Why Corporate Governance Matters: Evidence from GCC Capital Market Growth

GCC capital markets have transformed by a lot through corporate governance practices. Saudi Arabia leads with a market capitalization of $2,920 billion, while the UAE follows at $953.11 billion. These numbers showcase how governance frameworks have matured throughout regional economies.

GCC nations have moved beyond their reliance on oil revenues. They now focus on deepening their commitment to private sector growth and knowledge-based industries. Each country’s corporate governance framework differs, especially when you have different board structures and ethical standards. Saudi Arabia and UAE have built resilient corporate governance structures that protect stakeholder interests and boost investor confidence. The region’s corporate governance principles stem from agency theory, stewardship theory, and stakeholder theory. These theories prove vital for family-owned businesses and state-owned enterprises that dominate the landscape.

GCC capital markets achieved remarkable success in 2023, raising $10.6 billion from IPOs. Saudi Stock Exchange claimed 31% of proceeds while UAE dominated with 58%. This soaring win results from GCC’s universal requirement to separate CEO and chairman roles, which enhances accountability and reduces conflicts of interest. These nations prioritize technology, finance, and tourism sectors. Their evolving corporate governance codes will stimulate market growth and maintain investor trust.

Theoretical Foundations of Corporate Governance in the GCC

The foundations of corporate governance in the GCC region come from three different but complementary frameworks. These reflect the unique business landscape of these economies. The theories give an explanation of how governance works within GCC markets’ distinct cultural, economic, and ownership structures.

Agency Theory in Family-Owned GCC Firms

Agency theory is the life-blood of corporate governance frameworks in the GCC, where families own most corporations. This theory tackles conflicts between shareholders and management. The relationship becomes particularly complex in GCC countries because of concentrated ownership structures. Family-controlled companies make up about 80% of Southeast Asian businesses with revenues over $1 billion. This creates unique governance challenges.

Families or state entities own most of the GCC corporate sector. Family presence runs strong in private-listed companies, non-listed firms, and SMEs. This ownership pattern creates a different type of conflict. Instead of the usual principal-agent conflicts seen in dispersed ownership, GCC firms face principal-principal conflicts between controlling and minority shareholders.

Family-controlled GCC enterprises demonstrate agency problems through several ways:

1. Pyramidal control structures create gaps between cash flow stakes and control rights. This motivates controlling owners to channel resources for private gains
2. Extended family ownership brings competing interests for group resources
3. Royal family ownership adds complexity. Royal members take part in policy debates and may seek government benefits through shareholdings and political connections

Controlling shareholders can also shape board composition and strategic decisions. This can weaken checks and balances. Sometimes boards don’t provide effective oversight due to time constraints and conflicts of interest.

Stewardship Theory and Cultural Fit

Stewardship theory offers a different view that fits well with GCC cultural contexts. The theory suggests managers act as stewards who put organizational welfare before personal gain. This idea matches perfectly with GCC businesses’ emphasis on trust and long-term relationships.

Stewardship theory focuses on autonomy and responsibility rather than control mechanisms. This framework sees executives as guardians of resources who commit to organizational goals and stakeholder value creation. The main principles of stewardship theory naturally fit GCC business practices:

• Internal motivation drives managers instead of external controls
• Trust serves as the foundation of governance structures
• Group orientation puts organizational success ahead of individual gains
• Focus stays on long-term sustainability rather than short-term results

Family businesses across the GCC show how well stewardship theory fits their culture. Research shows that steward-like behavior reduces conflicts and boosts collaboration between employees and family members. This creates an edge for family firms over their non-family competitors.

Stewardship theory works best in GCC governance when interests line up properly. Jaskiewicz and Klein note that “goal alignment gives rise to stewardship governance, while misalignment of interests triggers agency governance”.

Stakeholder Theory and SDG Alignment

Stakeholder theory looks beyond shareholders to include other groups. GCC companies now see stakeholder expectations as the main driver for ESG disclosure in 2023. About 83% of companies call it a key factor. This shows a major transformation toward a more inclusive governance model.

