Abstract
This paper examines the relationship between corporate governance institutions and financial riskiness in Saudi Arabia oil and energy market, using a balanced sample of thirty companies followed across 2016-2024 (270 firm-years). The study examines the relationship between board size, independent (non-executive) director proportion, CEO duality, board gender diversity and quality of internal control systems with the measured financial risk. The secondary data were based on annual reports and exchange disclosures by the firms and a short structured questionnaire conducted on the senior managers and board members was used to develop an index of internal control quality. Some of the important control variables are firm size (log assets), firm age, leverage, and year dummies in order to appreciate macro trends. The analysis is methodologically divided into descriptive statistics, correlation diagnostics and panel regression. Random effects and fixed effects estimates, based on the Hausman test and model selection, were estimated and the robust (White-corrected) standard errors and a set of post-estimation diagnostics (VIF, Breusch-Pagan) were calculated to confirm the reliability of inferences. Conventional robustness tests used different risk measures and specification tests. Reproducible Python scripts were used to clean and plot data as the main econometric estimations were done in IBM SPSS v.26. The patterns of the empirical results are consistent. The quality of internal internal controls is found to have a negative and strong relationship with financial risk exposure among estimators, and this implies that an increase in audit functions, risk committee activity and formal control procedures prevents volatility and measurements based on default significantly. The lower measured risk is also linked to board size, especially when expansion is coupled with an increase in board competence and not with the number size. In contrast, CEO duality is positively associated with increased pooled estimates of risk, which indicates that combined CEO-chair positions can undermine oversight and opportunistic decision-making unless other governance controls are in place. These findings are strong to different specifications and resistant to various diagnostic tests. The implications of the policy and managerial issues are to focus on internal audit and risk management capacity, hire board directors who possess sectoral and risk-management skills instead of focusing on size alone, and revise governance models that concentrate executive authority. The research adds industry-specific data on one of the most strategically significant regional markets and provides viable advice to regulators, institutional investors and corporate boards in pursuit of greater financial resilience.
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Published in
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Journal of Finance and Accounting (Volume 14, Issue 2)
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DOI
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10.11648/j.jfa.20261402.13
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Page(s)
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101-114 |
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Creative Commons
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This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
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Copyright
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Copyright © The Author(s), 2026. Published by Science Publishing Group
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Keywords
Corporate Governance, Financial Risk Exposure, Oil and Energy Sector, Internal Controls, CEO Duality, Board Size,
Saudi Arabia
1. Introduction
Concern about governance of corporate bodies has dominated accounting and finance literature since the Saad Group’s saga. The conglomerate collapsed in 2018 after defaulting on debt payments worth billions of US dollars, an event that did not merely shock the Saudi financial community but resonated globally as one of the most notable governance failures in the region. The collapse demonstrated clear weaknesses in oversight, internal controls, risk management, and transparency, creating ripples throughout academic and regulatory spheres. The concern was again triggered by the 2020/2021 global economic crisis wrought by the COVID-19 pandemic, which exposed the fragility of corporate structures across sectors and revealed how suddenly even seemingly stable firms can slip into distress when confronted by systemic shocks. This concern will continue to be at the forefront of academic discourse for as long as corporate entities continue to default, mismanage resources, or perform poorly.
As world financing transactions become more interconnected with the advancement of Information and Communication Technology (ICT), big data analytics, digital finance, blockchain systems, open banking and rapidly evolving cross-border capital flows, no financial institution or corporate entity is truly immune to default
| [1] | George, A. S., 2024. Finance 4.0: The transformation of financial services in the digital age. Partners Universal Innovative Research Publication, 2(3), pp. 104-125. |
[1]
, This interconnectedness creates an even greater concern among regulators, investors, institutional shareholders, and policymakers on the effectiveness of corporate governance mechanisms as preventive measures towards default and collapse.
