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Transparency and Disclosures in Saudi Arabia
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This pillar of CG ensures accessibility of information in business operations or dealings. Transparency reflects the accuracy and completeness of disclosed information, in turn building a positive image for stakeholders and the marketplace. Transparency ensures that all information revealed by a company is clearly presented. In relation to this pillar of CG, Mallin (2012) has stated that in business organisations, all shareholders should have full information about any new agenda by attending general meetings. At their request, shareholders should be provided with the required information about the functioning of the organisation (Mallin, 2012).
Balachandran and Chandrasekaran (2000) have stated that transparency is central to CG as it ensures accurate and timely disclosure of corporate information on material matters. In relation to financial accounting and auditing, the process of disclosure must be of high quality. Transparency is mainly linked to access of information by different stakeholders, information that includes business objectives, board structure, foreseeable material risk and information about different employees and stakeholders (Balachandran and Chandrasekaran, 2000).
Concerning transparency, the most important function of the board of directors in an organisation is to work in a harmonious manner to evaluate all business activities and processes at regular intervals. Here, effective CG functioning is mainly based on internal control followed by business management and the supervisory role of the board. Under the pillar of transparency, management effectiveness is required so as to ensure precise, open and efficient flow of information.
The EU and Turkey a
Transparency, as one of the main pillars of corporate governance, plays an important role in the success of both corporations and financial markets. In fact, it is argued that transparency is perhaps the most important one because the other three pillars ‘fairness, accountability and responsibility’57 depend on a high level of information disclosure and cannot be effectively provided where there is a lack of transparency. Therefore, transparency and financial disclosure may be claimed as the first step toward successful corporate governance.
This shows a need to be explicit about exactly what is meant by transparency. Historically, it was accepted as ‘hearing was believing’, but in today’s highly visible information age, this can no longer be claimed for the markets.58!Hence, today’s definition of transparency is ‘seeing is believing’.59
Transparency and financial disclosure give the public a general right of access to all kinds of recorded information with regard to a company. It means that they make the truth available for others in corporations.60 However, today`s transparency is not simply a case of corporations publishing information; it is ensuring that every single person in the company can access published information at the right time, in the right format and in the right place.
Fundamentally, the main aim of transparency and public disclosure is to ensure accurate, complete, comprehensive and understandable information for shareholders and investors at a low cost and in a timely manner.61 Thus, disclosed information is important and essential as long as it helps in the decision-making process of investors.
Bernard Black also considers this subject in his article and comes to a similar conclusion. According to him, it is not important to access information unless the information is reliable.62 Therefore, publishing of random information cannot be accepted as increasing transparency in corporations. The key problem with this explanation is that it may be difficult to understand the quality of information. Therefore, in order to improve the quality of disclosed information, the published information should have some features, such as ‘clarity, accuracy, trueness and authenticity, impartiality, comparativeness, continuousness, audited and updated’.63
In fact, recently there has been an increasing interest in providing better information for markets at an international level. For example, after the financial crises, many countries increased their use of International Financial Reporting Standards (IFRS) in order to improve their accounting standards and to regain the investors’ confidence in the market.64 In this respect, it seems to be essential to determine the main standards for a high level of information transparency for information users.
In general, qualified corporate transparency pays attention to three categories in companies. First, it examines the quality of reporting in terms of consistency, credibility, timeliness, audit quality and determined principles by law, by international organisations or even by their own regulations; secondly, it evaluates and monitors private information with regard to investment strategies or insider trading options; thirdly, it measures the quality of storage and dissemination of information and the degree of understanding of disseminated information by information users.65
In this respect, it may be useful to draw attention to the main advantages of better transparency requirements in corporate governance issues. A large and growing body of literature has investigated the relation between transparency and corporate governance. For instance, Ferrell claims that better transparency plays a key role in companies, especially within concentrated ownership structures.66 According to him: firstly, in the event of the lack of transparency in corporations major shareholders tend to use corporate resources for their own benefits by transferring corporate assets at very low prices to other firms with which they have a connection.
