and studying the accounting policies; and the internal audit by studying the internal, financial control and risk management systems, studying the internal audit reports and following up the corrective procedures, supervising and overseeing the performance of the internal auditor and the internal audit function in the company, and recommending the appointment of the head of the internal audit unit and proposing his remuneration; and the auditor by recommending the nomination of the auditors, their removal and the determination of their fees and the evaluation of their performance after verifying their independence and reviewing the scope of their work, verifying the independence and objectivity of the auditor, reviewing his work plan, answering his inquiries, and studying his report and his observations and following up what has been taken in respect of them; and ensuring compliance by reviewing the results of the reports of the regulatory bodies and verifying that the necessary procedures have been taken, verifying the company's compliance with the laws, regulations and instructions, reviewing the contracts and dealings with related parties, and raising the matters that it deems necessary to take action in respect of to the board of directors.
And upon these broad competencies were built two supervisory guarantees in Articles Fifty-Three and Fifty-Six of the Authority's regulations: the first is that if a conflict occurs between the recommendations of the audit committee and the decisions of the board of directors, or the board refuses to adopt the committee's recommendation regarding the appointment of the auditor, his removal and the determination of his fees, or the appointment of the internal auditor, "then the board of directors' report must include the committee's recommendation and its justifications, and the reasons for not adopting it"; and the second is that the audit committee has the right to review the company's records and documents, to request any clarification from the members of the board of directors or the executive management, and to request the convocation of the general assembly if the board impedes its work or the company is exposed to serious damage or losses. And Article Fifty-Five also obliges the committee to set a mechanism that enables the employees of the company to submit their observations confidentially regarding any violation in the financial or other reports, and to verify its application by conducting an independent investigation.
As for the meeting dates, they were decided by Article Fifty-Four of the Authority's regulations whose paragraph (b) was amended by the Resolution of the Board of the Authority No. (8-5-2023) effective as of 1/1/2024AD, as it provides that "the audit committee meets periodically, provided that its meetings are not less than four meetings during the company's fiscal year", and that "the audit committee meets periodically with the company's auditor, and with the company's internal auditor", with the permissibility of the internal auditor and the auditor requesting to meet the committee whenever the need arises.
And in non-listed joint stock companies, Article Fifty-Three of the Ministry of Commerce regulations decides a fundamental rule that differs from the Authority's regulations: as it provides that the audit committee "is formed by a decision of the company's ordinary general assembly" and not by a decision of the board of directors, "from the shareholders or from others, provided that among them be at least one independent member and that it does not include any of the executive members of the board of directors, and that the number of the audit committee members should not be less than three nor exceed five, and that among them be a specialist in financial and accounting affairs", with the rule "the chairman of the audit committee should be an independent member" in a non-binding (guidance) form, and the issuance by the general assembly -based on the board's proposal- of a work charter for the committee. And this difference in the forming body (the ordinary general assembly in the non-listed versus the board of directors in the listed) is among the most precise and most hidden differences to practitioners, and it is expressly provided in the two official sources. And Article Fifty-Four of the Ministry's regulations transfers the same four pillars of the committee's competencies (the financial reports, the internal audit, the auditor, and ensuring compliance), and Article Fifty-Eight gives it the powers of review, requesting clarification and requesting the convocation of the assembly, and Articles Fifty-Five and Fifty-Seven organize the conflict of the recommendations with the board's decisions, and the mechanism of submitting observations confidentially.
And it is observed that Article Fifty-Six of the Ministry's regulations sufficed in the meeting dates of the audit committee with that it "meets every (six months) at least, and whenever the need arises for that", with the periodic meeting with the company's auditor and the internal auditor, while the Authority's regulations emphasize that the audit committee meetings in the listed company should not be less than four meetings during the fiscal year -that is, more frequent and firmer- and it is another difference worth noting.
