Board Composition | Pillar 3: Board of Directors Management

Composition of the Board of Directors

Structure, Member Types, Diversity, and Competencies in the Modern Board

First: Introduction

The board of directors is the beating heart of corporate governance — the body entrusted by shareholders with the responsibility of strategic oversight and the protection of their interests. The composition of this board is not merely an administrative matter of selecting names; it is a critically important strategic decision that determines a company’s capacity to respond to challenges, seize opportunities, and achieve its long-term objectives. A successful board combines diverse competencies, deep experience, and sufficient independence to make objective decisions that serve the interests of all stakeholders.

In the Kingdom of Saudi Arabia, the corporate governance framework has evolved significantly with the issuance of the new Companies Law (Royal Decree M/132) and the Corporate Governance Regulations issued by the Capital Market Authority (CMA). Board composition has become a highly precise regulatory matter, with specific requirements regarding size, independence ratios, diversity, and specialized competencies. This article reviews the fundamental principles, legal requirements, and best practices in composing boards of directors in Saudi companies, with international comparisons and future trends.

💡  Key Insight A board of directors is not a randomly selected group of individuals — it is an integrated team of competencies designed carefully to combine diverse expertise. Every member must add unique value, and every selection must serve the company’s strategy and culture. Companies that treat board composition as a strategic decision consistently outperform their peers over the long term.

Second: Legal Framework for Board Composition

1. Saudi Companies Law

The Saudi Companies Law (Royal Decree M/132), issued in 2022, regulates the general framework for board composition in joint-stock companies. Article 68 of the law sets the number of board members at a minimum of three and a maximum of eleven, appointed for terms not exceeding three years and subject to renewal. The law also requires that each member hold a number of shares whose value is determined in the company’s articles of association (if applicable).

2. CMA Corporate Governance Regulations

The Corporate Governance Regulations issued by the Capital Market Authority detail additional requirements for listed companies:

• Independent Member Ratio: The number of independent members shall not be less than one-third of the board, or two members, whichever is greater.
• Non-Executive Members: The majority of board members shall be non-executive.
• Separation of Roles: Combining the position of board chairman with any executive position in the company is prohibited.
• Competence and Experience: Members must possess experience and qualifications appropriate to the company’s nature of business.
• Multiple Directorships: A board member may not serve on the boards of more than five listed joint-stock companies.

3. Articles of Association

In addition to the legislative framework, a company’s articles of association set company-specific requirements — such as the specific number of members (within the legal range), required qualifications, nomination procedures, and term length. The articles cannot reduce statutory requirements but may add more stringent conditions.

Third: Types of Board Members

1. Executive Member

An executive member is one who holds an executive position in the company (such as CEO, Deputy CEO, or CFO) in addition to their board membership. This member possesses deep knowledge of the company’s operations, operational challenges, and internal culture. They bring a necessary executive perspective to the board, but simultaneously carry an objective challenge: how can they be part of the body that oversees them?

For this reason, regulations impose a ceiling on the proportion of executive members on the board and prohibit the chairman from being executive. Mature companies typically retain a limited number of executive members (often just the CEO, sometimes the CFO) with a clear majority of non-executives.

2. Non-Executive Member

A non-executive member does not hold any executive position in the company but may represent a major shareholder, serve as an expert in a particular field, or cooperate with the company in an advisory or commercial capacity. Their primary advantage is that they are not part of daily management, granting them sufficient distance to evaluate management’s performance more objectively than an executive member.

Nevertheless, a non-executive member may not be fully independent in the strict sense if they have material or personal relationships with the company or its major shareholders. This is where the third classification comes in.

3. Independent Member

An independent member is one who enjoys complete independence from the company, its executive management, and its major shareholders, such that they have no relationship or interest that could influence their objectivity in decision-making. Independence is not merely the absence of an employment relationship but requires the absence of any circumstance that could create potential conflict of interest.

The Corporate Governance Regulations establish strict criteria for independence, including:

• No Prior Employment: Not having been employed by the company or its group during the past two years.
• No Significant Ownership: Not owning 5% or more of the shares of the company or any company in its group.
• No Familial Relations: No first-degree relationship to any senior executive or board member.
• No Commercial Relationship: No material commercial relationship with the company during the past two years.
• No Professional Services: Not being a partner or employee at the company’s auditor or principal consultants.
• Maximum Service Period: Continuous membership not exceeding nine years, to preserve actual independence.

Member Type		Relationship to Management	Independence	Primary Role
Executive		Works in executive management	Not independent	Provides operational perspective
Non-Executive (Related)		Represents major shareholder	May not be independent	Represents shareholder interests
Independent		No material relationships	Fully independent	Objective oversight and balance
	📌  Note Independence is a state, not a certificate. A member who begins as independent may lose their independence over time if their relationships with the company or its management evolve. Therefore, good governance requires periodic review (at least annually) of each member’s independence, with documentation of the assessment in the nomination committee’s minutes.

