Corporate Governance Research Center (CGRC)
The CGRC is in the process of approval. It has been approved by the College of Business; Council of Deans at Alfaisal University, and by Alfaisal University Council. It is on the agenda for the Board of Trustees for approval. It is expected to be fully operational by January 2019.
The Saudi Market is in the midst of transformational economic change. The newly announced Saudi 2030 Vision for a diversified economy with less dependence on oil reflects this transformation. Foreign institutional investors were recently allowed to invest directly in the Saudi stock market. As well, in its effort to attract investment, diversify its economy, and create sustainable economic growth and jobs. The government has embarked on a new initiative that allows fully owned foreign retail and wholesale companies to invest directly in the Saudi market without the traditional Saudi partnership requirements. The aim of the government is to transform the Saudi economy to one of the region’s most diversified knowledge based economic centers and to improve the performance of different sectors of the Saudi economy, including state-owned enterprises and family businesses as they transition between generations.
As part of the effort to transform the Saudi economy, corporate governance is identified as an important factor in providing a vehicle to assure sustainability and security for investors and for corporate social responsibility. Quality corporate governance is viewed as a key factor for attracting domestic and foreign investors, spurs sustainable economic growth, and provides employment opportunities.
College of Business (CoB) at Alfaisal University partnered with Saudi Arabia General Investment Authority (SAGIA) on a project aimed at increasing the society awareness of corporate governance and its value to the economy. The partnership started with a project to calculate the Corporate Governance Index (CGI) for the companies trading on the Saudi stock market. The main objective of the CGI is to promote good corporate governance culture in the Saudi market through tracking and monitoring corporate governance practices, and identifying governance challenges, and best practices.
CoB with support from SAGIA wishes to expand the work of the CGI to include other aspects of CG. Both partners feel the best way to achieve this objective is to establish a CG research center. The Center, in addition to publishing the CGI on annual basis, will serve as a think tank and be engaged in CG research leading to the establishment of public policies and strengthening CG practices and on the long run extend the methods of CGI to large family businesses and some government agencies. It also will be engaged in training students and government and business officials on various aspects of CG. The Center and CGI project will provide many CoB students the opportunity for hands-on experience that will enrich their academics and equip them with practical skills that are highly valuable to the businesses and government communities.
The proposal is organized as follows: In the next section the vision, mission and values of the center are stated. Section 2 deals with the organizational structure and governance of the center. Section 3 deals with students’ engagement. Section 4 deals with sources of funding and required initial support. Section 5 presents a possible timeline for the establishment of CGRC.
1. Vision, Mission, and Values
We aspire for the CG Research Center to be the leading center in the Gulf Cooperation Council (GCC) region for impactful research on CG and for promoting best CG policies and practices.
The mission of the center is to provide reliable and independent CG practices and policies through quality research and education that serves the GCC region and its economies.
1.3 Values of the Center:
The values of the center emanate from its mission and are based on guarantying the reliability and integrity of its work, and the independence of its personnel and processes. These are:
We take great pride that we are independent, non-profit Center that strives to conduct quality CG research and provide an objective and independent assessment of the CG practices in the GCC region.
We hold ourselves to the highest ethical and professional standards and take full responsibility for our reports and publications.
Transparency: We conduct ourselves with full disclosure, and openness,
Partnership: We seek feedback from all directions. We engage our partners in the business and professional communities to promote good CG practices in the GCC region.
2. Organizational Structure and Governance
2.1 Organizational Structure:
To achieve the vision, and mission of the Center and allow it to carry out its responsibilities effectively, the Center will be structured in three departments managed by an executive director with an oversight of CG Advisory Board as exhibited in the organizational chart below. The departments are:
- Research Department
- Training Department
- Assessment Department
Initially the first two departments (Research and Training) may be combined into one department, and can be separated as the center develops further and its engagement becomes larger.
2.1.1 Research Department:
The objective of this department is to conduct and disseminate quality CG research that guides good governance practices, improve board of director’s effectiveness, enhance trust in the capital market, create sustainable value for all stakeholders and train graduate and undergraduate students. The department also is to identify challenges in CG and develops solutions and policy recommendations that address these challenges. The outcome of this department can impact the processes of the other two departments and the country’s public policy making. Also the other two departments may feed into this department CG issues that need to be researched. The research may lead to generating income for the Center. For the department to achieve its objectives, it will pursue the following:
- Develop a comprehensive research program. Encourage and fund research projects in CG, financial accounting, financial reporting and disclosure that contribute to the development of good corporate governance practices and social responsibility. Enhance the role of financial reporting and corporate governance in the development and maturity of capital markets.
- Organize conferences and symposiums on corporate governance and financial reporting and disclosure.
- Host distinguished speakers in corporate governance and financial reporting and disclosure.
- Establish partnerships with distinguished local and international institutions and CG centers to promote and advance corporate governance and exchange experiences.
