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Why have shareholding companies sustained losses?
01/02/2017  Dr. Ali Al-Ghamdi - Saudi Gazette

Okaz daily recently carried a report by Abdulrahman Al-Sabahi discussing the reasons why several shareholding companies have sustained losses. Al-Sabahi interviewed a number of economic analysts and people who trade in the Saudi Stock Exchange. Different explanations were given for the losses.

Anas Al-Rajhi, an economic analyst, attributed the losses to the decrease in profits of some large companies such as the Saudi Arabian Fertilizer Company (SAFCO) and the SAVOLA Group. The insurance sector, he said, has recorded huge profits but the Q4 2016 profits were the lowest in years. He noted that this should not come as a surprise given the current economic situation. Following the increase in fuel prices and the decrease in public spending, corporate profit margins have slumped while costs have risen. Moreover, the demand for some products has decreased.

Saeed Binzagar, a member of the Jeddah Chamber of Commerce and Industry, blamed management planning for the losses incurred by shareholding companies. Some companies over-expanded their operations although they, as big companies, recorded low profits. In his opinion, an expansion plan should only be implemented after conducting exhaustive studies because unplanned expansion policies will lead to losses.

Ahmed Ba-Hebail, a chartered accountant, blamed the decrease in public demand for consumables. The profits of the 167 companies that announced their financial results were much lower than the profits made by these companies last year.

These analysts, however, failed to mention that some companies have never made a profit while others have made low profits that were not commensurate with the profits made by their competitors in the market. The reason for this can be attributed to mismanagement and violations beyond the control of the corporate governance law or violations committed with the blessing of that law.

For example, one company called its shareholders to attend a general assembly meeting. The agenda of that meeting focused only on voting on dealings with what was termed «pertinent parties». What does that mean? It means the company entered into contracts with another company, which is owned fully or partially by members or a member of the board of directors. In other words, the board member or members have an interest in the company. The governance law calls this a conflict of interest and only allows it if the general assembly meeting approves such an action.

The general assembly of any company, without exception, does not carry any weight or importance; it is merely a meeting that must take place as a routine. Moreover, only a few shareholders show up to discuss routine topics. If any shareholder who attends such meeting criticizes an action, he will be silenced in one way or another. In fact, most attendees do not have any idea about the agenda items to be discussed during the meeting. At the end of the meeting, a favorable vote on the agenda is assured because most of the company’s shares are owned by members of the board of directors. That is why the meeting is routine and only held for publicity purposes.

The Ministry of Commerce and Investment’s representative who attends the meeting does not add any value or credibility to the agenda discussion. His role is only to ensure that the agenda has all the required items; otherwise how we can explain why the general assembly approves items that are in complete violation of the governance law.

There is something wrong with the way board directors are selected, especially in the case of family-owned companies that have turned into shareholding companies. Very often, the owner of the company controls the board of directors. He or another family member or his friend selects the directors. The company is run in a way that maintains and strengthens the owner’s control over all its operations. The members of the board of directors receive annual bonuses, which are usually an exaggeratedly large amount, especially for companies that have not made any profits or have been incurring losses for the past 10 or fifteen years.

I do not know how the chairmen of boards of directors or members of the boards can allow themselves to sign contracts with companies in which they have interests. They do this although they know that it is against the governance law. How can they allow themselves to take bonuses and allowances for years while they know that the company they run continues to suffer losses? They abuse the governance law and fail to protect the rights of shareholders, especially the ones who have only a few shares. Do they not feel conscience-stricken? Do they not know that Islam prohibits taking what is not yours?

— Dr. Ali Al-Ghamdi is a former Saudi diplomat who specializes in Southeast Asian affairs.

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