Monday, 09 October 2017 12:48

Making sense of the Kingdom of Saudi Arabia

Women driving, a street party in Riyadh’s main drag Tahlia Street, new forms of taxation and a relentless push towards modernisation and diversification of the economy are leaving external observers of Saudi Arabia as breathless as those trying to make sense of President Trump’s daily flurry of tweets.  

The reality is that the Kingdom is in a race against the clock to preserve its very existence.

The usual platitude of “tell me where the price of oil is going and I will tell you where the Saudi economy is going” gives a terrible forecast, which most people using this blithe statement have not grasped: unless the government and people of Saudi Arabia can make a success of the ‘Great Leap Forward’ plan – better known as Vision 2030 – we are facing the collapse of the Kingdom. The stark truth is that with current oil prices and oil price trends, the economy of the Kingdom is unsustainable.

For the last two decades I have been travelling to Saudi Arabia and there has been a comforting premise for the population that the country had hundreds of years’ worth of oil – and indeed it may do. The problem of course is that the world is going electric and the power it needs will come from nuclear, renewables and, in the case of North America, from domestic carbon sources.  That the world is going electric is challenge enough for the giants of the automotive industry as they face competition from Tesla, Dyson and Google.  But for the Saudis, as they are presently configured, it is a disaster.  

saudi oil wells

Give or take, the Saudi Government has needed oil to be at 80 dollars a barrel to break even – at 50 dollars a barrel and with an incredibly costly) war  against Yemen, this largely undiversified economy is under severe threat.  

To make matters worse, the country has a fast growing population with almost 45% under the age of 25. All these young people need jobs and with the economy growing at 0.1% it seems that unemployment currently pegged at anywhere between 11% and 25%, will get significantly worse.  

480px Mohammed Bin Salman al Saud2

If this picture seems bleak, there is hope. The Royal Family has made the very bold move of preparing the way for a young king. When his father passes on the reins to him, Mohamed Bin Salman will have the possibility of a long reign ahead and the chance of actually pushing forward the reforms the country needs.  Many of the issues facing the country – inclusion of women, entrepreneurship and diversification – are dealt with in the 2030 plan.  But these will bring disruptive and at times painful changes to society.

Saudi Arabia will need all its cohesiveness to weather these.  Very sensibly, by addressing the bug bears of the young – restrictive societal practices and the ban on women driving – the government is creating palpable levels of goodwill and social unity in this critical demographic group.  I assume that a calculation has been made that by winning over the young of the Kingdom there will be an overwhelming counterbalance to the conservative elements of Saudi Arabia who have, for so long, resisted change.  

My guess is that the Kingdom will make it. What is not always obvious to those in the West who, to my mind, are too quick to criticize Saudi Arabia is that the Kingdom, as a country and as a people, has a lot going for it.  Most notably, over and above oil it has considerable mineral wealth and the possibility to generate vast solar energy. 

But most misunderstood are the considerable talents of its people – women and men. Once their energy is harnessed, their skills developed and their economic framework liberalized, the prospects for the Kingdom actually look bright.  

But the government will need to keep firm on its plans.

Published in Leadership

I have been honoured to interview a number of Saudi CEOs recently to hear their views on the skills needed to achieve Vision 2030. This is for a report we are producing, What makes an Outstanding Saudi chief executive? (You can read my views on the skills that Saudi chief executives will need in this blog)

One of the themes to emerge is the need for a corporate governance framework in the Kingdom. As one CEO said, “We need to have a conducive atmosphere for leadership to flourish, but under a robust corporate governance framework. Corporate governance starts at the top. Audit needs to be independent.”

Corporate governance is still a relatively new concept across the world. I was interested to read Lubna Qassim’s blog (she is on the leadership team and general counsel at Emirates NBD) where she cites the Cadbury report in 1992 as the start of governance in the UK.

What the Cadbury Report did was to introduce the concept of independence. And it is clear that if the Kingdom of Saudi Arabia is to become more open to the world, it will need its own corporate governance framework.  

Saudi Arabia has been pursuing corporate governance reforms, with the Capital Market Authority (CMA) in 2003 and the publication of the Saudi Corporate Governance Code (SCGC) in 2006. In the Saudi Organization for Certified Public Accountants (SOCPA), the accounting standards committee holds the responsibility of developing and reviewing accounting and auditing standards in the country. All of these will play a part in developing Saudi Arabia’s own corporate governance code.

The central components of the voluntary Cadbury Code, are

  • a clear division of responsibilities at the top, primarily that the position of chairman of the board be separated from the chief executive, or that there be a strong independent element on the board
  • the majority of the board to consist of outside directors
  • remuneration committees for board members to have a majority of non-executive directors
  • the board to appoint an audit committee including at least three non-executive directors

So what do I think would be the key ingredients of corporate governance for Saudi Arabia and the challenges and opportunities of this?

1. Independent board members

Saudi Arabia’s businesses are no different from the way American, British and others have been run – and still are in many cases. Before codes of conduct were introduced, the tendency was to recruit family members to the board and appoint ‘people we know’. The phrases ‘old boys’ club’ and ‘old boys’ network’ came from the very normal practice of appointing people you were at school with or were in the same men’s club

old boys    

The Cadbury code is voluntary and it has taken years to achieve the shift in culture to recruit independently – some would say this still has a way to go in the West, especially around finding and recruiting women.

This will be one of the biggest challenges for the Kingdom; to open up family businesses to outsiders.

2. Clear division of responsibilities at the top

Separating out the role of chairman and chief executive has been well established in the Kingdom for some years. While this should be included in any governance code, the practice of executive chairmen in Saudi is not widespread and will be less of a challenge to achieve.

The issue that will need addressing is that, while there may be a distinction between chairman and chief executive in terms of titles, many chairmen act like the chief executive, essentially making the role of the CEO more that of a chief operating officer.

3. Audit committee with three independent non-executive directors

Having an audit committee with independent non-execs will be more of a challenge to achieve in Saudi Arabia. An independent audit committee requires a confident chief executive to accept, and also manage, strong external views.

A report by Independent Business Research on Corporate Governance and Auditor Independence in Saudi Arabia: Literature Review and Proposed Conceptual Framework looks at the emerging role of the auditing profession and the role of audit generally. They say

this end

Vision 2030 has set out a clear direction for the future of Saudi Arabia – should a corporate governance be part of this to ensure a robust and sustainable business community in the Kingdom?

Published in Leadership

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