Law

It is generally accepted that in the aftermath of the financial crisis in Asia during the 1990s, a lot of emphasis was placed on reforming corporate governance.  However, the success of those reforms is not well known.  This research examines these reforms and conducts a critical analysis of the success of these reforms by focusing on Indonesia, the Republic of Korea, Thailand and Malaysia, the Asian areas hit hardest by the financial crisis in Asia.  General perceptions have been that poor corporate governance within the banking system was a major contributing factor to the 1990s Asian financial crisis.

    In the final analysis, it was primarily the loss in confidence on the part of investors that gave way to declining investments in Malaysia, Indonesia, South Korea and Thailand that contributed to the Asian financial crisis.  Investors lost confidence over concerns about satisfactory laws and the legal regimes in each of these Asian countries.  In other words, corporate governance within the banking system was the primary target in the aftermath of the Asian financial crisis.  Governments of Asia set about implementing reforms aimed at reforming corporate governance within the banking system.  This research paper therefore sets out to investigate and explain the significance of corporate governance within the banking system and the corporate governance and reforms of the Republic of Korea, Malaysia, Indonesia and Thailand in the wake of the Asian financial crisis of the 1990s.


The 1997 financial crisis in Asia, particularly in Indonesia, the Republic of Korea, Thailand and Malaysia drew attention to the significance of corporate governance within the financial sector.  These four Asian countries suffered the greatest losses during the 1997 financial crisis and contributed to the crisis.  It was generally believed that the governance within the banking system was the primary contributing factor to the crisis.  The research will therefore set out to critically evaluate the significance of corporate governance within the banking system by reference to the Asian banking system particularly with respect to reformatory responses to the 1997 financial crisis in the region.  Particular emphasis is placed on the governance within the banking systems of Indonesia, the Republic of Korea, Thailand and Malaysia.

The first part of this research examines the significance and characteristics of corporate governance within the banking system.  This will offer a lead in to the next section which hones in on corporate governance within the banking system of Asia in general.  A more specific approach follows by a detailed examination of corporate governance of banks in Indonesia, the Republic of Korea, Thailand and Malaysia.  The emphasis is on the weaknesses of the corporate governance of these four Asian jurisdictions in the pre-Asian crisis era and the reforms that followed.  Only then will it be possible to offer a critical analysis of the corporate governance reforms of the banking systems in Asia.  The four countries are selected because they suffered the greatest losses and share the greatest responsibilities for the Asian financial crisis of the 1990s.

Corporate Governance in the Banking System Its Nature and Significance

The OECD defines corporate governance as involving a number of relations between a companys management and its stakeholders. The standard of governance required of banking institutions is quite high because financial institutions economic diversification and consolidation is entirely important for economic growth.  Banks are particularly important because of their role in the operation of the financial system.  In the interim banks are confronted with a variety of risks including credit, liquidity, interest rates and markets. Corporate governance of banking systems typically involve supervision and regulation which focuses on risk management. This brings together all of the banks stakeholders which invariably include shareholders, regulators, supervises, managers, internal and external auditors as well as the public who have either a direct or indirect involvement in the financial risk management system.

    The significance of corporate governance within the banking system is exemplified by the fact that the moment things go wrong within the banking system, attention immediately turns to corporate governance. In general corporate governance is a system of controls which identifies how rights and duties are distributed among the various actors within a corporation and it delineates the regulatory process and standards by which decisions are made relative to corporate matters.  For banks, corporate governance means implementing a regime for the administration of the banks day to day business affairs by virtue of setting objectives and not only monitoring those objectives, but also achieving them. 

However, the role of banks in the overall economy makes corporate governance for banks particularly important.  Banks make provision for financing for business entities and provide general financing for a wide portion of any given population as well as facilitating systems for payments.  Moreover, banks can also make credit available when market conditions are problematic.

    Risk management is seen as the key to effective corporate governance in the banking system.  Risk management helps to set up processes for identifying, analyzing and mitigating risk that have the potential to help the bank accomplish aims and objectives.  Risk management is particularly important in banking system because of the unique manner of banks capital structures.  To start with, banks when compared to other financial firms, have entirely restrictive equity.  For banks, approximately 90 percent of their funding comes from debt.  Secondly,  the liabilities of banks are typically deposits which are available to creditors when called for and meanwhile a banks assets are typically in the form of loans with long-term maturity dates.  Therefore, by possessing liquidity and issuing liquidity in the form of debts, banks are in a unique position to liquidate the economy.

    Risk management is particularly important because the operation of liquid production can result in problems where creditors are concerned.  This is because banks only hold limited amounts of deposits in reserve.  Several depositors are therefore not able to have their deposits issued at the same time because banks will not have all of the deposits available. Problems will therefore arise in circumstances where a large number of depositors seek to withdraw all of their funds in times where there are fears that the banks reserves are in danger of being depleted.

    The significance of corporate governance in banking systems is obvious.  Banking operations engage concerns about the banks private interest in respect to owners and public interests in terms of its stability.  The banks role within the financial network imposes upon the bank the role of principle-agent. Banks confront the juxtaposition between shareholders and its management.  In this regard, shareholders are motivated to increase risk under the auspices of enhancing leverage via increased stakes in equity.  Management, on the other hand, is predisposed to manage risks in order to safeguard their own human capital.

    It therefore follows that corporate governance in the banking system is entirely important or a number of obvious reasons.  First, when a bank fails, failure gives rise to external negatives.   Secondly, agency difficulties are exemplified when bank monitoring on the part of depositors and other stakeholders is insufficient.  Thirdly, banks function in non-transparent climates giving rise to complicated flows of information.  Fourthly, banks are subjected to heavy regulatory processes in that its stakeholders are the regulators.  Finally, diverse activities within banks enhance the difficulties associated with agency between insiders and smaller shareholders.  As a result, conflicting interests are common place and corporate governance is necessary for striking a fair balance in the frequently occurring circumstances where conflict of interest arise. Corporate governance, responds to the shortfall in contractual obligations and the obligations attributed to stakeholders and for the improvement of information transparency relative to bank information.

    Theoretically at least, corporate governance within banking systems generates increased awareness of the objectives and measures of effectiveness in achieving those objectives.  Corporate governance is also meant to minimize threats to the banks success and it business operations continuity. Overall, corporate governance in banking systems is designed to ensure effective and efficient returns on investments and market premiums and helps to minimize pressures emanating from investors and critics alike.

Corporate Governance in the Banking System in Asia
The Asian financial crisis in 1997 drew attention to the significance of corporate governance in banking institutions generally.  There are a number of reasons why corporate governance in the banking system in Asia as a region comprised mainly of developing economies is important.  In developing economies, banks occupy a dominant position in the financial systems of these countries economic growth. Secondly, the financial markets in these economies are typically underdeveloped and banks provide the most significant sources of finance for most of the business organizations. These banks are typically the main receptors for savings and fourthly, a number of banks in developing countries are restructuring to embrace the concept of privatization.

    Despite the significance of banks in developing countries, the corporate governance of banks relative to developing countries has received very little attention by researchers.  In fact, it was only fairly recently that researchers have turned attention to the corporate governance of banks in developed countries.  Whether in the developed or developing nation, banks require a system of regulation that takes into account the interests of the depositor as well as that of the general financial sector.

    Asia represents a mix of both developing and developed economies.  There are some Asian countries that either equal or exceed the economies of some of North America and Europes more successful economies.  Similarly, there are a number of countries in Asia that are characterized as poor.  Even so, there is common ground in Asia.  For instance there is an intense conglomeration of corporate ownership and there are decidedly weak legal frameworks in Asia.

    The concentration of corporate ownership is tied to weak legal frameworks.  Claessens and Fan argue that in countries such as those in Asia where property protection laws are weak, it is natural for families to control cooperate ownership.  In the absence of reliance on the state, owners gain authority via maximum voting powers and incentives via high cash entitlement rights to enforce contractual arrangements with the diverse stakeholders. However, while diverse ownership creates conflicts of interest between internal stakeholders and external stakeholders, in concentrated ownership conflicts of interest arise between the large shareholder and smaller shareholders which has consequences for agency problems.  This has an entrenchment effect where the controlling owner typically decides how to run the company and to distribute profits among the shareholders.

Although minority shareholders may monitory firms in Asia if they have long term large equities,  it is not certain if they can effectively challenge controlling owners.  Similarly, internal governance has it problems as directors are usually controlled by insiders and rarely if ever have outside influence.  For instance corporations in Taiwan are usually regulated by insiders while controlling owners are apt to appoint family members to sit on boards when their respective voting powers are in excess of the firms cash flow rights.  However, when the cash flow rights of controlling owners increase, it is likely that family members on boards will decline implying that insider predominance on boards contributes to agency complications as a result of the separation of control and cash flow rights.

    China, where state control ownership characterizes much of the corporate structure, corporate governance presents a different governance problem.  In one research conducted of 632 Chinese companies that are publically owned, approximately half of the board of directors are appointed by state owners and 30 percent are aligned to other government agencies.  Likewise, the presence of minority shareholders and professionals are scarce.  The result is a board dominated by politicians with little or no financial or legal knowledge.  Moreover, politicians take advantage of their political powers to influence markets and firms within their respective jurisdictions.  In this regard, rent-seeking transactions are prevalent and professionalism is not in demand as it might disclose information that could expose the rent seeking transactions.

    In a study conducted by the Asian Development Bank of four economies in Asia, namely Indonesia, the Republic of Korea, Malaysia and Thailand, it was found that corporate governance in these banks corresponds with the problems identified above. Specifically it was found that ownership is concentrated in approximately 70 percent of the banks and controlled by either families, foreign firms or governments.  It was also found that politicians are heavily involved in the banks governance constructs.  A number of banks are not governed by professionals and bank governance typically corresponds with ownership controls. Moreover, banks have a tendency to take on governance constructs that pander to controlling ownership. 

    In trying to identify the underlying factors that led to the financial crisis in Asia in 1997, a number of theories have emerged.  One theory coming out of the US is that the crises was due to unsatisfactory economic policies complicated by incompetent or inappropriate governance of the original depreciation.  Another theory attributes the crisis to the International Monetary Funds demands that interest rates be increased and that some banks be closed.  Yet another theory suggests that the financial crisis was brought about as  a result of improbable government guarantees.  Each of these theories have one thing in common.  They each suggest that whatever happened to contribute to the Asian financial crisis, one thing is certain, they each reflect a loss of confidence on the part of domestic and non-domestic investors.  This loss of confidence emanated from weak legal frameworks relative to corporate governance.

In this regard, corporate governance in Asia was such that it was ineffective for preventing expropriation of minority shareholders. In essence, when managements expropriation goes up as the anticipated investment returns drops, negative shocks to investor confidence will automatically give way to more frequent expropriation and declines in capital inflows as well as increases in attempts at capital outflows. The result is a decline in stock prices and exchange rate depreciation.

    The cases of expropriation on the part of managers in Asia during the financial crisis of 1997 are well documented.  For instance the Bangkok Bank of Commerce in Thailand saw funds being moved to offshore locations in a manner that corresponded with losses. Hong Kong creditors with businesses in mainland China were not able to recover loan payments.  Korean minority shareholders challenged the transfer of assets from large firms. The fact is, each of these cases demonstrate that management had the capacity to transfer funds and assets simply because they were also controlling owners.  This is indicative of weak protection of minority shareholders and creditors and this goes to the heart of corporate governance.

Following the Asian financial crisis banking reform has honed in on regulating poorly performing loans, consolidation of banking institutions and recapitalization together with emphasizing legal and regulatory reformation and restructuring.  After the Asian financial crisis of 1997, the Asian Development Bank Institute (ADBI) conducted a robust study on corporate governance in the four countries which suffered the greatest losses.  As previously noted, the fours Asian countries are Republic of Korea, Malaysia, Indonesia and Thailand.  The corporate governance and reforms of each of these jurisdictions are discussed below.

Corporate Governance of Banks in Malaysia
Malaysia had always been regarded as regulating a safe banking and financial system having followed the Basle Core Principles of Effective Banking.  The Basle Core Principles of Effective Banking was a result of the G-10 summit in Basel in 1988. There are essentially 25 core principles and they relate primarily to supervision such as adequate capital, reserves for loan losses, concentration of assets, risk management, internal controls and liquidity.  The emphasis was on the degree of responsibility banks must assume for risk management. However, the Asian financial crisis of 1997 exposed the gulf between concepts of governance and its adoption and practices.

    According to the International Monetary Fund, the Asian crisis was catapulted as a result of weaknesses in domestic policy.  Large deficits in current accounts demonstrated this with the focus on bank loans in realty as well as the financing of purchases of shares.  Evidence of weaknesses in domestic policy was also evidenced in the financial system via weak governance and weak risk management.  Additionally, there was far too much borrowing by the corporate sector from international sources.

     The World Bank was of the opinion that the Asian financial crisis was brought about by a vulnerable banking system that was characterized by weak risk management and excessive lending. Weak risk management was a result of poor corporate governance and constraints on risk management technology investment.  Excessive lending was a result of concentrated ownership of banks and corporations, poor bank regulations enforcements and state lending demands.  Ultimately these factors would come together to cause a significant amount of stagnant loans and insolvency among financial organizations.

    A common thread runs throughout both the World Bank and the International Monetary Funds assessment of the Asian financial crisis.  The common thread is poor corporate governance.  It is therefore not surprising that Malaysia, like the rest of the jurisdictions in East Asia would turn its attention toward strengthening corporate governance in the aftermath of the Asian financial crisis.

    Corporate governance reform in Malaysia was promulgated via the Malaysian Code on Corporate Governance by Finance Committee on Corporate Governance, Capital Market Master Plan (CMP) by Securities Commission and Financial Sector Master Plan (FSMP) by Bank Negara Malaysia within the financial sector.  The Malaysian Code on Corporate Governance 1998 established a Finance Committee on Corporate Governance which is comprised of industry and government alike.  The Committee released a report in 2000 which contained four significant principles.  These principles are board of directors, remuneration for directors, shareholders and accountability together with auditing.  Malaysian companies are required to apply these principles in the management and operation of their businesses.