The Remuneration Committee: Its Formation, the Remuneration Policy and Its Competencies
Article Fifty-Seven of the Corporate Governance Regulations (Formation of the Remuneration Committee) organizes the remuneration committee in listed companies, as it provides that "a committee called (the Remuneration Committee) is formed by a decision of the company's board of directors from the non-executive members of the board of directors, provided that among them be at least one independent member", and that the general assembly issue -based on the board's proposal- a work charter for the committee that includes the controls of its work, its tasks, the rules of selecting its members, their membership term and their remuneration. And in non-listed companies, Article Fifty-Nine of the Ministry's regulations corresponds to it with almost the same text, with the rule of its formation "by a decision of the company's board of directors".
And Article Fifty-Eight of the Authority's regulations (The Competencies of the Remuneration Committee) enumerates four basic competencies: preparing a "clear policy for the remuneration of the members of the board of directors, the committees emanating from the board and the executive management, and raising it to the board of directors for consideration preparatory to its approval by the general assembly, provided that in that policy be observed the adoption of standards linked to performance, disclosing it, and verifying its implementation"; clarifying the relationship between the granted remuneration and the remuneration policy and stating any material deviation from it; the periodic review of the remuneration policy and the evaluation of its effectiveness; and recommending to the board of directors the remuneration of the members of the board, the committees emanating from it and the senior executives in accordance with the approved policy. And Article Sixty of the Ministry's regulations provides for the same four competencies.
And Article Fifty-Nine of the Authority's regulations (The Remuneration Policy) completes the nine-item framework of the controls of the remuneration policy, as there must be observed in it: its consistency with the company's strategy and objectives; the provision of remuneration for the purpose of prompting the members and the executive management to make the company succeed and develop it in the long term, such as linking the variable part of the remuneration to the long-term performance; the determination of the remuneration according to the level of the position, the tasks, the responsibilities, the qualifications, the experiences and the level of performance; its consistency with the size, nature and degree of the risks of the company; taking into account the practices of other companies while avoiding unjustified elevation; aiming at attracting, retaining and motivating the competencies without exaggeration; preparing it in coordination with the nominations committee at the new appointments; organizing the cases of suspending the payment of the remuneration or recovering it if it was decided based on inaccurate information presented by a member of the board of directors or the executive management; and organizing the granting of shares to the members of the board and the executive management whether they were a new issuance or shares purchased by the company. And Article Sixty-One of the Ministry's regulations corresponds to it in its nine items.
As for the meeting dates, Article Sixty of the Authority's regulations and Article Sixty-Two of the Ministry's regulations decided that "the remuneration committee meets periodically every (year) at least, and whenever the need arises for that". And it is mentioned that paragraph (7) of Article Forty-Seven of the Authority's regulations (and what corresponds to it, paragraph (f) of Article Forty-Nine of the Ministry's regulations) permits the company "to merge the remuneration and nominations committees into one committee called the Remuneration and Nominations Committee", and in this case the merged committee must satisfy the requirements of the two committees and exercise all their competencies contained in Articles Fifty-Eight and Sixty-Two of the Authority's regulations (and Articles Sixty and Sixty-Four of the Ministry's regulations), "provided that the committee meets periodically every six months at least".
The Nominations Committee: Its Formation, Competencies and Nomination Procedures
Article Sixty-One of the Corporate Governance Regulations (Formation of the Nominations Committee) organizes the nominations committee in listed companies in the same pattern as the remuneration committee: "a committee called (the Nominations Committee) is formed by a decision of the company's board of directors from the non-executive members of the board of directors, provided that among them be at least one independent member", with the issuance by the general assembly of a work charter for the committee. And in non-listed companies, Article Sixty-Three of the Ministry's regulations corresponds to it with the same text.
