EVER since the catastrophic Jeddah floods of 2009, there has been much discussion in the Saudi press about corruption and incompetence in government departments and city municipalities. However, very little attention has been paid to the Kingdom's state owned enterprises or SOEs, which together make up approximately 50 percent of our non-oil economy and account for over 25 percent of the Saudis employed in the private sector. Except for never-ending complaints about the level of service offered by the national airline, most of the country's SOEs hardly come up in public discussions of corruption. This is truly unfortunate because more important than the occasional corruption scandal is the fact that many of the Kingdom's SOEs are led by managements which are rarely held accountable for the public funds they waste on the mismanagement of the country's national assets. The main reason for this lack of accountability is the way that the boards of directors of these SOEs or state owned enterprises are chosen. This problem of “corporate governance”, which is not unique to Saudi Arabia but is common in many developing and even developed countries, was highlighted by a recent Organization for Economic Cooperation and Development (OECD) report on the governance of SOEs in the MENA region that followed a seven year effort and is titled, OECD (2012), Towards New Arrangements for State Ownership in the Middle East and North Africa. In particular on page 63 under the subtitle “Reforming SOE boards”, the report argues that: “At the very heart of ongoing discussions of corporate governance of state owned enterprises is the structure and operation of SOE boards. The board is particularly important because SOEs are often subject to specific agency problems. To complicate matters, many SOEs operate in non-competitive industries and are therefore not subject to market pressures and oversight. In the MENA region, specific governance challenges affecting SOE boards include conflicts in reconciling competing social and commercial objectives, opaque nomination procedures for directors and senior managers, and competing ownership interests among government agencies. “In order to be effective, SOE boards must have the power to exercise their own judgment and should be given responsibility for strategic decisions, including major investments and choice of senior management. A certain level of board independence is required if SOE boards are to fulfill their functions. “Research shows that the best SOE boards focus heavily on performance management and meet regularly with government owners to shape joint strategy. In addition to independence, SOE boards should also have an appropriate balance of competencies. Directors should have a strong command of the strategic issues in the sector where the company operates. The competence of board members is best assured through a structured and transparent nomination process. In practice, nomination processes for board posts in the region are often based on criteria other than competence. “The Hawkamah-IFC Survey (2008) noted that 62 percent of the respondents surveyed believe that being a high-profile public officer remains a primary criterion for nominating a director to the board of an SOE; 52 percent of the respondents said that competency and skills are secondary requirements.” The report then goes on to cite the boards of SABIC and STC as examples of boards that, “appear to have been chosen to a large extent ex-officio and on the basis of seniority … with no background in the companies' industries and with extensive other obligations”, that keep them too busy to evaluate the performance of their managements. In contrast to these SOEs, the report then cites Saudi Aramco as: “…. the one Saudi SOE that most closely approaches an ideal board with independent directors. Its 12-member board includes five executives of the company and a number of very senior Saudi technocrats (including the Minister of Finance), but also one former World Bank managing director and two former international oil executives chosen for their experience and networks in the sector. Aramco is the only major Saudi SOE whose operations are supervised by foreign board members.” That is why it is imperative to have an independent government body, like the Shoura Council, involved in the nomination and evaluation of the performance of Saudi SOE board members. Most of our national assets as a country are being managed by the people who have been nominated to oversee the performance of SOEs, like Saudi Arabian Airlines, SEC, SWCC and several others, and we must protect ourselves and our children from their potential waste of these assets, through incompetent management, before we worry about their possible corruption.
— Nabil Al-Khowaiter is a Saudi Arabian business development consultant
