Key Principles of Governance in Financial Institutions Subject to Saudi Central Bank’s Oversight and Supervision (Third Edition – Dhul-Qa'dah 1442 AH/June 2021 AD)

Important Note:

To keep pace with updates and amendments regarding instructions issued by the Saudi Central Bank, the Central Bank emphasizes the necessity of always relying on the versions published on its official website: www.sama.gov.sa

---

Contents

Page No.	Chapter / Principle
3	Chapter One: Definitions and General Provisions
6	Chapter Two: Key Principles of Governance
6	Principle One: Qualifications of Board Members
7	Principle Two: Board Composition, Appointment, and Affairs
9	Principle Three: Board Responsibilities
12	Principle Four: Executive Management Responsibilities
13	Principle Five: Board Committees
17	Principle Six: Shareholders' Rights
17	Principle Seven: Disclosure and Transparency
19	Appendix: Governance Controls for the Exchange Sector

---

Chapter One: Definitions and General Provisions

1. Definitions:

The following terms – wherever they appear in these Principles – shall have the meanings assigned to them below, unless the context requires otherwise:

Term	Definition
The Central Bank	The Saudi Central Bank.
Financial Institution	An entity subject to the oversight and supervision of the Central Bank, excluding insurance and reinsurance companies.
The Board	The Board of Directors of the Financial Institution.
Executive Management (Senior Management)	The persons entrusted with managing the daily operations of the Financial Institution, proposing strategic decisions, and implementing them.
Member	A member of the Board or any of its committees.
Executive Member	A member dedicated to the Executive Management of the Financial Institution and participates in its daily operations.
Non-Executive Member	A member not dedicated to the Executive Management of the Financial Institution and does not participate in its daily operations.
Independent Member	A member who enjoys complete independence in their position and decisions, and to whom – by way of example and not limitation – none of the following independence impediments apply: <br> a. Owning five percent or more of the shares of the Financial Institution or shares of another company within its group, or having a kinship relationship with someone who owns this percentage. <br> b. Representing a legal person who owns five percent or more of the shares of the Financial Institution or shares of another company within its group. <br> c. Having a kinship relationship with any of the Board members or senior executives in the Financial Institution or in another company within its group. <br> d. Being a board member in another company within the Financial Institution's group for which they are nominated to the board. <br> e. Working or having worked as an employee during the past two years for the Financial Institution or any party dealing with it or another company within its group, such as auditors and major suppliers, or owning a controlling discount with any of those parties during the past two years. <br> f. Having a direct or indirect interest in the business and contracts carried out on behalf of the Financial Institution. <br> g. Receiving financial amounts from the Financial Institution, in addition to the remuneration for Board membership or any of its committees, exceeding two hundred thousand Saudi Riyals or fifty percent of their remuneration in the previous year received for Board membership or any of its committees; whichever is less.

Term	Definition
Relatives	Parents, grandparents, children and their descendants, spouses.
Major Shareholders	Anyone who owns five percent or more of the shares of the Financial Institution. Voting therein.
Related Parties	a. Major shareholders in the Financial Institution. <br> b. Members of the Board of the Financial Institution or any of its subsidiaries and their relatives. <br> c. Senior executives in the Financial Institution or any of its subsidiaries and their relatives. <br> d. Board members and senior executives of major shareholders in the Financial Institution. <br> e. Entities – other than companies – owned by a Board member or a senior executive or their relatives. <br> f. Companies in which any of the Board members or senior executives or their relatives are partners. <br> g. Companies in which any of the Board members or senior executives or their relatives are members of its board of directors or senior executives. <br> h. Joint-stock companies in which any of the Board members or senior executives or their relatives own five percent or more, taking into account what is stated in paragraph (d) of this definition. <br> i. Holding or subsidiary companies of the Financial Institution.
Stakeholders	Anyone with an interest in the Financial Institution, including: shareholders, investors, customers, and suppliers.