Hence, a high level of transparency is in conflict with the ‘devil side of corporations’;67 secondly, better transparency provides better stock returns performance and facilitates finding external capital. Thus, companies may withstand economic downturns or may even overcome a financial crisis with little damage; and thirdly, an effective disclosure regime reduces capital cost by reducing agency cost, adverse selection, the level of unpublished information, and diversion of resources in corporations. Therefore, it provides a cost advantage for the corporate governance mechanism.68 Apart from these advantages, the well-regulated disclosure requirements may decrease volatility, increase efficiency and positively affect the attractiveness of companies in financial markets.69 These relations between better transparency and well-organised corporate governance frameworks will be analysed and assessed in the following parts of this chapter. The ideas of disclosure and transparency are at the centre of good CG. Disclosure creates trust among suppliers at the firm level, and transparency creates confidence at the economy level.
What are the Gatekeepers? (You can reduce this section from 900 to 350)
In modern corporations, where ownership and control are separated, owners and other stakeholders need to be assured that the managers are acting in the interest of the corporation and not abusing the power they have been given. Although the board of directors is viewed as an intermediary between the investors and management in agency theory, a more independent certification is needed for all types of stakeholders to testify that the management is effectively performing its duty. From here, the concept of gatekeepers arises to refer to “some form of outside or independent watchdog or monitor who screens out flaws or defects or verifies compliance with standards or procedures”.440
Coffee lists some of the advantages that gatekeepers bring to the corporation and how they enhance its governance structure.441 These advantages include, firstly, a more accurate valuation in the market. Unless corporations can distinguish themselves from others, investors will price them based on the average quality of all other corporations, despite their actual value.442 Therefore, trusted gatekeepers can signal more credit to the corporation to be valued above the average quality and lower its cost of capital by providing assurance to the investors that the corporation’s disclosure is accurate so the fear that their share value might be discounted will be reduced.443
Secondly, the board of directors cannot outperform the role of gatekeepers. Without independent gatekeepers, the board will be blind except for selective information provided by the corporation’s managers. Even independent boards were proved to be unable to detect or prevent financial misconduct, which led to the financial crises, such as the Enron crisis in the U.S. in 2001. Thirdly, gatekeepers play an important role in situations where ownership and control are separated. To reduce the information asymmetry, shareholders can rely on gatekeepers to become the trusted source of the flow of unbiased information to stakeholders and the public and help to detect and prevent problems before a crisis occurs. In addition, to ensure the accuracy and truthfulness of the statements that the company itself makes, gatekeepers could potentially present a critical view of the management or the board, to give a rounded picture of the company for investors.444
The role of gatekeepers and who they are might differ slightly based on different perceptions about the concept. Some literature views the role of gatekeepers as preventing or disrupting any misconduct by withholding the support necessary for the wrongdoing to succeed.445 Based on this view, it is defined as “parties who sell a product or provide a service that is necessary for clients wishing to enter a particular market or engage in certain activities”.446 In this view, gatekeepers are seen as a private police whose role is to prevent wrongdoing. The main characteristic of gatekeepers is the power they have to veto or block any transaction. For example, auditors are considered gatekeepers because they exercise such a veto by declining to deliver necessary opinions for the corporation when they discover a serious issue in the corporation’s financial statements. The power of veto, as the main attribute that defines gatekeepers, is wide enough to include the board of directors as gatekeepers since it can veto or withhold consent.447
The other view focuses on the verification or certification role of gatekeepers as the providers of independent credibility and assurance to the company’s stakeholders. Coffee defines gatekeeper as “reputational intermediaries who provide verification and certification services to investors, doing essentially what investors cannot easily do for themselves”.448 This definition characterizes gatekeepers as intermediaries whose job is necessary in enabling investors and the market to rely on the corporation’s own disclosure or assurance, where they otherwise might not. The power of gatekeepers arises from their reputation obtained by being a repeat player serving many clients over several years so corporations seek their positive evaluation which gives credibility to its disclosure or predictions.449
Based on this, the main role of gatekeepers as intermediaries is to rent their reputations to corporations.450 Therefore, gatekeepers include outsiders who risk their reputations by certifying the information released by the company. This includes auditors who verify the financial statements, rating agencies which evaluate the creditability of a company’s financial standing, securities analysts who provide assessment and prediction of the financial prospects of companies, investment banks when delivering a fair opinion to appraise the fairness of a specific transaction, and lawyers, but only in the case of lending their reputations to a transaction rather than engineering it.451
These two perspectives of gatekeepers overlap.452 They consider mostly the same types of gatekeepers but the reason for this consideration is slightly different. While auditors, for example, are considered gatekeepers in one view because they withhold necessary support, they are also so in the other because they lend their reputations when certifying the financial statements. The difference between these two perspectives of gatekeepers is reflected by whether to consider the board of directors as a gatekeeper because it has the veto power or not since the members, with certain exceptions, do not have the required reputational capital to lend to the institution.453 Therefore, the latter perspective of gatekeepers is narrower as the board of directors is not qualified to be a gatekeeper, so it can be inferred that gatekeepers in most cases have both the veto power as well as the reputational capital. They exercise the veto power in a way that protects their reputations by withholding services that would support misconduct which might jeopardise their reputation.