    The CMP was launched in 2001and its primary objective is to mobilize and allocate funds with a certain level of confidence for market participants.  This objective is to be achieved through good corporate governance.  The CMP contains a compulsory provision for disclosing compliance with the Malaysian Code on Corporate Governance on the part of listed companies.  The FSMP was launched a month after the CMP by the Bank Negara Malaysia and focuses on promoting resiliency, competition and dynamic financial systems that promote economic and technological development. Corporate governance is covered by the FSMPs recommendation that shareholder and consumers are active in the regulatory process and financing in the priority sector. Other corporate governance reforms are noted in the FSMPs recommendations requiring the implementation of committees, transparency and unambiguous warning systems as well as the promotion of mergers among banking organizations and the establishment of an insurance fund for deposits.

    Institutional development in the aftermath of the Asian financial crisis is also another method for improving corporate governance in Malaysia.  Institutional developments came by virtue of the implementation of the Malaysian Institute of Corporate Governance (MICG) and the Minority Shareholders Watchdog Group (MSWG).  The MICG was launched in March 1998 and is a non-profit public company founded by the Federation of Public Listed Companies, the Malaysian Institute of Accountants, the Malaysian Association of Certified Public Accountants, the Malaysian Institute of Chartered Secretaries and Administrators and the Malaysian Institute of Directors. The MICG is committed to effecting the development of corporations and businesses in Malaysia via enhanced best practices in corporate governance. 

    From 1998 to 2003, Malaysias Central Bank has taken significant steps toward revising and improving guidelines for the regulating of the financial market via improved disclosure and transparency with respect to information within the banking sector.  However, history dictates that regulatory initiatives are insufficient for mitigating the incidents of moral hazard and excessive risk taking.  Even so, Malaysias Central Bank has made significant progress in the aftermath of the Asian financial crisis in revising its guidelines for ensuring that policies are consistent with the changes that occur within the financial and banking industries.  Likewise, domestic banks have evolved to such an extent that they are making corporate governance a priority in terms of decision making and conducting the business affairs of banks. Measures have been taken by banks to improve and validate boards in their constructs and compositions.

The MSWG was set up to ensure that companies adhere to corporate governance principles and to heighten minority shareholders awareness of their rights and how to go about enforcing those rights.  Committee members emanate from government fund organizations including the Employees Provident Funds, Armed Forces Fund Authority, Pilgrims Fund Board, Social Security Organization and Permodalan Nasional Berhad.

Although, corporate governance in the Malaysian reform initiatives acknowledge the rights and authority of shareholders, these rights and authority remain subordinate to government laws.  What this means is that the rights and authority vested in principal and agent within a company depends on the extent to which the government intervenes.  In this regard, the government is actually the controller of the company relative to laws or policies promulgated under the corporate governance rules and regulations.  Moreover, financial institutions play a significant role in the corporate governance enforcement process.  Therefore a stable financial institution will give way to a stable company.  Even so, difficulties may arise in circumstances where the financial institution is owned by the government.  In these kinds of circumstances the government is in a position to control the company by virtue of both economic policies and corporate laws and regulations.

    Concentrated ownership, as noted previously contributed to weak corporate governance constructs in Asia in general.  The issue of concentrated ownership was addressed by FSMP which emphasizes the significance of institutional and foreign ownership and placing restraints on individual as well as family ownership of banking institutions and like businesses.  The CMP goes further to mandate the ownership of equity for future brokerage businesses be reformed so as to permit ownership by a foreign majority.  It was also announced later on that foreign actors would be permitted to own up to 100 percent of a brokerage firms equity.  Moreover, corporations may only own 20 percent of the equity in a banking institution while individuals may only own 10 percent of the equity.

    Additional corporate governance reforms in Malaysia include the introduction of a new mandate for the board of directors.  In this regard, the board is charged with the responsibility for ensuring that management conduct themselves in a manner that provides the best returns for shareholders.  Moreover, the Bursa Malaysias 2002 listing criteria restrict the individuals number of directorship. A director is only permitted to have 10 directorships in a listed company and 15 directorships in companies that are not listed.  The idea it to ensure that the director is not inundated with commitments and that his or her time can be put to more productive use.

    The Malaysian Code on Corporate Governance 2000, also requires that there be a balance of authority between the Chairman and the Chief Executive Officer.  The idea is to prevent an individual having autonomous authority in the decision making process.  It is therefore important that no one individual maintains both positions. Other improvements in corporate governance include the admission of outsiders to the board and the admission of professions to the board.  Both moves are intended to ensure the board of directors fosters some semblance of independence and neutrality.

    It is obvious that Malaysia has turned its attention to strengthening corporate governance within the banking system.  It has targeted a number of the weak areas that gave rise to the loss of investor confidence, the catalyst of the 1997 Asian financial crisis.  Whether or not these reforms will effectively transfer into practice will only be known in time.  This is because these reforms are relatively new and are essentially a work in progress.

Corporate Governance of Banks in the Republic of Korea
Prior to the 1997 crisis corporate governance of the banks in the Republic of Korea was characterized as inefficient. Reforms within corporate governance which focused on transparency and meeting global standards of banking compliance is believed to be primarily responsible for the Republic of Koreas financial recovery.  In short, the government of Korea has emphasized improving corporate governance.  In the interim there have been enhancements both institutionally and legally accompanied by debate and civic groups pressure and examples by model corporations relative to improving corporate governance.  Still, there is room for improvement.

In the thirty years leading up to the Asian financial crisis in 1997, Korea evolved as Asias second largest financial market.  At the core of this economic growth was a banking system controlled by the government which essentially channeled consumer savings into a capital base for a minority of business firms referred to as chaebols. Chaebols are ownership structures where Korean corporations are owned by virtue of conglomerates (chaebols). Chaebols were the beneficiaries of preferential treatment which included business license access, foreign investor and import protection and cheap credit from state controlled banks.  Moreover, the government managed interest rates but at the same time placed constraints on the sectors and corporations that banks could finance and encouraged savings by consumers.

    During this period, Korean banks were responsible for more than 50 percent of the countrys financial assets or at least US863 billion by 1997.   Even so, management within the banking sector was described as weak during the period leading up to 1997.  Weak management was primarily a result of dependence on chaebols and government as well as poor bank supervision.  Many of the consequences of weak bank management were manifested in the poor orientation of profit, weak supervision and regulatory processed, fragmentation of industry, insufficient risk assessment and management and very little innovation relative to production and service provision.

    Caught by strict government control under a government committed to supply oriented economic policies, a majority of Koreas banks were not tailored to pander to the needs of retail consumers or profit returns for shareholders.  Instead, banks were primarily tailored to transform savings from households to cost friendly financing for specific industries and corporations.  In this regard, the Korean government commanded that banks issue lower interest policy loans and purchase bonds at a significantly reduced rate. Additionally, banks were rewarded for loan surpluses rather than profit margins.  With a damper on bank autonomy and little focus on profits, financial and management weakness was a natural consequence.

    In the aftermath of the 1997Asian financial crisis, Korea market actors moved for reforms and improved their own efficiency.  These initiatives have contributed to Koreas economic recovery at a more rapid pace than anywhere else in Asia.  The Korean government also implemented policy changes within the finance system that liberalized interest rates, relaxed finance industry development and expanded financial institutions business areas. Even so, the changes in company ownership constructs have not been fast enough nor have government control been relaxed enough.  

    The most important corporate governance laws in Korea are the Commercial Code, the Securities and Exchange Act (SEA), Act on External Audit of Stock Companies and Listing Rules.  Both the Commercial Code and the SEA have been amended a number of times following the Asian financial crisis of 1997.  These amendments are reflective of significant reconstruction which are compiled in the Memorandum of Understanding which are co-signed with the International Monetary Fund and the International Bank for Reconstruction and Development.  The Commercial Code together with the SEA have stressed the promotion of corporate management efficiency, transparency and emphasizing the rights of minority shareholding.

    Directorship has changed so that directors are appointed at the general meeting of shareholders and are required to be at least three in number unless the companys total share capital is below W500,000,000.  Directors liabilities and obligations have also been implemented so that they are required to be faithful and to adhere to confidentiality considerations.  In the event a directors conduct causes damages to the company, shareholders with a total of 1 percent outstanding shareholding may initiate proceedings against that director.

    The Commercial Code regulates audit committees and requires that no less than three directors sit on the audit committee.  Moreover, directors affiliated with the companys business shall not occupy more than one-third of the committee.  In order to facilitate independence, the audit committees chairperson is required to be a non-executive director.

The amended laws also turned attention to heightening awareness of and strengthening shareholders rights and obligations.  In this regard, shareholders are entitled to notice of all general meetings.  They also have the right to use proxies with respect to their voting authorities.  Similarly, minority shareholders rights and duties have also been enhanced.  As previously noted, minority shareholders can initiate action against a director for damages to the company.  In addition, minority shareholders with a shareholding of at least 0.5 percent of the shares for at least 6 months may request directors, auditors or liquidators dismissal.  A 0.5 percent minority shareholding may also obtain injunctive relief with respect to the illegal act of a director or directors.  Minority shareholders with no less than 0.1 percent of shares for over 6 months have the right to inspect company books and other documents.  Minority shareholding of at least 3 percent may also convene general meetings of the shareholder or demand appointment of auditors.   Minority shareholders with 1 percent of shares may also make proposals.  These rights apply to listed companies and are slightly altered in terms of percentage of shares for larger companies and general companies.

    In order to enhance post-crisis regulatory systems, the government set up two primary regulatory organizations namely the Ministry of Finance and Economy (MOFE) and the Financial Supervisory Commission (FSC).  The Korean Securities and Futures Commission as well as the Financial Supervisory Services fall under the supervision of the FSC.   The MOFE is responsible for setting principles and directions for the countrys economic policy.  The FSCs primary responsibility is regulating the Financial Supervisory Services.  The primary role of the Securities and Futures Commission is to follow up on recommendations by the FSC.  Invariably these recommendations include investigating suspicions of unfair securities and futures markets dealing,  companies accounting and audits standards and managing and supervising securities.

Self-regulatory organizations were also set up in the aftermath of the Asian financial crisis.  Among the self-regulatory organizations are the Korea Stock Exchange (KSE), the Korea Securities Dealers Association and the Korea Listed Companies Association.  The Korea Securities Dealers Association set up the KOSDAQ Market for the purpose of performing functions relative to the operations of the market such as disclosing listed companies, executing transactions and actions like suspending trading.  The KSE was set up to regulate fair pricing and for the protection of investors.  In this regard, the KSE makes information relative to corporations available, monitors alleged unfair dealings and monitors trading in general.  KSE reports its findings to the FSC who in turn may take action accordingly.

    The Korea Listed Companies Association was established by the Securities and Exchange Law to deal with securities issues.  Its primary responsibilities are to recommend modifications that improve the corporate and securities systems including training processes.  The Korea Listed Companies Association also provides a list of within the banking system and makes recommendations for non-executive directors.  The Korea Corporate Governance Service was also set up by the KSE for the purpose of making provision for analysis so that corporate governance is a prominent focus for Koreas listed companies.

    Although the FSS performs investigations, those powers are constrained and the investigative powers relative to financial institutions are conducted by the Securities and Futures Commission under the auspices of the FSC.   The FSS may take action upon completing an investigation and action can include the termination of a business license or registration, suspension of a business either partially or entirely, business closure andor issue warnings.  Persons may also be indicted and therefore face criminal prosecution.  However, between 2000 and 2001 only two investigations resulted in partial suspension of businesses, four in cautions, and nine in punitive action by the FSS.  All indications are therefore that only a small degree of enforcement exist in Korea.

    Other post-Asian financial reforms in Korea relate to transparency via disclosure and information sharing.  For instance the FSC has the last word on the implementation, modification and construction of the Korean Accounting Standards (KAS) as well as the Korean Standards on Auditing.  In 1998, immediately following the Asian financial crisis the FSC made a number of substantial amendments to the Korean Financial Accounting Standards and the Korean Standards on Auditing so that auditing and accounting standards in the country were consistent with international standards. 

    Ownership of banks in Korea changed substantially following the Asian financial crisis. Although prior to the crisis a significant amount of privatization had taken place, during the crisis, the government injected significant funds in Koreas failing banks and this situation had to be rectified quickly.  Ultimately the Korean government acquired total control of at least seven Korean banks.  A system of acquisitions and mergers were utilized for privatization.  The Ministry of Finance and Economy encouraged five banks to acquire the holdings and liabilities of these failed banks and the mergers and acquisitions were completed by mid 1998.  This process was compulsory, but by 1999 voluntary mergers and acquisitions took place.

    Prior to the financial crisis, the Korean government had placed significant restrictions on foreign ownership of shares in Korean corporations.  However, by virtue of the Foreign Investment Promotion Act 1998, significant steps were taken to reduce those obstacles.  For instance the 4 percent limitation on foreign holdings in Korean financial institutions was removed.   This led to an increase of foreign ownership in domestic banks which increased the stakes and the degree of foreign management of Koreas banks.

    Specific management laws were implemented to ensure that Koreas banks improved its corporate governance.  The Banking Act was amended in 2000 mandating that all banks appoint external directors and auditors during the annual meetings of the shareholders.  Moreover, banks were required to set up internal standards for control and management as well as staff and for the appointment of a compliance officers charged with responsibility for examining and monitoring compliance.  In line with this change, the FSS provides a meticulous set of principles for the promotion of effective and efficient operations by directors, auditors and compliance officials.  For example, banks must appoint at least three directors, half of which must be external directors.  Banks are also required to have at least two compliance officers whose primary job is to detect and prevent illegal conduct so as to help the board and management.

    Two surveys were distributed for the purpose of obtaining information relative to corporate governance within the banking system.  One survey was distributed in 2000 by the Korea Institute of Finance together with the FSS and McKinsey.  The participants were comprised of 72 external directors and 56 executive directors from at least 15 banks.  The survey illustrated that corporate governance among Koreas banks had improved significantly.  The second survey took place in 2004 and was conducted by the ADBI and involved a survey of 14 banks in Korea.  41 external directors and 12 executive directors took part in the survey.  This survey also reflected satisfaction with corporate governance improvements among Koreas banks.