Leaders within organizations play a bigger role in driving accountability. Boards of directors (69%) and top management (63%) lead the push for ESG transparency in GCC organizations. This shows strong commitment from within to arrange business strategies with sustainability goals.

The region’s governance codes now reflect stakeholder theory principles more clearly. More organizations use global frameworks – GRI Standards usage grew from 57% in 2018 to 79% in 2023. UN Global Compact participation increased from 17% to 42% during this time.

Companies increasingly follow ESG practices to comply with regulations. This motivation rose from 14% in 2018 to 65% in 2023. UAE, Saudi Arabia, and Oman lead net-zero initiatives through long-term transition plans, energy efficiency measures, and innovative technologies.

This stakeholder-focused approach brings clear benefits. Better brand reputation (72%) and stronger investor relations (68%) top the list of advantages from ESG practices. About 70% of companies report customers now prefer businesses that follow ESG standards.

These three frameworks – agency, stewardship, and stakeholder theories – together provide a solid base to understand how corporate governance continues to develop across GCC capital markets.

Comparative Board Structures Across GCC Countries

GCC countries have unique approaches to corporate governance. Their corporate governance frameworks show both similarities and differences in key mechanisms. These countries are building better governance systems that match international standards while staying true to local business practices.

CEO-Chairman Role Separation Mandates

The life-blood of corporate governance in the GCC lies in keeping CEO and chairman positions separate. This split in leadership roles creates an essential system of checks and balances in corporate governance structures. Every GCC country requires this separation to reduce conflicts of interest and boost accountability within corporate boards. This split prevents power concentration and promotes independent oversight—a principle that runs deep throughout the region.

GCC countries share this view on leadership structure even though they differ in other governance areas. Research by Al-Malkawi et al. shows that 85% of GCC companies follow this separation rule, which proves their commitment to good governance. This requirement matches global best practices while respecting regional business culture.

Independent and Non-Executive Director Requirements

Each GCC country has its own rules about independent and non-executive directors, but they all value these roles. UAE boards need at least seven members, all non-executive, and one-third must be independent. Saudi Arabian boards should have three to eleven members, with at least two being independent.

Kuwait does things differently. Their boards need at least eleven members, including two independents, with no upper limit. Bahrain wants seven to fifteen board members, with three being independent. Qatar allows the biggest boards, requiring twelve to fifteen members.

Every GCC country needs at least half their directors to be non-executives. But Al-Malkawi et al. found that just 61% of GCC companies fully meet this requirement. GCC boards average 3.8 independent directors, which shows room for improvement.

Some countries limit how long independent directors can serve. UAE rules say independent board members can serve up to twelve consecutive years from their first appointment.

Board Size and Meeting Frequency Variations

Board sizes vary across the region, reflecting different views on governance. GCC companies typically have eight directors on their boards. Islamic banks in the region follow this pattern with eight directors too.

Meeting requirements differ by country:

• UAE and Qatar require at least six meetings yearly
• Bahrain and Oman need minimum four meetings per year
• Saudi Arabia hasn’t set any minimum requirement

GCC Islamic bank boards meet about 7.04 times yearly. This is a big deal as it means that Southeast Asian Islamic banks meet more often (8.94 times) than GCC boards (5.25 times).

Board diversity remains the biggest problem in the region. GCC boards average just 0.25 female directors. Women’s presence has barely improved, going from zero in 2002 to just 1.1% in 2011. Southeast Asian Islamic banks have more women (3%) on their boards than GCC Islamic banks (0.36%).

We have a long way to go, but we can build on this progress. The UAE took a step forward in 2012 by making corporations and federal agencies include women on their boards. These changes suggest GCC board structures are slowly becoming more diverse.

Audit Committee Composition and Financial Oversight

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Audit committees are the life-blood of financial oversight in GCC corporate governance frameworks. They play a key role to ensure financial integrity and stakeholder trust. In the last two decades, these committees have become widely accepted in the region as key governance structures. Recent laws have deepened their authority and scope.

