CORPORATE GOVERNANCE: FACTORS INFLUENCING VOLUNTARY DISCLOSURE BY PUBLICLY TRADED SAUDI ARABIAN...

www.tjprc.org [email protected]

CORPORATE GOVERNANCE: FACTORS INFLUENCING VOLUNTARY DISCLOSURE

BY PUBLICLY TRADED SAUDI ARABIAN FIRMS

KHALID HAMAD ALTURKI

Assistant Professor, Department of Accountancy, College of Business Administration, Qassim University,

Albokairiah, Saudi Arabia

ABSTRACT

This paper investigates the determinants and the features of voluntary disclosure based on information in the

annual reports of 113 Saudi companies listed on Saudi stock market (Tadawul) for the period 2012-2013.

Using a multivariate regression, the results shown that firm size, profitability, leverage and assets-in-place are the

principal factors affecting the voluntary disclosure of Saudi firms. However, the board independence, ownership

concentration and liquidity does not affect the level of voluntary disclosure for Saudi companies. Another interesting result

is that audit quality have opposed effect on the disclosure level.

KEYWORDS : Corporate Governance, Board of Directors, Audit Committees, CEO Duality, Voluntary Disclosure,

Annual Report, Saudi Arabia

INTRODUCTION

The debate about corporate governance is typically traced way back to the early 1930s (Berle and Means, 1930).

They noted that with the separation of ownership and control, and the wide dispersion of ownership, there was effectively

no check upon the executive autonomy of corporate managers. In the 1970s these ideas were further refined in what has

come to be known as Agency Theory. Agency theory predicts that companies with high agency costs will try to reduce

them using control mechanisms such as the monitoring activity, delivered by its corporate governance structures, and the

voluntary disclosure (Jensen and Meckling 1976; Leftwich et al. 1981; Fama and Jensen 1983).

As applied to corporate governance the theory suggests a fundamental problem for absent or distant

owners/shareholders who employ professional executives to act on their behalf. The root assumption informing this theory

is that the agent is likely to be self-interested and opportunistic ,therefore, the executive will serve their own interests rather

than those of the owner principal. To counter such problems the shareholders will have to incur 'agency costs'; costs that

arise from the necessity of creating incentives that align the interests of the executive with those of the shareholder, costs

incurred by the necessity of monitoring executive not to serve their own interests, and the costs incurred for the need for

more disclosure since the agency theory literature approved the existence of complementary and a substitutive relationship

between governance and disclosure. Due to the high costs attached to discloser, companies might opt for strengthening

internal governance mechanisms instead of increasing the level of disclosure (Cheng and Courtenay 2006; Cerbioni and

Parbonetti 2007).

In this study the author investigates the interplay between corporate board, effective audit committee, and

voluntary disclosure in an agency setting characterized by the presence of large controlling shareholders, which express a

strong board leadership. It is emphasized in the literature that better disclosure is associated with improved transparency

International Journal of Accounting and Financial Management Research (IJAFMR) ISSN(P): 2249-6882; ISSN(E): 2249-7994 Vol. 4, Issue 5, Oct 2014, 15-38 © TJPRC Pvt. Ltd.

16 Khalid Hamad Alturki

Impact Factor (JCC): 4.4251 Index Copernicus Value (ICV): 3.0

and a reduction in the information gap between firm and outside investors (Lobo and Zhou, 2001). While large insider

shareholders can exploit the benefits of private control, having direct access to information, outsider shareholders rely on

the monitoring activity of the board of directors and on disclosure. Mere adoption of international accounting standards and

other mandatory disclosure rules without considering managers' attitude towards voluntary disclosure, however, will not

improve corporate disclosures. While mandatory disclosure ensures minimum amount of information, voluntary disclosure

is supplemental to the mandatory disclosure (Ho and Wong, 2001).

Voluntary disclosure is an important tool that could be used moderate the information asymmetry between

different types of shareholders. However, due to the fact that disclosure is the product of an agent

(Meek et al. 1995; Healy and Palepu 2001), it is important to study the characteristics and duties of boards and its members

in determining the firm’s disclosure behavior in this context. The characteristics and duties of independent directors appear

to be crucial to guarantee the outsider investors interests. Independent boards increase financial reporting quality by

playing a crucial role in monitoring senior management. Research suggests that, as the proportion of independent board

members increases, the likelihood of financial fraud in a firm decreases (Beasley 1996; Beasley et al. 2000); earnings

overstatement is less frequent (Dechow et al. 1996); the magnitude of abnormal accruals is lower (Klein 2002); and the

external audit fee is greater (Carcello et al. 2002).

The empirical setting of the study is provided by the Saudi Arabia stock market. This market is less developed and

plays a minor role than the U.S. and the British markets do. In the Saudi Arabian setting, large controlling shareholders

who dominate boards can influence the directors nomination process, as well as the board and the committees agenda. In

this context, agency conflicts between large insider and minority outsider shareholders are hardly mitigated with the only

contribution of an internal control mechanism, such as the board of directors. This situation is likely to produce calls for

additional external control devices, such as disclosure. Like in other similar agency settings (e.g. Spain, see Mendez and

Garcia 2007), recurring calls for richer voluntary disclosures came by the Saudi Arabia Stock Exchange Authority and the

professional associations in the past years (Saudi Stock Exchange 2006). These features make the Saudi Arabia setting

appealing for a research about the interplay between governance and disclosure.

Healy and Palepu (1993) stated that managers face a tradeoff between disclosing information that may help

capital markets to assess the value of the firm correctly, and withholding information to avoid potential consequences on

the firms’ competitive position, the so called proprietary costs. Therefore, there is a wide range of firm specific and

institutional characteristics that affect managers’ decisions on disclosure: the company’s size, listing status, industry sector,

the presence in international markets, managers’ compensation plans, the ownership structure or the litigation and

proprietary costs are some of the documented factors that may affect the cost-benefit equilibrium associated to the

disclosure policy, leading voluntary information to significantly differ across firms and countries (Meek et al., 1995; Giner,

1997; Khanna et al., 2004; Hutton, 2004; Gómez Salas et al., 2006; Lundholm and Winkle, 2006).

The author regressed a voluntary disclosure index on eight corporate governance variables, regarding board

independence, firm size, profitability, leverage, ownership concentration, audit quality, liquidity and assets-in-place. We

also deepened the analysis by regressing two models, where the first expresses the relationship between the disclosure level

and its determinants and the second expresses the relationship between the adjusted disclosure index and its determinants.

The results shown that firm size, profitability, leverage and assets-in-place are the principal factors affecting the

voluntary disclosure of Saudi firms. However, the board independence, ownership concentration and liquidity does not

Corporate Governance: Factors Influencing Voluntary Disclosure by 17 Publicly traded Saudi Arabian Firms


affect the level of voluntary disclosure for Saudi companies. Another interesting result is that audit quality have opposed

effect on the disclosure level in contrast with the previous studies.

The remainder of the paper is organized as follows. The related literature on the factors that affect voluntary

disclosure is stated in the next section. Section 3 develops the hypotheses of this research. Section 4 discusses the

regression and methodology used in this research. The results are then presented in section number five.

Section 6 concludes with a summary and discussion.

LITERARTURE REVIEW

Agency problems are influenced by the legal environment, leading corporate control mechanisms constraining the

conflict of interest within the firm, to vary significantly across different institutional settings. This paper aims to look at the

interplay between corporate board, effective audit committee, and voluntary disclosure in an agency setting characterized

by the presence of large controlling shareholders. Particularly, the author focuses on voluntary disclosure as a key

complementary mechanism of the corporate governance process and the financial reporting system to reduce the costs

linked to the information asymmetries that arise as a consequence of the agency relationship (Lambert 2001).

