How to form a company board of directors according to the new company law

The steps and procedures for forming a company's board of directors cannot be viewed as merely formalities and fulfilling legal requirements. Rather, this aspect should be considered as a precise strategic process that establishes the principles of governance and transparency.

This process is based on a legal framework that sets out detailed provisions governing the establishment and formation process, including determining the number of members and the maximum membership of the boards of listed companies, the rules for nomination and cumulative voting, and the mechanism for forming specialized committees as supervisory bodies emanating from the board.

This article explains how a company's board of directors is formed under the legislative changes, highlighting the formal and substantive controls that legitimize the board's decisions, and the legal consequences of violating them.

Abdulaziz bin Yasser Al-Anzi Law Firm

The concept of both the company and the board of directors

He knewNew Saudi Companies LawA company is defined as a legal entity established in accordance with the provisions of the law, based on an incorporation contract or articles of association, whereby two or more persons commit to contributing to a profit-seeking project by providing a share of money, labor, or both, to share any profit or loss arising from this project.

The system has permitted, as an exception, that a company be established by the sole will of one person, in accordance with its provisions, as well as the establishment of non-profit companies in accordance with what is stated in Chapter Seven thereof.

The Board of Directors is the company’s highest management body. Its members are elected by the shareholders, and it assumes the responsibility of supervising and directing the company’s management, ensuring that its objectives are achieved in accordance with the strategies and policies approved by the General Assembly.

Responsibilities assigned to the company's board of directors according to Saudi regulations

The board of directors is the cornerstone upon which the company relies to achieve its objectives and ensure the efficient conduct of its business, as the chairman and members bear significant responsibilities entrusted to them by law to ensure sound management andSustainable governance. 

The corporate system has organized these responsibilities through a set of duties that require board members to exercise due diligence and loyalty and to avoid conflicts of interest. The following is a review of the most prominent of these duties:

1. Developing plans and strategies and setting goals.
2. Giving the CEO free rein to direct, pass, comment on, and amend decisions.
3. Commitment to duties of care and loyalty and avoidance of conflicts of interest.
4. Monitoring the company's performance and progress to ensure that the goals for which it was established are achieved.
5. Formulating the outlines of how things should be done, managing and monitoring the company according to a structure that distributes rights and responsibilities between the board of directors, the management body and the shareholders.
6. Achieving the primary goal of "a good return on investment" by defining the goals and strategies ("means") of the CEO.
7. Forming the organizational structure of the institution.
8. Forming committees and delegating powers and authorities.
9. Providing an independent external reviewer.
10. Taking responsibility towards shareholders.
11. Compensating the company, partners, shareholders, or third parties for damages arising from a violation of the regulations, articles of incorporation, errors, negligence, or failure to perform business.
12. Calling for meetings, preparing their agendas, and considering any new business or proposals submitted by members or any employee.

Requirements for Board Member

In addition to general requirements such as legal eligibility and not having been convicted of a crime involving moral turpitude, the following conditions must be met by a member of the board of directors:

1. To have the necessary competence, experience and knowledge in the company's field of business.
2. To be familiar with the corporate system and relevant rules and regulations.
3. He should have the ability to read and analyze balance sheets and knowledge of accounting and finance.
4. To have the motivation and sufficient time to actively contribute to guiding the company's business and policies.
5. Not to hold more than five membershipsListed joint-stock companiesAt the same time.

How does the board of directors achieve the company's goals?

The board of directors has sufficient independence to effectively supervise the managers, hold them accountable for their performance, and even terminate their duties if they fail to achieve the goals for which the company was founded. The board also holds managers accountable to ensure that their actions serve the interests of the company and investors.

The presence of a supervisory board of directors also enhances confidence in the company, which facilitates its entry into and continuation in the markets, and encourages investors to inject large capital into it.

Good oversight by the board of directors also contributes to achieving outstanding economic performance and sound management of the company, thus achieving high performance rates that reduce the cost of capital and increase the value of partners’ shares.

The role of governance in forming corporate boards of directors

Governance plays a fundamental role in setting the controls that regulate the formation of the board of directors, given that it is the main controller of the company’s management. The governance regulations and the Saudi Companies Law have addressed this formation from several aspects as follows:

First: The number of council members and the term of their membership

The system and regulations left it to the general assembly to determine the number, but with a minimum of 3 members and a maximum of 11 members. The regulations stipulated the presence of at least two independent members or the equivalent of one-third of the members. It is also preferable for the number to be odd to avoid a tie in votes. As for the term of membership, the system set it at a maximum of three years, with the possibility of re-election.

Second: Conditions for candidacy to the council

The system did not specify direct conditions as much as it set prohibitions, the most prominent of which are: preventing conflicts of interest except with prior authorization from the General Assembly, and preventing competition with the company or participation in activities that compete with it.