    Although there is room for improvement, corporate governance of Koreas banks has been improved with relatively satisfactory results.  There have been significant increases in Koreas banks profitability since 2001.  However, insolvent corporate loans continue to be a problem as well as consumer loans.  Banks have responded by putting aside provisions for bad debts. Even so, the improvement in Koreas banks profitability at the very least indicate that improving corporate governance of banks is the right approach to take.  At worst, Koreas situation indicates that corporate governance improvements within Koreas banking system has more work to be done.  In the meantime corporate governance reforms is at least on the right track.

Corporate Governance of Banks in Thailand
Thailands banking industry is among the countrys most important industries with the result that the banking sector is far bigger than the countrys stock market.  Thailands corporate governance of its banks was disadvantaged by incidents of corruption and poor risk management systems.  Government intervention was also a contributing factor.  In the wake of the 1997 Asian Crisis, Thailand was able to recover as a result of massive restructuring.

With the onset of the Asian financial crisis in Thailand, it was immediately assumed that Thailands issues were a result of currency crisis. On an entirely superficial level, this is indeed what contributed to the Asian financial crisis of 1997, however, when one goes below the surface, a number of underlying problems are discovered and Thailand is no exception.  In Thailand, the general consensus is that within its financial system, transparency shortfalls permitted financial businesses to function with little respect for legal technicalities.  Rather the relationship-capitalism, a business environment which depended on long-term relations between family elite ownership and government was the primary trait of the corporate constructs. 

This relationship-capitalism was quite common across Asia and typically played out via government granting licenses at the exclusion of others to elite family businesses therefore distorting the principles of fair competition.  Another problem was created by the indiscriminate provision of loans to the elite without first determining the ability to satisfy those loans.  Moreover, business was conducted in the absence of neutral or independent supervision outside of the supervision of conventional regulatory bodies with the result that corporate governance of banks and businesses in Asia in general were inherently flawed.

    It is argued however, that the financial crisis in Thailand was primarily brought about as a result of unsound macroeconomic policies and imbalances and the overutilization of short-term foreign currency-denominated loans as opposed to poor corporate governance constructs.  Be that as it may, the financial crisis did expose fundamental problems in Thailands corporate governance system in terms of practices that were not heeded in the past. Some argue that the flaws in the corporate governance practices in Thailand emanate from a lack of disclosure and transparency models. Researchers in the field are largely agreed that there were two primary contributing factors to Thailands financial crisis.  First there was the concentration of ownership among large corporations.  Secondly, the corporate governance system was entirely opaque or lacking in transparency.
 Thailands responses to the financial crisis involved major reconstruction by the government and Thailands banks.  Nationally, the government introduced a number of measures calculated to enhance the capacity of the central bank to monitor and supervise the financial sector and to improve corporate governance.  The banks themselves conducted restructuring which included the termination of bad loans and the introduction of improved corporate governance and risk management processes.
The first step taken by the Thai government was the implementation of a blanket guarantee in August 1997 as a means of regaining confidence in its banking sector.  The Bank of Thailand also amended the rules relating to the establishment of fund adequacy and for defining non-performing loans provision.   In order to make the financial sector effective once again and to improve transparency and competitiveness, the Thai government introduced improvements in the prudential constructs and a supervisory framework.  In 1997 and 1998, a number of amendments were made to the Bank of Thailand, banking generally and finance systems laws so that authorities were in a position to act quickly in respect of failing financial systems.

By October 1997, Thailands government introduced a robust reconstruction framework for the banking and related sectors.  This plan for reconstruction included the establishing of the Financial Sector Restructuring Authority (FRA) and asset management companies (AMCs) for the purpose of providing a regime for regulating the disposition of assets of failing financial systems and for restoring the financial sector.  Plans were also announced for the introduction of international standards for regulating the classification and provision of loans as well as for accrual of interests.  Plans were also announced for establishing an insurance system for deposits.

    These plans for reconstruction of the banking and financial sector went into effect in August 1998 under the 14 August 1998 Program which resolved six banks via government intervention. The Thai Asset Management Company (TAMC) was set up in June 2001 for the purpose of cleaning up Thais banks balances by the taking over of national banks.  The TAMC was implemented to resolve the issue of poor bank assets that had been transferred to AMCs from state-owned financial sectors.  Additionally, the TAMC also covered poor loans within the private banking sector. In covering bad loans, enforcement by virtue of collection powers were conferred upon the TAMC.

    The banks ownership regime was also targeted by the Thai government.  By virtue of the Commercial Bank Act 1962 an individual was authorized to hold a maximum of 5 percent shares in commercial banks.  Yet there were no limitations on the share percentage for the Crown Property Bureau or other relevant government units.  Similarly, foreigners could only hold up to 25 percent of the commercial banks shares.  Following the 1997 financial crisis the restrictions on foreign ownership changed to permit foreigner to own up to 100 percent of commercial banks shares for up to 10 years.

    In the immediate aftermath of  the 1997 crisis a majority of Thais banks  shares were owned by families.   However, with the restructuring of the banking system in Thailand in response to the 1997 financial crisis, this ownership by families decreased significantly.  Even so, the concentrated ownership of banks became more pronounced in the wake of the 1997 financial crisis as the government nationalized a number of banks.  Likewise, banks acquired by foreigners also reflected a large degree of concentration in that regard.

    Corporate governance was targeted in a far more direct way however.  In February 2002, the National Corporate Governance Committee (NCGC) was created for the introduction of policies aimed at enhancing corporate governance.  Six sub-committees were therefore established by the NCGC.  One such sub-committee was  the Sub-Committee on the Enhancement of Corporate Governance in Commercial Banks, Finance Companies and Insurance Companies. Additionally, the Thai government introduced a number of guidelines and regulatory processes for improving banks corporate governance.

    In March 2002 guidelines appeared in the Bank of Thailands Financial Institution Directors Handbook.  The fiduciary duties of the directors were enunciated together with policies and monitoring guidelines for supervising management taking account of stakeholders expectations.  The handbook also clarified a regulatory regime for the duty of care, breach of which could result in criminal liability for directors.  In December of the same year, the Bank of Thailand published guidelines and regulations for the qualifications, duties and the compositin of the board of directors as well as the sub-committees attached to banks.  Under these guidelines a bank is required to have a minimum of 9 d board members and one third is required to be non-executives.  Independent directors must comprise at least three board members or one fourth, whichever is highest.

    External and neutral directors are required to be individuals who are not employed by the bank do not have relatives occupying top executive positions or are major bank shareholders, do not own 0.5 percent or more of the banks shareholding and do not have an interest in the bank or in the interests of major shareholders of the bank.  Moreover, directors may not be appointed politically.  Nor may they be members of the financial supervision bodies nor may they be individuals who have been dismissed from public offices as a result of mismanagement or fraudulent conduct.  Directors are also prohibited from serving on more than one bank board at the same time.  Directors are also not allowed to serve as executives of more than three business entities while sitting on a banks board.  The guidelines also require that directors participate in at least half of the banks yearly board meetings.

    The Bank of Thailand also mandated that banks establish risk management and audit committees.  The audit committee is required to have a minimum of three members and two must be independent.  The committees chair must not serve on any other committee.  The risk management committee must contain a minimum of five members who can be members of the banks board or from among the banks top managers.  The chairman is required to be the banks chief executive officer.

    The Bank of Thailand also targeted the qualifications of the senior bank management.  Previously, under the Commercial Banking Act 1979, the banks top management could not serve if heshe had been removed from public office as  result of fraud or bankruptcy.  In 1997, the Bank of Thailand added that in addition to these disqualifications, top management is required to have at least five years experience in senior management at a financial institution of good standing.  Additionally, banks top management must be in possession of a sound ethical business history with a good record and no previous custodial sentences.

    In May 2001, the Bank of Thailand also targeted transparency and disclosure requirements as a means of improving the banking systems corporate governance.  In this regard, banks are required to make a number of monthly detailed disclosures.  These disclosures include transactions relative to senior bank managements and companies where they possess a minimum of 10 percent of the relevant shareholding.  Banks are also required to disclose both financial and non-financial remuneration given to directors as well as senior management non-performing loans loans to connected personsparties and breaches of the Bank of Thailands regulations and any corresponding fines.

    The Bank of Thailand issued guidelines for improving the effectiveness of internal auditing processes in October of 2001.  These guidelines included reporting criteria, the auditing process and internal auditors duties.  The guidelines are also applicable to group-wide internal auditor or an out-sourcee of such duty of a bank.  Additionally internal auditors are requested to use other guidelines applicable to internal controls that are provided by other bodies like the Institute of Internal Auditors, the Committee of Sponsoring Organizations of the Treadway Commission, the Stock Exchange of Thailand and the Institute of Certified Accountants and Auditors of Thailand.

    The Accounting Act 2000 was implemented with a view to improving accounting standards and closely mirrors that International Accounting Standard.  All companies functioning in Thailand are required to adhere to the new statutory accounting standards. Failure to do so will result in penalties.  The Bank of Thailand also provides that all financial statements are required to be certified by external auditors who have been previously approved by the Bank of Thailand.  Additionally, the Bank of Thailand requires that a bank may not use the same auditor for a period exceeding five years.  In addition, external auditors must make annual reports on a banks internal control system, the competency of the banks internal auditors and any suspicious lending history.

The restructuring of Thailands banking system is aimed at reconstructing ownership, management and supervision of the banking systems primary participants.  It also aims at taking into account the wider interest of all stakeholders including the public by making internal and external controls more transparent and accountable.  Some of these changes have only occurred in the early part of the 21st century.  Therefore reforms aimed at improving corporate governance in Thailands banking system remains a work in progress. It is anticipated that more changes are afoot as Thailand copes with and adjusts to changing financial environments.  This is particularly so since ownership restructuring has rather than removed concentration of ownership, has transferred it from family ownership to foreign and government ownership.  As explained throughout this paper thus far, concentration of ownership was one of the primary contributing factors to the weakening of corporate governance and in large part facilitated the financial crisis of 1997.

Corporate Governance of Banks in Indonesia
Prior to the 1997 Asian financial crisis Indonesias Company Law Act 1995 provided the primary legislative regime for corporate governance.  Previously the Commercial Code of 1847 regulated corporate governance.  Banks were specifically regulated by the Banking Law 1992.  In short, policy reforms in Indonesia between 1983 and 1992 effected the dismantling of interest rates controls, controls on lending and branch expansion as well as the removal of obstacles to entry.  The decimation of loan subsidy processes which were funded by the central bank corresponded with these reforms.  Private banks were able to take over the market share from the less efficient and less customer-oriented public banks. Despite these reforms, Indonesia was hit hard by the Asian financial crisis and further reforms were necessitated.

    It is generally agreed that it was these bank deregulation reforms prior to the 1997 financial crisis that caused Indonesias financial crisis. Regardless, by 1998 confidence in Indonesias banking sector had fallen dramatically, so much so that the banks liquidity was adversely impacted. In response, Indonesias officials established the Indonesian Bank Restructuring Agency (IBRA) for the purpose of restructuring failing banks and for the management of these banks assets.  By August of the same year at least 54 of Indonesias 222 banks were under the supervision of IBRA.  By year end the IBRA had control of approximately 70 percent of all of Indonesias banks.  In other words, private banks diminished significantly as a result of the financial crisis of 1997.

    Serious structural weaknesses within Indonesias banking sector were revealed as a result of the 1997 Asian financial crisis.  Previously banks were regulated by the Banking Law 1992 which had reformed Indonesias banking system.  This Act was amended in 1998 in response to the crisis so that banking in Indonesia is under the supervision of Bank Indonesia,  the countrys central bank.  As noted above, failing banks were transferred to the supervision of the IBRA.

Under the new Banking Law 1998, only two types of banks are permitted in Indonesia.  These banks are general banks and peoples credit banks.  General banks are able to operate as limited liability companies and fall under the Company Law 1995.  General banks can be state, private or other types of commercial banks such as foreign or joint-venture banking systems. 

Under the Banking Law 1992, the legal lending limit also known as 3L rule which was a lending limit imposed by the central bank on occasion.  The Banking Law 1998 introduced a prohibition against banks going over the relevant 3L rule.  In the event a shareholder has a part in getting a bank to go over the 3L rule, that shareholder faces a custodial sentence of between 7 and 15 years as well as a substantial fine.  Additionally, amendments made by virtue of the Banking Law 1998 levied more onerous duties on banks to monitor both the capacity and intention of those applying for loans with respect to their ability to repay those loans with a view to safeguarding against bad and multiple debts.  The Banking Law 1998 also introduced a deposit insurance scheme requiring Indonesias banks to make provision for insurance schemes to protect those who deposit funds in the bank.

    Another important change under the Banking Law 1998 was the central banks supervisory role.  Licenses which had been issued to bankers by the Minister of Finance in consultation with the central bank are now issued solely by the central bank.  In addition to having the capacity to order interim audits and bank inspections, the central bank may now appoint external public accountants to audit banks on behalf of the central bank.  Ultimately, what this means is that government intervention has been reduced.  Instead of relegating control of banks to the Minister of Finance and the Department of Finance, much of their responsibilities have been transferred to the central bank.  The Bank Indonesia Law 1999 made provision for the creation of a new independent financial services supervisory organization by December 31, 2002 so that the central bank may transfer its supervision to that entity.

As for corporate governance generally, corporate ownership in Indonesia is dominated by conglomerates.  Conglomerates are big business entities with a number of businesses and subsidiaries which provide a variety of products.  Some of their businesses include banking.  Indonesian conglomerates typically function via corporations and as a whole control a significant part of the economics in Indonesia.  However, conglomerates have grown to have poor reputations in Indonesia with perceptions of unfairly obtained wealth.  These conglomerates are typically monopolistic or oligopolistic.

    Cronyism is another derogatory term associated with Indonesian corporate climate during the 1990s.  Cronyism became a popular term in Asia during the 1980s when Marcos ruled in the Philippines.  Ten years later it was the term used to characterized the corruption which is alleged to have caused or at the very least worsened the financial crisis.  Even so, according to Christianto Wibison, the head of the Indonesian Business Data Centre maintains that there are essentially three types of conglomerates in Indonesia.  They are authentic conglomerates who operate in a clime of fair competition crony conglomerates which survive on cronyism and bureaucratic conglomerates which are under state control or are affiliated with the state.

