Expectations Gaps in the Roles of Independent Directors: Evidence from Saudi Arabia

Abstract

In recent years, the Saudi government has endeavored to make Saudi companies more attractive to both foreign and domestic investors. In doing so, they have strengthened regulatory codes of conduct to enhance corporate accountability to the wider investment community. Given that independent directors (IDs), as a key mechanism of corporate governance, are expected to ensure managers perform to safeguard their shareholders’ interests, this thesis focuses on the extent to which they fulfil their expected roles and the factors that influence their performance in this regard. The thesis more particularly investigates the existence of expectations gaps in the control, strategic and resource roles that IDs play in corporate governance to help us gain insights into the real life functioning of the monitoring roles they are expected to play, as well as the factors that hinder and facilitate them. To this end, twenty-nine semi-structured interviews were conducted with Saudi independent directors, non-independent directors, executive directors, institutional investors and regulators. The findings highlight the existence of a perceived gap between what IDs can be reasonably expected to achieve and their actual performance (i.e., a performance gap) but no gap between what is expected to be achieved and what can sensibly be achieved (i.e., a reasonableness gap) with respect to their control and strategic roles. It is argued that the observed gaps are attributable to a range of regulatory and socio-economic factors. Hence, both the control and strategic roles could benefit substantially from further changes in regulatory requirements as well as wider socio-economic changes. The thesis consequently puts forward a number of recommendations on how the regulatory codes and guidelines can be reformed to help improve the performance of the control and strategic roles. Finally, the lack of any expectations gap with regard to the resource role is seen to be attributable to the elevated value that large shareholders place on how independent directors fulfil this role.