The separation of ownership and control results in information asymmetry and potential conflict of interests

between management and shareholders (Jensen and Meckling 1976; Fama 1980). In an agency setting featured by

ownership concentrated in the hands of dominant shareholders, the presence of shareholders in the board as either

executive and non executive directors can be expected (Shleifer and Vishny 1997).

Several studies document the existence of such an agency problem (Claessens et al. 1999; DeAngelo and

DeAngelo 2000; Faccio et al. 2001; Anderson and Reeb 2004). Jensen and Meckling (1976) define an agency relationship

as arising when there is a contract designed to motivate a rational agent to act on behalf of a principal when the agent’s

interests would otherwise conflict with those of the principal. Faccio et al. (2001) found empirical evidence of wealth

expropriation by controlling shareholders, studying the dividend policy. DeAngelo and DeAngelo (2000) find that large

shareholders in public firms extract private rents through extraordinary dividends, excessive compensations schemes and

related-party transactions.

Since the early 70s, empirical literature on voluntary disclosure has placed special attention on the factors

explaining why companies disclose information beyond the one required in the accounting regulation, as well as the impact

of this information on capitals markets (Ahmed et al., 1999). If complementary, agency theory predicts that a greater

amount of voluntary disclosure can be expected from companies whose governance practices provide ‘‘an intensive

monitoring package’’ (Leftwich et al. 1981). The monitoring activity reduces the management’s opportunistic behavior and

the information asymmetry. In such an intensive monitoring environment, managers will be not likely to withhold

information for private benefits, with possible improvements of the disclosure comprehensiveness and quality.

The adoption of corporate governance mechanisms has increased in recent years due to changing expectations of

capital markets around the globe; increased regulatory requirements; adoption of international accounting standards. Given

the growing attention to the role of corporate governance, there is a substantial body of evidence evaluating the influence

of individual governance attributes on firms’ disclosure policy.



Jensen et al. (1983) stated that the board of directors is one of the major devices that limits agency costs and

permits the survival of most corporations. Fama (1980) explained that the board of directors is one of the most important

internal control monitoring mechanisms of top internal managers in an open corporation, where external directors play a

key role in working in favor of shareholders interests, “carrying out tasks that involve serious agency problems”

between internal-executive directors and shareholders.

Kim et al. (2007) stated that although large owners might play a relevant monitoring role over managers,

large shareholders’ interests may not be aligned with those of minority shareholders and therefore the composition of the

board of directors may be significantly affected by the ownership structure. He mentioned that concentrated ownership is

considered a governance mechanism as large owners may use their power to appoint independent non-executive directors

to control managerial decisions effectively in order to reduce agency costs between owners and managers. The presence of

large shareholders may lead to wealth expropriation from minority shareholders, if large shareholders tend to appoint

managers or directors that are aligned with their own interests (Lim et al, 2007). Therefore, the composition of the board of

directors becomes a key control mechanism for minority shareholders. Independence becomes a crucial requirement to

control the costs of the different agency relationships within the firm. The presence of a significant proportion of

independent non-executive directors tends to guarantee an objective control over pervasive managers and non-independent

directors’ decisions.

Powerful board members control board and its committees’ agenda, influencing their decision control activity

(Carcello et al. 2002; Laksmana 2008). In this conduct, it would be difficult to mitigate agency conflicts only with the

contribution of an internal control device, such as the board of directors, and there is a need for additional external control

mechanisms such as voluntarily disclosed information. Corporate governance and voluntary disclosure can be seen as

complementary mechanisms, when internal decision making mechanisms, as board of director strengthen the extent of

voluntary disclosure. Instead, if the relationship is substitutive, one corporate governance mechanism may substitute for

another one, and companies will choose to improve one at the expense of the other one (Rediker et al., 1995).

Karamanou and Vafeas (2005) investigate the association between corporate governance structures and voluntary

financial disclosure practices, proxied by management earnings forecasts. They note that the likelihood of making

management earnings forecast is positively associated with stronger corporate governance structure in the form of more

outside directors on the board, a lower level of managerial share ownership, a higher level of institutional ownership and a

smaller audit committee.

Prior studies have examined the association between corporate disclosure and specific governance characteristics

such as corporate board, audit committee, voluntary disclosure, board composition, board committee formation and

independence, CEO and board chairperson duality, audit committee (Donnelly et al., 2008, Cheng et al., 2006, Gul et al.,

2004, Ho et al., 2001, Chen et al., 2000). However, these studies do not produce consistent evidence regarding the impact

of these individual governance attributes on corporate disclosure.

Agency theory-based empirical literature also find mixed evidence. Most studies address the question in an

agency context, where conflicts of interests are between shareholders and management (Chen and Jaggi 2000; Ho and

Wong 2001; Cheng and Courtenay 2006; Eng and Mak 2003; Gul and Leung 2004; Cerbioni and Parbonetti 2007).

In an agency setting featured by ownership concentration, large insider shareholders take advantage of the benefits of

private control and enjoy direct access to information (Shleifer and Vishny 1997; Dyck and Zingales 2004).



In this situation, outsider investors rely both on the internal governance mechanisms and on disclosure for protecting their

interests.

It is expected therefore that there is a complementary relationship between governance and disclosure in an

agency setting characterized by the presence of large controlling shareholders and strong board leaders.

Internal and external control are expected to be present at the same time, insofar as the presence of one of them reduces the

incentive for controlling shareholders to avoid the other.

HYPOTHESES DEVELOPMENT

Board Independence

The presence of independent non-executive directors depends on the costs and the needs of both advising and

monitoring within each firm (Linck et al., 2008). It is expected that independent directors would mitigate the agency

conflicts between large controlling shareholders and minority outsider shareholders (Anderson and Reeb 2004; Park and

Shin 2004; Patelli and Prencipe 2007).

Most of the literature focuses on the monitoring role of independent directors where empirical results reveal how

their presence significantly affects transparency and improves firm performance. Previous literature find evidence that

independent directors act to alleviate conflicts between controlling shareholders and outside shareholders

(Anderson and Reeb 2004). Rosenstein and Wyatt (1990) find a positive stock price reaction to appointments of outside

directors to corporate boards; Weisbach (1988) finds that a poorly performing CEO is more likely to be replaced if the firm

has a majority of outside directors; Brickley et al. (1994) report a positive stock price reaction to the adoption of anti

takeover mechanisms (poison pills) when there is a majority of outsiders in the board; More recently, Black et al. (2006)

find that the presence of independent directors affects company value in emerging economies; Beasley (1996) looked at the

relationship between board composition and financial statement fraud, finding that those companies with higher presence

of independent directors on their board are less likely to be involved in financial fraud than those with a lower proportion

of independent directors. Hossain et al. (2001) find a positive relationship between the presence of independent directors

and firm value on New Zealand companies, while other authors such as Dahya et al. (2002, 2005) find a similar effect on

outside CEO appointments and company performance.

Prior literature examined the relationship between board composition and voluntary disclosure, however, the

findings were mixed. Some studies document a complementary relationship between board composition, measured by the

percentage of independent directors in the board, and voluntary disclosure (Lim et al. 2007; Cheng and Courtenay 2006;

Patelli and Prencipe 2007). Other studies conducted on Asian Countries provide evidence that a higher proportion of

independent directors in the board is associated with a lower level of voluntary disclosure (Eng and Mak 2003; Gul and

Leung 2004).

Ho and Wong (2001) did not find a significant relationship between independent non-executive directors and

voluntary disclosure. However, due to the inconsistency of their results with previous empirical evidence (Chen and Jaggi,

2000; Forker, 1992, and Leftwich et al., 1981) the authors question the independence of directors among Hong Kong

corporate boards. It is expected though that the existence of independent non-executive directors in the board is positively

related to the level of voluntarily disclosed information. The following hypothesis is formulated.