    Complicating matters, family corporate ownership, particularly within conglomerates is also a problem in Indonesia.  The problem with this kind of dominance in family ownership is that it makes it difficult to strike a fair balance between control and ownership which is one of the key legal characteristics of the corporation.  Realistically, this will have unhealthy consequences for the effectiveness and authenticity of corporate governance.  In order to deal with the problem of conglomerate and family ownership the IBRA and Indonesias government privatized a number of banks that had been rescued and state banks by selling shares to the public and private investors.

    Understandably, corporate governance was a key feature of reform following the Asian financial crisis of 1977 by the Indonesian government.  Corporate governance was in fact a new concept for Indonesia to the extent that it did not have a specific term during 1999 to 2000.  In August 1999, the National Committee on Corporate Governance (KNCG) was created.  The KNCGs aim is to make recommendations for a domestic regime for introducing good corporate governance throughout Indonesia.  This included preparation of a Code for Good Corporate Governance and making suggestions for reforms capable of complimenting the Code. 

The Code was issued in March 2001 and is comprised of 13 chapters.  Provisions are made for the duties and rights of shareholders, the board of commissioners, the board of directors, auditing systems, shareholders and corporate secretaries and provisions defining disclosure, confidentiality, insider dealing, business ethics and corruption. By 2003 the KNCG prepared an Indonesian Banking Sector code as supplementary to the KNCG.  In the Indonesian Banking Sector Code, banking corporate governance is characterized by five factors.

    The first factor is fairness.  In perpetuating fairness, Indonesian banks are required to take into account the interest of all of its stakeholders in a manner that corresponds with concepts of equality.  Banks are also directed to ensure that all of its stake holders have the opportunity to have an input and to make comments as well as access to information based on the principle of transparency.  The second salient feature is transparency under which banks are required to make information readily available promptly and for the information to be clear and adequate. The information revealed should include everything connected to vision, mission, business aims, strategies, finances, management, compensation, shareholding, officers, risk management and good corporate governance policies as well as any other matter that effects the management of the bank.

The third factor targets accountability.  In this regard banks are urged to establish unambiguous duties for each of their division and that those duties correspond with the vision, mission, objective and strategies of the bank.  Banks are also urged to ascertain that each of their divisions are possessed of the competence necessary for carrying out their designated duties and are aware of the significance of those duties in comporting with good corporate governance systems.   Banks are also urged to establish a system of checks and balances among the banks management and to measure the effectiveness of performances in the ambit of the banks values, objectives and strategies under a reward and penalization process.

    The fourth factor is responsibility and accordingly banks are urged to implement prudential banking systems and make sure that the level of adherence comports with current rules and regulations.  Banks are also required to conduct themselves as good corporate citizens who take account of the environment and social responsibilities. The fifth factor is independence under which banks are required to prevent improper domination by stakeholders and to avoid conflicts of interest.

    The Banking Code also lays out a Governance Structure and Mechanisms which cover shareholders.  Although bank shareholders have the same duties and rights as those of corporate shareholders, there are a number of differences. For instance, those holding controlling shares must be fit and proper on terms and conditions set by Bank Indonesia.  Similarly, members of the both the board of commissioners and the board of directors are all required to satisfy Bank Indonesias fit and proper requirements.  Perspective members of both boards are nominated by a nomination committee and are subsequently approved by the shareholders in a general meeting.

    Under the Banking Codes Governance Structure and Mechanisms the internal auditor is appointed by the board of directors and approved by the board of commissioners and once appointed must be reported to Bank Indonesia.  While the internal auditor reports to the board of directors it also works in coordination with the board of commissioners and the audit committee.  The audit committee works with both the internal and external auditors with respect to financial reporting, particularly when preparing financial statements. This coordination is obviated by the fact that the audit committee must ascertain the efficiency of internal management and control relative to prudential banking policies and practices as well as adherence to the standards for auditing and the satisfactory follow-up on the results of an audit.

The Banking Codes Governance Structure and Mechanisms also provide for the placing of compliance officers within Indonesias banks.  These compliance officers are charged with the responsibility for ensuring that the bank conducts its business in a manner consistent with laws, regulations, Bank Indonesias commitment and the banks specific internal standard operation processes.  Bank Indonesia requires that all banks secure the services a compliance director.

    Bank Indonesia regulations requires that the board of commissioners which is a supervisory board of a bank must have no less than two members and the board of directors must have no less than three members.  The Jakarta Stock Exchange requires that the board of commissioner of listed companies have external commissioner that make up at least 30 percent of the membership of the commissioners.  All commissioners are required to have some experience andor knowledge in banking and directors must have no less than five years prior experience in banking at the level of an executive.  Banks owned by foreigners may have foreign commissioners and directors but they must have at least one Indonesian on each board.

    Corporate governance reforms within the banking sector in Indonesia were entirely important for restoration of both the publics and investors confidence in banks.  This explains why Indonesia targeted transparency and accuracy in the area of disclosure. It also explains why ownership, risk management, supervision and measures of effectiveness have been employed.  Competition has become fairer among Indonesias banks.  Although the concept of corporate governance is rather new to Indonesia, it has adopted an acceptable and workable method of corporate governance and has a long way to go, Indonesia has come a long way from the cronyism and concentrated ownership that previously characterized the system.

Analysis
Corporate governance of banks is a particularly difficult process to adopt.  This is because it necessarily engages supervision and regulation.  The nature of banking, its role in overall economy, the unpredictable nature of finance, widespread competition and diversity subjects banks to a number of risks and complications.  The necessity for good corporate governance is exemplified by the four Asian countries in this study.  The four countries studied also demonstrate that regardless of corporate government constructs, putting it into practice may be difficult when bank ownership and supervision are inseparable. As Thailand, Indonesia, the Republic of Korea and Malaysia teaches us, structural soundness must precede good corporate governance.  In other words, unless supervision and ownership are separated good corporate governance within any banking system is no more than a misnomer.

    Thailand, Indonesia, the Republic of Korea and Malaysia have taught us that when banks are owned and controlled by conglomerates, governments or families, conflict of interests and corruption are more likely to undermine the operation of good corporate governance.  Moreover, where the legal framework for corporate governance is weak to start with, when banks are owned and supervised by the same entity, good corporate governance is even more compromised.  Corporate governance is entirely important.  In a study conducted on Korean banks following the financial crisis of 1997 and the ten years that followed after restructuring ownership and improving corporate governance, proves that corporate governance reduced risk and increased returns.

    In the pre-financial era, many Asian countries as evidenced by the four countries studied, were vulnerable to financial risks.  These risks were borne out of the fact that owners were primarily in control and supervised their corporations.  Moreover, ownership was entirely concentrated.  These factors together with intrinsically weak regulatory constructs compromised the supervision and internal management of banks.  A vast majority of the loans advanced by the banks were of short term value and were also unhedged.  This resulted in excessive debts, many of which were delinquent. 

    The most salient features of the structure of ownership and control among Asias banks in the pre-financial crisis was the resulting lack of transparency, disclosure and accountability.   These were the natural consequences of the concentrated ownership and controls of banks in Asia.  Moreover, the introduction of corporate governance mechanisms in Asian banks, as evidenced by the four countries studied in this research also offer direct evidence of the kinds of weaknesses permeating these banks which were subject to concentrated ownership and the wide range of control owners had over banks.

    Governments almost immediately responded by restructuring the ownership culture and setting forth principles and bodies for setting standards for good governance and enforcement of good governance.  Transparency, disclosure and accountability were heavily targeted by the four countries.  These factors were targeted by requiring all stakeholders interest be balanced against the banks missions and visions.  More directly, banks were required to ensure that directors include independent, competent and reputable board members.  Similar steps were taking with respect to auditors and accountants and standards for conducting audits and accounting.

The reforms made in Asia were consistent with the Organization for Economic Development and Cooperation Principles of Corporate Governance.  Impliedly these countries have adopted international standards of corporate governance which are reflected in a number of laws, codes and regulations which provide improved minority shareholder protection, improved transparency and greater transparency and accountability.  Even so, putting these initiatives into practice has proven difficult since corporate practices and enforcement by regulatory bodies have not been consistent, nor have they been harmonious.  These practices are reflective of the problems that gave way to the financial crisis and necessitated reforms.

    Unfortunately, what this means is that corporate governance reforms and strengthening in Asia is for the most part good in theory and on paper.  Having international standards of corporate governance is one thing.  Putting it into practice and enforcing it is another thing altogether.  Unless and until all banks adopt good corporate governance as promulgated by their respective regimes and unless there enforcement of good corporate governance standards are aggressively pursued, good corporate governance will continue to be compromised.

    Many of the pre-financial crisis corporate governance weaknesses in Asia have been repeated globally in the current financial crisis.  A report by the Organization for Economic Development and Cooperation bears this out. It was found that there were a number of infractions relative to remuneration, risk management, board practices and shareholders exercise of their rights.
It would seem that not too many lessons were learned in or from Asia.  The current financial crisis is indicative of the fact that countries cannot afford to pay mere lip service to the significance of corporate governance within the banking system.  An aggressive approach to practice and enforcement is entirely necessary.  Certainly, the Asian countries studied have implemented measures for encouraging good corporate governance standards and practices and for enforcement.  Enforcement is found in the penalties for failing to comply with the various corporate governance codes, legislation, regulations and guidelines.  Enforcement is also found in the allocation of rights to minority shareholders who may take action against offending directors.  However, if these new reforms are not enforced, practice will continue to be a problem.  This is evidenced by the current financial crisis.

    Undoubtedly, Asian countries as well as the rest of the world will seek to improve their corporate governance structures yet again.  Hopefully, the emphasis will now be on enforcement and practices.  In this regard, it is likely that greater emphasis will be placed on laws providing for the punitive action against corporations and banks that fail to comply with corporate governance standards and guidelines.  Too much of the blame is placed on directors, as seen in the corporate governance reforms in the four countries studied.  These laws call for criminal convictions of directors.  While these laws are entirely necessary, banks and corporate entities should be jointly and equally responsible.  This places more pressure on banks to ensure that directors are not only competent but also diligent. 

Prior to the Asian financial crisis, the Asian countries were characterized by a system of bank ownership and supervision laws and regulation that was entirely weak and ineffective.  In the aftermath of the Asian financial crisis a number of reforms were made to the banking system to improve corporate governance standards and enforcement of those standards.  Since it was not possible to research the reforms of all Asian jurisdictions, this paper chose the four jurisdictions hit the hardest.  A study of these four jurisdictions, namely the Republic of Korea, Indonesia, Malaysia and Thailand confirms the prevalence of weak corporate governance.

    Changes were made to improve and enforce corporate governance.  The current financial crisis, like the Asian financial crisis indicates that poor corporate governance was the catalyst for both crises.  The current crisis just like the 1997 crisis also indicates that having good corporate governance regulations in place is of no consequence if they are not practiced by banks and they are not aggressively enforced.  So while Asia made significant reforms in terms of corporate governance, practice and enforcement remains a concern. 

    This research was easily facilitated by the fact that there has been extensive research as reported in the literature on the question of corporate governance and its link to successful bank management and practices.  The literature is also rich with respect to the Asian financial crisis and the factors given way to the crisis and the responses taken in that regard.  However, there is a paucity of research on reforms taken in response to the current literature.  Those reforms would help to identify the measures taken and how they improve on the measures taken in response to the Asian financial crisis of 1997.  However, the current financial crisis is relatively new.  So while there is a large body of literature on the superficial causes of the crisis, there is not enough research on what caused the crisis and the responses taken to them.  It would be interesting to know how Asian countries, particularly the four case studies in this research, responded to the current crisis. It would be interesting to know whether these countries have been able to identify how to go about ensuring that good corporate governance is practiced and enforced.

Saudi Company law has been amended several times through 30 years, in which the shareholders right to information has been protected much better. This new company law enhances shareholders rights to a large extent, and promotes the prosperity of capital markets and numerous investments. This dissertation discusses the rights which are available to shareholders under the Saudi Companies Law in particular those which related to distribution of company income, buy new shares, and the right of sell the shares. Saudi Companies Law may need to adopt international remedies and solutions to improve the protection of shareholders rights in order to attract domestic and foreign investments. This paper has achieved its goal by comparing the protection of shareholders rights under Saudi Companies Law and English Law. This dissertation also argues that improving the protection of shareholders rights by amending and adopting new rules will result in attracting international investment.

Stock market offers a valuable investment opportunity for most people. While there are individuals who make it their business to be trading on the stock market daily, others buy shares as a form of long-term or short-term investment. It is the dream of most people to own shares in successful companies because this provides them with an opportunity to become shareholders of the company and hence share in the success of the company. However, not many people understand how the stock market operates and most of them do not know their rights as shareholders. Becoming a shareholder means the individual becomes a part of the system and one of the stakeholders in running of the company.  A shareholder has some responsibilities towards other stakeholders and other stakeholders have duties and responsibilities towards the shareholder. Most important, the shareholder needs to understand their rights and obligations towards the company. Shareholders need to understand the limits of their relationship with the company because the company stands as a separate entity from the shareholders. For example, assume that an individual has bought shares in Disney and hence becomes a shareholder in the company. Does this mean the person can enjoy summer in Disneyland for free Does the individual have the right to know financial performance of Disneyland Can the individual shareholder decide who will take up managerial duties of the company These and many others are questions that not many shareholders are willing to know about, despite being a part of the company once they purchase shares.

While most shareholders may not be well aware of what it entails to become a shareholder, most of them end of up losing a lot or not playing their role well as far as their responsibilities towards the company are concerned. Most shareholders assume that their only concern with the company is the amount of dividends they are going to get at the end of the year. They are not aware that they can play an important role in the management of the company. Therefore, it is important that first time shareholders become aware of their obligations towards the company. They should be aware of the active role they can play in making their companies better.

A company is usually an entity that brings together different stakeholders. In most cases, the main stakeholders include shareholders who are the owners of the company, managers who have the responsibility of running the company on daily bases, customers who rely on the company for products or services, employees who depend on the company for wages and salaries, the surrounding community where the company operates, and the environment. All these stakeholders depend on the company in one way or another and they have different obligations towards the company. Among these stakeholders, the relationship between shareholders and managers has attracted a lot of interest in academic circles. There are volumes of literature that looks into the fiduciary duties of shareholders and managers towards the other and towards the company as well.

