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Saudi Arabia made family charters binding in 2023 and sets a searching test for who may sit as an independent director. Adoption is the visible gap. Whose judgement that director feels he owes is the real one.

Posted At: Aug 07, 2026 - 226 Views

The board seat is regulated. The mandate is not.

Saudi Arabia made family charters legally binding in January 2023. About three quarters of Saudi family businesses still do not have one. That reads as an adoption gap, and it is the wrong thing to be counting.

Only 30% of family businesses worldwide have a family constitution, on PwC's twelfth global survey, so the Saudi quarter is a lag rather than an aberration. The Saudi figures come from INSEAD and the chief executive of the National Center for Family Businesses, published in November 2025: roughly three quarters without a charter, 59% without a succession plan. Those documents are a symptom. The cause sits one level below them.

The sector is large enough that this matters to the whole private economy. Around 95% of operating enterprises in the Kingdom, some 633,000 firms, are family businesses, and they employ nearly half the country's workforce. Estimates of their contribution to output range from about 27% of GDP to roughly a third, depending on which National Center figure you take and against which denominator. The lowest reading is enough.

Two regimes govern these firms. For Main Market issuers, independence is compulsory. On Nomu, where many recently listed family businesses sit, the same provisions are merely guiding, and for the unlisted majority nothing applies at all.

The architecture is already built

In May 2018 the Ministry of Commerce and Investment issued a Guiding Charter for Saudi family companies under Ministerial Decision 42241/1439H. It sets out four tiers of authority: the general assembly, the family council, the board and executive management. Three of its provisions matter more than the rest of the document combined. Article 18 bars a family council member from also sitting on the board or the executive team. The chief executive may not serve as chairman or vice-chairman, under Article 37. And Article 31 says the board "exercises its work with independence, particularly from the family."

Four years later, Article 11 of the Companies Law, issued by Royal Decree M/132 and in force from 19 January 2023, made the family charter enforceable. Read the two halves of it together. Paragraph 2 says a family charter "shall be binding" and may be written into the articles of association. Paragraph 1 says shareholders "may" conclude one. It can govern ownership, management, employment of relatives, dividend policy, the disposal of shares and the settlement of disputes, and it can do none of those things unless a family chooses to write it.

For Main Market issuers the Capital Market Authority goes further. Article 16(3) of the Corporate Governance Regulations requires independent directors at no fewer than two members or one third of the board, whichever is greater. That provision is mandatory, not guiding.

So the scaffolding is built. What it does not include, and probably cannot, is the part that determines whether any of it operates.

Boards exist. The question is whose judgement they answer to.

The assumption that Gulf family firms lack boards is wrong. The GCC Board Directors Institute's Board Effectiveness Review 2025, published in November 2025, found that 91% of respondents agree boards should concentrate on policy and strategy, leaving day-to-day operations to management. It then found that "many boards still struggle to separate governance from management, which can frustrate executives and diminish the board's influence." Only 32% said their boards have a formal selection, induction, review, development and deselection process. Board composition "remains largely relationship-driven, with added challenges in family businesses," shaped by family ties, personal relationships and former executive relationships. Overboarding is "especially prominent within family-controlled or unlisted companies." And 67% reported no formal succession plan for executive and critical organisational roles.

That is a self-selected survey of 193 members and contacts of a director-training institute, with no sampling frame and no stated margin of error, so the percentages describe the people who answered, not the Gulf board universe. Of those respondents, 52% sit on at least one Saudi-domiciled board and 30% on at least one non-listed family business. Read that way it cuts harder, not softer: this is the governance-conscious end of the market, and even here nine in ten know what a board is for and most cannot hold the line.

Nine in ten agree the board should stay out of day-to-day operations. A third have a formal process for selecting directors, and a third have a formal succession plan.

The reason is visible in the CMA's own text. Article 19(c) sets out, "by way of example," what negates a director's independence. A shareholding of 5% or more. Kinship with such a holder, with another director or with a senior executive. Employment by the company within the past two years. Payments beyond board remuneration above SAR 200,000, or half the prior year's remuneration, whichever is less. Service of more than nine years. It is a searching test of who a director is. It says nothing about whose judgement he will feel he owes.

Saudi law is not silent on election. Cumulative voting has been mandatory for Main Market boards since 2016, under Article 5(a) of the CMA's Implementing Regulation of the Companies Law, and it lets a shareholder concentrate every vote on a single nominee. On a nine-seat board a coordinated 30% minority has the arithmetic to seat three directors. The machinery exists.

It is rarely decisive, for reasons that are structural rather than legal. Cumulative voting pays only when minorities coordinate, and a dispersed retail float facing one family block generally does not. The nomination committee that screens candidates is appointed by a board the controller elected. And nothing in Article 19 disqualifies a director because the controlling family proposed him, campaigned for him and can decline to renominate him at the end of his term.