And Article Sixty-Two of the Authority's regulations (The Competencies of the Nominations Committee) undertakes ten detailed competencies: proposing clear policies and standards for the membership in the board of directors and the executive management; recommending to the board of directors the nomination of members to it and their renomination in accordance with the approved policies while taking into account not nominating one who was previously convicted of an offense involving dishonesty; preparing a description of the capabilities and qualifications necessary for the membership of the board of directors and the positions of the executive management; determining the time that the member should allocate for the work of the board; the annual review of the needs of skills and experiences; reviewing the structure of the board of directors and the executive management and presenting recommendations regarding its changes; verifying annually the independence of the independent members and the absence of conflict of interest if the member holds membership of the board of directors of another company; setting the job description for the executive, non-executive and independent members and the senior executives; setting the special procedures in the event of the vacancy of the position of one of the members of the board of directors or the senior executives; and determining the aspects of weakness and strength in the board of directors and proposing the solutions for addressing them in a manner consistent with the interest of the company. And Article Sixty-Four of the Ministry's regulations transfers these same ten competencies.
And in the chapter of the nomination procedures, Article Sixty-Three of the Authority's regulations decides that the nominations committee must, when nominating the members of the board of directors, take into account the conditions of the regulations and the requirements decided by the Authority, then its paragraph (b) -which was marked in the official text as a non-binding (guidance) paragraph- provides that "the number of the candidates for the board of directors whose names are put before the general assembly must exceed the number of the available seats so that the general assembly has the opportunity to choose from among the candidates", and Article Sixty-Five of the Ministry's regulations decides the same rule in the non-binding (guidance) "should" form.
And Article Sixty-Five of the Authority's regulations (Publishing the Nomination Announcement) decides that "the company must publish the nomination announcement on the company's website and the market's website and in any other means determined by the Authority; and that is to invite the persons wishing to run for membership of the board of directors, provided that the door of nomination remains open for a period of at least one month from the date of the announcement", while Article Sixty-Seven of the Ministry's regulations is limited to the permissibility of publishing on "its website" only. And Article Sixty-Six of the Authority's regulations (and Article Sixty-Eight of the Ministry's regulations) decides that what was contained in the nominations chapter "does not prejudice the right of each shareholder in the company to nominate himself or others for membership of the board of directors in accordance with the provisions of the Companies Law and its regulations". And finally the nominations committee meets in the two regulations periodically every year at least, in accordance with Article Sixty-Four of the Authority's regulations and Article Sixty-Six of the Ministry's regulations.
The Risk Management Committee: Its Formation and Its Twelve Competencies
The risk management committee is considered the only committee among the four committees whose provisions in the Authority's regulations were marked as non-binding (guidance) provisions in their entirety, as the margins of the official text published in the Official Gazette indicated that Articles Sixty-Seven, Sixty-Eight and Sixty-Nine relating to the formation of the committee, its competencies and its meetings are "a non-binding (guidance) article". And Article Sixty-Seven (Formation of the Risk Management Committee) provides that the committee "is formed by a decision of the company's board of directors, a committee called (the Risk Management Committee) whose chairman and the majority of its members are from the non-executive members of the board of directors. And it is required that its members possess an appropriate level of knowledge of risk management and financial affairs".
And Article Sixty-Eight of the Authority's regulations (The Competencies of the Risk Management Committee) devotes twelve competencies: setting a comprehensive strategy and policies for risk management in a manner proportionate to the nature and size of the company's activities and verifying their implementation, reviewing and updating them; determining an acceptable level of risk and maintaining it and verifying not exceeding it; verifying the viability of the company's continuity and determining the risks threatening its continuity during the next twelve months; supervising the risk management system and evaluating the effectiveness of the systems and mechanisms of identifying, measuring and monitoring the risks; re-evaluating the company's ability to bear the risks periodically through stress tests by way of example; preparing detailed reports on the exposure to risks and the steps proposed for managing them and raising them to the board of directors; presenting recommendations to the board regarding the matters relating to risk management; ensuring the availability of sufficient resources and systems; reviewing the organizational structure of the risk management and setting recommendations regarding it before its adoption; verifying the independence of the risk management employees from the activities from which the company's exposure to risks may arise; verifying the risk management employees' grasp of the risks surrounding the company and increasing the awareness of the risk culture; and reviewing the matters raised by the audit committee that may affect risk management. And Article Seventy of the Ministry's regulations transfers the same twelve competencies, with the formation of the committee in Article Sixty-Nine of the Ministry's regulations "by a decision of the company's board of directors -based on the company's need and the nature of its business-" with a chairman and the majority of the members from the non-executives and the requirement of an appropriate level of knowledge.