There is wide-scale financial malfeasance documented in various segments of the oil and energy sectors in Saudi Arabia, a sector that remains at the heart of the nation’s economic structure. These malfeasances have led to the declaration of many companies as distressed, with takeovers and mergers reaching the highest peak in the history of the Saudi oil and energy market.
| [2] | Sari, A. A., 2020. The Regulatory Framework of the Market of Corporate Control: Legal and Economic Analysis of the Saudi Case (Doctor of Juridical Science (SJD) dissertation, Indiana University Maurer School of Law, USA). Available at:
https://www.repository.law.indiana.edu/etd/86/ |
[2]
. Cases of fraudulent reporting, misallocation of funds, inflated contracts, weak internal auditing systems, and related-party transactions have been widely discussed in both practice and academic communities. While the energy sector is globally known to be sensitive to price shocks, geopolitical risks, and technological disruptions, in Saudi Arabia a substantial number of governance failures have been linked not only to external shocks but also to managerial misconduct, inadequate disclosure practices, and conflicting interests between powerful insiders and minority shareholders
| [3] | Alqahtani, A. and Klein, T., 2021. Oil price changes, uncertainty, and geopolitical risks: On the resilience of GCC countries to global tensions. Energy, 236, p. 121541. |
| [4] | Zehri, C., Alsadan, A. and ben Ammar, L. S., 2025. Asymmetric impacts of geopolitical risks on energy Trade: Divergent vulnerabilities in emerging vs. advanced economies. The Journal of Economic Asymmetries, 32, p. e00427. |
[3, 4]
.
In response to these realities, the Saudi Central Bank has deployed a wide range of corrective measures, including bailouts, forced mergers, takeovers, liquidation of non-viable entities, tightening of regulatory supervision, and enforcement of new corporate governance codes. Over the years, the regulatory environment around corporate governance has become more stringent and sophisticated, especially after the introduction of the updated corporate governance code, which emphasizes risk management frameworks, board accountability, transparency, and disclosure of risk management strategies by companies
| [5] | Al-Faryan, M. A. S., 2020. Corporate governance in Saudi Arabia: An overview of its evolution and recent trends. Risk Governance and Control: Financial Markets&Institutions, 10(1), pp. 23-36. |
[5]
. The Capital Market Authority (CMA) has also strengthened listing requirements, internal control assessments, and board composition guidelines to ensure that listed firms adhere to global best practices aligned with OECD principles of corporate governance. Despite these measures, oil and energy companies continue to face potential distress and default, often brought about by factors that transcend regulatory boundaries
| [6] | In-Sun, S. O., 2024. Saudi Arabia in the Post-Oil Era: Cultural Diversification within Vision 2030. Global Cultural Studies, 15(2), pp. 31–54. |
[6]
.
The attributable factors to persistent distress include corporate mismanagement, inadequate capitalization, weak risk-management structures, inefficient allocation of resources, and limited board competence
| [7] | Al-Dhamari, R., Al-Wesabi, H., Farooque, O. A., Tabash, M. I. and El Refae, G. A., 2023. Does investment committee mitigate the risk of financial distress in GCC? The role of investment inefficiency. International Journal of Accounting&Information Management, 31(2), pp. 321-354. |
[7]
. Others relate poor performance to international risk exposure, including fluctuations in global oil demand, foreign exchange volatility, supply disruption risks, technological transitions toward renewable energy, geopolitical tensions, and shifts in global investment patterns. Many Saudi energy firms operate in a global ecosystem where supply-chain disruptions, sanctions, climate-related policies, and decarbonization agendas influence their revenue streams and cost structures
| [8] | Biazzi, R., 2022. Saudi energy sector developments within the energy transition process: Strategies and geopolitical impact. |
[8]
. This exposes them to high levels of operational and financial risks that require robust governance structures to navigate effectively. Inadequate governance frameworks often mean that firms face these risks blindly or with insufficient preparation, leading to amplified vulnerability when shocks occur
| [9] | Alnaeem, A. S., 2017. The instability caused by oil dependency within the banking systems of the Gulf countries: the case of KSA and Qatar (Doctoral dissertation, Manchester Metropolitan University). |
[9]
.
