Assessing the Liability Exposure of Public Joint-Stock Companies\u27 Directors Under the Liability Rules in Saudi Arabia

Historically, the business environment in Saudi Arabia has been considered low risk. However, with the introduction of Vision 2030 in 2016, the socioeconomic transition and regulatory evolution witnessed in Saudi Arabia have reshaped the business environment and redefined the risk landscape faced by public companies and their boards. The increase in the market regulator’s monitoring and penalizing activities, the legislative reforms of management liability rules, the approval of securities class action, and the unprecedented rise in shareholder activities against their board of directors are recent developments that directly affect directors’ exposure to liability. Generally, operating in a legal system with perplexing liability and protection rules is associated with negative implications, such as risk aversion, which leads directors to turn down profitable, yet risky, business projects, and it discourages qualified individuals from serving as directors, which negatively affect the company’s performance and its profitability. This study seeks to understand the effect of the current changes in the work environment on the liability exposure of public companies’ boards of directors, and to assess the adequacy of the current regulatory framework of directors’ liability. Thus, 65 public companies’ directors were surveyed, and it was found that their fear of personal liability has increased dramatically in recent years. In addition, by using deductive reasoning, this study demonstrates that the current liability system of directors’ liability as embodied in the Companies Law of 2015 does not adequately respond to the emerging risks in business. Saudi Directors are not granted a sufficient level of protection and guarantees to enable meaningful and efficient board performance, which subsequently impedes an optimal performance of the company. Such regulatory insufficiency centers on defects in the liability standard of directors, the regulator’s lack of recognition of risk shifting mechanisms, and the inadequacy of directors’ rights. This study offers practical recommendations to improve the system of directorial liability and protection that meets the challenges and new risks within the business environment in Saudi Arabia