Financial Expertise Requirements in Audit Committees

GCC countries require financial expertise in their audit committees. This shows how the region values specialized knowledge for proper financial oversight. The requirement comes from agency theory’s view that financial literacy helps committees do their oversight duties better.

Financial expertise brings real benefits to corporate governance. Studies show that audit committee members with accounting knowledge help improve forward-looking information disclosure, especially with strategic and financial matters. Yes, it is true – data from the Standard and Poor’s 100 Index shows that accounting experts on audit committees lead to better disclosure practices.

Oman’s regulators need at least one director with financial expertise on audit committees. The UAE’s rules say audit committees must have at least three members, and most need financial expertise. This focus on financial literacy means boards can properly oversee financial reporting and compliance.

Committee Structures: Audit, Nomination, Remuneration

Committee structures vary in GCC countries based on different governance priorities. Bahrain stands out by requiring four separate committees: audit, nomination, remuneration, and corporate governance. Oman only needs an audit committee, which is the region’s basic requirement.

GCC corporate governance codes typically need audit committees to have at least three members. Most members should be independent. Meeting schedules differ – UAE and Qatar need quarterly audit committee meetings, while other countries have their own rules.

The UAE Central Bank’s guidelines are particularly strict. They don’t allow audit and risk committees to merge with each other or any other board committees. Independent board members must chair both committees. These chairs must be different from the board chair and other committee chairs.

Nomination committees need most members to be independent non-executive directors. An independent non-executive director must be the chairman. These committees lead appointment processes and suggest board member and senior management appointments to the board.

Country-Specific Governance Code Variations

Each GCC country has its own corporate governance codes with different audit committee rules. Saudi Arabia’s Capital Market Authority issued its code, amended in 2009, which works on a comply/explain basis. Article 9 requires details about board committees, including names, chairmen, members, and how often they meet.

Kuwait’s corporate governance code came late, starting in 2010 through the Kuwaiti Capital Standards Rating Agency on a comply/explain basis. Before this, only basic rules in Company Law (15/1960) covered governance issues.

The UAE’s code, “Governance Rules and Corporate Discipline Standards,” focuses on internal controls and clear governance reporting to shareholders. This applies to all domestic non-financial companies listed on securities markets, except government-owned ones.

Bahrain’s Ministry of Industry and Commerce worked with the Central Bank to create their code. It has nine principles, with strong controls for financial audit and internal control. Qatar created its framework in 2009 with 31 articles across ten sections. These cover board responsibilities, internal controls, and what external auditors must do.

Recent changes in GCC corporate governance codes have made audit committee rules stronger. This helps boost credibility and trust in operations and external auditor reports. These evolving frameworks show the region’s steadfast dedication to resilient financial oversight that lines up with global best practices.

Executive Remuneration Policies and Transparency

The GCC region’s executive compensation structures show how corporate governance frameworks try to balance stakeholder interests with talent retention strategies. Each country has its own way of handling incentive structures, performance metrics, and disclosure requirements.

Remuneration Committee Roles in Policy Formulation

Remuneration committees shape executive compensation frameworks across GCC nations. These committees in the UAE decide how to pay the company’s Chairman, CEO, executive Directors, and the core team. They create policies that reward good performance and ensure fair compensation for both company and individual achievements.

These committees work independently but must follow specific governance principles. They approve pay schemes tied to performance and set yearly payment targets across the region. The committees also review and approve share incentive plans before the board and shareholders can look at them.

Market trends and economic conditions need regular analysis by GCC remuneration committees. They choose remuneration consultants and set the criteria for selection. These committees make sure executive pay lines up with long-term company goals instead of quick wins.

Performance-Based Pay Structures in UAE and KSA

The UAE and Saudi Arabia differ in their performance-based compensation models. Saudi CEOs get long-term incentive plans (LTIPs) at a rate of 56.5%, which is a big deal as it means that the UAE’s 35.3%. About 18% of Saudi chief executives get LTIs worth nine to twelve months’ salary, while UAE executives mostly depend on short-term incentives.

Bonus distributions tell a similar story. Saudi Arabia gives 34.8% of CEOs bonuses equal to four to six months’ salary. UAE executives mostly fall in a lower bracket, with 43.3% getting one to three months’ salary.