And the risk management committee meets in the two regulations every six months at least, in accordance with Article Sixty-Nine of the Authority's regulations and Article Seventy-One of the Ministry's regulations, with the observation that the Ministry's regulations -unlike the Authority's regulations- did not mark the provisions of the risk management committee as non-binding (guidance) expressly, although the second article of the Ministry's regulations makes the regulations non-binding (guidance) in origin except for what a law or another regulation or a decision decides.
The Degree of Bindingness: When Are the Committees Mandatory and When Are They Non-Binding (Guidance)?
The whole regulatory structure depends on the degree of bindingness decided by the two regulations themselves, and it is not permissible to confuse them:
- In companies listed on the main market: Article Two of the Corporate Governance Regulations considers the regulations "mandatory for companies listed on the main market except for the provisions indicated that they are non-binding (guidance)". Accordingly, the provisions of the formation of the committees in Articles Forty-Seven and Forty-Eight, and the provisions of the audit committee in Article Fifty-One (except for the two non-binding (guidance) paragraphs (c) and (d)) and Articles Fifty-Two, Fifty-Three, Fifty-Four, Fifty-Five and Fifty-Six, and the provisions of the remuneration and nominations committees in Articles (57) to (66), are mandatory provisions on companies listed on the main market, while the provisions of the risk management committee in Articles (67), (68) and (69) remain non-binding (guidance), and likewise paragraph (b) of Article Sixty-Three relating to the excess of the number of candidates over the seats.
- In companies listed on the parallel market (Nomu): Article Two of the Authority's regulations decided that paragraph (c) of Article Thirteen, paragraph (b) of Article Fifty, paragraph (a) of Article Fifty-One, Articles Fifty-Two and Fifty-Six, and Article Eighty-Eight, are "mandatory on companies listed on the parallel market, and the rest of the other provisions in these regulations are considered non-binding (guidance)" on them unless a law or another regulation or a decision issued by the Authority provides for the mandatory nature of any of them. And from that resulted a precise conclusion: that the audit committee is mandatory in the parallel market with three basic elements -the formation of the committee pursuant to paragraph (a) of Article Fifty-One, its competencies, powers and responsibilities pursuant to Article Fifty-Two, and its powers in Article Fifty-Six- while the remuneration, nominations and risk committees remain non-binding (guidance) on companies listed on the parallel market.
- In non-listed joint stock companies: Article Two of the Ministry of Commerce regulations decided that the regulations "are considered non-binding (guidance) for non-listed joint stock companies except for the provisions that the Companies Law or another law or regulation or a decision provides that they are mandatory", and accordingly all the provisions of the committees in the Ministry's regulations -including the audit committee- are non-binding (guidance) in origin, although some of its provisions such as the formation of the audit committee are stated in a mandatory creating form, the final degree of bindingness is determined by the mandatory texts contained in the Companies Law or its regulations or the decisions of the competent body.
And a note is deserved to an important practical result: for although the provisions of the risk management committee are non-binding (guidance) in the main market, Article Seventy-One of the Authority's regulations obliges the listed company -in order to implement the approved internal control system- "to establish units or departments for the evaluation and management of risks, and internal audit", which means that the risk management function itself is stipulated in a binding form at the level of the administrative organization, even though the committee emanating from the board of directors itself is non-binding (guidance) in formation; and likewise Article Seventy-Three of the Ministry's regulations decides that the non-listed company establish departments for the evaluation and management of risks and internal audit, with the permissibility of enlisting external bodies.
