The Role of Blockholders in the Governance of Saudi Public Listed Companies

Abstract

This thesis investigates the role of blockholders in the governance of Saudi public listed companies. Saudi Arabia presents a unique setting, where religious, cultural and social factors, that are similar to those of other Arab and Islamic nations, play an important role in the day to day lives of the society. Similar to other developing countries, Saudi Arabia is characterized by a wide presence of blockholders in addition to a weak legal setting, in such context minority shareholders become prone to expropriation by controlling blockholders.

In order to examine the level of influence blockholders have on corporate governance, three empirical chapters, chapters 3, 4 and 5, focus on key governance mechanisms that concern minority shareholders, namely the board of directors, dividends and audit quality, respectively. Using appropriate regression models, each study examines the influence of the different blockholder types present in the Saudi market, namely family, royal family, government, corporate, managerial and multiple blockholders, while controlling for various factors that are known to have an impact on the governance measures in question. The studies examine data from 117 non-financial listed companies in Saudi Arabia from 2008-2013, with a final sample (N) of 619 firm year observations.

Overall, the results show that minority shareholder rights are fairly protected under blockholder control in Saudi public listed companies. The initial results, in chapter 3, indicate that blockholders reduce board independence and maintain control over board representation, which enables them to expropriate minority shareholders. The exclusion of outside independent directors might reflect the dominance of the Arabian culture in Saudi Arabia, which is characterized by high power distance and strong levels of secrecy in business dealings. However, further analyses, in chapters 4 and 5, reveal that blockholders actually act in the best interest of all shareholders and curb managerial self serving behavior by positively influencing the corporate governance of the firm, through improved dividend payout policy, which reduces the levels of free cash flow available for appropriation, as well as improving the firms' audit quality, by appointing Big Four auditors and independent and expert audit committee members.

Collectively, these results reflect the possible role that Islamic teachings play in shaping the behavior of blockholders within the Saudi capital market, where fair treatment and just dealing represent core Islamic values, in which minority shareholders are not found to be expropriated. The Islamic ethical system promotes the protection of the rights of the various stakeholders and urges humans to act as stewards entrusted in achieving continuity and societal welfare.

The results of the thesis are of interest to academics, practitioners and policy makers in developing countries in general, and the Middle East and Saudi Arabia in particular. Local and international investors become more aware of the environment of the Saudi market when prompted to make investment decisions. Policy makers also recognize the relationship between blockholders, corporate governance and minority shareholders in the Saudi market.