Hypothesis 1: There is a Positive Relationship between the Proportion of Independent Non-Executive

Directors in the Board and the Level of Voluntary Disclosure

Firm Size: there a broad consensus among the various studies that there is a positive relationship between firm

size and the level of voluntary disclosure (King et al., 1990; Skinner, 1992; Depoes, 2000; Eng and Mak, 2003; Wang et

al., 2008; Dal-Ri and Dos, 2010; Lan et al., 2013). these papers and other studies confirmed that voluntary disclosure

increases with firm size. This can be explained by the dollar value of damages in securities litigation is a function of firm

size (Kolsi, 2012).

Based on signaling theory, we assume a positive relationship between firm size and voluntary disclosure level.

Hypothesis 2: The Voluntary Disclosure Level is positively related to Firm Size.

Profitability

Drawing on the signaling theory, Inchausti, 1997; Watson et al., 2002 shows that when firm performance is good,

firms will be more inclined to signal their quality to investors. Subramanyam (1996), Ahmed and Courtis (1999),

Dal-Ri and Dos (2010) claim that greater profitability may induce management to supply more information, to illustrate its

ability, to maximize shareholder value, and to elevate managerial compensation (Singhi and Desai, 1971; Lan,

Wang and Zhang, 2013). Finally, we can deduce that there is a positive relationship between firm profitability and

voluntary disclosure level.

To measure profitability the ‘Return on Assets’ (ROA) ratio is used. This is the net profit plus interest costs

divided by the total assets. ROA as a proxy of profitability has also been used in multiple prior studies such as

Eng and Mak (2003).

Hypothesis 3: The Disclosure Level is positively associated to a Firm's ROA.

Leverage

Watson et al., 2002 defined leverage as a description of company’s financial structure, and measures the long term

risk implied by that structure. Most studies have largely used agency theory to explain the relationship between leverage

and corporate disclosure (Hossain et al., 1995; Inchausti, 1997; Watson et al., 2002; Alsaeed, 2006; Abdullah & Ku Ismail,

2008). These studies argued that leveraged firms have to disclose more information to satisfy information needs of the

creditors. We can concluded that It can be seen that there is a positive leverage-disclosure level relationship.

Hypothesis 4: The Voluntary Disclosure Level is positively related to Leverage.

Ownership Concentration

The presence of controlling shareholders may create agency problems between controlling and non-controlling

shareholders (Ali et al., 2007; Patelli and Prencipe, 2007). Under these circumstances, independence and monitoring

mechanisms becomes a crucial requirement for the protection of minority shareholders, guaranteeing equal access to

information for small and dominant shareholders (Mc Kinnon and Dalimunthe, 1993). The firm’s ownership is associated

with different levels of disclosure (Gelb, 2000). Particularly, information disclosure is expected to increase with higher

levels of ownership diffusion, (Raffournier, 1995) where non-controlling shareholders cannot be easily constrained by

majority shareholders to require a greater level of transparency and information disclosure.

Most of the empirical evidence reports a negative relationship between ownership concentration and voluntary

disclosure: Patelli and Prencipe (2007) in Italy, Barako et al (2007) in Kenya, Babio and Muiño (2005) in Spain,



Chau and Gray (2002), Cheng and Courtenay (2006) or Chen and Jaggi (2000) in Asian countries. However, authors as

Donnely and Mulcahy (2007), Haniffa and Cooke (2007) or Eng and Mak (2003) do not find evidence on a significant

relationship between ownership and voluntary disclosure. Based on the theory postulates and previous empirical evidence

the author of this study formulates the following hypothesis.

Hypothesis 5: There is a Negative Relationship between Ownership Concentration and the Level of

Voluntary Disclosure.

Audit Quality

The Organization for Economic Co-operation and Development (OECD) in their report of the Principles of

Corporate Governance encouraged the board of directors to establish sub-board committees when it is considered

necessary by the board to exercise not only independent judgment of areas that may attract potential conflict of interest but

also key areas of responsibilities (OECD, 1999). When it is established, their mandate, composition and working

procedures should be well defined and disclosed by the board. An organization's board of directors is responsible for

forming committees when necessary. Committee members must be drawn from the current members of the board itself.

The board's power to form committees is usually addressed in the organization's bylaws. The nomination committee can

play an important role in presence of large controlling shareholders, since it can give more possibilities for the minority

shareholders to advocate a nominee (Jensen 1993; Shivdasani and Yermack 1999).

The nomination committee can influence the independence of outside directors since, given the number of

outsiders, the committee influences the degree of independence among those by selecting fewer ‘grey’ directors (Vafeas

1999a). The presence of a nomination committee can contribute to the board effectiveness as monitoring device. The

compensation committee can also contribute to sound governance, playing a positive role in the top management control.

This committee can contribute to define the remuneration mechanisms and to align the management’s and the

shareholders’ interests (Main and Johnston 1993; Conyon and Peck 1998; Laksmana 2008). The audit committee plays an

important role in ,omitoring the board activities (Blue Ribbon Report 1999).

The literature above find evidence that the presence of the audit, compensation and nomination committees in the

board positively affect disclosure (Cerbioni and Parbonetti 2007; O’Sullivan et al. 2008). Hence, the author hypothesizes

the following:

Hypothesis 6: There is a Positive Relationship between the Presence of the Audit and the Level of Voluntary

Disclosure.

Liquidity

The ability of a firm to meet its short-term liabilities defined the liquidity. Cooke (1989) and Wallace et al (1994)

suggest that when the firms are with a greater liquidity, they are considered to be operating better business and are prone to

disclose more information voluntary. Generally, several studies argued that weak liquidity may prompt firms to increase

their disclosure in order to justify their liquidity status.

In this study, we considers the current ratio as a proxy for liquidity and it is related positively to the level of disclosure.

Hypothesis 7: The Voluntary Disclosure Level is positively related to Liquidity.



Assets-in-Place

Some studies suggests that fewer agency problems and less information asymmetry may exist in firms with larger

assets-in-place, thus indicating a positive relationship between assets-in-place and disclosure level (Myers, 1977).

Darrough and Stoughtou (1990) and Darrough (1995) assert that firms that are protected in their sectors by high entry

barriers are likely to disclosure more information than firms that are not. Lan, Wang and Zhang (2013) claim that fixed

assets are usually used to measure proprietary costs, as they are an easily measurable indicator of barriers to entry.

Thus, it appears likely a positive relationship exists between larger fixed assets and voluntary disclosure level.

Hypothesis 8: The Voluntary Disclosure Level is positively related to Assets-in-Place.

All the hypotheses and proxies used to test them are summarized in Table 1.

Table 1: Hypothesis to be tested

Nr Hypothesis Variables used to test the Hypothesis Expected Sign

H1 There is a positive relationship between the proportion of independent non-executive directors in the board and the level of voluntary disclosure.

The proportion of non-executive directors on the board.

+

H2 The voluntary disclosure level is positively related to firm size.

Total assets. +

H3 The disclosure level is positively associated to a firm's profitability.

Return on assets (ROA) +

H4 The voluntary disclosure level is positively related to leverage.

Total book value of debt to total assets at year-end.

+

H5 There is a negative relationship between ownership concentration and the level of voluntary disclosure.

The percentage of shares held by each individual investor.

-

H6 There is a positive relationship between the presence of the audit and the level of voluntary disclosure.

Dummy for a firm audited by the big-four auditor.

+

H7 The voluntary disclosure level is positively related to liquidity.

Current ratio of firm at year-end. +

H8 The voluntary disclosure level is positively related to assets-in-place.