Transparency and other pillars
For example, transparency and responsibility might, on occasions, be used interchangeably with accountability. However, this is somehow problematic since accountability has a broader meaning. Concerning transparency, it is seen as an important element of accountability. However, accountability involves more than revealing or reporting facts.690 Transparency alone could be meaningless for stakeholders since it may not necessarily lead to accurate or examined information. Therefore, transparency must be connected to accountability as one of its mechanisms for achieving meaningful information that has been subject to careful examination.691 The situation is similar for the concept of responsibility, as it is seen as an essential part of accountability.
Chapter 3: The Saudi Stock Market Disclosure Regime
One of the main elements of the stock market is disclosure and transparency, which is considered to be an important requirement for the proper functioning of market forces. Consequently, information asymmetry may threaten the growth of the stock market and cause inefficiency. The stock market crash in Saudi Arabia at the beginning of 2006 highlighted the lack of transparency and disclosure.
Thus, “Black argues that the two key elements of investor protection are (1) disclosure of information about listed companies and (2) confidence that the company’s insiders won’t cheat investor out of the value of their investment through “self-dealing. Transactions or outright theft. If these essential prerequisites are achieved, strong capital market can develop”.316
Consequently, transparency and disclosure is regarded as one of the main elements of an improved stock market regulations as expanded disclosure reduces information asymmetry and therefore reduces transaction costs in secondary markets, resulting in increased share liquidity. Share liquidity, as noted by Black317, Levine and Zervos and others 318, is a primary factor in market development.
Moreover, Black proposes that the provision of credible information about the value of a company’s business (and therefore a reduction of information asymmetry) is an essential prerequisite for strong public securities markets, and that strong public market can facilitate economic growth.319
Fair disclosure is critical for protecting investor, because information disclosure is a key factor in their investment decisions. Therefore, disclosure regulations aim to accomplish a number of goals. This involves, inter alia, the protection of investor and the promotion of efficiency. Disclosure and transparency also help investor make decisions within their respective companies. Consequently, a study Bhat and other, found that an increase in disclosure and transparency helped improve the environment of a given company.320 Moreover, these decisions are fully informed and investor are completely aware of the operational and financial factors affecting their companies. On the other hand, disclosure and transparency help companies properly display their positions and prevent forgery and deception. These factors also increase the ability of the stock market to monitor the boards and executive departments of its participating companies.321 One of the most important lessons learned from the Saudi stock market collapse of 2006 was the detrimental effect of weak disclosure and transparency standards in annual and periodic reports as mentioned in chapter Two.