Viewing firms as a nexus of relationships among different stakeholders, scholars in agency theory and stakeholder theory have long postulated that there exists a potential conflict among the stakeholders on the issue of risk. Managers may be inclined to pursue investments and strategies that yield higher returns in the short run, especially when their compensation structures are tied to performance indicators such as profit margins, asset growth, or share price
| [10] | Nasta, L., Magnanelli, B. S. and Ciaburri, M., 2024. From profits to purpose: ESG practices, CEO compensation and institutional ownership. Management Decision, 62(13), pp. 46-68. |
[10]
. Such short-term gains may enhance managerial bonuses or improve their reputation in the labor market. However, these high-return strategies often come with high risk. On the contrary, shareholders, especially long-term institutional investors, tend to prioritize steady returns with minimum risk
| [11] | Cochrane, J. H., 2022. Portfolios for long-term investors. Review of Finance, 26(1), pp. 1-42. |
[11]
. They prefer longevity, organizational stability, debt discipline, and prudent capital allocation, which secure their investments over time. The conflicting risk preferences create tension between principals (shareholders) and agents (managers), a central dilemma in the corporate governance literature.
In the quest to balance these conflicting interests, regulatory authorities, boards of directors, and investors have intensified their search for best governance practices, that is, the optimum governance mix and structure that provides higher returns with minimum bearable risk and steady, sustainable long-term growth in this context
| [12] | Kavadis, N. and Thomsen, S., 2023. Sustainable corporate governance: A review of research on long‐term corporate ownership and sustainability. Corporate Governance: An International Review, 31(1), pp. 198-226. |
[12]
, board independence, board size, board diversity, oversight committees, CEO duality, risk-management committees, and transparency in reporting play crucial roles. A board that is too small may lack the diversity of skills required to oversee complex energy-sector operations
| [13] | Nuhu, Y. and Alam, A., 2024. Board characteristics and ESG disclosure in energy industry: evidence from emerging economies. Journal of Financial Reporting and Accounting, 22(1), pp. 7-28. |
[13]
, while a board that is too large may become bureaucratic and slow in decision-making
| [14] | Gruber, J., 2023. Controlling bureaucracies: Dilemmas in democratic governance. Univ of California Press. |
[14]
. Similarly, concentrated ownership may enable decisive leadership but may also weaken accountability by placing too much power in the hands of a few insiders who may override institutional controls.
CEO duality can centralize decision-making power to an extent that undermines board independence and risk oversight
| [15] | Yadava, A., 2023. The role of corporate governance in mitigating financial risk: Evidence from multinational firms. International Journal of Innovative Research in Science, Engineering and Technology, 12, pp. 11-17. |
[15]
. On the other hand, separating these roles strengthens checks and balances. Thus, corporate governance configurations must be treated as multi-dimensional mechanisms rather than isolated components. Scholars increasingly argue that governance effectiveness is contingent on firm size, industry structure, regulatory conditions, and risk profile
| [16] | Karim, S., Vigne, S. A., Lucey, B. M. and Naeem, M. A., 2024. Discretionary impacts of the risk management committee attributes on firm performance: do board size matter?. International Journal of Emerging Markets, 19(8), pp. 2222-2240. |
[16]
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In the Saudi context, the energy sector is deeply embedded in global markets and subject to intense scrutiny from foreign investors, sovereign wealth funds, and international rating agencies
| [17] | Montambault Trudelle, A., 2023. The Public Investment Fund and Salman’s state: the political drivers of sovereign wealth management in Saudi Arabia. Review of International Political Economy, 30(2), pp. 747-771. |
[17]
. For this reason, the sector requires governance practices that are aligned with international expectations, particularly around disclosure, environmental and social governance (ESG), risk-management transparency, and accountability frameworks. Missteps in governance now carry much greater consequences, not only financially but also reputationally
| [18] | Kothari, R., 2025. A Comparative Study of ESG Reporting Practices: India, the UK, and Switzerland. Available at SSRN 5310596. |
[18]
. Investors are more sensitive to governance weaknesses due to global transparency campaigns, anti-corruption drives, and the lessons learned from events such as Enron, WorldCom, Parmalat, Wirecard, and the 2008 financial crisis
| [19] | Chang, Z., Rusu, V. and Kohler, J. C., 2021. The Global Fund: why anti-corruption, transparency and accountability matter. Globalization and Health, 17(1), p. 108. |
[19]
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Saudi Arabia has actively sought foreign investment as part of its Vision 2030 economic diversification agenda
| [20] | Sultan, B. and AlTunisi, M., 2025. Sustaining Foreign Direct Investment in Saudi Arabia: An Analysis of Investment Protection Frameworks and Their Impact on Economic Growth Within Vision 2030. Sustainability, 17(19), p. 8845. |
[20]
. To attract and retain foreign investors, the country must demonstrate its commitment to global governance standards. Weak corporate governance poses the risk of capital flight, reduced investment appetite, higher cost of capital, and lower competitiveness for Saudi firms in global markets
| [21] | Elhabib, M. A. A., 2024. Corporate governance and capital market development in the GCC: a comparative literature review. Journal of Capital Markets Studies, 8(2), pp. 255-274. |
[21]
. Therefore, even though regulatory authorities have made significant progress, the of governance shortcomings continues to raise concern.