Because of the complex nature of relationship between the stakeholders, the ownership of any company that allows the public to become owners is listed in the stock exchange market. Once the company has decided to go public, the ownership of the company transfers from the original owners of the company to the new shareholders. Because it no longer belongs to those who started it, it lists in the stock exchange market where anyone willing to become the shareholder of the company can buy shares. In a way, most shareholders will therefore perceive their relationship to the company as interconnected to the stock market. Rather than playing a crucial role in affairs of the company, they expect the stock exchange market to assume the guardianship role. The stock market is just a regulator and not a guardian.

The rights of shareholders vary from one country to the other. Although most of these rights are the same from one country to the other, there are important differences between countries with some countries having laws that give shareholders more rights than in other countries. The rights of shareholders in each country depend on the extent to which free markets have evolved. Countries that have been running on government-controlled economies have little experience on operation of the capital market and hence they may be lagging behind those countries that adopted liberalized markets a long times ago. In addition, it is also evident that depending on daily experiences, countries are likely to borrow from the experiences of other countries.  Therefore, shareholders rights are not static but they keep on changing based on market experiences.  The interest of this study is to compare the rights of shareholders in one developed economy, which is in this case will be UK, and one developing economy, which will be Saudi Arabia. The study will take a comparative study of the way shareholders rights are protected in the two countries by company laws. 

Shares and shareholders
The nature of shares and shareholders is complex and many shareholders do not understand how they operate. Shares and shareholders are part of the corporate world, which is reserved for the educated who can understand the jargons and technical terms used in the field.  This means that shareholders need to understand the technical terms to keep afoot when technical terms are being mentioned.
Pertinent to this study, there are two terms are of great importance and which may be considered as jargons. The two terms of great importance to this study are shareholders and shares. The word share as used in this study refers to the ownership of a person or a company based on the percentage of their investment on the profit of the company.  A share is defined as a unit of account that refers to various financial instruments that may include stocks (in reference to ordinary or preferential stock), investment (mostly in limited partnership), and REITS (Real Estate Investment Trust).  Therefore, the most common aspect of shares is participation in the equity market where they can be traded (unless in suspension), although this may be limited in case of preference shares.  The two common types of shares are common shares and preferred shares. The word stock is commonly used to refer to shares in the bourse. Shares give an individual ownership to a company or any other entity that has floated its ownership (in form of shares) in the stock market. Shares are commonly valued in reference to a number of principles but this depends with markets. The basic premise is that shares are worth the price or value of a transaction if the shares are to be sold. Shares receive dividends that are awarded in terms of total number of share the individual owns in a company. In common cases, companies usually award x units of company income to every one share owned in the company.  Traditionally, a share certificate used to be awarded in recognition of individual ownership of the company shares. However, this has changed with advent of modern technology and today, brokerages have put in place electronic records that shows share ownership details. Most countries have a central depository system that is maintained by authority overseeing the stock market that identifies individuals share ownership. Paperless share ownership has made trading in shares simpler and move convenient. When one has a share in a company, it means that the individual is a part of the owners of the company and has all the rights and privileges of sharing the gains of the company, and participating in making decisions for the company. A shareholder therefore has the power and privileges of participating in decision-making process for the company. They have the voting power to participate in all elections to choose the directors of the company.

Shares are units of company capital. Capital is the total amount of that is invested in a company.  This it the total amount of capital that is required to keep the company running including assets and liquid capital. For a company, capital usually refers to share capital. The capital clause that is contained in the Memorandum of Association states the amount of capital that is required by the company and it also gives information on the number and type of shares.  This information is important in the stock market because a company is not supposed to issues more share capital than has been outlined in the Memorandum of Association. The capital clause in the Memorandum of Association should be altered to give allowance for more capital. The following is an explanation of the different aspects of share capital

Nominal, authorized or registered capital refers to the sum that is mentioned in the capital clause in the Memorandum of Association. This is the maximum amount of capital that can be raised by the company by issuing shares and upon which a registration fee is paid.

Issued capital refers to the part of the authorized capital that has been offered to members of public to be purchased in form of shares. This mainly includes the maximum shares that are allotted to willing members

Subscribed capital refers to the part of the issued capital at nominal values, which have been taken up by share purchasers and that has been allotted

Called-up capital includes the total amount of called up capital on the shares that have been issued and subscribed by shareholders on capital account. For example, if the face value of the share is 10 each and company require raising only 2 at present then it may call 2 and the rest, 8 later. This means that 2 is the share capital and 8 is the uncalled share capital.
Paid up capital include the total  amount of the called up share capital that has paid to the company  by shareholders

Another term that is closely related to shares is par share of values. According to the company act, a share can have a value of 10 or 100 or any other value that is fixed in the Memorandum of Association. If the shares are issued at a price that is higher than the par value, like 15, then 5 would be considered as the premium. Similarly, if the share is issued at an amount lower than the par value, in this case, it can be 8 then 2 is considered the discount on the shares and 10 remains par value.
There are different types of shares. A company shares can be similar in the sense that they can carry the same rights and liabilities, in which case they confer same rights, liabilities, and duties. Equity shares are part of the share capital of the company that cannot be considered as preference shares.  On the other hand, preference shares are shares that meet the following two conditions
Carry preferential rights with respect to dividends at a fixed amount or at a fixed rate.  This means that dividends payable is only paid based on fixed figures or at a percentage. This dividend is usually paid first before other shareholders who have equity shares are paid.
Preference shares also carry preferential rights in reference to payment of capital on winding up the company. This implies that the amount that is paid on preference shares is paid back to preference shareholders before any other amount can be paid to equity shareholders. Preference shares can be of different types. They can be cumulative or non-cumulative shares, redeemable or non-redeemable share, and participating preference shares or non-participating
The above two conditions shows that preference shares have priority over equity share in payment of both dividends and capital.

The other ambiguous word that will surface more often in this study is shareholder. A shareholder is person who owns shares in a particular company. He or she can be described as mutual shareholder of stockholder of a company that has accepted to have a stake in the company. A shareholder therefore legally owns one or more shares of stock in such a company. A shareholder of a company legally and collectively owns the company by signing the memorandum of association. This means that the aim of a company that is owned by shareholders is to enhance the value of shareholders. Because the shareholders collectively own the company, they have the right to make decision on how the company should be managed and the right to choose who run the company. The rights of the shareholder therefore stems from this collective ownership of the company in the sense that as an individual, the shareholder cannot decide on the fate of the company but has to participate, in collaboration with other shareholders, to make decision on what is good for the company. A shareholder is usually entitled to dividends from the company. At the end of every financial year, the company evaluates its performance the profit made within this period is divided among the shareholders while a part of the profit may be used for business development purposes. However, the shareholder has the right to decide how the profit is to be put into practical use because they collectively own the company. A shareholder may be an individual person or an entity like a business entity a company. In common case scenarios, companies usually invest in other companies that are deemed more profitable.  An individual shareholder exercises the rights of the shareholder in his or her individual capacity but a company or any other business entity usually appoint a person to represent it. This means that the person who represents the business entity as a shareholder will be exercising shareholder rights under the authority the one or more shareholders he or she represents.
There are two different ways in which an individual can become a shareholder of a company. It is a Replaceable rule in most countries that before any company decides to issue new shares, they are first offered to the existing shareholders in a proportion that matches what the shareholder already have but at a price that is determined by the company.  In practices, an individual can become a shareholder of a company when

The person is listed as a shareholder by applying for registration of the company. This means right form the start, the individual is willing to contribute money to set up the company. In case the company decides to sell shares afterwards, the listed shareholders will be given first preference.
The company decides to issue the shares to the person and the individual is willing to pay for the shares to become a shareholder. For example a company can decide to issue shares to the existing employees as a way of motivating them, where they may be required to pay for the shares or given free
An individual decides to buy shares from an existing shareholder, and consequently, the company registers the share transfer to the new owner.
At the same time, an individual can cease to be a shareholder of a company through the following ways
The person decides to sell all shares held and the company consequently registers the share transfer
The person forfeits shares by not paying for share calls
The company buys back shares for consolidation purposes
The company registration is cancelled

Therefore, a person can become a shareholder for a given company through purchase of three different types of securities that can be issued by a company. These include bonds, preferred stock, and common stock. The priority that is given to each of the above securities differs. This can be illustrated in a situation where a company goes bankrupt.  A shareholder would assume that because they are owners of the company, they would be the first to line up and get paid a portion of the company asset if the company is winding up. However, this is not the case as it depends with the type of security that the individual shareholder has. A common shareholder is at the bottom of the corporate food chain. When it comes to winding up its operations, creditors line up first to get their shares in order to settle the outstanding balance.  After the creditors, the bondholders then line up to get their share. After the bondholders, it is the turn of the preferred shareholders or those who hold preferred shares and at the end comes the turn of common shareholder. This hierarchy of priority into company assets and capital is based on principle of absolute priority and it gives priority depending on the type of securities held but the rights of these shareholders outside the winding process, in voting and other activities, remains relatively equal.

Apart from prioritizing based on principle of absolute priority, there are some rights that differ depending on the class of the security that the shareholder has.  For example, in the companys charter, it is clearly stated that only the common stockholders holds voting privileges and all preferred stockholders should receive dividends before the common stockholders.  This differs from the rights of the bondholder because the indenture or bond agreement is considered as a contract signed between the issues and the bondholder.  This implies that the payments and privileges that are advanced to the bondholder are largely based on and governed by the tenets of the indenture.
However, a common shareholder is entitled to risks and rewards of the company. Commons shareholders are part of the business and when the business turns a profit, they gain by getting dividends.  Considering the liquidation preferences given above, it is evident that common shareholders take greater risk because they risk going home with nothing in the winding up process.  On the other hand, they have a greater reward potential because they are exposed to higher gains through share price appreciation if the company succeeds, a situation that is not common to shareholders who holds preferred stocks. Preferred stocks experience less price fluctuation implying that the value of their shares may remain constant for a long period of time.

Shareholders have six main rights which are to be found in most countries. These basic rights include
Voting power

The power to vote is the most important right that is given to shareholders because it entitles them to decide how the company will run. The right to vote gives shareholders democratic rights to participate in company affairs.  This right includes the power to elect directors. This power is also extended to making decision on fundamental changes that affects the company like merger or liquidations. Voting mostly takes place during company annual meetings. If the shareholder does not attend the meeting, he or she can exercise the right to vote by proxy and mailing the vote. Shareholders affect the way the company is managed through passing resolutions. Votes that are cast by the shareholders, whether in person or by proxy, mainly passes ordinary resolutions. On the other hand, passing a special resolution will require at least 75 of the votes that are cast by shareholders who are entitled to vote on the particular resolutions, whether they vote in person or by proxy.

Ownership of a portion of the company
The connection between the shareholder and the company lies in their ownership of the company. Depending on the number of shares they hold, shareholders have varying degree of ownership of the company but every shareholder owns a part of the company. This implies that shareholders can claim a part of the assets owned by the company and because these assets generate profits, shareholders may call for increased reinvestment of the profits in assets thereby raising the value of their share through increased share price. Although the company and the shareholders exists as two separate  legal entities shareholders affects the way the company is managed through passing down resolutions. Shareholders can make decision on different issues that directly affects the company through ordinary resolutions or special resolutions as outlined by the constitution or the replaceable rules.  Special resolutions are passed on important issues that mainly affect the company as a whole, including the rights of some or all the shareholders. This implies that shareholders are part and parcel of the company because they make decisions that affect the company.

The right to transfer share ownership
The right to transfer ownership grants shareholders the right to trade their shares in the stock exchange market.  This right may be perceived mundane but the liquidity that is to be provided by stock exchange is very important. Liquidity is the most important factor that tends to differentiate between investment in shares and other forms of investments. It is easier to transform shares into liquidity compared to other investments like real estates.

Entitlement to company dividends
Apart from claiming company assets, shareholders have a right to claim any profits that the company pays in form of dividends. There are two major options that are available for companies to deal with their profits. First, the company can decide to reinvest or plough back to the company with an aim of increasing the overall value of the company and thereby share prices. Second, they can decide to pay the profit in form of dividends to the shareholders. A common scenario is where shareholders decide to implement the two options side by side where a certain percentage of the profit is ploughed back to the company and the other percentage is given out in form of dividends. However, shareholders do not have the right to determine the percentage that will be paid out as dividends because this is the duty of the board of directors. The common shareholders are however entitled to receive dividends as per the number of shares they own in the company.

Right to inspect corporate books and records
Shareholders also have the right to inspect corporate books and records. The shareholder has the right to inspect all corporate books through a companys filings including the annual reports.  However, this right may not be great relevance because most countries require all public traded companies to announce their financial performance publicly. This means that it can be important in private companies that do not announce their performance to the public.

Right to sue the company
In addition, it is also important to note that shareholders have the right to sue the company for wrongful acts.  This takes the form of shareholder class-action lawsuit. Shareholders are given the right to sue the company if they perceive the company has been acting in such a manner that is not consistent with company laws or business ethics. For example in the event of WorldCom scandal in 2002, the company faced strings of lawsuits from the shareholders when they learned that the company has been overstating its earnings and giving erroneous financial reports to investors.
However, it important to consider that shareholder rights vary from state to state. This largely depends on the advancement of market economy that can be attributed to the particular region. For example, shareholder rights in North American are more developed compared to other nations because North America has long history of free market economies. This means that the region has had experiences that helped to shape shareholders rights.  A close comparison of shareholder rights in developed markets like North America or Europe with other developing markets is important to understand the standards of practice that needs to be adopted by the developing countries. This is because shareholders rights are important for progressive growth of a free market economy because it acts as a barometer for market confidence.

In addition to the six basic rights of the shareholder, it is important that shareholders understand the basic corporate governance policies that govern a company. Every company has its own structure of corporate governance and these policies mainly determine how the company informs and treats the shareholders.  Corporate governance is an in-depth concept that outlines the relationship between different stakeholders in the company. Corporate governance mainly entails the relationship between shareholders, directors,  and the management of the company as it is defined by corporate charter, bylaws, formal policy and the rule of law upheld in that particular country.

In addition, there is shareholder rights plan that is somehow different from the six rights that had been discussed earlier. The six rights discussed earlier forms the base for recognition of shareholder rights in every country. Shareholder rights plan is specific to a company and therefore it is likely to vary from one company to the other.  Every company comes up with its own rights plan for its shareholders based on its corporate plan. Companys shareholder right plan is mainly accessible to investors and most companies also post it on their website. This ensures that it is accessible to all people who want to understand the corporate governance structure of the company. 