Ratio of fixed assets to total assets. +

METHODOLOGY

Sample Selection

The firms included in this research were selected from the entire list of companies that traded on the

Saudi Arabian Stock Exchange Market (Tadawul). The sample of this study consists of 113 Saudi companies, out of 161

listed on the Saudi Stock Exchange in years 2012 and 2013. These firms represent more than 70% of all companies that

traded on the Saudi Arabian Stock Market. Table 2 presents the number and the percentage of our sample firms by

industry. This research excludes banks and insurance companies due to their specific disclosure requirements by the Saudi

Arabian Monetary Agency (SAMA) and because their business activities and financial reports are not comparable with

those of firms in other industries. A few other firms were also excluded, as some required data are lacking.

Appendix A presents the list of companies sample.



Table 2: Sample description

Names of Firms Number of Firms Percentage Petrochemical industries 14 12.93 Cement 13 11.50 Retail 13 11.50 Energy & Utilities 2 1.77 Agriculture and food industries 15 13.27 Telecommunications& Information Technology 3 2.65 Multi-investment 6 12.39 Building & Construction 15 13.27 Real estate development 8 7.08 Transport 4 3.54 Media and Publishing 3 2.65 Hotel and Transport 3 2.65

The period under study is from 2012 to 2013. As Kolsi (2012), we use only two years because we are interested in

the cross-sectional determinants of the voluntary disclosure practice.

The disclosure level information and the data of its determinants was collected for each firm from the annual

reports and Tadawul database. The data on corporate governance are collected from the corporate governance regulations,

available on the Saudi Capital Market Authority (CMA) database.

Model Specification

In order to determine the factors influencing voluntary disclosure by publicly traded Saudi firms, the model to be

estimated is as follows:

5 70 1 2 3 4 6 8it it it it it it it it it itDS NED size ROA lev own audit liq AIPα α α α α α α α α ε= + + + + + + + + + (1)

were DSit is the index of voluntary disclosure of firm i at year t. this index is computed as follows:

Number of items disclosed voluntarily by a given firmVoluntary disclosure index =

Total number of relevant itemsthat should be disclosed

All other variables ( , , , , , , and ) represents the independent variables that

can have an effect on voluntary disclosure index.

Following Lan, Wang and Zhang (2012), another test is made by the adjusted disclosure score (Adj-DS) rather

than, in order to take into account the differences in voluntary disclosure in various industries. Indeed, a company's Adj-DS

is equal to its DS minus the average DS of the industry to which it belongs.

The adjusted model is as follows:

, , , , , , , , , ,5 70 1 2 3 4 6 8i t i t i t i t i t i t i t i t i t i tNED size ROA lev own audit liq AIPAdj DS α α α α α α α α α ε= + + + + + + + + +− (2)

Were the adjusted disclosure score of firm i is computed as follows:



,1

, ,

n

i ji

i j i jj

DS

Adj DS DSn

=− = −∑

Where j = 1, 2, ..., 12 represent the number of industries and i represent the number of firms.

Presentation and Measurement of Variables

Dependent Variable: Following Botosan (1997), Xiao et al. (2004), Wang et al. (2008) Lan, Wang and Zhang

(2013), the dependent variable in this paper is the voluntary disclosure. We use a two-step procedure to compute a

disclosure index for the sample firms.

Step1: Counting the number of items which are considered as voluntary by Saudi firms and also the list of

relevant information within each item.

Step 2: given the value "1" if an item from the list is disclosed by the firm and "0" otherwise. finally, a disclosure

score for a given firm is weighted by the total number of the relevant items.

Thus, the disclosure index is given as follows:

1

n

iji

jj

X

DSn

==∑

where n presents the maximum number of items that should be disclosed by firm j. In this study, we selected 66

voluntary items from 14 disclosure areas (See Appendix C). the index i = 1, 2, ..., 66 represent the number of disclosure

items. Xij is a dummy variable, it equal 1 if the im item is disclosed by the jm firm for the period under study and 0

otherwise.

Independent Variables: Based on the empirical studies, we Based on the empirical literature, we use the main

determinants of a firm's disclosure level. We use eight independent variables. These include: Board independence (NED),

Firm size (size), Profitability (ROA), Leverage (Lev), Ownership (own), Audit quality (audit), Liquidity (liq), Assets-In-

Place (AIP). Appendix B listed the definitions, the measurement and the data sources of these variables.

RESULTS AND DISCUSSIONS

Descriptive Statistics

Table 3 reports the descriptive statistics for the dependent and independent variables. As shown, the disclosure

index ranges from 0.17 to 0.30 and the mean of the disclosed items by the sample firms is about 20 %. The proportion of

non-executive directors on the board represents 46 % in our sample firms. The mean of leverage ratio is about 69 %,

suggesting that the sample firms are highly leveraged. The average proportion of shares held by each individual investor

held approximately 15 % of the firm's total equity. Finally, 4 % of our sample are audited by a Big Four auditor.

Table 3: Summary Statistics

Variables Mean Maximum Minimum SD DS 0.2067 0.3 0.17 0.13 NED 0.46 1 0.21 0.07 Size 22.46 29.52 16.08 1.41



Table 3 Contd., ROA 1.87 4.12 1.42 2.63 Lev 0.69 6.36 0.011 0.32 Own 0.15 0.44 0.001 0.03 Audit 0.04 1 0 0.48 Liq 0.58 1 0.105 0.24 AIP 0.49 0.81 0.001 0.19

Table 4 displays the Pearson correlation among each pair of independent variables. Following Gujaratti (1988),

the correlations between explanatory variables is accepted if they are not harmful in multivariate unless they exceed 0.80.

As shown, table 4 suggest that the multi-collinearity between the explanatory variables is unlikely to pose a serious

problem in interpreting the results of our various estimations.

Table 4: Correlation Matrix

DS NED Size ROA Lev Own Audit Liq AIP DS 1.00 NED - 0.03 1.00 Size 0.21 - 0.03 1.00 ROA 0.17 0.01 - 0.47 1.00 Lev - 0.12 0.01 - 0.03 - 0.12 1.00 Own 0.02 0.06 - 0.11 - 0.01 0.03 1.00 Audit - 0.08 - 0.01 0.02 - 0.13 - 0.07 - 0.16 1.00 Liq - 0.06 0.02 - 0.24 - 0.06 - 0.21 0.01 - 0.14 1.00 AIP 0.09 - 0.05 0.09 - 0.08 - 0.02 - 0.20 0.12 - 0.36 1.00

Discussion of Estimation Results

The estimation results of equations (2) and (3) respectively are summarized in tables (5) and (6). Both tables

shows that the estimation results are consistent for most explanatory variables, implying that they are highly robust.

Table 5: Estimation of Relationship between Voluntary Disclosure Index and its Determinants

Dependent Variable: Voluntary Disclosure (DS) NED - 0.004 (- 0.26) Size 0.033*** (3.71) ROA 0.098** (2.30) Lev 0.074** (2.56) Own 0.244 (0.68) Audit - 0.019*** (- 4.47) Liq - 0.086 (-1.29) AIP 0.27** (2.31)



Number of observations 197 Adjusted R2 0.0512 F-Statistic 7.49 p-value (0.000)

***, ** and * respectively indicate the significance at 1%, 5% and 10%.

The estimation results presented in tables 5 and 6 suggest that the board independence measured by the proportion

of number of non-executive directors in the board, the diffused ownership measured by the percentage of shares held by

each individual investor, and the liquidity measured by current ratio at year-end have no effect on the both voluntary

disclosure and adjusted-voluntary disclosure levels of the Saudi firms.