2. General Provisions:

a. These Principles aim to establish minimum requirements that enhance effective management in financial institutions, direct their financial and non-financial resources towards achieving their strategic objectives, and maintain their stability and the rights of stakeholders.

b. An effective governance system requires independence and a clear separation between the position of the Chairman of the Board and the Chief Executive Officer. This necessitates good organizational and administrative frameworks and clarity in powers and responsibilities among the key parties in the Financial Institution, including board members and executives, in addition to establishing a general framework for oversight through a risk management department, an internal audit department, a compliance department, internal control systems, and an external auditor.

c. These Principles do not prejudice the requirements imposed on financial institutions by other relevant laws, regulations, and instructions.

d. The Central Bank has issued several detailed instructions on governance, and these Principles should be read alongside them – as appropriate – including the following:

• Principles of Conduct and Business Ethics in Financial Institutions.
• Compliance Principles for Banks and Banking Institutions Operating in the Kingdom of Saudi Arabia.
• Appointment Requirements for Leadership Positions in Financial Institutions Subject to the Supervision of the Saudi Central Bank.
• Sharia Governance Framework for Banks and Banking Institutions Operating in the Kingdom.
• Corporate Governance Instructions for Finance Companies.

e. Corporate governance receives international attention; several international bodies and organizations have issued guiding instructions for governance, including the following:

• Basel Committee on Banking Supervision (BCBS).
• Organisation for Economic Co-operation and Development (OECD).
• Islamic Financial Services Board (IFSB).
• The World Bank (WB).
• Committee on Payments and Market Infrastructures (CPMI).

3. Scope of Application:

a. These Principles are mandatory for local banks, banking institutions, finance companies, and real estate refinancing companies.

b. Subject to the mandatory provisions of relevant laws and regulations, these Principles apply to credit information companies, payment and financial technology companies, exchange institutions companies¹, micro or nano Islamic finance companies, finance activity support companies, financial lease contract registration companies, and debt crowdfunding companies. The Central Bank may, at any time, mandate the application of all or some of the provisions of these Principles.

---

Chapter Two: Key Principles of Governance

Principle One: Qualifications of Board Members

Members should be qualified to perform the tasks assigned to them, have a clear understanding of their required role, and the ability to make decisions impartially and objectively without any external influence from within or outside the Financial Institution. Specifically, they must:
4. Members' curricula vitae must be publicly available so that stakeholders can assess their competence and ability to perform their duties effectively.

5. The member must possess professional competence, including various practical and administrative skills and experiences, and suitable personal qualities, especially honesty and integrity, in addition to the following:
   a. Leadership: Possessing leadership skills that enable delegation of authority, thereby motivating performance, applying best practices in effective management, and instilling professional values and ethics. b. Competence: Reflected by education level, experience, skills, and a desire for continuous learning.
   c. Guidance: Possessing technical and administrative capabilities, speed in decision-making, understanding technical requirements related to workflow, the ability for strategic direction, long-term planning, and a clear future vision.
   d. Financial Knowledge: Possessing skills to read and understand financial statements, reports, and ratios used to measure performance. e. Health Fitness: Must not have a health condition that prevents them from performing their duties and responsibilities.

6. The member must be characterized by the following attributes:
   a. Honesty: Their relationship with the Financial Institution must be a sincere professional relationship, disclosing any relevant information before executing any transaction or contract with the Financial Institution or one of its subsidiaries. b. Loyalty: Avoiding transactions involving conflicts of interest, ensuring the fairness of transactions, and that they are conducted in the best interest of the Financial Institution and stakeholders.
   c. Care and Diligence: Performing their duties and responsibilities effectively, and obtaining all information necessary to ensure that decisions made are in the best interest of the Financial Institution. To this end, they are responsible for the following:

• Attending Board meetings regularly, not being absent without a valid excuse, preparing for them, and participating effectively, including asking relevant questions and discussing with executive managers.
• Making decisions based on complete information and in good faith. A member is not exempt from responsibility if they abstain from voting without clarifying their opinion on the decision being voted upon.
• Expressing dissent in the activities of the Financial Institution and other related areas.
• Ensuring that important and key topics are included in the Board's agenda.
• The executive member providing comprehensive information to the Board upon request.