Shareholder rights plan is designed to give the board of directors the power to protect the interest of the shareholders in an event that an outsider want to acquire the company. In some case, there can be instances of hostile takeover of the company that is likely to risk the interests of the shareholders.  The shareholder rights plan is exercised when there is another person or affirm that acquires and outstanding percentage of shares in the company, a situation that may compromise the rights of shareholders. This plan can work in the following way. If company A notes that its competitor, company B, has purchased substantial percentage of its common shares, the rights of its shareholders are at risk. Therefore, the board of directors for company A may give its shareholders a chance to purchase company shares at a discounted price (about 10-20).  This strategy, commonly referred to as flip-in poison pill helps common shareholders to purchase shares at a discounted price thereby getting more profits. However, the main reason why the board of director may decide to take such strategy is to dilute the shares that are held by the competitor making any attempted takeover more difficult and expensive. There are many other strategies that can be implemented by the Board of Directors in a bid to avoid a hostile takeover by the competitor.

Apart from the rights outlined above, there are companies that are likely to offer extras to their shareholders. There are some companies that may give free goodies to the shareholders. For example ATT, one of the giant communication company in the United States has given is shareholders a 10-minute phone card attached to the annual reports.  McDonalds has included vouchers giving shareholders free fries in its annual reports while Starbucks gave the shareholders a free cup of coffee. These free goodies are just meant to extend the sense of ownership to the shareholders. However, this practice has been dominant in the United States and may rarely be seen in other countries around the world.

Company law and how it protects shareholders
Making a decision to invest in a company is usually driven by different factors, among them being safe investment. This means that that an individual must have confidence in company before making decision to invest and own a part of it. In the stock market, there are hundreds of companies that list their shares but an investor would go for the company that interests them. If the investor wants to own shares in a company that is already starting up, he or she must see prospects of future growth of the company. One of the most important aspects of gaining investor confidence in a company is that the individual must consider their rights to control their investment.  This means that the extent to which the investor is in a position to decide what will happen to their investment one of the basic considerations before choosing the company to invest in.

An investor is likely to have doubts about investing in something that they will not have full control or will have limited rights to manage their investments. The governance structure or the law in place that enables the investor to manage or to say how their investment will be managed is very important to the investor. If the law or the management structure provides limited rights for the shareholders to control their investment, many shareholders might be suspicious and lose their confidence in the company. Limited control of individual investment would be disadvantageous and would only defeat the purpose of investing, which is basically to provide the investor with many advantages.
By purchasing a share, an individual technically and legally becomes a shareholder and therefore assumes the right to manage his or her investment. This is the main reason that in every country, the government enacts legislations that governs the corporate world, extending right to shareholders that enable them to decide how their investments are going to be managed. The basic premise of building confidence in the stock market is to assure investors that they have the rights to control the direction of their investment, which can be only guaranteed by ensuring that shareholders have some basic rights.  To implement such a structure, most countries have entrusted the Capital Market Authorities with a chance to mediate between the shareholder and the companies that have listed their shares in the stock market. This is guaranteed by ensuring that before a company is listed in the stock market, it must put in place structures that enable the shareholders to have rights to control their investment. In addition, the Capital Market Authority also puts in place a structure that guarantees all shareholders their basic rights.  The Capital Market Authority in Saudi Arabia has drafted laws that extend the rights of the shareholders, protect these basic rights, and ensure that ever company adheres to the laid down structure when dealing with shareholders. This has been one of the most important factors that have attracted millions of investors into Saudi Arabia because they have confidence in the stock market and are assured of their basic rights.

What is a company law Also referred to as corporate law, company law is a law that is used to regulate the operations of modern business enterprise.  It mainly regulates the relationship between shareholders, directors, employees, creditors, consumers, and other stakeholders including the surrounding community and the environment. Company law regulates the interaction of these stakeholders and the firm. There are five main defining characteristics of a company law including
Separate legal entity or personality which means that the law treats the business firm as a separate entity from the human being owners
Limited liability of the shareholders, which means if the company becomes insolvent, they will only owe the money they had subscribed for shares
Transferable share, which means that the business entity can be listed in the stock exchange market to trade its shares
Delegated management, which implies that the owners of the company delegates the management of the company to board of directors
Investor ownership, a concept that implies that the ownership of the business entity is in the hands of the shareholders

Corporate law is the foundation of corporate governance.  Corporate governance is generally concerned with the power relations between the board of directors and the shareholders and employees who elect them during a general meeting. Corporate governance however extends towards other stakeholders who have interests in the business entity.  There is a major difference between countries as far as the corporate governance structure is concerned. There is one-tire and two-tier system of corporate governance. The UK, United States, and most of the commonwealth countries have a single unified board of directors. On the other hand, a country like Germany has two-tiers where shareholders and employees mainly elect a supervisory board and then the supervisory board is the one which elects a management board. There are tons of literature that discusses the issue of balance of power in corporate governance between the board of directors and shareholders who own the company.  However, the interest o this study is not only the balance of power but rather on the protection of shareholders rights in Saudi Arabia and therefore it will not dwell on details of corporate governance in relation of directors and the shareholders.

The Kingdom of Saudi Arabia is the leading state in free economy in the Middle East region. This implies that along the path of adoption of free market economy, the kingdom has strived to inculcate corporate law that governance the corporate sector. Saudi Arabia corporate and commercial laws were enacted as a result of Royal Decree for the Regulation of Companies NO 11 of 1962. This was later amended in Royal Decree for the Regulation of Companies NO M6 of 1965. 

Saudi Arabia corporate law is similar to corporate laws implemented in the region. As was highlighted above, the main purpose of company law is to regulate the relationship between different stakeholders a company. In a nutshell, Saudi Arabia, and in deed most of the company laws in the Middle East region offers contain protection for shareholders but not as advanced as company law in other western countries. Saudi company law requires that majority of shares in the companies incorporated within the jurisdiction are owned by its own nationals. This means that investors need to understand the importance of forming a formidable relationship with shareholders from the country.   However, since Saudi Arabia become a member of the WTO, there has been restructuring of the ownership structure and therefore in line with WTO requirements, the percentage of ownership by foreign investors for a local firm cannot go beyond 51. Foreign investors in Saudi Arabia should understand that a well drafted shareholders agreement is very important not only as framework for long term relationship but also for protecting the rights of the minority shareholders into the future.
Generally, company law in the region offers protection for minority shareholders. These provisions can however be categorized in two main groups which include

Blocking rights  These include the rights that provide shareholders with  the power  to block passage of shareholder resolutions  based on the percentage of the votes that are needed to be case in favor of the resolution.  These rights exists in reference to situations where there may be attempts to amend the company constitution, appointment of directors and managers, changing of company capital structure, change of company name, and in many other instances.

Positive rights  These are rights that provide shareholders who holds a specific percentage of shares  the ability to demand some actions like calling of shareholders meetings or any kind if report from the companys management.

One of the most important aspects of these rights is that they help to protect shareholders interests. For example, the blocking rights are important to minority shareholders when there is an attempt to issue new shares. New shares are likely to dilute the existing shares and therefore minority shareholders can use their blocking rights to protect the value of their shares.  This is also important because issuing of new shares may reduce the percentage of minority shareholders beyond the level at which they have right to block resolutions that are being passed by the company.

What kinds of investments are encouraged by Saudi Company law
For any country, company law is drafted to encourage investments. The law is meant to provide regulations in the corporate world. As has been highlighted several times in this study, the performance of the stock market acts as a barometer of countrys economic performance because it indicates investors confidence. Therefore, a company law will inspire investor confidence if they feel that their investments are well protected or it may discourage investors from investing in the particular country in reference to the provisions of the Company law.  

The provisions of the company law may encourage investment in some sectors of the economy while it may also discourage investment in other areas. On the principles of taxing and protection of investment, investors feel secure to invest in areas where they are not heavily taxed and where the safety of their investment is guaranteed. This means that among the documents those investors are likely to make reference to when deciding on their investment destination will be the company law.
As has been reviewed in the previous chapter, Saudi Arabia has a host of laws that are meant to protect investors. The previous chapter has recognized two important set of laws including the Saudi Arabia Companies law and Saudi Arabia Capital Market Authoritys corporate governance regulations. These two set of laws have a number of provisions that may encourage investors to come into the country and invest in particular sectors of the economy company. It is worthy to restate that Saudi Arabia is the leading free market economy in the Middle East region. Although the country has not developed a complex set of commercial laws like the Western countries, Saudi Arabia has important provisions that are meant to protect investors and shareholders. Given the extensive laws that are drafted and implemented in Saudi Arabia, there are different investments opportunities that investors can be interested in.

Common capital investment is well provided for by Saudi Arabia company law. Common capital investment mainly entails providing asset base for companies which is mainly provided in form of shares. Saudi Arabia Companies law provides the structural framework that can be used by investors to provide capital assets for companies. One of the most important areas of investment for foreign and national investor is the capital market. Since the capital market laws was implemented, there has been a growing number of investors in the capital market owing to the  enabling environment provided by commercial laws and  availability of more companies that are  cross listing their shares in the stock market. Capital investments mainly entails providing primary assets that company banks into for its growth, thus providing investors  the benefit in form of income in the future. The availability and enforcement of company law has provided a working structure for most companies and investors to invest their capital in the stock market because of the nature of economic growth and protection of investments by the company law.

In addition, the current company law also provides opportunity for investment in the fixed income investment. This is a different form of investment in which the income invested generates fixed profit such that it would not depend on income rate of the company. Capital investment like investment in shares gets dividends based on the net profit a company makes in one year.  On the other hand, fixed investment does not depend on net profit made by the company. Whether the company makes profit or not, company laws provided that the income to be paid on fixed investment will be paid. For example, company law in Saudi Arabia provides for investment in bonds. Payment of income on bonds is fixed based on the number of years they will take to mature and whether the company that issues the bonds makes profit or not, investors will be paid full amount of their income.

Comparing monetary and non-monetary control rights of shareholders in U.K and Saudi Arabia company law

Saudi Arabia and United Kingdom have one thing in common in that they are both monarchies.  Although the extent of monarchial influence in both countries varies, government decisions in both countries are influenced by monarchies.  Again, both countries differ in the sense that U.K has a long history of free market economy, which means that country commercial laws are well established.  A comparison of the Company law in these two countries is important to understand areas where they can both share development in company law. If U.K has well established Company law, then it means that Saudi Arabia can learn a lot from U.K.  The bases for comparison of company laws between these two countries will be on the extent to which the rights of shareholders are protected.

Rights of shareholders in Saudi Arabia
Company law in Saudi Arabia first protects the rights of shareholder through differentiating the interests of the shareholder with that of the company. Like other company laws in the world it recognizes the difference in entity between the shareholders and the company. Article 13 of Saudi Arabia Companies law provides that once a company has been incorporated, it assumes a different legal entity from the shareholders and henceforth is considered a legal person. This mean that the liability of the company lays with the institution itself rather than the shareholders and this protects the shareholders from getting their personal properties settle their debts of the company.  However, the concept of separate legal entity is further outlined in Article 157 which states that the shareholders of a limited liability company are fully held responsible for the debts incurred by their company but this is limited to the extent of their respective interest in the capital of the company. The following are some of the instances under which the shareholders may be held liable for company debts

Saudi Arabia corporate laws are very clear on the shareholders ownership of the company. Shareholders are given the right to decide on the fate of their companies based on the company performance. Article 180 of Saudi Arabia Companies law stipulate that if a limited liability company incurs a huge losses that amounts to 75 or more of its share capital, shareholders reserve the right to resolve within a period of 30 days how the company made losses reaching more than 75 or more of its share capital and consequently decide whether to continue with the company if it will responsible for paying its debts or whether they going to liquidate the company. If the shareholder does take such drastic action, then all the protection that is accorded to a limited liability status is lost. Every shareholder is therefore responsible (to an extent limited by the shareholders private assets) for the debts of the company.

In addition, it should be noted that if the manager of the directors fail to convene the meeting of shareholders, pursuant to article 180, then each of the shareholders would be jointly and severely held liable for company debts.  This may be the case in instances where the shareholders fail to reach a solution on how the company should settle debts.

On dividends, article 8 of Saudi Arabia Company law provides that dividends are not distributed to the shareholders unless they have been derived from the net profits.  The law further stipulates that if the dividends are distributed other than from the net profits, creditors have the right to claim from the shareholders an amount that exceeds the net profits.  This situation is application even in cases whether shareholders had received the dividends in good faith. Furthermore, the ability of a limited liability company to distribute profits to shareholders is further regulated by Article 176 of the Saudi Arabia company law.  This article states that a company must transfer not less than 10 of the annual net profits into reserve funds until the company has accumulated an amount not less than 50 of the total share capital of the company. This article is meant to avoid the company from engaging in dubious distribution of net profits to an extent that it becomes bankrupt.

Another important source of shareholder protection in Saudi Arabia is the corporate governance regulations. This set of laws is similar to Saudi Arabia Companies law but it gives specific regulations that pertain to relationship between the shareholders and the board of directors, one of the most controversial areas in corporate world. The following are basic provisions for shareholder protection under Saudi Arabia Capital Market Authoritys corporate governance regulations.
The corporate governance regulations in Saudi Arabia provide a clear definition of shareholders.  According to Saudi CMA, a shareholder is any person who holds interest in the company including a shareholders, employee, creditor, customers, supplier, and community. Minority shareholders are defined as those shareholders who represent a class of shareholders that does not have control of the company and therefore they are unable to influence the company. The focus of CMA is mostly to protect the rights of these minority shareholders because their rights are likely to be abused by the majority shareholders.