Risk exposure in the oil and energy sector does not manifest only through financial risk. There are operational risks arising from extraction, logistics, environmental hazards, and technical failures
| [22] | Dakhaeva, F. and Magomaev, T., 2022. Environmental and economic risks of the oil and gas sector. Reliability: Theory&Applications, 17(SI 4 (70)), pp. 530-536. |
[22]
. There are strategic risks linked to global energy transitions toward renewables and electrification. There are regulatory risks from climate-related policies and carbon pricing mechanisms. There are geopolitical risks associated with regional tensions, global political realignments, and supply-chain vulnerabilities. These layered risks require governance structures capable of integrating risk intelligence into decision-making. Boards must be proactive in understanding how global trends affect firm strategies, investment choices, and long-term performance. Corporate governance becomes a pivotal element in risk mitigation because governance frameworks determine how risks are identified, measured, controlled, and disclosed. Firms with strong corporate governance tend to have risk committees, independent audit functions, board members with expertise in finance and energy technology, and culture of accountability. By contrast, poorly governed firms often understate risk, delay critical reporting, or fail to enforce compliance placing the firm in a vulnerable position when market conditions deteriorate
| [23] | Sun, H., Zhang, X. and Luo, C., 2025. A Review of Carbon Pricing Mechanisms and Risk Management for Raw Materials in Low-Carbon Energy Systems. Energies, 18(13), p. 3401. |
[23]
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Given the growing complexity of the energy sector and the increasing integration of global financial markets, studying the relationship between corporate governance mechanisms and their influence on risk exposure is imperative. Such a study becomes relevant not only for academic purposes but also for policy formulation, investment decisions, and corporate strategy development. It contributes to the broader discourse on how governance shapes firm resilience, particularly in sectors where risks are structurally high and unavoidable.
Against the above backdrop, the study seeks to examine the relationship between corporate governance and financial risk exposure in the oil and energy sector in Saudi Arabia. It aims to illuminate how governance mechanisms can be optimized to produce firms that are stable, transparent, competitive, and capable of navigating the unpredictable terrain of global energy markets. It also contributes to filling the gap in empirical work on governance-risk relationships in the Middle Eastern context, a region where governance reforms are ongoing, and where energy firms play a pivotal role in national economic structures. The findings of such a study could provide insights for policymakers, regulators, and industry leaders seeking to refine governance policies and strengthen the overall financial stability of the sector.
1.1. Statement of Problem
In an industry as pivotal to the Saudi economy as oil and energy, persistent financial risk exposure presents not only a corporate threat but also a systemic economic concern. The sector plays a dominant role in national revenue, foreign exchange generation, and national investment strategies, particularly under Vision 2030, which seeks to transform the Kingdom into a diversified, modern economy. However, despite its economic importance, many companies in this sector continue to experience financial vulnerability attributed to governance deficiencies such as inadequate board structures, excessive concentration of decision-making power, weak internal control systems, and insufficient risk oversight
| [24] | Murayr, A. A., 2023. Impact of Corporate Board Structure and International Financial Reporting Standards on Voluntary Risk Disclosure and Firm Value: The Case of Saudi Arabian Listed Companies (Doctoral dissertation, Victoria University). |
[24]
. These governance challenges threaten the ability of firms to achieve sustainable performance, attract foreign investment, and maintain competitiveness in an increasingly globalized market.
