Opening the market, raising the bar: The governance implications of Saudi Arabia’s capital market liberalization

Saudi Arabia’s capital market has changed markedly over the past decade. What began as a cautious opening to foreign investors is now entering a more decisive phase. The Capital Market Authority (CMA) has removed the Qualified Foreign Investor regime and opened the Main Market to all categories of foreign investors, signaling a clear intention to lower barriers and attract broader international participation.

Foreign ownership remains modest by global standards. Franklin Templeton estimates that foreign investors held close to 7 percent of Saudi-listed equities in the third quarter of 2025. Even so, the direction is clear. Index inclusion has normalized Saudi equities within global portfolios, and international investors are increasingly visible in large transactions. Attention is now turning to what comes next, particularly whether foreign ownership limits will be eased further.

What matters most at this stage is not market access alone, but governance credibility. Large institutional investors do not allocate capital simply because markets are open. They invest when they are confident that governance risks and regulations are understood, managed, and enforced. This is not unique to Saudi Arabia. Research consistently shows that global investors treat corporate governance as a key investment criterion in emerging markets. This influences valuation, position size, and engagement priorities.

As Saudi Arabia’s investor base diversifies, local companies will increasingly be judged against global governance expectations. These expectations are well documented. Major asset managers such as BlackRock and Vanguard make clear in their stewardship and proxy voting policies that board effectiveness, independent oversight, and transparent disclosure are central to long-term value creation. These are not theoretical principles. They guide how investors vote, engage with boards, and decide whether to increase or reduce exposure.

In practice, global investors begin with ownership and control. Saudi Arabia is a concentrated-ownership market, shaped by founding families and the state. Investors understand this structure and do not expect it to disappear any time soon. Their concern is how minority shareholders are treated when control is strong. OECD analysis shows that, in such markets, investor confidence depends heavily on whether boards and regulators can manage conflicts and protect minority interests.

Boards therefore play a central role. While Saudi governance regulations require independent directors, global investors look beyond formal checklists. Independence is judged by actual behavior. Long tenures, close personal or historical ties to controlling shareholders, and overlapping roles across related entities raise questions about whether directors can exercise genuine independent judgment. This focus on substance over form is consistent with global stewardship standards and investor engagement practices.

Board composition is assessed in the same way. Diversity has become an important signal for global investors, not simply for reputational reasons, but because it is associated with broader skills capacity, likelihood of board level challenge, and decision quality. Progress has been made in Saudi Arabia, but diversity remains limited. The GCC Board Gender Index Report 2025 shows that women hold just 2.9 percent of board seats in Saudi listed companies. For investors accustomed to boards that demonstrate regular renewal and diverse skillsets, this reinforces the view that board evolution is still uneven.

Executive compensation is another area where governance credibility comes under scrutiny. Global investors increasingly expect clear alignment between pay and long-term performance, supported by equity-based incentives and transparent performance metrics. Vanguard’s voting policies explicitly link pay design to long-term shareholder value. As foreign ownership grows, boards will face greater pressure to demonstrate that management and board incentives are aligned with sustained value creation.

Disclosure remains one of the most important drivers of investor confidence. Saudi exchange requirements are extensive and transparency has improved, but global investors will increasingly compare Saudi companies with large OECD-listed peers. From that perspective, disclosure quality varies widely. ESG reporting, executive pay disclosure, and explanations of board decision-making processes are still often voluntary and inconsistent. Surveys of emerging-market investors consistently show that weak or unclear disclosure is a major deterrent to investment.

Reporting language and consistency also matter. Investment information available only in Arabic, or presented inconsistently across companies, increases the cost for global investors to assess risk. This reduces the number of global institutions willing to engage deeply, particularly those managing large, diversified portfolios. The CMA’s reforms aim to attract global capital, but issuers also need to make themselves understandable to that capital.

Related-party transactions remain a particularly sensitive issue. Such transactions are common in concentrated-ownership markets and are to a large extent unavoidable. What concerns investors is whether they are clearly disclosed, independently reviewed, and demonstrably conducted on arm’s-length terms. OECD research highlights related-party transactions as a key risk to minority shareholders when governance safeguards are weak. Global proxy voting policies reinforce this focus, placing strong emphasis on transparency and independent oversight.

Investor perceptions are also shaped by how boards address succession, evaluation of their own performance, and long-term oversight. Research by Heidrick & Struggles finds that while Saudi boards are becoming more professional, gaps remain in strategic focus, international experience, succession planning, and board evaluation practices. These are precisely the areas global investors examine when assessing whether governance can support growth and transformation.

The experience of the UAE illustrates the point. There, market liberalization was accompanied by stronger governance requirements, improved disclosure, and visible enforcement. This combination reduced uncertainty and helped build investor trust. Saudi Arabia now has the opportunity to follow a similar path, while defining a governance model suited to its own market structure.

As Saudi Arabia enters this next phase of capital market openness, governance readiness will be the decisive factor. Sustaining the benefits of liberalization will require consistent enforcement, effective boards, clear protection of minority shareholders, and disclosures that allow investors to understand how decisions are made. The market is opening. Whether global capital stays will depend on whether governance delivers in practice.

Dr. Tara Vanli - Research and Thought Leadership Assistant Manager, Center for Governance.

Dr. Roger Barker - Chief Research and Thought Leadership Officer, Center for Governance. 

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the opinion or position of the Center for Governance.