In contrast, the governance regulations included more detailed requirements, focusing on the necessity for members to possess professional competence, good health, and complete independence that prevents any compromise to that independence. These requirements aim to ensure the member's seriousness and ability to bear responsibility.

Third: Forming the Council Presidency

After the general assembly elects the board members, the members elect from among themselves a chairman and a deputy chairman. The chairman must not hold any executive position in the company, in order to ensure the separation between management and execution and to prevent the concentration of power.

The president's role is to follow up on the implementation of the board's decisions on behalf of the shareholders, while emphasizing that his authority does not supersede the authority of the board as a whole. At the same time, he is responsible for ensuring the smooth running of the business and providing guarantees for that.

End of Board Membership

The Corporate Governance Regulations and the Saudi Companies Law regulate the termination of board membership, achieving a balance between the General Assembly's authority to dismiss and the rights of dismissed members, while establishing specific mechanisms to deal with cases of absence and resignation to protect the company's interest, as follows:

1. Membership automatically terminates upon the expiry of the term specified in the company's articles of association, and necessarily ends after the three-year period stipulated by the bylaws as the maximum term for the board.
2. The General Assembly has the right at any time to dismiss all or some of the members of the Council by its own will.
3. The dismissed member has the right to claim compensation in two cases: if the reason for dismissal is unacceptable or unfair, or if the dismissal was carried out at an inappropriate time that resulted in greater harm to the company.
4. The Board of Directors has the right to submit a recommendation to the General Assembly to terminate the membership of a member, in the event that he is absent from three consecutive meetings of the Board without an acceptable or legitimate excuse.
5. The company is obligated, immediately upon the termination of any member’s membership “in any way”, to notify the competent authority and the financial market of this, and the notification must include a statement of the reasons that led to the termination of membership.
6. If a member submits his resignation and has comments on the company's performance, he must submit a written statement to the chairman of the board, and the chairman is obligated to present this statement to the other members of the board.

In light of the above, it is clear that the process of forming a company's board of directors in Saudi Arabia is not a mere formality to fill leadership positions, but has, under the new Companies Law and Corporate Governance Regulations, become a fundamental element in building an effective and integrated governance system.

A structure based on strict professional and institutional principles, such as separating the CEO position from the board chairman position, ensuring the independence of one-third of the members, and adopting cumulative voting to represent minority shareholders, guarantees compliance with regulatory provisions and creates an internal control dynamic that protects the company from conflicts and abuses.

Having a majority of non-executive and independent members contributes to enriching deliberations with neutral viewpoints, subjecting strategic decisions to an objective evaluation based on the company’s interest rather than the interest of individuals, thus enhancing transparency and reducing opportunities for conflicts of interest that may go unchecked.

This well-established corporate practice enables the board of directors to transform from a traditional administrative body into an active strategic partner, addressing rapidly evolving challenges—whether regulatory, financial, or technological—with a proactive vision built upon diverse competencies and expertise.

The commitment to forming specialized committees, such as review, nominations, and rewards, gives the council the ability to delve into critical technical matters and ensures that appointments, compensation, and performance reports are subject to professional standards and are not subject to whims. This gives Saudi companies the flexibility needed to achieve their strategic goals and reach financial and operational sustainability, because it establishes a culture of accountability and puts performance measurement at the heart of corporate work.

Ultimately, the qualitative shift in the concept of forming boards of directors aligns with the aspirations of the Kingdom’s Vision 2030 towards building a strong and globally competitive private sector. It does not merely aim to increase the number of companies or their profits, but rather seeks to deepen confidence in the Saudi business environment, attract foreign investments, and localize the best international practices in transparency and integrity. This can only be achieved with boards of directors that are aware of their legal and ethical responsibilities and operate in the spirit of a national development partner. Thus, appointing board members committed to governance standards becomes the true gateway to companies capable of competing regionally and internationally, and a key driver of a sustainable economy that enhances the Kingdom’s position as a leading investment destination on the world map.

You can rely onAbdulaziz bin Yasser Al-Anzi Law FirmIn Saudi Arabia, to obtain legal advice related to how to form a company's board of directors, the lawyer ensures that the foundations of governance and transparency are established by preparing and reviewing the articles of association and incorporation contracts in a way that clearly defines the powers and responsibilities of the board, and auditing its elections, meetings and disclosure procedures to comply with the Companies Law and the Corporate Governance Regulations.

The lawyer also undertakes to periodically evaluate the board's performance to ensure its effectiveness and achievement of the company's strategic objectives within a robust legal framework that protects shareholders and spares the company compliance risks that could lead to future penalties or disputes.

ContactToday, our experts will ensure that you form a board of directors that is compliant with the new corporate system.