One of the governance issues under scrutiny is board size. Among Saudi oil and energy firms, board composition and size continue to differ widely, and these variations have raised questions about whether larger or smaller boards are more effective at monitoring management decisions and mitigating risky financial behavior
| [25] | Musa, A. M. H., Alqubaysi, R. and Alqahtani, H. A., 2025. The Effect of Board Characteristics on ESG Commitment in Saudi Arabia: How Diversity, Independence, Size, and Expertise Shape Corporate Sustainability Practices. Sustainability, 17(12), p. 5552. |
[25]
. Some firms operate with boards that may be too small to provide adequate oversight, diverse perspectives, and specialized knowledge. Others have boards so large that decision-making becomes inefficient and coordination among members deteriorates. The absence of an optimal board size leaves many companies vulnerable to financial misjudgments, governance lapses, and heightened exposure to market-driven risks
| [26] | Yahaya, O. A., 2025. CEO Power and firm performance: The mediating role of board independence. Available at SSRN 5158574. |
[26]
.
Another persistent challenge relates to CEO duality, the practice where the same individual serves as both the Chief Executive Officer and the Chairperson of the Board. While some companies retain this structure for the sake of unified leadership, research has shown that CEO duality can undermine board independence, weaken oversight, and increase managerial discretion in ways that elevate risk-taking behavior
| [27] | Efunniyi, C. P., Abhulimen, A. O., Obiki-Osafiele, A. N., Osundare, O. S., Agu, E. E. and Adeniran, I. A., 2024. Strengthening corporate governance and financial compliance: Enhancing accountability and transparency. Finance&Accounting Research Journal, 6(8), pp. 1597-1616. |
[27]
. In Saudi oil and energy companies, where strategic decisions involve high-capital investments, complex supply chains, and exposure to international market volatility, unchecked executive authority can amplify financial risks and weaken institutional resilience. Yet, despite regulatory encouragement for the separation of roles, the extent to which CEO duality affects financial risk exposure in the sector remains empirically underexplored.
Internal control systems also represent a critical governance mechanism, particularly in industries dealing with vast capital expenditures, cross-border transactions, and fluctuating commodity prices. Although the Saudi Corporate Governance Regulations emphasize the importance of strong internal controls, internal audits, and risk management committees, many companies still display weaknesses in monitoring mechanisms, reporting accuracy, and risk evaluation procedures. These deficiencies allow operational inefficiencies, fraud, mismanagement, and misallocation of resources to go undetected, thereby elevating financial risk exposure. The ability of internal control systems to prevent or mitigate financial distress is therefore a key concern that requires deeper investigation in the context of the Saudi oil and energy sector.
1.2. Research Objectives
1) To examine the influence of board size on financial risk exposure among oil and energy companies in Saudi Arabia.
2) To assess the effect of CEO duality on corporate financial risk-taking and overall risk exposure in oil and energy firms.
3) To analyze how internal control systems influences the level of financial risk exposure in the Saudi oil and energy industry.
1.3. Research Hypotheses
Hypotheses 1
H₀₁: Board size has no significant influence on financial risk exposure among oil and energy companies in Saudi Arabia.
H₁₁: Board size has a significant influence on financial risk exposure among oil and energy companies in Saudi Arabia.
Hypotheses 2
H₀₂: CEO duality has no significant effect on corporate financial risk-taking and overall risk exposure in oil and energy firms in Saudi Arabia.
H₁₂: CEO duality has a significant effect on corporate financial risk-taking and overall risk exposure in oil and energy firms in Saudi Arabia.
Hypotheses 3
H₀₃: Internal control systems do not significantly influence the level of financial risk exposure in Saudi Arabia’s oil and energy industry.
H₁₃: Internal control systems significantly influence the level of financial risk exposure in Saudi Arabia’s oil and energy industry.