Comparative Table: The Four Committees in Listed and Non-Listed Companies
The following table gathers the most important precise differences between the organization of the four committees in listed companies (the Capital Market Authority's regulations) and non-listed joint stock companies (the Ministry of Commerce's regulations), extracted literally from the official texts referred to in each line:
| The provision | Listed companies (the Authority's regulations) | Non-listed joint stock companies (the Ministry's regulations) |
|---|---|---|
| The number of committee members generally | Three to five (Article 47/4) | Three to five (Article 49/d) |
| The body forming the audit committee | A decision of the board of directors (Article 51/a) | A decision of the ordinary general assembly (Article 53/1) |
| The minimum number of the audit committee members | Three to five, among them a financial and accounting specialist, and at least one independent member (mandatory) (Article 51/a, b) | Three to five, among them a financial and accounting specialist, and at least one independent member (Article 53/1) |
| The chairman of the audit committee | An independent member (paragraph c of Article 51 - a non-binding (guidance) paragraph) | An independent member in the "should" form (paragraph 2 of Article 53) |
| Half of the independent members | Required (paragraph d of Article 51 - a non-binding (guidance) paragraph) | Not provided |
| The cooling-off (calm) period | Two years from working in the executive/financial management or at the auditor (Article 51/f) | Not provided |
| The maximum number of audit committee memberships | Five listed joint stock companies (Article 51/z) | Not provided |
| The audit committee meetings | At least four meetings annually + a periodic meeting with the external and internal auditor (Article 54) | Every six months at least + a periodic meeting with the external and internal auditor (Article 56) |
| The formation of the remuneration and nominations committees | From the non-executives with at least one independent member; and the members of the two committees are from the independents and their chairmen are from the independents (Articles 57, 61, 48/b) | From the non-executives with at least one independent member; and the members of the two committees are from the independents and their chairmen are from the independents (Articles 59, 63, 50/2) |
| The competencies of the remuneration committee | Four competencies (Article 58) + nine controls for the remuneration policy (Article 59) | Four competencies (Article 60) + nine controls for the remuneration policy (Article 61) |
| The competencies of the nominations committee | Ten competencies (Article 62) | Ten competencies (Article 64) |
| The nomination announcement | The company's website, the market's website and any other means determined by the Authority, with the door remaining open for at least a month (Article 65) | The company's website (Article 67) |
| The meetings of the remuneration and nominations committees | Every year at least (Articles 60 and 64) | Every year at least (Articles 62 and 66) |
| The formation of the risk management committee | Its chairman and the majority of its members are non-executives with an appropriate level of knowledge (Article 67 - a non-binding (guidance) article) | Its chairman and the majority of its members are non-executives with an appropriate level of knowledge (Article 69) |
| The competencies of the risk management committee | Twelve competencies (Article 68 - a non-binding (guidance) article) | Twelve competencies (Article 70) |
| The meetings of the risk management committee | Every six months at least (Article 69 - a non-binding (guidance) article) | Every six months at least (Article 71) |
| The degree of bindingness | Mandatory in the main market except for the non-binding (guidance); and the audit committee is mandatory in the parallel market with its three elements | Non-binding (guidance) in origin, except for what a law or another regulation or a decision provides is mandatory |
And the comparison reveals that the two regulations share in the essence -which is the necessity of the existence of the specialized committees, and the number of members from three to five, and the requirement of the non-executives in the audit committee and an independent member in the three first committees, and the unification of the competencies of the remuneration, nominations and risk committees- and they differ in the level of firmness: for the Authority's regulations are firm by charging the board of directors with the formation of the audit committee, and the cooling-off period, and the limit of the five companies, and the fourfold frequency of the meetings, and the publication of the announcement on the market's website, and the notification of the Authority of the names of the committees within five working days, while the Ministry's regulations decide the formation of the audit committee by a decision of the ordinary general assembly, and suffice with the semi-annual meetings, within a non-binding (guidance) framework in origin.
The Most Prominent Practical Matters That Should Be Adjusted in Application
The review of the literal texts reveals a number of precise practical matters that companies, their boards of directors and with them the supervisory bodies must adjust in application, and they can be summarized in the following:
- Separating the formation of the audit committee from the rest of the committees: for in the listed company the audit committee is formed by a decision of the board of directors (Article 51/a of the Authority's regulations), while it is formed in the non-listed company by a decision of the ordinary general assembly (Article 53/1 of the Ministry's regulations), and it is a fundamental difference that requires an explicit delegation in the company's articles of association and the committee's work charter.