3.2 The Concept of Disclosure and Transparency
Robert defined transparency as accounting disclosure322 that goes beyond the principles of public acceptance, accounting standards, and legislative requirements in financial reports to provide investor with the information they need to make their decisions.323 Frank and Thomas defined transparency as external users having access to the same information as members of a company’s management team, thus giving these external users the ability to control management.324 Ragab defined transparency as the disclosure of any inside information that affects stock prices.325
There are different definitions of transparency and disclosure and each definition consider a different aspect of disclosure. For example Lee (2012) believes that disclosure and transparency refers to accurate and timely release of information about the business strategy, financial performance and corporate governance to the general public by a company. Gibbins, Richardson and Waterhouse (1990, 122) defined financial disclosure as any deliberate release of financial (and non-financial) information, whether numerical or qualitative, required or voluntary, or via formal or informal channels. Patel and Dallas 2002 believe that transparency is an important element of corporate governance and state that Good corporate governance includes a vigilant board of directors, timely and adequate disclosure of financial information, meaningful disclosure about the board and management process, and a transparent ownership structure identifying any conflicts of interests between managers, directors, shareholders, and other related parties.”322
3.2.1 Determinants of Disclosure and Transparency
Robert determined several factors affecting disclosure and several determinants of transparency. These were as follows326: Robert mentioned (90) of financial and non-financial elements disclosed by large companies in their annual reports, as well as the amount of general information about the balance sheets, income statements, and statements of cash flows elements disclosed by the company; Moreover, The disclosure group on research and development; The movement of the company’s corporate data, including: the identities of the company’s managers, the rewards and benefits usually assigned to board members, the stock owned by managers and employees, the company’s major shareholder, and the rate of property; Information regarding the operational and information regarding the company’s financial analysis. Finaly: The timing of the financial report’s publication. Robert’s study reported that the relationship between transparencies, legal and political systems, and legitimacy is tied to the limitations of transparency. The presence of these systems is necessary to achieve transparency, and in the case of financial reports these systems help create better levels of transparency.
3.2.2 Barriers of Disclosure and Transparency
There are many obstacles a company may face when trying to achieve transparency. Some of these obstacles are: A lack of incentives for managers to deal with the interests of shareholders. There should be incentives for managers to disclose information regarding the company’s current and future performance to external parties.327 As the presence of these incentives for managers of companies has two potential effects.
The first effect of these incentives is that they encourage managers to choose the alternative that results in showing the external parties that the company’s profits are high, if the bonuses and incentives are associated with increasing the company’s profits. The second effect of these incentives is that they cause management members to disclose information openly, causing the administration to provide accurate information about their finances. According to Eldahrawi, the model achieves adequate security by not risking real disclosure; by obtaining a fixed salary, a member of management is not affected by the results of the economic unit.328
Some managers attempt to mislead third parties by only disclosing good news about their company, even though they know that there is also news that does not reflect well on the company’s finances. If an incentive program were in place, a manager who made this mistake would face a penalty; that is, something would be deducted from his or her total rewards. In addition to raising the value of the company’s stock in the long term, an incentive program would also help neutralize conflict between managers and shareholders.329 Changing Saudi Arabian accounting standards may improve the regulations of disclosure and thereby decrease the possibility of recording managers’ economic transactions, which may not be in the best interest of the shareholders. The second obstacle a company may face when attempting to achieve transparency is the competitive advantage companies gain when they do not practice transparency. Company executives often complain that transparency reduces their ability to compete, even though no research indicates or confirms this phenomenon.
It is unknown whether or not the relationship between disclosure and competitiveness is causal or merely correlative. The researcher believes that the expanded flow of information is an essential requirement for free-market economics. This flow of information facilitates transparency and encourages competition, which leads to the improvement of the work at hand. Without this flow of information, it would be impossible for companies to grow and survive within the competitive business environment. Though many corporations object that disclosure reduces their competitiveness in the market, it is the opinion of the researcher that this objection is based on individual interest rather than public interest. It also has to do with a lack of awareness about the meaning and importance of disclosure.330
The third obstacle to transparency is the balance between cost and revenue. Accounting information is not free, and being transparent usually costs money. This means that disclosure requires an accounting system that accounts for the standard balance between cost and revenue.331
3.4 The Role of Disclosure
Disclosure is a soft law considered crucial to adequately inform shareholders and other stakeholders of the conduct of the company’s top management and the board of directors. The principal role of disclosure and transparency is significant because they allow shareholders and regulators to monitor the actions of corporate leaders.70 In addition, disclosure and the institutions designed to facilitate reliable disclosure to investors and shareholders71 give them a reliable basis on which to assess the risks they assume if they maintain their investments in the company. The nature of soft law permits the required coordination as well as cooperation in a real of rapidly developing as well as the politically contentious environments. Is such environments experts ensure that there is no pressing legal strengths unless through the constitutional reviews that ensue a balance between the involved parties.