According to Part 2, Article 3 of Saudi Arabia corporate governance regulations that outlines the general rights of shareholders, a shareholder is entitled to all rights that are attached to the share they purchase. They are in particular awarded the rights to a share of distributable profits made by the company. They are also entitled to a share of company assets in case there is winding up or liquidation of the company. Saudi CMA law also accords shareholders the right to attend General Assembly and fully participate in deliberations and also exercise their right to vote on relevant decisions. Shareholders are also given the right to supervise the activities of the Board of Directors and they can also file responsibility claims against the member of the board. Saudi Arabia CMA law also awards shareholders the right to inquire and access information without being prejudiced to the interest of the company and in a manner that will not in any way contradict the Capital Market Law.
Saudi Arabia Corporate governance law also provides shareholders with a framework to exercise their rights and access information required. Article 3 reviewed above defines the basic rights of the shareholders. Article 4 outlines facilitation of shareholders exercise of rights and access to information required. Article 4(a) outlines that 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. This implies that the law defines clear what every company that is to be listed in the stock exchange requires to do to protect the rights of shareholders. The companys Article of Association must clearly outline the necessary procedures and precautions to form the framework for shareholders to exercise their rights. Article 4 has clear specifications on the rights of shareholders to access required information. Article 4(b) states that All information which enable shareholders to property 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. This article outlines that companies must provide necessary information to shareholders within the stipulated time and there is no shareholder who should be denied necessary information or be prejudiced as far as provision of information is concerned.

Saudi Arabia corporate governance regulations provide extensive rights to shareholders as far as control of the company is concerned. It provides extensive rights on General Assembly from where major decisions that affect the immediate and future status of the company are decided. In realty, shareholders control of the company can only be exercised during the General Assembly because this is where they exercise their voting rights. Article 5 of Saudi Arabia Corporate governance regulations has basic provisions for shareholders rights related to General Assembly.  Article 5(a) provides that every company should convene a General Assembly once in a year and this should be held within six months after the end of a financial year. This provision ensures that companies have to call shareholders to a meeting from where they will decide on the future of the company.  With this provision, board of directors must call shareholders for a meeting from where they will discuss the immediate and future issues affecting the company.  Article 5(b) the General Assembly is convened with the request of the Board of Directors. This article also provides that the General Assembly can be convened upon a request by the auditor or by a number of the shareholders who have a shareholding the represent at lest 5 of the equity share capital. This means that if the Board of Director, auditor, or shareholders with at least 5 equity share capital feels that there is something that is not going on well in the company, they can request for a General Assembly to discuss the issues.  Article 5(c) provides that the date, place, and agenda of the General Assembly is supposed to be specified and announced at least 20 days before the date of the meeting and members shall be invited using different means like website, newspaper and other high tech modern means of communication. Article 5(d) defines the right of shareholder participation in the Assembly. It provides that shareholders shall be given opportunity to participate fully in the meeting and they shall be informed of the rules of the meeting and the voting procedures. Article 5(f) provides that Board of Directors must include the most pressing issues in the agenda and in case there are issues that are omitted a group of shareholders with shares at least 5 of total share capital can add an item in the agenda. On shareholders participation in the meeting, article 5(g) provides that shareholders shall discuss freely the maters that have been listed in the agenda. They are also given the right to ask any question pertaining to matters under discussion and directed either to the Board of Directors or to the auditor. The Board of Director or the external auditor should respond to the questions asked by shareholders in a way that it does not prejudice the interest of the company. Article 5(h) also provides that the Board of Directors should present matters to the General Assembly together with sufficient information to the shareholders to enable them to make decisions. On article 5(i) it is also outlined that shareholder are  enabled to  peruse the minutes of the items that discussed in the General Assembly  through providing shareholders with a copy of those minutes 10 days  of  the  convening date  of the General Assembly.   Finally, Article 5(j) provides that the Exchange must be immediately informed of the result of the General Assembly.

    Shareholders voting rights are also well entrenched in Saudi Arabia corporate governance regulations.  According to Part 2, Article 6(a) of Saudi Arabia corporate governance laws 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 that might hamper the use of the voting right a shareholder must be afforded all possible assistance as may facilitate the exercise of such right.  This implies that shareholders in Saudi Arabia have the right to vote and this right cannot be denied by the company in on any ground. In addition, the corporate governance regulations require that shareholders be given any possible facilitation and assistance in voting process. Article 6(b) requires that voting in General Assembly for nominating the member of the board, cumulative voting method is applied. Further, article 6(c) states that a shareholder may  appoint another person in writing to represent on his behalf during a voting process so long as the person appoint is not an employee of the company of the board member. This means that the shareholder will not be denied the right to vote just because he or she is not attending the General Assembly. Finally, article 6(d) outlines that investors who are judicial person acting on behalf of others must disclose in their annual reports the voting polices, actual voting and methods of dealing with material conflict arising  due to conflict of interest and that which might affect fundamental rights  in relation to their investment.

    Saudi Arabia corporate governance laws also provide for the rights of shareholders to dividends. Article 7(a) outlines that the Board of Director of a listed company should put in place a clear policy regarding sharing of dividends and in such a way that the interest of shareholders in the company are taken into consideration.  It also outlines that shareholders should be informed of the policy during the General Assembly and this reference should be made in the report published by Board of Directors. Article 7(b) clearly provides that the General Assembly approves dividends and the date at which they will be distributed. The General Assembly may decide to award dividends in different kinds like cash or bonus shares should be given as a basic right to all shareholders whose records appear in the Securities Depository Center at the end of the trading session on the day which the General Assembly was convened.

Saudi corporate governance regulations provide grounds for company disclosure and entitle shareholders to enjoy this right. Part 3, Article 8  of Saudi corporate  governance regulations, which deals with polices and procedures related to  disclosure stipulates that The company shall lay down in writing the policies, procedures and supervisory rules related to disclosure, pursuant  to law.  Under this article, shareholders are entitled to disclosure of a wide range of information including financial statements.  Therefore, in Saudi Arabia, shareholders have the right of disclosure in published periodic filings.  The disclosure right extends to disclosure of information on different transactions that involve the company. This ensures that shareholders have the right to access information regarding the company and puts them in position to control and manage their investment. As outlined in the above table, the disclosure usually gives full details of all material facts that pertain to the transactions. The right to disclosure therefore ensures that shareholders have access to wide range of information on the company where they have invested. It grants them the right to be fully informed of the major transactions that the company is involved in and contribute to this decision. If the company decides to enter into a merger with another company, such transaction cannot be complete without the input of shareholders.

Protection of shareholder is the most important role bestowed on the Capital Market Authority. As had been mentioned earlier, the stock markets acts as barometer for economic growth of any country. Considering the fact that stock market operates on investors confidence, protection of shareholders is not an option for most CMAs.  They have to ensure that consumers feel safe putting their investment in the stock market because they feel protect from losing their investment.

To   have an effective glimpse of shareholders are protected under the Saudi company law, it is important to look literature findings on protection of shareholders in the country. According to doingbusiness.org, Saudi Arabia ranks the highest in free market economy in the Middle East. The country has put in place measures that protect the rights of the shareholders and this may be the reason why there are more investors flowing to Saudi Arabia that any other  states in the Middle East. Protection of shareholders in the country was assessed on different index and the following were the results obtained in tabulated form
Strength of Investor protection index (0-10)

Extent of disclosures index (0-10)Corporate body provides  legally sufficient approval  for transaction (0-3)3Immediate disclosure to shareholders (0-2)1Disclosure in form of published periodic filings (0-2)2Disclosure by Mr. Hussein  to board of directors (0-2)2Requirement for external review of transaction before it takes place  (0 no, 1 yes)1
Extent of directors liabilityAbility of shareholders to hold Mr. Hussein liable for damage in buyer-seller transaction  (0-2)1Shareholder ability to hold board of directors liable for damage to the company (0-2)1Extent to which court can void transaction upon claim by shareholders (0-2)2Whether Mr. Hussein pays damage to the company upon claim by shareholders (0-2)1Whether Mr. Hussein pays damages to the company upon claim by shareholders (0no, 1 yes)1Whether Mr. Hussein repays profits made from the transaction upon claim by shareholders (0 no, 1 yes)1Whether there can be fines and imprisonment for Mr. Hussein (0no, 1 yes)1

End of shareholder suit Documents are available to shareholders from defendants and witness on trial (0-4)0Ability of shareholders to question defendant and witness  during trial (0-2)1
Shareholders who own 10 of less of share can request an inspector  to investigate transaction (0no, 1yes)1The above shareholder can inspect transaction documents before a suit (0-2)1Proof for civil suit is lower than for criminal cases (0no, 1yes)1    From the above table it is evident that Saudi Arabia scores differently on shareholders protection. The above table makes a lot of reference to company law in Saudi Arabia and how it is instrumental in protecting the shareholders.  On the extent of disclosure, Saudi Arabia has strong and weak points on protection of shareholders. As was highlighted on the basic rights of shareholders, they own a part of the company and have a say on how the company is run. This means that they should be involved when the company is making an important transaction. Considering what corporate body provides legal approval for a transaction, the board of directors, Chief Executive Office, and the shareholders have the mandate to approve a transaction. The above table shows that shareholders have the right to vote in approving a transaction and the person the other party involved in the transaction do not have the right to vote on the transaction. The board of directors or the CEO cannot therefore make unilateral decision without including the shareholders when the company is making a major transaction.

Shareholders have the right to know the performance of the company and right to disclosure of information about the company.  Disclosure is one of the most important ways in which the company builds shareholders confidence because they are aware of what is happening in the company. Doingbusiness.org assess the extent to which shareholders have access to information from the company and from the above table, it is evident that shareholders have the right disclosure.
Another important aspect of shareholders rights as outlined in the above table is the right to hold the directors to liable for damage that is caused to the company. The directors are supposed to provide guidance to shareholders on major decisions that are to be made pertaining to the operation of the company. This means that  shareholders have the obligation to make sure that the shareholders understands the decision they are going to make and the impact it will have on the company. From the above table, it is evident that shareholders have the right to hold the directors and managers liable for the damage that has been caused to the company if they were negligent in their duties or they influenced the decision making process that led to conclusion of the transaction. This law has been upheld in Saudi Arabia to ensure that directors and managers fully understands their   duties and make decisions that will lead to  increasing  the  interest of shareholders. The table above also reveals that in Saudi Arabia, the shareholders have the ability to hold the approving body, whether it was the CEO or the Board of Directors liable for the damage that was caused to the company if they were negligent in the approval of the transaction. This means that if they failed to inform the shareholders about the full details of the transactions and henceforth made the shareholders make the wrong decision, they should be held liable for the loss because this would be treated as a case of negligence.
From the above table, it is also evident that shareholders have the right to become plaintiff and seek intervention of the court if they see that the transaction is not fair. Arbitration by the commercial court is one of the strategies that are used by shareholders when they feel that directors have overstepped their mandate. In Saudi Arabia, the above table shows that the court has the power to void transaction upon successful claim by a shareholder plaintiff if the court deems the transaction to be unfair and that which entails to a conflict of interest.  This is important because it gives confidence to shareholder holders that there can be successful arbitration from the court of law when they seen that the board of directors or the CEO has engaged the company in an unfair transaction. In this case, the court in Saudi Arabia will act as a third party in arbitration to ensure that there is fair judgment to all sides. During trial, the plaintiff, in this case shareholder representative, has the right to ask questions directly to the defendant and the witness, which implies that the shareholder has the right to get more information about the transaction. However, plaintiff (shareholder) is not allowed by the Saudi Arabia Company law to request for documents from the defendant without giving details on the specific documents required. The law also provides that shareholders who own 10   or less of buyers share can request for an inspector to investigate a questionable transactions.  In addition, a shareholder who owns 10 of less of the buyers share can also inspect transaction documents before they decide to file a suit. During court proceedings, the level of evident required in this is lower than the level of evidence that is required in a criminal case.

Considering the total score from the table above, Saudi Arabia scores 7out of 10 on shareholder protection. This is a good standard by any means as it shows that the country company law protects the right of the shareholders and also empowers shareholders to influence decisions regarding the management of their investments. Most important, Saudi Arabia scores 9 out of 10 on the extent of disclosures. This implies that the shareholders in the country have more access to information on management of their investment. They have access to more information on financial statues of their company and the decisions that are implemented by the board of directors or the CEO. The country also scores higher on extent of director liability scoring 8 out of 10. This implies that shareholders in Saudi Arabia are in a position to hold their directors liable for the decision they make. Shareholders are empowered to hold directors liable to damage caused to the company and this provides an impetus for all directors and CEOs to make the best decision that advances the interests of the shareholders. However, the country scores poorly on the ease of shareholder suit. It scores 4 out of 10 which implies that shareholders may find it increasingly difficult to file a suit against the board of director or the CEO to recover the damage caused to the company by a transaction. This is made worse by the fact that the shareholder is not allowed to access vital documents during trail, a situation that is more likely to hamper effectiveness of evidence presented by the plaintiff.

Rights of Shareholders in the UK
In the UK, the rights of the shareholder are embodied in the Companys Article of Association as required by the English law or the Companies Acts.  Having embraced free market economy long time ago, the UK has developed one of the most comprehensive set of laws that are geared towards protecting the shareholders.  However, most of the laws do not appear to have been prepared for the current situation where listed companies are having hundreds of thousands of shareholder and therefore they have been continuously revised to meet the current situation. The situation in United Kingdom is also complicated because there are many there shareholders who are virtually represented by nominee accounts.

In United Kingdom, corporate world is governed by the Companies act 2006, The Insolvency Act 1986, and Company Directors Disqualification Act 1986. Like in other countries, UK Companies laws are meant to mediate the rights and the duties of the board of directors and the shareholders during a general meeting.  UK Companies laws sets out the mandatory floor rights for shareholders who have invested in a particular company and it is more concerned with measures of power and its balance between shareholders and the board of directors.   The law also looks into the relationships between the board of directors and the shareholders and this relationship affects the operation of the company. Company laws govern the rights of the shareholders and how the rights are exercised.
UK company laws are divided into two main branches including the corporate governance and corporate finance. Corporate governance is mainly concerned with allocation of power between different stakeholders in a company while corporate finance is concerned with measurable monetary values of the company. The two branches of company laws are however interspersed at different junctions to bring congruity to their operations.