2. Literature Review
Empirical literature provides strong evidence that robust corporate governance mechanisms significantly enhance the disclosure of financial information, the quality of reporting, and the mitigation of information asymmetry between managers and investors. A study on strengthening corporate governance and financial compliance demonstrates that firms with stronger governance frameworks are more likely to provide transparent, accurate, and timely financial disclosures
| [28] | Ebrahim, A. M. A., 2024. The Relationship between the Assurance Role of the External Auditor about the Corporate Risk Disclosure and Investment Efficiency: An Applied Study (Doctoral dissertation, Mansoura University). |
[28]
. The oil and energy sector is exposed to global commodity fluctuations. Investors, creditors, and other stakeholders require detailed and reliable information to evaluate project viability, operational efficiency, and the sustainability of revenue streams. further argues that high-quality disclosure reduces information asymmetry, enabling better decision-making by capital providers and reducing the cost of capital for firms in high-risk industries
| [29] | Michaelis, M., 2021. Third-Party Monitoring and Risk Management: A Literature Review. Review of Economics, 72(3), pp. 229-272. |
[29]
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While strong corporate governance facilitates internal monitoring and accountability, financial intermediaries such as banks and lenders play a complementary role in the oil and energy sector by scrutinizing debt-financed projects. These intermediated monitoring mechanisms focus primarily on assessing default risk and information risk
| [30] | Chodnicka-Jaworska, P., 2022. Environmental, social, and governance impact on energy sector default risk—Long-term issuer credit ratings perspective. Frontiers in Energy Research, 10, p. 817679. |
[30]
. Financial risk assessment in the oil and energy sector is often framed in terms of default risk and information risk. Default risk refers to the probability that a company will be unable to meet its debt obligations
| [31] | Bakshi, G., Gao, X. and Zhong, Z., 2022. Decoding default risk: A review of modeling approaches, findings, and estimation methods. Annual Review of Financial Economics, 14(1), pp. 391-413. |
[31]
. while information risk arises from incomplete, delayed, or inaccurate disclosure of financial and operational performance
| [32] | Derouiche, I., Manita, R. and Muessig, A., 2021. Risk disclosure and firm operational efficiency. Annals of Operations Research, 297(1), pp. 115-145. |
[32]
. However, in oil and energy firms, operating risk is also a critical factor, reflecting the efficiency of resource utilization, project execution, and day-to-day operational management.
Investors view operating risk as a proxy for management competence and stewardship of capital-intensive assets, such as refineries, drilling rigs, pipelines, and renewable energy infrastructure. Firms with weak operating risk management often experience cost overruns, production delays, and revenue shortfalls, all of which elevate financial risk exposure and can lead to default
| [33] | Ismail, M., 2025. Critical evaluation of credit risk management within defects liability period of infrastructure projects in UAE banks (Doctoral dissertation, Anglia Ruskin Research Online (ARRO)). |
[33]
.
Agency theory provides a foundational explanation for the relationship between governance and risk in the oil and energy sector. Conflicts between managers and stakeholders can increase the variance of expected cash flows and consequently raise default risk. Managers motivated by personal gain may engage in opportunistic behavior, such as shirking, over-consumption of perks, empire-building, or undertaking unprofitable projects with negative net present value. Self-serving managerial behavior in the oil and energy sector can have profound consequences, including cost escalations, delayed projects, and reduced operational efficiency
| [34] | Kidido, J. K., Ajabuin, B. A. and Kumi, S., 2025. Negotiating compensation in Ghana's mining sector: Community valuer's selection dynamics and governance implications. Resources Policy, 109, p. 105704. |
[34]
. These outcomes not only diminish shareholder value but also heighten the probability of financial distress and default.
Operational inefficiencies caused by managerial opportunism are particularly consequential in the oil and energy sector since production cycles are long, capital requirements are high, and revenue streams are highly sensitive to commodity price fluctuations
| [35] | Zaabouti, K. and Ben Mohamed, E., 2025. Enhancing Technical Efficiency in the Oil and Gas Sector: The Role of CEO Characteristics and Board Composition. Journal of Risk and Financial Management, 18(2), p. 80. |
[35]
. For instance, a poorly planned drilling project or delayed refinery expansion can significantly reduce expected cash flows and amplify financial risk. Therefore, governance mechanisms such as board oversight, CEO accountability, audit quality, and internal controls are essential in aligning managerial behavior with organizational goals and minimizing exposure to risk.