Composition, meanwhile, is not where the deficit lies. PwC's 2023 Middle East survey found 28% of boards are family only, against 36% globally; 45% seat no director under 40, against 57%; and 19% seat no director from a different industry, against 26%. The region outperforms the global average on all three. It underperforms badly on one: 59% have no women on the board, against 31% globally. The Middle East sub-sample is small, so read all of it directionally.

Middle East family-business boards against the global average on four measures. The region is ahead on family-only boards, directors under 40 and outside-industry directors, and far behind on women directors.

The one measurement that speaks to role separation directly is now fourteen years old. In 2012 Pearl Initiative and PwC interviewed 106 GCC family firms, 40% of them Saudi. About half had defined the boundaries between family, board and management. Only 20% had implemented those definitions in full, and 48% in part. Family members held senior executive positions in 85% of them. No published survey since has repeated that specific measurement.

What the gap costs

Succession has a price and it has been estimated cleanly. Bennedsen, Nielsen, Pérez-González and Wolfenzon instrumented family-CEO succession with the gender of the departing chief executive's firstborn child, and found in Danish administrative data that "operating profitability on assets falls by at least four percentage points around CEO transitions." The underperformance was largest in fast-growing industries, industries with a highly skilled labour force and relatively large firms. Those are the industries Vision 2030 is built to create. Set that against a Saudi cohort in which, on the National Center's figures, 23% of founders are past 55 and most have no plan. That last figure appears only in the INSEAD piece and carries no source there.

Bloom and Van Reenen reach the same place from management practice rather than profitability: across 732 medium-sized manufacturers in four countries, family ownership is associated with better management than comparable non-family firms, a family chief executive is roughly neutral, and choosing that chief executive by primogeniture costs about four-tenths of a standard deviation on their index. Ownership is not the problem. Inherited operational control is.

The equity market says it too. Villalonga and Amit found the family premium is a founder premium: with controls and a selection correction, a founder chief executive adds 1.16 to Tobin's q, while a descendant chief executive subtracts 0.23. The authors attribute the descendant discount entirely to second-generation firms, which is precisely the handover now queued across the Kingdom.

Capital is the second cost. When the Capital Market Authority and Tadawul signalled measures in July 2020 to encourage family companies to convert and list, chairman Mohammed El-Kuwaiz was reported as saying that 30% of family businesses avoid a public offering for fear of losing control. The figure is unsourced, so treat it as a regulator's impression. As an impression from that seat it is still worth having, because the obstacle he named was control, not disclosure.

What it costs the minority

For an outside shareholder the abstraction becomes cash, and here the Saudi evidence is real but contested. Alsultan and Hussainey studied 91 non-financial Saudi listed firms across 429 firm-year observations with firm fixed effects and found related-party transactions negatively associated with earnings quality. On dividends the picture is unsettled. An unpublished 2023 doctoral thesis at the University of New England, covering 88 Saudi listed firms from 2010 to 2018, reported family ownership positively related to dividends but family occupation of the chief executive's seat significantly negatively related, which its author reads as entrenchment. A larger published study, Boshnak on 280 Saudi listed firms from 2016 to 2019, finds family ownership has no significant effect on dividend payout at all.

The disclosure architecture is easier to state. CMA Article 41(6) requires a Main Market company to notify the Authority and the public without delay of a related-party contract only where it equals or exceeds 1% of total revenues. For a SAR 10bn issuer a SAR 99m contract sits below that trigger, and a pattern of them sits below it indefinitely. Those contracts still surface in the annual related-party note. They simply never arrive as news.

A third cost appears only when someone wants out. Article 11 permits a charter to govern the disposal of shares, and in Gulf family groups the absence of a priced, pre-agreed exit is a common trigger of open conflict. Majid Al Futtaim is the current illustration. The founder died in December 2021 leaving ten heirs. In February 2022 Dubai's ruler appointed a special judicial committee to adjudicate disputes over the estate. In June 2025 that committee named a nine-member board at the group's parent, Majid Al Futtaim Capital: four family members and five outsiders. The Financial Times called the five government representatives; S&P called them independent or non-executive. Majid Al Futtaim Holding, the operating group, is rated BBB by S&P and Fitch, is a repeat international sukuk issuer, and says its own operations and governance are unaffected. It had professionalised its management and its board. The exposure was at the ownership-transfer layer, which no amount of executive quality reaches.

What separation is worth

The argument is usually made as an obligation. It is better made as a price.