Like the Saudi Arabia corporate governance regulations, U.K Company laws have strong derivative claim awarded to the shareholders.  A derivative claim entails the ability of the  a shareholder to hold the director or a third party liable  for  damages to  the company where a shareholder acts on behalf of the company.  In the UK law, this right is described as derivative because the shareholders right to sue is not a personal right but it is derived from the right of the company which the company has failed to exercise. Under the Companies Act 2006, sections 260 and 269 there is a wider range of circumstances under which the shareholder is given the derivative right. The act gives the shareholder the right to purse a derivative in case of omission that involves negligence, default, breach of duty or breach of trust by the directors of the company

Another important aspect of protection of shareholders rights that is outlined in Companies Act 2006 is the right against unfair prejudice. This is the most important protection shareholders have got under this act because under s459, the act grants the shareholder right to petition for fair treatment in case where the company affairs are being controlled by major shareholders. This means that if shareholders are shortchanged as agreed in the Shareholders Agreement or Articles of Association breach of fiduciary duty or in any other, shareholders have the right to sue the directors. In this case, the court will act as arbitrator between the conflicting parties to find a solution that safeguards the interest of the shareholders. This provision is important to safeguard the interest of the shareholders. The court has wide range of discretion on the decision to be made and it is under no influence when making its decision.

In addition, UK Companies Act 2006 also provides shareholder with the right to enforce against the company or other shareholders whether shareholders agreement has been reached or not.  This right gives shareholders a wide range of discretion including objection to alteration of Memorandum and Article of Association, class rights, financial assistance, director duties, ultra vires transactions, and others like hostile take over bids. The memorandum of association and articles of association is a statutory agreement that is signed between the shareholders and the company that defines how the company should be run. This means that when this is violated, shareholders have the right to petition the board of directors.

Article s122 (1) (g) of the Insolvency Act 1986 further protect shareholders in case of winding up. This article provides for just and equitable wind-up that protects the rights of shareholders. This acts grants the court power to wind-up the company ensuring that there is just and equitable distribution of company resources. This means that the court will make a decision in such a way that the rights of the minority shareholders are upheld.

In the UK, the rights of shareholders are not given in bracket. It depends with percentage of the shares they have. Shareholders with 100 share capital ownership have the right to pass a resolution. UK Companies Act also grants shareholders the right to pass an elective resolution. This is a resolution that is passed by all the member of the company who are entitled to attend a General Meeting and vote.  Shareholders must be given not less than 21 days notice  that specifies the intention to propose the elective resolution as provided in Companies Acts s379A(2)(b).  The elective resolution must be passed at a general meeting and has to be signed by all members as provided in Companies Act s38 or as provided by the Companys Article of Association.  According to Companies Act s80A, the election resolution may grant the directors the authority to allot shares for a given period. As provided in s252, the election resolution may also be meant to dispense with laying of accounts and reports during the meeting for scrutiny.  As provided in ss369 (4) and 378(3), the elective resolution may also be passed in case where majority are required to authorize the holding of general meetings upon a short notice.  Companies Act s386, the election resolution may be passed in an election to dispense with appointment of auditors ever year.

    The rights of shareholders who have 95 share ownership include the right to hold and extraordinary General Meeting (EGM) on a short notice less than members would be required as provided by s369 of Companies Act. Those with 75 shareholding have the right to pass special resolution. A special resolution is that resolution  that is passed by 75 of members present  who are present in person or in proxy and have the right to vote As provided by Companies Act s378(2) the members must be given not less that 21 days notice specifying the intention to propose the resolution  as a special resolution. The following are some of the matters under which a special resolution may be passed
CA s 4-6     Altering objects of the company
CA s 9     Altering articles
CA s 28    change of name
CA s35      Ratifying an act that is beyond power of directors
CA s 135    Reducing share capita
CA s 95(1)    Authorizing allotment of equity securities by directors without restrictions
CA s 155    Providing financial assistance by a private company
CA s 164    Approving certain off-market purchasers
In addition, 75 of member can also pass an extra ordinary resolution as provided in CA, s 378(1). An extraordinary resolution is passed for different purpose including all resolutions proposed at class meetings, variation of class rights, resolution for voluntary wind up of the company, and many others.

    Companies Act also provides that when 50 of members are present, all with voting rights through person or proxy, they can pass an ordinary resolution. This is a resolution that is not defined by Companies Act but which can be passed by a simple majority of 50.01 of the votes that are cast my members. This resolution may be passed in different situation including any item that can be defined of routine business nature which requires approval of embers in a general meeting as provided by CA s121, in exercise of authority to change but not reduce authorized shares as provided in CA s121, provide or renew the authority of the directors   to allow shares as provided in CA s 80(8), for payment of final divided, or for capitalization of reserves. In addition, 50 of shareholders can also pass an ordinary resolution with special notice that can be implemented proposing removal of director as provided in CA s303(2), appointing director of public company who is more than 70 years of age as provided in CA s293 (5), appointing auditor other than retiring auditor as provided in CA s391A, or the removal of an auditor before expiry of his term of office as provided by CA s391A.
There are limited rights that are provided to 25 of shareholders because they can only block a special resolution.  On the other hand 10 of shareholders have the right to call EGM as provided in Ca s368 but a written request of the meeting should be sent to the companys registered office. On the other  hand, 5 of shareholders have the right to refuse to consent to short notice as provided by CA s369(4) but the request must be given to company in writing 6 weeks before the AGM is held.  CA s376 also grants 5 of shareholders the right to have an item placed on the Agenda of the AGM while they are also given right to circulate a written statement by CA s 376.

There are rights that are extended to bracket percentage of shareholders. Any percent of shareholder have the right to request the court to call an EGM as provided in CA s371. They also have the right to restrain an ultra vires act as provided by CA s35 (2). They have the right not to be unfairly prejudiced as provide by CA s459.  The Insolvency Act 1086 s122 (1) (g) provide any percentage of shareholders with the right to have the company wound up provided that the process is just and equitable.  However, the company has to be solvent for this right to apply. Any percentage of shareholders is also provided with the right to vote according to CA s370. They are also provided with the right to receive notice for a general meeting according to CA s370.  Table A Article 104 also grants shareholders the right to a dividend if it is declared. Directors are given power to declare a dividend and shareholders cannot pay to pay themselves more than what has been approved by directors. According to CA s 185, shareholders have the right to share certificate and have the right to shareholder name entered in the Register of Members as provided by CA s352 but this depends on the Articles of Association of the company. Shareholders are also granted the right to a copy of annual accounts as provided by CA s240 and right to an AGM as provided by CA s366. Furthermore they are also provided with the right to inspect Minutes of General Meetings as provide by CA s382, s382A, and s383. Section 379A also grants members the right to prevent the introduction of an elective regime while section 356(1) grants shareholders the right to inspect the register of members and index of members names without any charge.

    Section 459 outlines the rights of shareholders when there is a conflict. This section provides that shareholders may apply to the court for legal settlement of the dispute. This means that shareholders have the right to seek intervention of the court when they feel that there is a dispute arising from the way the company is being conducted. This section is meant to protect the shareholders against unfairly prejudicial actions that may endanger their interests. They are protected from unfair conduct of the majority of shareholders.

Are shareholders rights guaranteed in UK and Saudi Arabia
It is difficult to cover of all the practical aspects of shareholders rights are provided in company laws for both UK and Saudi Arabia.   When considering the shareholder rights, the most important aspect would be to look at the basic provision that may guarantee shareholders, especially minority shareholders from abuse of their rights by majority shareholders. This is what has been looked into in greater details throughout this study.  One factor that comes out clearly is the fact that Saudi Arabia put in place a comprehensive document, the Royal Decree in 1965 while the document that was aimed at protecting shareholders in the UK was the Companies Act of 1985 that had been amended several times before and after, lately being in 2006. However, the degree of development in both countries, as far as the rights of shareholders is concerned varies greatly. The UK has made strides in protecting the shareholders by encapsulating the rights of shareholders in different documents in the same way that Saudi Arabia has done. However, shareholders rights are more advanced and well protected in the U.K that in Saudi Arabia. Both countries have continuously revised their provisions for rights of shareholders but UK has been able to integrate in improve rights of shareholders compared to Saudi Arabia.

This can be understood in the context of the period of development between the two countries. UK has long period of corporate development while Saudi Arabia is an emerging economy that is still organization corporate regulations of its young free market economy.  UK revised its corporate laws in 2006 and put in place a new framework that aligned with its accession to EU, which means that the country company laws could have been inspired by the changes that were made in the EU. On the other hand, Saudi Arabia has also been influenced by  the change that have been implemented in the Middle East region and to an extent, the country has also been undergoing drastic improvement in formulating and enforcing laws related to corporate governance.

The main purpose of comparison of UK and Saudi Arabia laws was to understand the areas of excellence and deficiency in both laws. It is evident that both countries have provided a basic framework that guarantees protection of shareholders rights. In a nutshell, both countries have made major improvement in their company laws to attract inward investment. Considering that UK is the second larges investor in Saudi Arabia, this comparison is important as it would assist Saudi Arabia to make important changes in its corporate governance laws to encourage more investors not only from UK  but also from other countries.

On monetary rights, there is a great similarity between the two countries. Both countries have important clauses in their company law that grants shareholders monetary rights. Under UK law, Article 104 provides that ever shareholder is entitled to dividends once they are declared by the company. Article 8 of Saudi Arabia company law provides that shareholders have the right to dividends that are derived from company net profits. This is further reinforced in Part 2, Article 3 of Saudi Arabia corporate governance regulations that grant shareholder rights to dividends. In both countries there are no rights that prevent shareholders from buying shares which means that once a company is listed in the stock exchange, every willing investor has the right to purchase shares on sale. In addition, every shareholder is entitled to the right to sell shares if they feel so without any coercion.

There is also wide range of non-monetary control rights that are granted to shareholders under Saudi Arabia and UK law. Both UK and Saudi Arabia grants shareholders the right to participate in formulation of policies and management of the company. Both laws recognize that principle of separate entity between the company and the shareholder which means that they recognize the company as a separate entity from shareholders that has its own liability. Shareholders are given wide range of powers that are meant to regulate the action so directors and participate in the companies policy making. Through  their rights to AGM in UK and General Assembly in Saudi Arabia, shareholders are given a unique opportunity to  participate in policy making process the determines the future of the company. In the UK, CA s459 grants shareholders the rights to be treated in a fair manner in running the company. This means that they should not be prejudiced in company affairs.  The voting power enables them to elects directors of the company who engage in daily management of the company. However, it important to note that shareholders in the UK are given wide range of discretion powers as far as control of the company is concerned. They have given power to pass different resolutions depending on their percentage of shareholders who want to pass a resolution.  This means that only those resolutions that are supported by many shareholders are likely to pass. This provision is not well established under the Saudi Arabia company law.  This means that there is need to borrow this provision from UK law and integrate it in the Saudi Arabia company law.
Another most important right that is given to shareholders in both countries is the right to access information. Access to information is the most important aspect that ensures the confidence of shareholders in management of the company. In the UK, shareholders are also granted the right to a copy of annual accounts as provided by CA s240.  In Saudi Arabia Part 3, Article 8 of Saudi corporate governance regulations, which deals with polices and procedures related to disclosure grants shareholders the right to access information about the company. As was see in a study conducted by doingbusines.org, Saudi Arabia fairs well in disclosures rights. This means that the right of shareholders to access information in both countries is well protected although World Banks findings show that Saudi Arabia is to fully implement disclosure laws.

In addition, shareholders in both countries are granted the right to a general meeting. Annual general meeting or General Assembly provide shareholders with an important opportunity to contribute to running of the company and also gives them an opportunity to participate in voting. In UK, CA s366 provides shareholders with right to an AGM in which they pass important resolutions for the company. Article 5 of Saudi Arabia Corporate governance regulations has basic provisions for shareholders rights related to General Assembly. Further, shareholders rights to vote is granted in Part 2 6(a). Therefore, in both countries, shareholders are granted right to annual general meeting with the board of directors and the right to vote in such meetings. This grants shareholders wide discretion to participate in company affairs like electing board of directors and passing important resolutions concerning the company.  There is no much difference between the two countries as far as the rights of shareholders to participate in general meeting and voting is concerned but there are variations on the power of voting based on the number of shareholders who support a given resolution.

Shareholders in both countries are also given rights to sue the company if they think the company is not being run in a fair manner. Under the Companies Act 2006, sections 260 and 269 there is a wider range of circumstances under which the shareholder is given the derivative right to sue the company if they feel that there is something that is not implemented well in the office. This right is also granted in Saudi Arabia laws where shareholders have the right to sue the company if they feel that there was violation of their agreement with the board of directors. In both countries, shareholders are also given right to hold directors liable for their actions. However, this right is not well developed in Saudi Arabia because there is no comprehensive legal provision of how shareholders can have control of the legal process through which they hold directors liable for their actions.

Finally, shareholders are granted rights during winding up of the company. The Insolvency Act 1086 s122 (1) (g) provide any percentage of shareholders with the right to have the company wound up provided that the process is just and equitable. This right is also advanced in Saudi Arabia laws. Article 180 of Saudi Arabia Companies law allows shareholders the right to decide on the fate of their company if it makes a loss of more than 75 of share capital. However, Saudi Arabia laws do not provide comprehensive rights to shareholders on insolvency compared to UK laws. 

Both Saudi Arabia and United Kingdom have a common feature in that they both have monarchs although the extent of influence of monarchal powers in both countries varies. This study was aimed at comparing systematically provisions for protection of shareholders rights in both countries as provided by corporate laws. What comes out clearly from this comparison is that both UK and Saudi Arabia have legal framework that is meant to protect the rights of shareholders although the depth of coverage of shareholders rights varies greatly. This comparison was important because it forms the bases of close understanding of the areas of excellence in the two laws and how the two countries can borrow from each other in improving their shareholder protection laws.

From the comparison, it is evident that United Kingdom has more advanced shareholder protection laws compared to Saudi Arabia. Although Saudi Arabia put in place a compressive shareholder protection laws earlier than United Kingdom, UK has revised its laws to make them more comprehensive.  UK Companies Act was enacted in 1985 and was revised in 2006 to make it more comprehensive, inspired by the changes that were taking place in the European Union.   On the other hand, Saudi Arabia corporate governance laws were enacted through a Royal Decree in 1965 and have been revised lately but their effectiveness is still questionable. Saudi Arabia needs to upgrade its laws to ensure that they align with international standards. Although Saudi Arabia is the leading free market economy in the Middle East region, it need to harness is shareholder protection laws  to make them more effective and wide encompassing  to   attract more inward investment. Most important Saudi Arabia need to enhance its shareholder right to participate in the legal system to ensure that there is fair judgment.