An Empirical Investigation Into the Challenges and Obstacles of Implementing Effective Corporate Governance in Saudi State-Owned Enterprises

Abstract

Corporate Governance (CG) research has received significant attention in developed countries like the UK and the US, yet its exploration within state-owned enterprises (SOEs) in emerging economies remains relatively nascent. This research investigates the challenges and obstacles surrounding the implementation of effective CG in Saudi Arabian SOEs. Employing an exploratory research design, this study combines qualitative and quantitative approaches through comprehensive semi-structured interviews (N=40) and a questionnaire survey (N=157) with board of directors’ members, senior finance officials, other senior managers, and internal and external auditors.

The findings delineate various challenges related to CG in Saudi Arabian SOEs. Notably, SOEs often lack fair policies and procedures for board nominations, resulting in political agendas infiltrating the process. Particularly, inadequate autonomy granted to SOEs exacerbates governance difficulties. Government domination of board directorships and scant independent director representation, as well as board members’ time constraints (due to concurrent government or private sector roles), further hinder board competence. The inadequate connection between board member compensation and social objectives also raises concerns regarding the integration of board compensation structures with the hybrid nature of SOEs operations. Institutional deficiencies such as the absence of a robust regulator further hamper the implementation of CG practices.

This study also finds that the role of the Saudi Arabian General Court of Audit (GCA) and external auditors in SOEs governance is minimal, and disclosure practices primarily adhere to regulatory requirements, limiting voluntary disclosures. Intriguingly, internal audit functions suffer from resource deficiencies, reporting discrepancies, and routine audit practices that lack risk considerations, all of which undermine effective CG implementation. Senior managers also encounter constraints on operational autonomy, often viewing their positions as transient, whereas compensation structures fail to align closely with long-term objectives.

Overall, this study makes several theoretical contributions to our understanding of CG in Saudi Arabian SOEs. Firstly, it illustrates how CG practices are sometimes adopted more for legitimacy purposes or coercive pressures rather than for their practical applicability. Employing Social Identity Theory, this study also highlights how board members’ self-perceptions as disparate groups hamper effective governance implementation. From an Agency Theory perspective, this research demonstrates that SOEs face the dilemma that increasing autonomy can amplify agency conflicts while reducing interference. It also critically examines the role of independent directors, finding that, despite their structural presence, they frequently face difficulties in voicing opposition or providing constructive criticism. Additionally, contrary to the assumptions of Stewardship Theory, the study observes that executives often view their roles not as stewards of the organisation but as stepping stones to further their careers in either the public or private sectors. This, indeed, underscores a critical gap between theoretical expectations and practical behaviours. Finally, the study offers critical insights and actionable recommendations for policymakers to bridge the gap between theoretical frameworks and practical implementation to improve CG practices in Saudi Arabian SOEs.