2.1.2 Training Department:
The objective of this department is to promote the value of corporate governance to the economy and society. It does so by its publications; round table discussions and workshops; lectures/seminars; governance training courses for board members, regulators, corporate governance specialists, and other interested parties; and if possible participate in offering graduate and undergraduate courses on governance within CoB programs and in the community. Some of the training courses and workshops can be used to generate income for the Center.
The Center under this department would bring together corporate and capital market leaders from the region as well as internationally. One of the main objectives of this department is to bring together CEOs, board chairmen, and board directors of leading publicly traded Saudi companies along with regulators, and corporate governance scholars and professionals in rigorous discussions and exchanges of ideas about new development in corporate governance and regulations. This department could be combined with the Research Department as their objectives overlap and they serve each other especially at the initial stages.
Figure 1: Organizational Structure of Corporate Governance Center
2.1.3 Assessment Department:
The main objective of this department is to track, monitor, and assess corporate governance practices in Saudi Arabia and other GCC markets based on certain national and international CG principles to understand its relationship to long term value creation and to stakeholder confidence in companies and markets. The department will start the monitoring and assessment of the publicly listed companies on Tadawul (Saudi Stock Exchange). Then it may expand its function to include the publicly traded companies on all of the GCC markets. Ultimately, this department may expand its function to include large family businesses/firms, and some government departments, authorities and agencies.
The department issues its CG report on an annual basis, starting with the Corporate Governance Index (CGI) which currently is limited to assessing the corporate governance practices of the publicly listed companies on the Saudi market. Within its annual reporting the department may promote good corporate governance through identifying and highlighting organizations with best governance practices and encourage others to adopt these best practices.
2.2 Governance of the Center:
The Center is organized under the auspices of the AU President’s office with advice from a Corporate Governance Advisory Council. As shown in the above organizational structure, its governance consists of the Executive Director, Chairs of the Departments, and supporting staff. The Executive Director manages the Center with direct supervision from the President of AU. The Executive Director in cooperation with the department chairs conducts the normal business activities of the Center including managing its budget, resources, endowment funds, discharging its obligations, organizing its events and activities, preparing its reports, and introducing agreements or MOUs with institutions and centers that advances the Center’s strategic objectives.
Changes to the charter or the governance system of the Center are initiated by the Executive Director in cooperation with other chairs and advice of the Center’s Advisory Council. These changes are approved according to AU rules and procedures.
2.2.1 Corporate Governance Advisory Council (CGAC):
CG Advisory Council should consist of nine members (including the Executive Director of the Center and the Dean of CoB) that are drawn from independent, highly respected academics, regulators, business and professional individuals, and other stakeholders with experience and interests in corporate governance and financial reporting. This highly respected, diverse body should ensure the independence and integrity of the Center and gives credibility to its activities (e.g., governance reports and policy recommendations). Council members including its Chairman are nominated by AU President and appointed by the AU Board of Trustees for a three-year term that can be renewed for a maximum of two more terms (all together for 9 years). In the steady state case, each term at least one-third of the Council must be new members.
The role of the CGAC is to advice the Center on various matters, and to endorse the strategy of the Center, its reports, policy recommendations, and annual budget. In its first term, the Council should decide on its by-laws, and operating procedures benefiting from Robert Rules of Order.
2.2.2 Executive Director of the Center:
The Executive Director should hold a Ph.D. degree in a related field (such as Accounting, Finance, Economics, or Strategy) with proven experience in corporate governance. He/she is appointed by AU President, based on recommendation of the Dean of the College of Business after consultations with CGAC, for a three years renewable term. The Executive Director of the Center should not accept board membership, consulting fees, or engage in a relationship or affiliation with any entity/organization that may create a conflict of interest and unduly influence on the duty of the Center, resulting in diluting its integrity. This is the case for his/her tenure as the executive director and for a full calendar year after his/her departure. It is strongly recommended that the Chairman is drawn from the CoB faculty at Alfaisal University if such a candidate is on its ranks.
2.2.3 Chairman of the Research Department:
The Chairman of the department should hold a Ph.D. degree in a related field (such as Accounting, Finance, Economics, or Strategy) and preferably with some experience in corporate governance. He/she is appointed by AU President, based on recommendation of the Dean of the College of Business after consultations with Executive Director, for a three years renewable term. It is strongly recommended that the Chairman is drawn from the CoB faculty at Alfaisal University if it has qualified faculty for the post.
2.2.4 Chairman of the Training Department:
The Chairman of this department can be Ph.D. degree holder in a related field (such as Accounting, Finance, Economics, or Strategy) and with some experience in corporate governance. As is the case in the Department of Research, he/she is appointed by AU President, based on recommendation of the Dean of the College of Business after consultations with Executive Director, for a three years renewable term. This post, at least in the initial stage, can be combined with the Research Department as shown in the Organizational Chart.