Black, Jang and Kim studied 515 Korean listed firms, using the country's 2 trillion won asset threshold as an instrument in a regression-discontinuity design. Moving from worst to best on their governance index predicts a 0.47 higher Tobin's q, which they translate as roughly a 160% higher share price. Holding the rest of that index constant, firms with 50% outside directors carried 0.13 higher q, in the authors' own words "roughly 40% higher share price." Korea is a closer comparator for Saudi Arabia than any Anglo-American market: concentrated ownership, family-controlled groups, a fast-institutionalising regulator, and a mandatory-independence rule structurally similar to Article 16(3).

Klapper and Love add the part that matters most here. Firm-level governance is associated with operating performance and market valuation across emerging markets, and it matters more where the legal environment is weaker, because firms "can partially compensate for ineffective laws and enforcement by establishing good corporate governance." They also find that observed governance levels are themselves lower in weak-law countries. The opportunity and the difficulty arrive together.

The honest counter-argument

Two objections are serious. The first is Saudi and recent. Alobaid covered 145 non-financial Tadawul-listed firms across 828 firm-year observations and found family ownership positively associated with both return on assets and return on equity. Family control in this market is not underperforming. The same paper finds that board independence strengthens the relationship, and recommends that regulators prioritise independent directors in family-dominated companies. Alobaid is making this argument, not refuting it. And ROA and ROE are accounting measures, in a market where related-party transactions are separately shown to degrade the earnings quality those measures are built from.

The second objection is the stronger one, and it comes from the governance literature itself. Duchin, Matsusaka and Ozbas used regulatory mandates as a natural experiment and found that when the cost of acquiring information about a firm is low, performance improves as outsiders are added to the board, and when that cost is high, performance worsens. An unlisted, multi-line Gulf group with no analyst coverage, no segment reporting and forty years of undocumented relationships is close to the highest-information-cost firm there is. Seating independent directors in a company that cannot inform them is theatre, and expensive theatre. Their sample is US firms subject to exchange and Sarbanes-Oxley mandates, so applying it to Saudi Arabia is my inference and not theirs. It should still change the sequencing: build the reporting before you build the board.

The extreme case

Ahmad Hamad Algosaibi and Brothers remains the reference point, though not for the reason usually given. More than SAR 44bn in claims were filed against the partnership. About SAR 27.5bn were ultimately approved, and in September 2021 the Commercial Court in Dammam ratified a restructuring under the 2018 Bankruptcy Law that returned creditors roughly a quarter of what they were owed. It took twelve years and litigation in courts on three continents.

The merits are not open. AHAB sued Maan Al-Sanea in the Cayman Islands alleging a multibillion-dollar fraud. The Grand Court dismissed those claims in 2018 and the Court of Appeal upheld the dismissal in December 2021, finding that the AHAB partners had themselves known of and authorised the borrowing at the heart of the case. Whatever else that record establishes, it does not describe a family unable to see inside its own enterprise. It describes an enterprise in which ownership, management and oversight had collapsed into the same set of hands, so that nobody stood outside the arrangement with either the standing or the information to stop it.

Three questions

Can the board dismiss the chief executive without first convening the family? Does any serving board member also sit on the family council? And is there a pre-agreed mechanism for transferring shares, priced and triggered before anyone needs it?

Saudi Arabia wrote the answers to the first two into ministerial guidance in 2018 and made them enforceable in 2023. The third it left to the parties, and Majid Al Futtaim shows what that costs. The state has settled who may sit on a board and how the vote is counted. It cannot settle whose judgement a director will feel he owes, and until a family settles that for itself, everything else is documentation.

Sources and notes

On the sector's contribution to GDP. The National Center for Family Businesses has published two figures on two denominators: about 27% of GDP, in figures released through INSEAD in November 2025, and 66% of private-sector GDP, a figure it first gave in January 2021 and was still using in July 2024. At the 51% private-sector share reported in the Vision 2030 Annual Report 2025, the second implies roughly 34% of the total. The two do not reconcile. The Center's own count of family businesses has also moved from 63% of private-sector entities in 2021 to 95% of operating establishments in 2024 without published explanation. The article takes the lowest available reading.

On the Saudi figures generally. The INSEAD piece co-authored by the National Center's chief executive carries no source, footnote, sample size or methodology for any of its Saudi statistics, including the 95%, the 633,000, the 59% and the 23%.

On the El-Kuwaiz remark. Single-sourced to an Asharq Al-Awsat report of 26 July 2020, syndicated via Al Bawaba; the original is no longer retrievable and no corroborating report was found. It is a reporter's indirect paraphrase, not quoted speech, and the 30% figure carries no underlying survey.

On scope. CMA Corporate Governance Regulations Articles 16, 19 and 41 are mandatory for Main Market issuers. For Nomu, only Articles 13(c), 50(b), 51(a), 52, 56 and 88 are mandatory; the rest are guiding.

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