---

Principle Two: Board Composition, Appointment, and Affairs

7. The Financial Institution's Articles of Association shall determine the number of Board members in proportion to its size and nature of business, taking into account the following:
   a. The number of members shall not be less than five and not more than eleven members¹. b. The number of independent members shall not be less than two members, or one-third of the Board members, whichever is greater.
   c. The number of executive members shall not exceed two.

8. The General Assembly shall elect Board members for the term specified in the Financial Institution's Articles of Association; provided that it does not exceed three years, and their election may be conducted unless the Financial Institution's Articles of Association stipulate otherwise.

9. The procedures for nominating and selecting Board members must be specific and clear, and diversity of experiences, qualifications, and attributes must be taken into account.

10. As referred to in Principle One of these Principles: Members shall elect a non-executive member to chair the Board² and another as their deputy, ensuring that the Chairman and their deputy do not perform any executive management duties.

11. The Board must conduct an annual assessment to measure the independence of the independent member and ensure that there are no relationships or circumstances that affect or may affect their independence. The member must also inform the Board if any independence impediments arise.

12. The Central Bank's Central Office must provide a no-objection from the institution before nominating any Board member or members of its committees, or appointing any occupant of leadership positions, in accordance with the relevant Central Bank instructions. The Central Bank must also be notified in writing upon accepting the resignation/leaving employment/termination of services of any employee holding a leadership position, or termination of membership of any Board member or members of its committees, or termination of the independent member's membership, within five working days.

13. A Board member may not hold membership on the board of directors of a similar financial institution operating within the Kingdom.

14. A member may not hold membership on the board of directors of more than five listed joint-stock companies at any one time. In case of a conflict of interest, the conflict of interest policy must be applied.

15. It is preferred that a member's service does not exceed twelve continuous or separate years.

16. Anyone wishing to nominate themselves for Board membership must disclose to the Board's public file and the General Assembly any conflicts of interest, including:
    a. Having a direct or indirect interest in the business and contracts carried out on behalf of the Financial Institution for which they wish to be nominated. b. Participating in an activity that would compete with the Financial Institution or compete with it in one of the branches of activity it engages in.

17. Every member must immediately inform the Board of any direct or indirect interest they have in the business and contracts carried out on behalf of the Financial Institution, and commit not to participate in the decision-making or voting on this matter.

---

Principle Three: Board Responsibilities

The Financial Institution must have an effective Board whose role is to guide the Financial Institution's operations in a way that preserves and develops its interests, evaluates them, and bears responsibility for its actions, even if some of its powers are delegated or assigned. In all cases, the Board may not issue a general or indefinite delegation, and it must do the following:

30. Forming the Executive Management, organizing its operations, overseeing and supervising it, and verifying its performance of assigned tasks.

31. Establishing the Financial Institution's main plans, policies, strategies, and objectives, overseeing their implementation, and reviewing them periodically.

32. Ensuring the soundness of the Financial Institution and maintaining effective relationships with regulatory authorities.

33. Establishing clear limits for responsibility and accountability, and adhering to them at all system levels. At the Executive Management level, it must:

34. The Financial Institution's organizational structure must define the competencies and distribution of tasks between the Board and Executive Management in accordance with best governance practices, ensuring decision-making, and achieving a balance in powers and authorities. To achieve this, the Board must:

a. Approving and developing internal policies related to the Financial Institution's operations, including defining tasks, competencies, and responsibilities at various organizational levels.

---

Principle Four: Executive Management Responsibilities

Executive Management monitors and manages the daily operations of the Financial Institution, and performs the tasks stipulated, and performs the tasks stipulated, and performs the tasks stipulated, and performs the tasks stipulated, and performs the tasks stipulated, and performs the tasks stipulated, and performs the tasks stipulated, and performs the tasks stipulated, and performs the tasks stipulated, and performs the tasks stipulated, and performs the tasks stipulated, and performs the tasks stipulated, and performs the tasks stipulated, and performs the tasks stipulated, and performs the tasks stipulated, and performs the tasks stipulated.