These regional differences happen because:

• Saudi organizations often go through transformation, restructuring, or scaling up, which needs longer-term leadership
• UAE’s private sector companies focus on short-term results
• Listed UAE companies give bigger LTIPs, ranging from 12 to 24 months of basic salary

Performance-based pay systems can have mixed effects. They push people to perform better but can also increase stress at work and make jobs less satisfying.

Disclosure Practices: Aggregate vs Individual Reporting

The GCC region’s transparency rules for executive pay vary widely, and most countries prefer total over individual disclosure. Only six out of eighteen Middle East and North Africa economies ask for individual pay details of directors and executives. Most GCC countries stick to total reporting even though global trends favor individual disclosure.

Research on the fifteen largest GCC-listed companies found that thirteen showed only total remuneration for board members and key executives. Just one company gave individual details. Saudi Arabia and UAE companies lead in disclosure quality for financial statements.

UAE companies follow a clear process for approving executive pay policies. The nomination and remuneration committee suggests policies, the board reviews them, and the general assembly gives final approval. UAE Federal law says board chairmen and members can’t get more than 10% of net profits after taking out consumption and reserves.

The preference for total reporting makes it hard for investors and stakeholders to judge if executive pay practices work well and are fair. In spite of that, better disclosure practices help build trust among investors by making remuneration committees and boards more accountable.

Capital Market Rankings and IPO Activity in the GCC

GCC capital markets are becoming a powerful force in the global financial world. Their market capitalization and IPO activities show how corporate governance frameworks have changed in the region. These markets now carry more weight in global portfolios as their presence in key market indexes grows.

Market Capitalization: KSA vs UAE vs Others

Saudi Arabia leads the GCC financial world with a 62% share of the combined GCC market capitalization. The UAE (16.9%) and Qatar (9.6%) round out the top positions. These three markets make up 89% of the total GCC market value. Arab financial markets’ combined market capitalization grew 2.54% in the third quarter of 2024 and reached AED 15.79 trillion.

Abu Dhabi Securities Exchange led this growth by adding AED 136.96 billion. Dubai Financial Market followed with a AED 78.40 billion increase. GCC markets’ combined market cap improved by AED 798.65 billion to reach AED 8.26 trillion in 2023, up from AED 7.45 trillion in 2022.

Saudi Aramco stands out as the largest corporation with a total value of AED 7.82 trillion. International Holding Company (IHC) comes in second at AED 876.79 billion. This concentration of market capitalization shows why better corporate governance structures are needed to handle systemic risk.

IPO Trends in 2023: Tadawul and ADX

GCC exchanges saw strong IPO activity in 2023 with 46 issuances that raised USD 10.79 billion. IPO numbers dropped slightly from 48 in 2022, while proceeds fell by 54% from USD 23.38 billion. Saudi Arabia led the pack with 35 out of 46 GCC IPOs. The Nomu-Parallel market handled 27 of these listings.

Tadawul ranked first among MENA exchanges for IPOs in Q4 2023, with 14 out of 19 regional offerings. The main market traded SAR 1.3 trillion worth of shares in 2023—22% more than the previous year. Nomu ended 2023 with SAR 48 billion in market capitalization. It traded 638 million shares worth SAR 8 billion combined.

UAE dominated IPO proceeds with 56.3% of issuance proceeds at USD 6.07 billion from eight listings. UAE exchanges’ average IPO size was USD 759 million, which was much higher than the rest of GCC’s USD 124 million average.

Sectoral Contributions to Market Growth

GCC markets show less sector diversity compared to other emerging markets. Financial sector leads with over 57% of the market capitalization weight in the MSCI GCC Countries Combined Index. Materials and energy follow at 9% and 8.5% respectively. This focus on few sectors could make the market structure vulnerable.

Materials, consumer, and transportation sectors each added six deals to the 2023 IPO landscape. These sectors led by number of transactions. Healthcare & pharmaceuticals, financials, technology, and energy sectors each contributed four to five IPOs.