Financial reporting quality is another critical governance dimension that influences risk in the oil and energy sector. A study found that higher-quality audits are associated with lower incidence of accounting errors, which enhances investor confidence and reduces information risk
| [36] | Carver, B., Muriel, L. and Trinkle, B. S., 2023. Does the reporting of critical audit matters affect nonprofessional investors’ perceptions of auditor credibility, information overload, audit quality, and investment risk?. Behavioral Research in Accounting, 35(1), pp. 21-44. |
[36]
. Empirical evidence indicates that firms with lower-quality audits experience more frequent accounting errors, increasing the uncertainty faced by investors and creditors
| [37] | Francis, J. R., 2023. Going big, going small: A perspective on strategies for researching audit quality. The British Accounting Review, 55(2), p. 101167. |
[37]
. High-quality audits ensure that financial statements accurately reflect operational performance, investment decisions, and risk exposures, providing critical information for stakeholders in making investment and lending decisions
| [7] | Al-Dhamari, R., Al-Wesabi, H., Farooque, O. A., Tabash, M. I. and El Refae, G. A., 2023. Does investment committee mitigate the risk of financial distress in GCC? The role of investment inefficiency. International Journal of Accounting&Information Management, 31(2), pp. 321-354. |
| [38] | Mesioye, O. and Bakare, I. A., 2024. Evaluating financial reporting quality: Metrics, challenges, and impact on decision-making. Int J Res Public Rev, 5(10), pp. 1144-1156. |
[7, 38]
.
Board characteristics, such as size, independence, diversity, and expertise, are also significant determinants of financial risk exposure in the sector. Larger boards may offer broader expertise and stronger monitoring capabilities, enabling more effective oversight of complex energy projects. However, excessively large boards can suffer from coordination problems, slower decision-making, and diluted accountability. Conversely, smaller boards may be more agile but may lack the capacity to oversee multi-billion-dollar operations effectively
| [39] | Issa, A., 2023. Shaping a sustainable future: The impact of board gender diversity on clean energy use and the moderating role of environmental, social and governance controversies. Corporate Social Responsibility and Environmental Management, 30(6), pp. 2731-2746. |
[39]
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CEO duality is another governance indicator that can influence financial risk in the sector. When the CEO also serves as the board chair, decision-making authority is highly centralized, which can lead to excessive risk-taking and reduced board independence
| [40] | Fernandes, C., Farinha, J., Martins, F. V. and Mateus, C., 2021. The impact of board characteristics and CEO power on banks’ risk-taking: stable versus crisis periods. Journal of Banking Regulation, 22(4), p. 319. |
[40]
. While some firms argue that duality ensures cohesive leadership, empirical evidence increasingly shows that separating these roles enhances accountability, strengthens oversight, and reduces risk exposure
| [41] | Sari, R., 2023. Enhancing Corporate Governance through Effective Oversight and Accountability. Advances: Jurnal Ekonomi&Bisnis, 1(6), pp. 344-356. |
[41]
.
Internal control systems are a critical mechanism for reducing both operational and financial risk. Effective internal controls ensure that processes are well-monitored, compliance is maintained, and managerial discretion is exercised responsibly. Empirical evidence shows that firms with weak internal controls exhibit higher default risk, more information risk, and lower operational efficiency
| [42] | Imdieke, A. J., Li, C. and Zhou, S., 2023. Does the presence of an internal control audit affect firm operational efficiency?. Contemporary Accounting Research, 40(2), pp. 952-980. |
[42]
. Internal controls in the oil and energy sector are particularly crucial due to the high cost of operations, exposure to regulatory and environmental risks, and complex supply chains
| [43] | Olaijide, J. O., Otokiti, B. O., Nwani, S., Ogunmokun, A. S., Adekunle, B. I., & Efekpogua, J. (2021). Developing internal control and risk assurance frameworks for compliance in supply chain finance. IRE Journals, 4(11), 459–461. |
[43]
. Weak internal controls can allow for misallocation of resources, fraudulent activities, and financial misstatements, all of which increase financial risk exposure.
Ownership structure also influences governance effectiveness and risk exposure in the oil and energy sector. Dispersed ownership can exacerbate agency problems due to limited oversight, whereas concentrated ownership, which is common in Saudi Arabia due to state and family involvement
| [5] | Al-Faryan, M. A. S., 2020. Corporate governance in Saudi Arabia: An overview of its evolution and recent trends. Risk Governance and Control: Financial Markets&Institutions, 10(1), pp. 23-36. |
[5]
can either mitigate or intensify risk depending on the controlling owner’s objectives. Institutional investors, such as sovereign wealth funds and pension funds, have increasingly pressured firms to implement stronger governance mechanisms, focusing on transparency, risk management, and long-term sustainability
| [44] | Megginson, W. L., Lopez, D. and Malik, A. I., 2021. The rise of state-owned investors: Sovereign wealth funds and public pension funds. Annual Review of Financial Economics, 13(1), pp. 247-270. |
[44]
. Their influence encourages the adoption of governance practices that reduce financial risk and enhance firm stability.