Fourth: Optimal Board Size

1. The Balance Between Large and Small

Choosing the optimal number of board members is a strategic decision. A small board (3-5 members) is characterized by speed in decision-making, lower costs, and ease of coordination, but may lack diversity of competencies and the capacity to form effective committees. A large board (9-11 members) offers greater diversity and multiple competencies but slows decisions, increases costs, and may dilute individual member accountability.

2. Factors Influencing Size Determination

• Company Size: Larger companies typically require larger boards to cover operational complexity.
• Nature of Business: Companies in multi-activity sectors need diverse expertise.
• Ownership Structure: Companies with dispersed ownership may need more members to represent different interests.
• Regulatory Requirements: Some sectors (such as banks) impose higher minimums than usual.
• Number of Committees: Forming multiple committees (audit, nominations, risk, investment) requires sufficient member numbers.

Company Size	Recommended Board Size	Rationale
Small (under SAR 500M)	5-7 members	Core competencies + 2 committees
Medium (SAR 0.5-5B)	7-9 members	Adequate diversity + 3 committees
Large (SAR 5-50B)	9-11 members	Specialized competencies + 4 committees
Mega (over SAR 50B)	11 members	Sectoral expertise + all committees

Fifth: Required Qualifications and Competencies

1. Core Qualifications

Regardless of specialization, every board member must possess core qualifications including:

• Personal Integrity: A clean professional and personal record, free from convictions or ethical concerns.
• Wisdom and Sound Judgment: Capacity for analysis, decision-making under uncertainty, and balancing competing priorities.
• Intellectual Independence: Ability to think independently and express opinions even in the face of majority views.
• Time Commitment: Sufficient time for reading, attending meetings, and effective participation in committees.
• Basic Financial Literacy: Ability to read financial statements and understand management reports.
• Governance Awareness: Knowledge of sound governance principles and board member duties.

2. Specialized Competencies

Beyond core qualifications, the board should include a balanced mix of specialized competencies:

2.1 Financial and Accounting Expertise

No board can do without at least one member (preferably two) with deep expertise in accounting, finance, and audit. This member typically chairs the audit committee and ensures that the board can understand and challenge financial statements and management reports.

2.2 Sector Expertise

Deep knowledge of the sector in which the company operates (banking, industrial, healthcare, technology, etc.). This expertise helps the board understand strategic challenges, competitive movements, and regulatory trends in the sector.

2.3 Strategic Expertise

The ability to think strategically over the long term, analyze the competitive environment, and assess opportunities and risks. This competency may come from senior management experience in other companies or from a strategic consulting background.

2.4 Technology and Digital Expertise

In the age of digital transformation, it has become essential to have at least one member who understands emerging technologies, cybersecurity, and digital business transformations. This competency was not required ten years ago and is today indispensable.

2.5 Legal and Regulatory Expertise

Knowledge of legal and regulatory frameworks affecting the company, especially in regulated sectors. A member with a legal background helps the board avoid regulatory and disclosure risks.

2.6 Risk Management Expertise

In large and regulated companies, it has become customary to have a specialized risk management member who chairs the risk committee and ensures the board understands the risk landscape facing the company.

2.7 Human Resources and Compensation Expertise

To lead the nominations and remuneration committee and ensure that the company’s hiring and compensation policies align with its strategy and culture.

Sixth: Diversity in Board Composition

1. Importance of Diversity

Diversity on the board is not merely a cosmetic requirement or a response to social pressure — it is a strategic necessity. Repeated studies confirm that diverse boards make better decisions, avoid groupthink, and reflect a deeper understanding of various customer segments and stakeholders.

2. Dimensions of Diversity

2.1 Professional and Sectoral Diversity

Combining experience from diverse sectors (banking, industrial, technology, consulting) enriches discussion and opens new horizons that would not have emerged had everyone come from the same background.

2.2 Nationality and Cultural Diversity

Companies with regional or international activity benefit from having members with diverse cultural backgrounds who understand target markets from the inside.

2.3 Gender Diversity

Saudi Vision 2030 strongly encourages increased representation of women on boards. Leading Saudi companies are moving rapidly in this direction, and international investors are giving this aspect increasing attention in their investment decisions.

2.4 Age and Generational Diversity

Combining the long experience of senior members with the fresh perspective of younger members creates healthy balance. Younger members may be more connected to emerging technologies and trends.

