Directors’ Duties under the Saudi Companies Ordinance: Strengthening the Protection of Stakeholders

Abstract

The aim of this thesis is to analyze critically the position of non-shareholder stakeholders in the Saudi legal system and the position of stakeholders in both hard and soft law. The thesis seeks answers to the following central research question: what is the current status of stakeholders under Saudi Companies Ordinance and how might stakeholder interests be enhanced? This question is addressed through a doctrinal and comparative methodology, which focuses on the relationship between stakeholder considerations and the duties of directors. The idea of stakeholders was introduced to the Saudi legal framework in 2006. Yet, the concept has been almost always ignored. Stakeholder consideration existed only in non-binding corporate governance regulations. The Saudi government has lately codified the duties of directors in the new Saudi Companies Ordinance of 2022 to resolve the drawbacks of the previous Companies Ordinance and incorporate stakeholder considerations directly. However, the thesis argues, through detailed critical analysis of Saudi legal history and practice, that codifying both duties of directors and stakeholders in the Saudi Companies Ordinance 2022 has substantial limitations. This thesis argues that strengthening the interest of stakeholders is still needed, and the Australian approach can provide some valuable insight into the necessary steps to achieve this, while also demonstrating the sticking points for the Saudi environment. Through comparative analysis of the Australian legal context, where stakeholder considerations and the duties of directors are well established, the thesis considers the challenges of incorporating such common law duties into the Saudi context. By doing this, the thesis demonstrates that the recent shift towards codification of such duties and interests in Saudi Companies ordinances will not be sufficient to avoid risk and harm to stakeholders in corporate decision-making. Accordingly, the thesis provides three recommendations for consideration. First, Saudi should consider enhance transparency in publishing explanatory memorandums of ordinances, reports, and detailed judgments related to directors’ duties and stakeholder responsibilities. This will support application of the principles of precedent and transparency into the Saudi context, essential for successful integration of common law concepts such as directors’ duties and stakeholder consideration. Second, Sharia court should engage more directly with graduates of common law countries, to enhance understanding of duties of directors and treatment of stakeholders in the jurisdictions that the codification of these duties has been taken from. Finally, Saudi should consider allowing the formation of associations to protect the rights of stakeholders, such as employees, thus enhancing the voice of these stakeholders in the governance of corporations in Saudi, again, drawing from the experience in Australia and other common law jurisdictions where the new Saudi Companies Ordinance 2022 has drawn inspiration from. It is asserted that, without adapting the context in which the new ordinance operates, the legal “cut and paste” of stakeholder consideration in corporate decision-making, will fail to secure status as a successful legal transplant.