There are clear limits for the scope of the laws, or even flaws in the use of the legal structure in some cases, but there is a need in the current global world to allow institutions to control their trade.Without such mechanisms, management might intentionally hide the true condition of the company—that is, not fully disclose corporate health—so that shareholders will not sell the stock in a panic and depress its price or react similarly. Doing so might protect for a short while board members and executives who quietly decide to take an advantageous position in the market before the price becomes volatile in reaction to whatever bad news is released. Such actions are deceptive, utterly unfair to shareholders and contrary to the principles of corporate governance if disclosure is any degree less than it should be.
3.5 Importance of Disclosure
3.5.1 Concrete Advantages for the Market
Transparency in a firm’s disclosure methods creates many advantages in the open market. The perfect market conditions for securities and the perfectly competitive market for goods and services both depend on the free flow of information through which people can form well- considered decisions. A company that practices full disclosure provides shareholders the means by which to more effectively exercise their rights of ownership. Annual reports and general meetings, which are elements of transparency and disclosure, enable shareholders to assess the continued viability and profitability of the business. Thus, current shareholders and potential investors can weigh the potential risks and likely returns in their investment decisions.72
Another benefit of full disclosure is the trust it engenders among players in the market. This allows the market price of the firm’s shares to approximate their true value. Stock market action is not devoid of a healthy level of speculation because a stock price rises and falls in the short term based on the most recent rumours about the company. While rumours persist, speculation continues, and the longer speculation-driven market action occurs, the greater market players’ fear that the volatility might be manipulated or staged. With full disclosure, whatever rumours that might be circulating will eventually be resolved and the uncertainty settled, thus maintaining the integrity of the market and eliminating unscrupulous traders. Disclosure dispels uncertainty, which reduces both market participants’ fears and the risks they face in the stock market.73
3.5.2 Concrete Advantages for the Company
Disclosure and transparency are also beneficial to the company. In this context, disclosure takes the form of accurate, timely reports to managers and employees. Managers, in particular, need information to support decision-making especially during contingencies which require quick, correct and decisive action. An empowered managerial structure enables the firm to build leadership traits down the chain of command, developing a pool of future upper-level managers and increasing the productivity, growth and profitability of operations.74
Disclosure to employees is important in matters relevant to the conduct of their jobs and personal circumstances. Employee engagement is a vital, useful tool in employee retention and job satisfaction and can be secured only in an atmosphere of trust and open communication between firm and employee.75 It is important that a firm not only improves communication with its workforce but also that it is perceived as doing so in good faith, with concern for employees’ welfare.
While the internal effects of disclosure work to create greater trust, the same is true regarding the effects of disclosure on communities and how residents regard the company. There are many reasons why a firm prefers to be regarded favourably by its neighbours and those further away. Most immediate is the opportunity to promote the company’s brand and engender loyalty, which increases sales. Good community sentiments towards the company can also alleviate the effects of possible negative publicity about the firm. In addition, resources in the community, such as water and power sources, sustain the firm and, if limited, might create friction with residents. Therefore, it is important for the firm to generate a sense of trust and acceptance in its locality (or those of its branches and networks) by adopting a policy of disclosure and open communication with community leaders and the public at large.76
 Exploring the Implications of Corporate Governance Practices and Frameworks for Large-Scale Business Organisations: A Case Study on the Kingdom of Saudi Arabia )
 The Role of Better Transparency Law in Corporate Governance and Financial Markets and Its Practicability in Legal Systems A Comparative Study Between the EU and Turkey
 Sharia Supervisory Board in Islamic Banks: A Critical Analysis of the Current Framework, Saleh Abdulrahman Al Amer
 Sharia Supervisory Board in Islamic Banks: A Critical Analysis of the Current Framework, Saleh Abdulrahman Al Amer
 A Critical Analysis of Investor Protection under Saudi Stock Market Regulations By Mohammed Sulaiman Aleid
 Chapter Three, An Overview of Corporate Disclosure and Transparency, corporate governance disclosure practices and protection of shareholders in saudi arabia.
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