2.5 Cognitive Diversity

This is the deepest and most important dimension of diversity: combining analytical thinkers, creative thinkers, practical thinkers, and strategic thinkers. This cognitive diversity ensures comprehensive discussion of decisions from multiple angles.

📊  Statistical Observation A 2023 McKinsey study showed that companies in the top quartile for gender diversity on their boards achieve profitability 25% higher than peers in the bottom quartile. Diversity is no longer a luxury — it has become a tangible factor in financial performance.

Seventh: Skills Matrix

The skills matrix is a practical tool that helps the nominations committee and the board as a whole evaluate current composition and identify gaps. The matrix consists of a table showing required competencies in columns, members in rows, with an assessment of each member’s level in each competency.

1. Designing the Matrix

• Step One: Identify required strategic competencies based on the company’s strategy and sector.
• Step Two: Define levels (e.g., None / Basic / Intermediate / Advanced / Expert).
• Step Three: Assess each member in each competency based on their CV, experience, and observations.
• Step Four: Analyze results to identify gaps (competencies not adequately represented).
• Step Five: Build a plan to close gaps through training or new nominations.

Competency	Member 1	Member 2	Member 3	Member 4	Gap
Financial & Accounting	Expert	Advanced	Intermediate	Basic	No
Strategic	Advanced	Expert	Intermediate	Advanced	No
Sectoral	Intermediate	Expert	Expert	Intermediate	No
Technology & Digital	Basic	None	Basic	Intermediate	Yes
Risk Management	Advanced	Intermediate	Basic	Intermediate	Limited
Human Resources	Basic	Intermediate	Advanced	Basic	No
Legal	None	Basic	Intermediate	None	Yes

2. Using the Matrix

The matrix is not an evaluation of members so much as it is an evaluation of board composition as a whole. The gaps identified form the basis for:

• Specifying Future Nominations: Searching for candidates who fill identified gaps.
• Training Programs: Developing missing competencies among current members.
• Committee Allocation: Placing each member on the committee that matches their competencies.
• Disclosure to Shareholders: Highlighting how the board’s composition meets the company’s strategic needs.

Eighth: International Best Practices

Country / Region	Independence Requirements	Diversity Requirements	Multiple Directorship Limits
Saudi Arabia	One-third independent	Diversity encouraged	5 listed companies
UAE	One-third independent	Mandatory female quota	5 listed companies
United Kingdom	Majority independent	40% female quota (2025)	No strict limit
European Union	Majority independent	40% underrepresented gender	Variable
United States	Majority independent (NYSE/Nasdaq)	Diversity disclosure	No limit
Japan	One-third independent (TSE Prime)	30% female (target)	No limit

Ninth: Challenges in Board Composition

1. Scarcity of Independent Competencies

In emerging markets, companies may face difficulty finding sufficient candidates who combine independence, competence, and required time commitment. This challenge calls for building a broader candidate base through professional development programs and leveraging retirees from both public and private sectors.

2. Resistance to Change from Owners

Founding shareholders or ruling families may resist the idea of relinquishing complete control of the board to independent members. Overcoming this resistance requires awareness of the benefits of sound governance and tangible success stories from similar companies.

3. Hidden Conflicts of Interest

Some members may appear independent on paper but have undisclosed social or commercial relationships with the company’s management or owners. Avoiding this challenge requires rigorous disclosure mechanisms and periodic independence review.

4. Focus on Formal Qualifications

Some boards focus on academic titles or previous positions without assessing actual capabilities. A board full of doctorates and business celebrities may be less effective than a board with humbler credentials whose members are committed and engaged.

⚠️  Caution The most dangerous scenario in board composition is formalism: meeting requirements on paper without achieving substance. A board that bears the “independent” label on one-third of its members who are in fact tied to management or owners harms the company more than a board explicitly composed entirely of non-independents — because it creates a false illusion of governance.

Tenth: Best Practices in Board Composition

1. Practices at the Design Level

• Approved Composition Strategy: A formal document approved by the board specifying required competencies, independence ratios, and diversity dimensions.
• Updated Skills Matrix: Annual update of the skills matrix with gap analysis.
• Succession Plan: An approved plan for each member and for the chairman, specifying potential candidates and timeline.
• Board Charter: A document defining composition principles, duties, and operating mechanisms.

2. Practices at the Nomination Level

• Wide Nomination Network: Going beyond customary narrow circles to reach diverse candidates.
• Transparent Criteria: Written and announced nomination criteria specifying requirements.
• Effective Nominations Committee: Led by an independent member, operating with professional methodology.
• Specialized Consultants: Engaging executive search firms for candidate searches.

3. Practices at the Disclosure Level

• Comprehensive Member Disclosure: CV, qualifications, experience, and other directorships.
• Disclosure of Nomination Rationale: How each nomination serves company strategy.
• Annual Independence Assessment: Disclosure of independence assessment results for each member.
• Skills Matrix in Annual Report: Highlighting board diversity and competencies.