Table 6: Estimation of Relationship between adjusted Voluntary Disclosure Index and its Determinants

Dependent Variable: Adjusted-Voluntary Disclosure (Adj-DS) NED - 0.086 (- 0.35) Size 0.091*** (3.19) ROA 0.127** (2.09) Lev 0.178*** (2.98) Own 0.313 (1.06) Audit - 0.183*** (- 3.879) Liq - 0.146 (- 0.53) AIP 0.227*** (2.61) Number of observations 197 Adjusted R2 0.0369 F-Statistic 6.60 p-value (0.000)

***, ** and * respectively indicate the significance at 1%, 5% and 10%.

Contrary to our expectations, these results does not conform with the previous studies (Lim et al. 2007; Cheng and

Courtenay 2006; Patelli and Prencipe 2007), but they are consistent with other studies (Ho and Wong, 2001; Chen and

Jaggi, 2000; Forker, 1992, and Leftwich et al., 1981). In our study, we rejected the we reject the first, fifth and seventh

hypotheses.

The coefficients of all other variables are statistically significant but do not have the same degree of significance.

Indeed, the coefficients of firm size, leverage, audit quality and assets-in-place are highly significant, whereas that for

profitability is only marginally significant. These finding are consistent with both existing theoretical literature and our

hypothesis, only for the variable audit quality. Indeed, the sign of auditor quality is in contrast highly significant but it is

negative. This result is inconsistent with our expectation and prediction, existing theory and prior empirical finding,

namely those for Xio et al. (2004) and Wang et al. (2008), but it is consistent with the results of Lan et al., (2013).

This result can be explained by a firm audited by the Big Four attract more attention than other firms and release more

information through other channels and therefore rely less on voluntary disclosure in annual reports (Lan et al., 2013).

About the relationship between leverage and disclosure level, the result confirms our fourth hypothesis indicating



that there is a positive relationship. This implies that a higher leveraged firms should disclosure more voluntary

information than other firms in order to give more insurance for investors and creditors (Kolsi, 2012). Thus, a higher level

of voluntary disclosure is positively priced by investors and creditors. This finding confirms by those of Raffoumier (1995)

and Kolsi (2012).

Generally, the coefficients of firm size, profitability measured by ROA, and assets-in-place are statistically

significant and positive, which confirm our hypothesis. these results imply that larger firm tend to disclose more

information in Saudi Arabian. Evenly, our finding confirms that firms with higher levels of profitability disclose more

voluntary information than firms with lower levels of profitability. The third hypothesis thus is confirmed. Concerning the

eighth hypothesis, it also is confirmed by the estimation results. Indeed, firms with higher levels of fixed assets are likely to

disclose more voluntary information than firms with lower ones.

CONCLUSIONS

Voluntary disclosure is an important tool that could be used moderate the information asymmetry between

different types of shareholders. However, due to the fact that disclosure is the product of an agent (Meek et al. 1995; Healy

and Palepu 2001), it is important to study the characteristics and duties of boards and its members in determining the firm’s

disclosure behavior in this context.

The aim of this study is to check for determinants and features of voluntary disclosure policy adopted by a sample

of listed Saudi firms. Following Botosan (1977) and Lan et al. (2013), we calculated an index for the voluntary disclosure

and for the adjusted-voluntary disclosure. Using a multivariate regression for a sample of 113 Saudi firms covering the

period 2012 and 2013, we find that the board independence, the diffused ownership, and the liquidity does not affect both

voluntary disclosure and adjusted-voluntary disclosure levels of the Saudi firms and that firm size, leverage, audit quality

and assets-in-place are highly significant associated with voluntary disclosure. Whereas, profitability is marginally

significant related to voluntary disclosure level.

Indeed, the effect of auditor quality is, in contrast, highly significant but it is negative. This result is inconsistent

with our expectation and prediction, existing theory and prior empirical finding, namely those for Xio et al. (2004) and

Wang et al. (2008), but it is consistent with the results of Lan et al., (2013).

REFERENCES

1. Abdullah, A., & ku ismail, K.N.I. (2008). Disclosure of voluntary accounting ratios by Malaysian listed companies.

Journal of Financial Reporting and Accounting, 6(1): 1-20. http://dx.doi.org/10.1108/19852510880000632

2. Ahmed, K., & Courtis, J. (1999), Association between Corporate Characteristics and Disclosure Levels in Annual

Reports: A Meta Analysis, British Accounting Review, Vol. 31, No. 1, pp. 35-61.

3. Alsaeed, K. (2006). The association between firm-specific characteristics and disclosure: The case of Saudi Arabia.

Managerial Auditing Journal, 21(5): 476-496. http://dx.doi.org/10.1108/02686900610667256

4. Beasley, M. (1996). An empirical analysis of the relation between the board of director composition and financial

statement fraud. The Accounting Review 71 (October): 443-465.



5. Carcello, J., D. Hermanson, T. N., & Riley, R. (2002). Board characteristics and audit fees. Contemporary

Accounting Research 19(Fall): 365-384.

6. Chen, C. J. P., & Jaggi, B. (2000). Association between independent non-executive directors, family control and

financial disclosures in Hong Kong. Journal of Accounting and Public Policy, 19, 285-310.

7. Cheng, E.C.M. & COURTENAY, S. M. (2006). Board composition, regulatory regime and voluntary disclosure.

The International Journal of Accounting, 41, 262-89.

8. Dal-Ri, M.F., & Dos, S.A. (2010). Determinants of Corporate Voluntary Disclosure in Brazil. Working Paper, Sao

Paulo University, available at: http://ssrn.com/abstract=1531767.

9. Darrough, M.N. (1995). Discussion of disclosure of predication information in a duopoly. Contemporary

Accounting Research 11(2).

10. Darrough, M.N., & Stoughton, N.M. (1990). Financial disclosure policy in an entry game. Journal of Accounting

and Economics 12, 219-243.

11. Dechow, P., Sloan, R., & Sweeney, A. (1996). Causes and consequences of earnings manipulation: An analysis of

firms subject to enforcement actions by the SEC. Contemporary Accounting Research 13 (Spring): 1-36.

12. Donnelly, R., & MULCAHY, M. (2008). Board structure, ownership, and voluntary disclosure in Ireland.

Corporate Governance, 16, 416-429.

13. Eng, L.L., & Mak, Y.T. (2003). Corporate governance and voluntary disclosure. Journal of Accounting and Public

Policy, 325-345.

14. Fama, E. (1980). Agency problems and the Theory of the Firm, Journal of Political Economy, 88(2), 288-307.

15. Giner, B. (1997). The influence of company characteristics and accounting regulation on information disclosed by

Spanish firms, European Accounting Review, 6 (1), 45-68.

16. Gómez-Salas, J.C., Iñiguez-Sánchez, R., & Poveda, F.F. (2006). Revelación voluntaria de información y

características de las sociedades cotizadas en el mercado de capitales español. Revista Española de Financiación y

Contabilidad, 131, 8-26.

17. Gul, F.A., & LEUNG, S. (2004). Board leadership, outside directors' expertise and voluntary corporate disclosure.

Journal of Accounting & Public Policy, 23, 351-379.

18. Healy, P.M., & Palepu, K.G. (2001). Information asymmetry, corporate disclosure and the capital markets: a

review of the empirical disclosure literature, Journal of Accounting and Economics, 31, 405-40.

19. Ho, S.S.M., & Wong, K.S. (2001). A study of corporate disclosure practices and effectiveness in Hong Kong.

Journal of International Financial Management and Accounting, Vol. 12, No. 1, pp. 75-101.

20. Hossain, M., Perera, M.H.B., & Abdulrahman, R. (1995). Voluntary disclosure in the annual reports of New

Zealand companies. Journal of International Financial Management and Accounting, 6(1): 69-87.

http://dx.doi.org/10.1111/j.1467-646X.1995.tb00050.x

21. Hutton, A. (2004). Beyond financial reporting: an integrated approach to disclosure”. Journal of Applied Corporate



Finance, 16 (4), 8-16.