Several governance changes helped drive GCC region’s positive market performance. These included looser limits on foreign ownership, better financial infrastructure, and stronger regulations. These changes opened these markets to global equity investors even more. This helped them outperform other emerging markets over five years.

GCC markets have typically shown lower correlations with global markets, which makes them valuable for portfolio diversity. Recent performance suggests they’re becoming more connected to global financial trends. This development shows why reliable corporate governance frameworks matter to keep investor confidence as these markets grow.

Governance Impact on Market Capitalization and Investor Confidence

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Empirical research in GCC markets shows complex relationships between governance frameworks and financial market performance. Studies confirm that effective corporate governance structures directly affect market valuations and investor behavior through multiple mechanisms.

Link Between Governance Quality and Stock Valuation

Research that analyzed GCC markets identifies specific governance dimensions that affect stock valuations by a lot. Political stability and rule of law demonstrate strong positive effects on stock market performance. These create environments where investors can make long-term commitments with greater confidence. Research about voice and accountability reveals surprising negative correlations with stock market indices. This might reflect concerns about how increased accountability could constrain certain business activities in the region’s unique context.

Regulatory quality stands out as a vital factor. Research confirms that countries with higher regulatory standards typically see corresponding increases in stock index values. Corporate governance quality shows direct positive correlations with share returns across Gulf companies. Organizations that implement better corporate governance frameworks generate superior returns. This happens in part by minimizing agency costs and resolving shareholder-director conflicts.

Control of corruption shows positive effects on GCC stock markets. This highlights how ethical governance practices strengthen market confidence. These findings suggest that well-governed companies command premium valuations through reduced risk perceptions and improved operational efficiency.

Foreign Investment Trends in Well-Governed Markets

Foreign direct investment patterns reflect governance quality variations across the GCC. Saudi Arabia and the UAE together attract about 80% of total GCC foreign direct investment. This shows investor preference for markets with stronger corporate governance codes. The UAE has experienced faster FDI growth than regional peers in the last decade. This growth can be attributed in part to its increasingly sophisticated corporate governance in UAE.

Governance reforms actively shape investor confidence. New transparency measures and governance standards implemented after the 2018 Abraaj scandal represent deliberate efforts to restore investor trust. Judicial independence plays a bigger role in investment decisions. About 42% of executives say GCC courts perform better than other regions regarding litigation risk.

GCC nations continue importing capital to support post-pandemic recovery and economic diversification. Strong governance practices and transparency will without doubt become even more significant.

Ethical Governance and CSR Integration in GCC Firms

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GCC firms have woven ethical practices into their corporate governance frameworks. The business world has moved away from simple charity work toward green practices that fit into their strategy. This change shows how ethical governance means more than just following rules.

CSR as a Strategic Governance Tool

GCC companies used to focus their CSR work on charity. Now they’ve revolutionized their approach by making CSR a key part of their business strategy. These organizations look beyond philanthropy to create real socio-economic change. Many GCC corporations equip their employees through training programs that help them think over CSR in their daily decisions. Some companies line up their CSR work with what their governments want to achieve. This includes supporting women and protecting the environment, which helps them work better and build a stronger brand.

SDG Reporting and Audit Committee Influence

Research shows how audit committees affect the way companies report on sustainable development goals. A study of 34 financial companies on Muscat Stock Exchange found some interesting patterns. Committee features like independence, financial knowledge, and shared directorships helped improve SDG reporting. However, more frequent committee meetings and having foreign directors led to less disclosure. Other GCC countries saw better sustainability reports from larger audit committees. Stakeholder pressure remains the main reason GCC firms include SDGs in their plans, which makes them more sustainable and open.

Voluntary Disclosures in Omani and Saudi Firms

Omani and Saudi companies show unique patterns in their voluntary disclosures. Research on companies listed on Tadawul Stock Exchange and Muscat Securities Market found company size affects internet financial reporting the most. Saudi companies’ governance setup plays a big role in their disclosure quality. This includes non-executive directors, board size, CEO roles, audit quality, and government ownership. These findings show how disclosure practices connect deeply with corporate governance structure. Boards take an active role in creating, watching over, and reaching company goals.