Conclusion

Board composition is a strategic, long-term decision whose effects range from a company’s success in executing its plans to shareholder and investor confidence in the integrity of its governance. Saudi companies today, with the evolving regulatory framework and accelerating Vision 2030, possess an exceptional opportunity to build world-class boards combining integrity, competence, diversity, and independence.

Success in this area does not come by chance, but through deliberate planning and continuous follow-up. Companies that treat their board composition as any other strategic project — with clear objectives, measurable metrics, and periodic evaluation — build a sustainable competitive advantage in a capital market that becomes more competitive and demanding year after year.

🎯  Essential Points to Remember (1) Board composition is a strategic decision, not an administrative procedure. (2) The Saudi Companies Law sets membership between 3 and 11, and Governance Regulations require at least one-third independent. (3) Three member types: executive, non-executive, and independent, each with a distinct role. (4) Independence is a state with strict criteria requiring annual assessment. (5) Optimal board size depends on company size, complexity, and number of committees. (6) Core qualifications are required of every member, alongside diverse specialized competencies. (7) Diversity (professional, cultural, gender, age, cognitive) is a strategic necessity with proven impact. (8) The skills matrix is a practical tool for assessing composition and identifying gaps. (9) Challenges include scarcity of independent competencies, resistance to change, hidden conflicts, and formalism. (10) Best practices include composition strategy, succession plans, wide nomination network, and transparent disclosure.

Frequently Asked Questions

What are the legal requirements for board composition in Saudi listed companies?

The Saudi Companies Law (Royal Decree M/132) sets board membership at a minimum of three and a maximum of eleven members, appointed for terms not exceeding three years and subject to renewal. The CMA Corporate Governance Regulations add several requirements specific to listed companies. Independent members must represent at least one-third of the board or two members, whichever is greater. Non-executive members must form the majority of the board. Combining the position of board chairman with any executive position in the company is prohibited. Each member must possess experience and qualifications appropriate to the company's nature of business. A board member may not serve on the boards of more than five listed joint-stock companies simultaneously. The company's articles of association may set additional requirements within these legal boundaries but cannot reduce the statutory minimums. Independence itself is defined by strict criteria including no prior employment with the company during the past two years, no ownership of 5% or more of shares, no first-degree familial relationship with any senior executive or board member, no material commercial relationship during the past two years, and continuous membership not exceeding nine years.

What are the three types of board members and what distinguishes an independent member?

Saudi governance regulations recognize three member types with distinct roles. An executive member holds a position in the company's management in addition to board membership, bringing deep operational knowledge but limited objectivity in overseeing the very management they are part of, which is why regulations cap their proportion and prohibit the chairman from being executive. A non-executive member holds no executive position and may represent a major shareholder or serve as a sector expert, but may not qualify as fully independent if they have material relationships with the company or its major shareholders. An independent member must be entirely free from relationships that could influence objectivity, meeting strict criteria covering prior employment, share ownership, familial ties, commercial relationships, professional services, and length of service. Independence is treated as a state requiring annual review rather than a permanent status, because a member who begins as independent may lose their independence as their relationships with the company or its management evolve over time.

What is a skills matrix and how does it improve board composition?

A skills matrix is a practical tool used by the nominations committee to evaluate current board composition and identify gaps. It takes the form of a table placing required competencies in columns, board members in rows, and assessing each member's proficiency level in each area from none through to expert. The competencies typically covered include financial and accounting expertise, sector knowledge, strategic thinking, technology and digital understanding, legal and regulatory knowledge, risk management, and human resources experience. Once populated, the matrix reveals which competencies are well represented, which are thin, and which are absent entirely. These gaps then drive three types of action: directing future nominations toward candidates who fill the identified shortfalls, designing training programs to develop missing competencies among current members, and allocating members to the committees that best match their strengths. The matrix is also disclosed in the annual report to demonstrate to shareholders how the board's composition is aligned with the company's strategy, serving both governance quality and investor confidence.

References and Sources

• Saudi Companies Law (Royal Decree M/132) — Articles 67-71.
• Corporate Governance Regulations issued by the Capital Market Authority.
• Implementing Regulations of the Companies Law for Listed Joint-Stock Companies.
• OECD Principles of Corporate Governance.
• ICGN Global Governance Principles.
• Spencer Stuart Board Index — Periodic Reports on Board Composition.
• McKinsey & Company — Diversity Wins: How Inclusion Matters, 2023.
• Egon Zehnder Global Board Diversity Tracker.
• Chartered Governance Institute.
• Capital Market Authority — Governance Guidance Manuals.