22. Inchausti, B.G. (1997). The influence of company characteristics and accounting regulation on information

disclosed by Spanish firms. The European Accounting Review, 6(1): 45-68.

http://dx.doi.org/10.1080/096381897336863

23. Jensen, M.C. (1983). Organization Theory and Methodology, The Accounting Review, 58 (2), 319-339.

24. Khanna, T., Palepu, K.G., & Srinivasan, S. (2004). Disclosure practices of foreign companies interacting with US

Markets. Journal of Accounting Research, 42 (2), 475-508.

25. Kim, A.K., Kitsabunnarat-Chatjuthamard, P., & Noftsinger, J.R. (2007). Large shareholders, board independence

and minority shareholders rights; Evidence from Europe. Journal of Corporate Finance, 13, 859-80.

26. Klein, A. (2002). Economic determinants of audit committee independence. The Accounting Review 77: 435-452.

27. Kolsi, M.C. (2012). The determinants of corporate voluntary disclosure: Evidence from the Tunisian capital

market. The IUP Journal of Accounting & Audit Practices, Vol 11(4).

28. Lan, Y., Wang, L., & Zhang, X. (2013). Determinants and Features of voluntary disclosure in the Chinesse stock

market. China Journal of Accounting Research 6, 265-285.

29. Lim, S., Matolcsy, Z., & Chow, D. (2007). The association between board composition and different types of

voluntary disclosure. European Accounting Review, 16 (3), 555-583.

30. Lobo, G.J. & Zhou, J. (2001). Disclosure quality and earnings management. Paper presented at the 2001 Asia-

Pacific Journal of Accounting and Economics Symposium in Hong Kong.

31. Lundholm, R. & Winkle, M. (2006). Motives for disclosure and non-disclosure: a framework and review of the

evidence. Accounting and Business Research, International Accounting Policy Forum, 43-48.

32. Meek, G, Roberts, C., & Gray, S. (1995). Factors influencing voluntary annual report disclosures by US, UK, and

Continental European multinational corporations. Journal of International Business Studies, Third Quarter, 555-

572.

33. Myers, S.C., (1977). Determinants of corporate borrowing. Journal of Financial Economics 5 (1), 147-175.

34. Raffournier, B. (1995). The Determinants of Voluntary Financial Disclosure by Swiss Listed Companies. The

European Accounting Review, Vol. 4, No. 2, pp. 261-280.

35. Rediker, K.J., & Seth, A. (1995). Boards of directors and substitution effects of alternative governance

mechanisms, Strategic Management Journal, 16, pp. 85–99.

36. Singhvi, S., & Desai, H.B. (1971). An empirical analysis of the quality of corporate financial disclosure.

Accounting Review 46, 621-632.

37. Subramanyam, K.R. (1996). The Pricing of Discretionary Accruals. Journal of Accounting and Economics, Vol.

22, Nos. 1-3, pp. 249-281.



38. Watson, A., Shrives, P., & MARSTON, C. (2002). Voluntary disclosure of accounting ratios in the UK. British

Accounting Review, 34(4): 289-313. http://dx.doi.org/10.1006/bare.2002.0213

APPENDIX A

List of Saudi Companies that traded Shares on Saudi Arabian Stock Market in 2012 and 2013