2.2.5 Chairman of the Assessment Department:
The Chairman of the department can be a Ph.D. degree holder in a related field and with experience in corporate governance assessment. He/she is appointed by AU President, based on recommendation of the Dean of the College of Business after consultations with Executive Director, for a three years renewable term. It is strongly recommended that the Chairman is always drawn from the College of Business faculty at Alfaisal University.
The Chairman of the Governance Assessment Department should not accept board membership, consulting fees, or engage in a relationship or affiliation with any entity/organization that may create a conflict of interest and unduly influence on the duty of the Center, resulting in diluting its integrity and credibility.
3. Students Engagement in CG Research and Training
Students can benefit from the activities of the CG center in different ways. First, a course can be developed that teach the interested students the principles, practices and importance of corporate governance. This course that is preceded by several core business courses in accounting, finance, ethics, business law, … paves the way for the students to pursue various interests in CG. It provides the student the opportunity to:
3.1 Conduct Research
Students, graduates and undergraduates, can benefit from the activities of the research and training departments. They can team up with faculty who will be conducting basic and practical research in the different facets of CG. They can also engage in the calculations of the CGIs and in independent studies under the supervision of the involved faculty.
3.2 Integrating CG Assessment in Internship
CoB students are required to have one semester off for full-time internship that is equivalent to nine credit hours (equivalent to three courses) at a company under the supervision of a faculty member. Every year, senior students must conduct their internships at different companies. We are planning to offer the interested students the opportunity to conduct the internship in CG. They will be asked to explore how companies implement CG principles in their governance. They will be required to write overall corporate governance assessment of the company at which they have internship.
3.3 Student Involvement in Data Collection
The CG index is based on more than one hundred variables. We are planning to attract several students per semester to help CGI team in data collection, interpretation, and analysis. This helps ease the work of CGI team and help students to gain better understanding of CG assessment.
3.4 Developing CG Learning Resources
CG Center will develop educational brochures and videos on what, why, and how of good corporate governance. The center will also build learning portfolio on CG through making available research reports, articles, data, books, and workshops.
Funding to support the establishment of the center, and sustain its the operation can come from various sources. In the initial stage it will require the support of the university, a government agency, or donations through fund raising activities. Such support can be reduced as the Center becomes more and more self-reliant. Once it is established it becomes self-supporting. It will generate funds through the following activities:
4.1 External Grants and Donation:
The center will be funded through external grants or donations from government and/or private agencies. We might have a single funder or multiple ones. The center may be named after a single funder. This form of this funding option may prevent any potential conflict of interest in spite of the difficulty of securing a continuous stream of funding.
4.2 Fees for CG Services:
The companies will be charged certain fee for annual customized report providing assessment on their corporate governance practices. The report will include thorough analysis of CGI data and make recommendations for CG improvement. This model is currently implemented in other countries. In Turkey for example each company is charged $20-25 thousand on annual basis for such a service. If we do the same for 100 companies, we could generate around 2 to 2.5 million dollars (equivalent to 7.5 – 7.5 SR) annual funding for the center; which is more than enough to cover its annual operation. This source of funding may have the appearance of the conflict of interest. However, this can be mitigated as the service becomes open to all businesses.
4.3 Fee for Service Indirectly Paid by Companies:
This is same with the previous model (3.2). The only difference is that companies will pay certain fee for the service to a government agency such as Tadawul. The government agency then provides funding to the center for its services. This eliminates any potential for conflict of interest. In both cases the services are provided by the Training and Assessment departments.
4.4 Specialized Workshops and Training Programs
Most centers generate funds through publications, workshops and training programs geared toward serving the community and the CG discipline. This in addition to promoting CG culture and good practices, it has the potential of generating steady stream of revenue without the potential for conflict of interest.
5. Initial Resource Requirements and Timeline
For the center to sustain itself benefiting from the various revenue generating possibilities discussed above, it or certain segments of it need to be established first. The center can be established in a gradual manner benefitting from the current SAGIA CGI three years grant. The grant already secured the establishment and support of the Assessment Department which is the dotted rectangle in presented in Figure 1. Through this grant a CG office has been established and staffed at CoB. This can form the nucleolus of CGRC. A website for CGI project is created as an integral part of CoB website.
Once the CGI for the year 2015 is completed and published, it provides visibility for CG work at AU, and can be used as a stepping stone to push for the realization of some of the above funding opportunities. The 2015 CGI is expected to be published by March/April 2017. Consequently, as the CG office embarks on the calculation of the CGI for the year 2016 an Executive Director can be recruited; participate in managing the CGI for the year 2016 and in the organization of the CG Advisory Council. This activity can be completed by January 2018.
The Executive Director starting in January 2018 with the support of the CG Advisory Council and in utilizing some of the grant funds for the CGI of 2017 can start expanding the operation of the current CG office and may establish the departments of Research and Training under one chair. This team, and by the publication of the 2017 CGI in December 2018 would have completed the establishment of the CGRC center as envisioned in the Organizational chart presented in Figure 1.
The timeline for the establishment of the CGRC.