- Prohibiting the chairman of the board of directors from chairing the committees: the chairman of the board of directors may not hold membership of the audit committee at all, and he may not chair the other committees stipulated in the regulations, in accordance with Article Forty-Eight (c) of the Authority's regulations and Article Fifty (3) of the Ministry's regulations.
- The role of the nominations committee in the annual verification of independence: the two regulations entrusted the nominations committee with the task of verifying annually the independence of the independent members and the absence of conflict of interest, which is directly connected to the provisions of the independence impairments in Article Nineteen of the Authority's regulations and Article Twenty of the Ministry's regulations, which necessitates keeping audited records of the members' relationships and the dates of their memberships.
- The interconnection of the committees' competencies: the work of the risk management committee overlaps with the work of the audit committee, as the audit committee is concerned with studying the risk management systems within the internal control, while the risk management committee includes reviewing "what the audit committee raises of matters that may affect risk management", which requires organized coordination between the two committees in practice.
- The amendments effective as of 1/1/2024AD: the Resolution of the Board of the Capital Market Authority No. (8-5-2023) amended sub-paragraph (3) of paragraph (b) of Article Fifty-Two (the oversight of the internal auditor's performance and the management of the internal audit) and paragraph (b) of Article Fifty-Four (the periodic meeting with the auditor and the internal auditor) of the Corporate Governance Regulations, effective as of 19/6/1445H corresponding to 1/1/2024AD, with the continuation of the work with the previous texts until that date, in accordance with what was stated in the margins of the official text.
- The merged remuneration and nominations committee: the company may merge the two committees into one committee that satisfies their requirements and exercises their combined competencies, provided that it meets every six months at least, in accordance with paragraph (7) of Article Forty-Seven of the Authority's regulations and paragraph (f) of Article Forty-Nine of the Ministry's regulations.
Official Sources and References
This article relied on the following official regulatory sources, which are the reliable source for all the texts, numbers and decisions contained in the sections above, and the review from these official links is always preferred to view the full texts and the latest amendments:
- Corporate Governance Regulations issued by the Capital Market Authority (Resolution 8-16-2017 and its amendments, including Resolution 8-5-2023) - the Official Gazette (Umm Al-Qura)
- Corporate Governance Regulations - the official text published on the Capital Market Authority's website
- The Capital Market Authority's regulations and rules - the official page
- Corporate Governance Regulations for Non-Listed Joint Stock Companies (Decision of the Minister of Commerce and Investment No. 44239) - the Systems and Regulations Register of the Ministry of Commerce
- Companies Law issued by Royal Decree No. (M/132) - the Official Gazette (Umm Al-Qura)
- Companies Law (M/132) - the Laws Portal of the Council of Ministers Experts Commission
- Companies Law M/132 - the official page of the Capital Market Authority
A methodological note: all the articles, competencies, dates and degrees of bindingness transferred in this article were stated literally from the official sources mentioned above (the Corporate Governance Regulations of the Capital Market Authority by the Board Resolution 8-16-2017 and amended by Resolution 8-5-2023, and the Corporate Governance Regulations for Non-Listed Joint Stock Companies by the decision of the Minister of Commerce and Investment 44239, and the Companies Law M/132), and it is advised to refer to these sources to verify any subsequent amendments to the texts, and their effect on the formation of the committees, their competencies and their degree of bindingness.
Frequently Asked Questions about Board of Directors Committees in Saudi Companies
We present in the following answers to the most commonly circulated questions among officials in companies and the secretaries of the boards of directors about the four committees, their formation and their competencies:
What are the four main board of directors committees in Saudi companies?
The four main committees are: the audit committee, the remuneration committee, the nominations committee and the risk management committee, and they are organized in the Fourth Chapter (Company Committees) of the Corporate Governance Regulations of the Capital Market Authority (Articles 47-69) for listed companies, and in the Corporate Governance Regulations for Non-Listed Joint Stock Companies (Articles 49-71) for non-listed companies, while the Companies Law itself does not provide for the formation of these committees.