Symbol Company Name Short Name

Acronym

Petrochemical Industries

2330 Advanced Petrochemical Company Advanced Advanced

2170 Alujain Corporation Alujain ALCO

2001 Methanol Chemicals Company CHEMANOL

CHEMANOL

2210 Nama Chemicals Co. Nama Chemicals

NAMA

2060 National Industrialization Co. TASNEE NIC

2002 National Petrochemical Company Petrochem Petrochem

2380 Rabigh Refining and Petrochemical Co. Petro Rabigh

PETRO RABIGH

2260 Sahara Petrochemical Co. Petrochemical

SPC

2020 Saudi Arabia Fertilizers Co. SAFCO SAFCO

2010 Saudi Basic Industries Corp SABIC SABIC

2250 Saudi Industrial Investment Group SIIG SIIG

2310 Saudi International Petrochemical Co Sipchem SIPCHEM

2350 Saudi Kayan Petrochemical Company Saudi Kayan

KAYAN

2290 Yanbu National Petrochemical Company YANSAB YANSAB

Cement

3091 AL JOUF CEMENT COMPANY Jouf Cement

Jouf Cement

3010 Arabian Cement Co ACC ARCCO

3003 City Cement Co City Cement

City Cement

3080 Eastern Province Cement Co. EPCCO EACCO

3001 Hail Cement Company HCC HCC

3002 Najran Cement Company Najran Cement

Najran Cement

3004 Northern Region Cement Company Northern Cement

Northern Cement

3030 Saudi Cement Company. SCC SACCO

3050 Southern Province Cement Co. spcc SOCCO

3090 Tabuk Cement Co. TCC TACCO

3040 The Qassim Cement Co QACCO QACCO

3020 Yamama Cement Company YSCC YACCO

3060 Yanbu Cement Co. YCC YNCCO

Retail

4001 Abdullah Al Othaim Markets Company A.Othaim Market

A.OTHAIM MARKET

4200 Aldrees Petroleum & Transport Services Co. Aldrees ALDREES



4290 Alkhaleej Training and Education Company Alkhaleej Trng

ALKHALEEJ TRNG

4004 Dallah Healthcare Holding Company Dallah Health

Dallah Health

4240 Fawaz Abdulaziz AlHokair Company AlHokair ALHOKAIR

4180 Fitaihi Holding Group Fitaihi Group

AHFCO

4190 Jarir Marketing Co Jarir Jarir

4002 Mouwasat Medical Services Company Mouwasat Mouwasat

4160 National Agriculture Marketing Co. THIMAR THIMAR

4005 National Medical Care Company Care Care

4050 Saudi Automotive Services Co. SASCO SASCO

4006 Saudi Marketing Company Farm Superstore

4003 United Electronics Company Extra Extra

Energy & Utilities

2080 National Gas & Industrialization Co. GASCO NGIC

5110 Saudi Electricity Company Saudi Electric.

SECO

Agriculture & Food Industries

6070 Al-Jouf Agriculture Development Co. ALJOUF JADCO

2280 Almarai Company Almarai ALMARAI

4061 Anaam International Holding Group CO. Anaam Holding

ANAAM HOLDING

6060 Ash-Sharqiyah Development Company Sharqiya Dev Co

SHARQIYA DEV CO

6080 Bishah Agriculture Development Co. BISHACO BISACO

6001 Halwani Bros H B H B

6002 Herfy Food Services Co Herfy Foods

Herfy Foods

6090 Jazan Development Co. JAZADCO GIZACO

6010 National Agriculture Development Co. NADEC NADEC

6020 Qassim Agriculture Co. GACO QAACO

6004 Saudi Airlines Catering Company Catering Catering

6050 Saudi Fisheries Co. SFICO SFICO

2270 Saudia Dairy and Foodstuff .Co SADAFCO SADAFCO

2050 Savola Group Savola Group

SAVOLA

6040 Tabuk Agriculture Development Co. TADCO TAACO

2100 WAFRAH FOR INDUSTRY AND DEVELOPMENT

WAFRAH FPCO

Telecommunication & Information Technology

7020 Etihad Etisalat Co. Etihad Etisalat

EEC

7030 Mobile Telecommunications Company Saudi Arabia

ZAIN KSA ZAIN KSA

7010 Saudi Telecom STC STC

Multi-Investment



2140 Al-Ahsa Development Co. ADC AADC

4080 Aseer Trading, Tourism & Manufacturing Co.

Aseer ATTMCO

4280 Kingdom Holding Company Kingdom KINGDOM

2120 Saudi Advanced Industries Co. SAIC SAICO

2030 Saudi Arabia Refineries Co. SARCO SARCO

2190 Saudi Industrial Services Co. SISCO SISCO

Industrial Investment

1214 Al Hassan Ghazi Ibrahim Shaker SHAKER SHAKER

1213 Al Sorayai Trading And Industrial Group Company

AlSorayai Group

AlSorayai

2340 ALABDULLATIF INDUSTRIAL INVESTMENT CO.

AlAbdullatif

ALABDULLATIF

1212 Astra Industrial Group Astra Indust

ASTRA

1210 Basic Chemical Industries Co BCI BCI

2180 Filing and Packing Materials Manufacturing Co.

FIPCO FIPCO

2220 National Metal Manufacturing and Casting Co.

Maadaniyah

NMMCC

1211 Saudi Arabian Mining Company MAADEN MAADEN

2230 Saudi Chemical Company SCC SCCO

4140 Saudi Industrial Export Co SIECO SIECO

2300 Saudi Paper Manufacturing Co. SPM SPM

2070 Saudi Pharmaceutical Indust.& Med. Appliances Corp.

SPIMACO SPIMACO

1201 Takween Advanced Industries Takween Takween

2150 The National Co. for Glass Industries Zoujaj ZOUJAJ

Building & Construction

1330 Abdullah A. M. Al-Khodari Sons Company ALKHODARI

ALKHODARI

2320 AL-BABTAIN POWER &TELECOMMUNICATION CO

AL-BABTAIN

AL BABTAIN

2200 Arabian Pipes Company APC APCO

1302 Bawan Company Bawan Bawan

2370 Middle East Specialized Cables Co MESC MESC

2090 National Gypsum Company NGC NGCO

4230 Red Sea Housing Services Company Red Sea RED SEA HOUSING

2160 Saudi Arabian Amiantit Co. Amiantit SAAC

2110 Saudi Cable Company SCC SCACO

2040 Saudi Ceramic Co. Saudi Ceramics

SCERCO

2130 Saudi Industrial Development Co. SIDC SIDC

1320 Saudi Steel Pipe Company SSP SSP

2360 Saudi vitrified clay pipes co. SVCP SVCP

1301 United Wire Factories Company ASLAK ASLAK

2240 Zamil Industrial Investment Co Zamil Indust

ZIIC

Real Estate Development



4150 Arriyadh Development Co. ARDCO ADCO

4300 Dar Alarkan Real Estate Development Company

Dar Al Arkan

DAR AL ARKAN

4220 Emaar The Economic City Emaar EC EMAAR THE ECONOMIC CITY

4250 Jabal Omar Development Company Jabal Omar JABAL OMAR

4310 Knowledge Economic City KEC KEC

4100 Makkah Construction and Development Co. MCDC MCDCO

4020 Saudi Real Estate Co. SRECO SRECO

4090 Taiba Holding Co. Taiba TIRECO

Transport

4040 Saudi Public Transport Co. SAPTCO SAPTCO

4110 Saudi Transport and Investment Company mubarrad SLTCO

4030 The National Shipping Co. of Saudi Arabia Bahri Bahri

4260 United International Transportation Company Ltd.

Budget Saudi

BUDGET SAUDI

Media and Publishing

4270 Saudi Printing and Packaging Company SPPC SPPC

4210 Saudi Research and Marketing Group SRMG RESEARCH

4070 Tihama Advertising & Public Relations Co. TAPRCO TAPRCO

Hotel & Tourism

1810 Al-Tayyar Travel Group Holding Co. ALTAYYAR

ALTAYYAR

4010 Saudi Hotels & Resort Areas Co. SHAR ِ◌ACO

SHARCO

4170 Tourism Enterprise Co. TECO TECO

APPENDIX B

Presentations, Definitions and Sources of Variables

Variable Label Definitions Sources

DS Voluntary disclosure Measured as the total number of items disclosed to the maximum possible number obtainable.

Tadawul database and annual reports (2012-2013)

NED Non-executive directors Measured as the proportion of non-executive directors on the board.

annual reports (2012-2013)

Size Firm size Measured as the natural log of total assets. annual reports (2012-2013)

ROA Return on assets Indicator of profitability and is measured as the ratio of net income to total assets.


Lev Leverage Measured as the ratio of total book value of debt to total assets at year-end.


Own Ownership concentration Measured as the percentage of shares held by each individual investor.


Audit Audit quality Dummy variable, where 1 represents a firm audited by the big-four auditor, and 0 otherwise.


Liq Liquidity Presents the current ratio of firm at year-end. annual reports (2012-2013)

FAA Assets-In-Place Measured as fixed assets to total assets ratio at year-end.




APPENDIX C

List of Voluntary Disclosure Items

Article 4: Facilitation of Shareholders Exercise of Rights and Access to Information:

(a) The company in its Articles of Association and by-laws shall specify the procedures and precautions that are

necessary for the shareholders’ exercise of all their lawful rights.

(b) All information which enable shareholders to properly exercise their rights shall be made available and such

information shall be comprehensive and accurate; it must be provided and updated regularly and within the

prescribed times; the company shall use the most effective means in communicating with shareholders. No

discrepancy shall be exercised with respect to shareholders in relation to providing information.

Article 5: Shareholders Rights Related to the General Assembly:

(a) A General Assembly shall convene once a year at least within the six months following the end of the company’s

financial year.

(b) The General Assembly shall convene upon a request of the Board of Directors. The Board of Directors shall

invite a General Assembly to convene pursuant to a request of the auditor or a number of shareholders whose

shareholdings represent at least 5% of the equity share capital.

(c) Date, place, and agenda of the General Assembly shall be specified and announced by a notice, at least 20 days

prior to the date of the meeting; invitation for the meeting shall be published in the Exchange’s website, the

company’s website and in two newspapers of voluminous distribution in the Kingdom. Modern high tech means

shall be used in communicating with shareholders.

(d) Shareholders shall be allowed the opportunity to effectively participate and vote in the General Assembly; they

shall be informed about the rules governing the meetings and the voting procedure.

(e) Arrangements shall be made for facilitating the participation of the greatest number of shareholders in the

General Assembly, including inter alia determination of the appropriate place and time.

(f) In preparing the General Assembly’s agenda, the Board of Directors shall take into consideration matters

shareholders require to be listed in that agenda; shareholders holding not less than 5% of the company’s shares are

entitled to add one or more items to the agenda. upon its preparation.

(g) Shareholders shall be entitled to discuss matters listed in the agenda of the General Assembly and raise relevant

questions to the board members and to the external auditor. The Board of Directors or the external auditor shall

answer the questions raised by shareholders in a manner that does not prejudice the company’s interest.



(h) Matters presented to the General Assembly shall be accompanied by sufficient information to enable

shareholders to make decisions.

(i) Shareholders shall be enabled to peruse the minutes of the General Assembly; the company shall provide the

Authority with a copy of those minutes within 10 days of the convening date of any such meeting.

(j) The Exchange shall be immediately informed of the results of the General Assembly.

Article 6: Voting Rights:

(a) Voting is deemed to be a fundamental right of a shareholder, which shall not, in any way, be denied. The

company must avoid taking any action which might hamper the use of the voting right; a shareholder must be

afforded all possible assistance as may facilitate the exercise of such right.

(b) In voting in the General Assembly for the nomination to the board members, the accumulative voting method

shall be applied.

(c) A shareholder may, in writing, appoint any other shareholder who is not a board member and who is not an

employee of the company to attend the General Assembly on his behalf.

(d) Investors who are judicial persons and who act on behalf of others - e.g. investment funds- shall disclose in their

annual reports their voting policies, actual voting, and ways of dealing with any material conflict of interests that

may affect the practice of the fundamental rights in relation to their investments.