Regional Governance Reforms and Future Outlook

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Corporate governance in GCC countries keeps changing through bold national visions, strategic privatization plans, and economic reforms. These changes point to a fundamental change in how governance works across the region.

Vision 2030 and UAE Vision: Governance Implications

Major GCC economies have seen their corporate governance frameworks altered by national vision programs. Mohammed bin Salman leads Saudi Arabia’s Vision 2030. The program wants to make the Kingdom “the heart of the Arab and Islamic worlds,” turn it into a “global investment powerhouse,” and establish it as a “global hub connecting three continents”. Sheik Mohammed bin Rashid Al Maktoum launched UAE Vision 2021 in 2010 to raise the country among the world’s best nations. This vision grew into UAE Centennial 2071, a fifty-year strategy that sets long-term governance guidelines.

Privatization and Public Sector Transition

Privatization serves as the life-blood of economic restructuring in GCC states today. Saudi Vision 2030 accepts new ideas like public-private partnerships and privatization. The plan includes selling stakes in Saudi Aramco and state-owned companies in utilities, transport, education, and healthcare. Kuwait has approved plans that boost private sector participation to 40-50% in public-private ventures. All the same, economic liberalization cannot succeed without political reform. The current social and political conditions, with family patronage networks and unclear property rights, could limit privatization’s success.

Challenges in Smaller GCC Economies

Competition between Saudi Arabia and UAE creates more governance challenges amid economic transformation. Saudi Arabia’s new economic policies challenge UAE’s regional dominance. These include import restrictions from GCC free zones and limits on government agencies working with companies outside the Kingdom. Smaller economies must coordinate regulations, improve transportation networks, and broaden their economies. These steps remain vital to increase intra-GCC trade, which sits at less than 10% of total exports—nowhere near the EU’s 50-60% standard.

GCC’s corporate governance frameworks have seen substantial progress, building mature capital markets that draw global investors. Saudi Arabia leads the pack with its impressive $2,920 billion market cap, while the UAE keeps building its strength through major reforms and market growth. These two economic giants pull in about 80% of all GCC foreign direct investment, showing how investors prefer markets with better governance systems.

The backbone of GCC governance frameworks rests on three key theories – agency, stewardship, and stakeholder theory. These theories help us learn about how regional businesses work. Agency theory tackles conflicts in family-owned businesses, while stewardship theory fits perfectly with cultural values of trust and long-term relationships. Stakeholder theory has become more important as ESG reporting grows, with 83% of companies saying stakeholder expectations drive their sustainability reports.

GCC nations share some board structure principles but take different approaches in others. They all agree that CEOs shouldn’t be board chairmen to prevent too much power in one person’s hands. All the same, rules about independent directors, board size, and meeting frequency differ quite a bit between countries. While there’s been progress, board diversity remains a challenge across the region, and women’s representation hasn’t improved much.

Audit committees are the foundations of financial oversight, and every GCC country requires these bodies to have financial experts. Better disclosure practices have made committees and boards more accountable, which builds investor trust. Each country has its own approach to pay policies – Saudi Arabia focuses on long-term incentives, while UAE executives mostly get short-term rewards.

GCC capital markets’ success shows how good governance helps markets grow, with IPOs raising $10.6 billion in 2023. Financial sectors still dominate these exchanges, but Vision 2030 and UAE Vision are working to broaden the economy through privatization and strategic reforms.

Good governance clearly affects stock values in GCC markets. Political stability, rule of law, and regulatory quality boost market performance. Companies with better governance typically earn higher returns by cutting agency costs and solving conflicts between shareholders and directors.

GCC corporate governance faces big challenges as competition heats up, especially between Saudi Arabia and UAE. Smaller economies need to coordinate their rules, build better transportation networks, and broaden their economic activities. Right now, intra-GCC trade is less than 10% of total exports. Despite these hurdles, ongoing improvements in corporate governance across the GCC point to continued market growth and stronger investor confidence as these economies work toward their ambitious goals.