Is the audit committee mandatory in listed companies?
Yes. In the main market, the provisions of Article Fifty-One of the Corporate Governance Regulations are considered mandatory (except for the two non-binding (guidance) paragraphs relating to the independent chairman of the committee and half of the independent members), and in the parallel market the second article of the regulations provided for the mandatory nature of paragraph (a) of Article Fifty-One (the formation of the committee), Article Fifty-Two (its competencies) and Article Fifty-Six (its powers), while its provisions remain in non-listed companies non-binding (guidance) in origin according to the second article of the Ministry of Commerce regulations.
Who forms the board of directors committees?
The remuneration, nominations and risk management committees are formed by a decision of the board of directors in the two regulations. As for the audit committee, it is formed in the listed company by a decision of the board of directors in accordance with Article 51/a of the Authority's regulations, and it is formed in the non-listed company by a decision of the ordinary general assembly in accordance with Article 53/1 of the Ministry's regulations, and it is a precise difference that requires adjustment.
What is the number of the committee members and the conditions of membership in them?
The number of the members of each committee ranges between three and five members in accordance with paragraph (4) of Article Forty-Seven of the Authority's regulations and paragraph (d) of Article Forty-Nine of the Ministry's regulations. And the audit committee does not include executive members, and a specialist in financial and accounting affairs and at least one independent member are required in it, and the remuneration and nominations committees are formed from the non-executives with at least one independent member, rather from the independent members with independent chairmanship.
How often do the board of directors committees meet?
The audit committee meets in the listed company at least four meetings annually in accordance with Article Fifty-Four of the Authority's regulations, and in the non-listed company every six months at least in accordance with Article Fifty-Six of the Ministry's regulations. And the remuneration and nominations committees meet every year at least, and the risk management committee meets every six months at least in the two regulations, and if the remuneration and nominations committees are merged into one committee, it must meet every six months at least.
Can the remuneration committee and the nominations committee be merged into one committee?
Yes. paragraph (7) of Article Forty-Seven of the Corporate Governance Regulations (and what corresponds to it in the Ministry's regulations) permits the company to merge the remuneration and nominations committees into one committee called (the Remuneration and Nominations Committee), provided that the merged committee satisfies the requirements of the two committees and exercises all their competencies, and that it meets every six months at least.
Conclusion: The Four Committees an Integrated Supervisory System
The governing rules of the four board of directors committees are summarized in three axes: the formation decided by a decision of the board of directors with respect to the remuneration, nominations and risk committees, and by a decision of the board of directors in the listed company or of the ordinary general assembly in the non-listed company with respect to the audit committee, with a number of members from three to five with the requirement of the non-executives in the audit committee and an independent member in the three first committees; and the competencies integrated, which are distributed between the oversight of the financial reports, the internal audit, the auditor and ensuring compliance in the audit committee, and the remuneration policy and its implementation in the remuneration committee, and the policies of membership, nomination and the annual verification of independence in the nominations committee, and risk management and the continuity of the company in the risk management committee; and the degree of bindingness graduated between the mandatory nature in the main market, and the partial mandatory nature of the audit committee in the parallel market, and the non-binding (guidance) in origin for non-listed companies.
And we emphasize in the conclusion that the committee structure is not a rigid administrative form, but rather it is the mechanism by which the board of directors converts its general supervision into effective specialized oversight, and by it the principles of transparency, independence and oversight are translated into daily working tools. At Nova Legal for Law and Legal Consultations, we provide our specialized consultations in establishing companies, drafting the articles of association and the committees' work charters in a manner that achieves the requirements of governance, and reviewing the formation of the boards of directors and their four committees and verifying their conformity with the mandatory texts in the governance regulations, and preparing the remuneration, nominations and risk management policies and addressing conflict of interest, and representing companies before the regulatory and judicial bodies, and we are pleased to accompany you towards sound and sustainable governance.