Article 7: Dividends Rights of Shareholders:

(a) The Board of Directors shall lay down a clear policy regarding dividends, in a manner that may realize the

interests of shareholders and those of the company; shareholders shall be informed of that policy during the General

Assembly and reference thereto shall be made in the report of the Board of Directors.

(b) The General Assembly shall approve the dividends and the date of distribution. These dividends, whether they be

in cash or bonus shares shall be given, as of right, to the shareholders who are listed in the records kept at the

Securities Depository Center as they appear at the end of trading session on the day on which the General Assembly

is convened.

Article 9: Disclosure in the Board of Directors’ Report :

(a) The implemented provisions of these Regulations as well as the provisions which have not been implemented,

and the justifications for not implementing them.

(b) Names of any joint stock company or companies in which the company Board of Directors member acts as a

member of its Board of directors.

(c) Formation of the Board of Directors and classification of its members as follows: executive board member, non-

executive board member, or independent board member.

(d) A brief description of the jurisdictions and duties of the Board’s main committees such as the Audit Committee,



the Nomination and Remuneration Committee; indicating their names, names of their chairmen, names of their

members, and the aggregate of their respective meetings.

(e) Details of compensation and remuneration paid.

(f) Any punishment or penalty or preventive restriction imposed on the company by the Authority or any other

supervisory or regulatory or judiciary body.

(g) Results of the annual audit of the effectiveness of the internal control procedures of the company.

Article 10: Main Functions of the Board of Directors:

(a) Approving the strategic plans and main objectives of the company and supervising their implementation.

(b) Lay down rules for internal control systems and supervising them.

(c) Drafting a Corporate Governance Code for the company that does not contradict the provisions of this regulation,

supervising and monitoring in general the effectiveness of the code and amending it whenever necessary.

(d) Laying down specific and explicit policies, standards and procedures, for the membership of the Board of

Directors and implementing them after they have been approved by the General Assembly.

(e) Outlining a written policy that regulate the relationship with stakeholders with a view to protecting their

respective rights.

(f) Deciding policies and procedures to ensure the company’s compliance with the laws and regulations and the

company’s obligation to disclose material information to shareholders, creditors and other stakeholders.

Article 11: Responsibilities of the Board:

(a) Without prejudice to the competences of the General Assembly, the company’s Board of Directors shall assume

all the necessary powers for the company’s management. The ultimate responsibility for the company rests with the

Board even if it sets up committees or delegates some of its powers to a third party. The Board of Directors shall

avoid issuing general or indefinite power of attorney.

(b) The responsibilities of the Board of Directors must be clearly stated in the company’s Articles of Association.

(c) The Board of Directors must carry out its duties in a responsible manner, in good faith and with due diligence. Its

decisions should be based on sufficient information from the executive management, or from any other reliable

source.

(d) A member of the Board of Directors represents all shareholders; he undertakes to carry out whatever may be in

the general interest of the company, but not the interests of the group he represents or that which voted in favor of

his appointment to the Board of Directors.

(e) The Board of Directors shall determine the powers to be delegated to the executive management and the

procedures for taking any action and the validity of such delegation. It shall also determine matters reserved for

decision by the Board of Directors. The executive management shall submit to the Board of Directors periodic

reports on the exercise of the delegated powers.



(f) The Board of Directors shall ensure that a procedure is laid down for orienting the new board members of the

company’s business and, in particular, the financial and legal aspects, in addition to their training, where necessary.

(g) The Board of Directors shall ensure that sufficient information about the company is made available to all

members of the Board of Directors, generally, and, in particular, to the non-executive members, to enable them to

discharge their duties and responsibilities in an effective manner.

(h) The Board of Directors shall not be entitled to enter into loans which spans more than three years, and shall not

sell or mortgage real estate of the company, or drop the company’s debts, unless it is authorized to do so by the

company’s Articles of Association. In the case where the company’s Articles of Association includes no provisions

to this respect, the Board should not act without the approval of the General Assembly, unless such acts fall within

the normal scope of the company’s business.

Article 12: Formation of the Board:

(a) The Articles of Association of the company shall specify the number of the Board of Directors members,

provided that such number shall not be less than three and not more than eleven.

(b) The General Assembly shall appoint the members of the Board of Directors for the duration provided for in the

Articles of Association of the company, provided that such duration shall not exceed three years. Unless otherwise

provided for in the Articles of Association of the company, members of the Board may be reappointed.

(c) The majority of the members of the Board of Directors shall be non-executive members.

(d) It is prohibited to conjoin the position of the Chairman of the Board of Directors with any other executive

position in the company, such as the Chief Executive Officer (CEO) or the managing director or the general

manager.

(e) The independent members of the Board of Directors shall not be less than two members, or one-third of the

members, whichever is greater.

(f) The Articles of Association of the company shall specify the manner in which membership of the Board of

Directors terminates. At all times, the General Assembly may dismiss all or any of the members of the Board of

Directors even though the Articles of Association provide otherwise.

(g) On termination of membership of a board member in any of the ways of termination, the company shall promptly

notify the Authority and the Exchange and shall specify the reasons for such termination.

(h) A member of the Board of Directors shall not act as a member of the Board of Directors of more than five joint

stock companies at the same time.

(i) Judicial person who is entitled under the company’s Articles of Association to appoint representatives in the

Board of Directors, is not entitled to nomination vote of other members of the Board of Directors.

Article 13: Committees of the Board:



(a) A suitable number of committees shall be set up in accordance with the company’s requirements and

circumstances, in order to enable the Board of Directors to perform its duties in an effective manner.

(b) The formation of committees subordinate to the Board of Directors shall be according to general procedures laid

down by the Board, indicating the duties, the duration and the powers of each committee, and the manner in which

the Board monitors its activities. The committee shall notify the Board of its activities, findings or decisions with

complete transparency. The Board shall periodically pursue the activities of such committees so as to ensure that the

activities entrusted to those committees are duly performed. The Board shall approve the by-laws of all committees

of the Board, including, inter alia, the Audit Committee, Nomination and Remuneration Committee.

(c) A sufficient number of the non-executive members of the Board of Directors shall be appointed in committees

that are concerned with activities that might involve a conflict of interest, such as ensuring the integrity of the

financial and non-financial reports, reviewing the deals concluded by related parties, nomination to membership of

the Board, appointment of executive directors, and determination of remuneration.

Article 14: Audit Committee :

(a) The Board of Directors shall set up a committee to be named the “Audit Committee”. Its members shall not be

less than three, including a specialist in financial and accounting matters. Executive board members are not eligible

for Audit Committee membership.

(b) The General Assembly of shareholders shall, upon a recommendation of the Board of Directors, issue rules for

appointing the members of the Audit Committee and define the term of their office and the procedure to be followed

by the Committee.

(c) The duties and responsibilities of the Audit Committee.

Article 15: Nomination and Remuneration Committee:

(a) The Board of Directors shall set up a committee to be named “Nomination and Remuneration Committee”.

(b) The General Assembly shall, upon a recommendation of the Board of Directors, issue rules for the appointment

of the members of the Nomination and Remuneration Committee, terms of office and the procedure to be followed

by such committee.

(c) The duties and responsibilities of the Nomination and Remuneration Committee.

Article 16: Meetings of the Board.

Article 17: Remuneration and Indemnification of Board Members.

Article 18: Conflict of Interest within the Board.

CORPORATE GOVERNANCE: FACTORS INFLUENCING VOLUNTARY DISCLOSURE BY PUBLICLY TRADED SAUDI ARABIAN...

Documents

Transcript of CORPORATE GOVERNANCE: FACTORS INFLUENCING VOLUNTARY DISCLOSURE BY PUBLICLY TRADED SAUDI ARABIAN...