The existing literature demonstrates a clear link between corporate governance practices, such as board characteristics, CEO duality, internal controls, audit quality, and ownership structure and financial risk exposure. However, gaps remain in understanding how these mechanisms operate in the Saudi oil and energy sector, where governance structures, market dynamics, and regulatory environments differ from Western contexts. Existing studies often generalize from developed markets, leaving the sector-specific evidence sparse. Given the economic significance of oil and energy firms, their capital intensity, and exposure to global market fluctuations, empirical research is essential to establish how governance mechanisms influence financial risk and to inform policy, regulatory reforms, and corporate practices. This study aims to address this gap by examining how board size, CEO duality, and internal control systems influence financial risk exposure in Saudi Arabia’s oil and energy sector.
3. Methodology and Data
The study is a quantitative research study with a mixed research design. It combines two data streams. Purposive sampling technique was used to select 30 oil and energy companies in Tadawul. The firms were selected as they were representative of the sector and available during the nine-year period. The panel balance has 270 firm-year observations. The justification of purposive sampling is that the research is devoted to the specifics of the sector-related dynamics of governance. The oil and energy sector is exposed to specific project, commodity and regulatory risks that allow considering the impact of governance on the dynamics of the industry. Secondary data was obtained from annual reports and consolidated financial data sources of the firms selected. The short questionnaire was sent to the target respondents whose informed-consent forms were documented; follow-up calls ensured a response rate that was enough to form the internal control index. The data of questionnaires were anonymized and matched to firm years at the index level. The ethical clearance, consent form and data protection measures were managed in the following way.
To establish a balanced panel, first, secondary financial and governance data of 30 oil and energy firms listed on Saudi Exchange (Tadawul) for the period between 2016 to 2024 were collected. This secondary sources includes annual reports of the company, Tadawul disclosures and databases monitoring the composition of the board, characteristic of the directors, and financial statements. Second, a brief structured survey was conducted on the board members, senior managers and analysts of the participating firms to get perceptual measurements of internal control quality and to test items including board diversity and internal control index construction. The questionnaire was in a conventional five-point Likert format with demographic information, perception of the board size and volume, non-executive director role, and duality of the CEO and effectiveness in internal control. Secondary panel data together with a structured survey enhances construct validity and enables the application of objective measures of performance as well as manager perceptions of internal control. The survey element is descriptive and supportive; the test of the main hypotheses involves the use of the panel data. It is a method of contemporary governance studies that is capable of providing breadth and depth of construct.
Data were analyzed using IBM SPSS (v.26). Panel regressions were estimated using both fixed‐effects (within) and rando effects models. This follows standard econometric practice: fixed‐effects models control for unobserved, time invariant firm characteristics, focusing on withi‐firm variationx. The Hausman specification test was applied to choose between FE and RE: a significant test statistic (χ², p<0.01) led us to reject the random seffects null, favoring the fixedeffects estimator. All regression coefficients are reported with robust (White corrected) standard errors to correct for potential heteroskedasticity. Model fit was assessed by R² and F tests; post estimation diagnostics (Breusch Pagan test) indicated mild heteroskedasticity. The empirical model is:
ROA_it = β_0 + β_1 BoardSize_it + β_2 NEDs_it + β_3 CEOdual_it + β_4 Diversity_it + β_5 Controls_it + α_i + ε_it,
where i indexes firms, t years, and α_i represents the unobserved firm fixed effect.
3.1. Variables and Operationalization
Dependent variable
Financial risk exposure which is a measure based on the aggregate risk measure based on financial statements of firms and market indicators. The main indicator in regressions was the volatility in returns as adjusted by the firm size and leverage to reflect the financial risk at the firm level. ROA volatility, leverage and the Q in the robustness tests were used as alternative specifications.
Independent variables
1) The study focuses on four governance variables that are operationalized as follows:
2) Board size: the number of directors on the board in each firm-year.
3) Non-executive directors (NEDs): count or percentage of independent directors.
4) CEO duality: dummy equal to 1 if the CEO also serves as board chair that year, 0 otherwise.
Board diversity/internal control index: board diversity measured as proportion of women on the board. Internal control quality was coded using a composite index based on disclosures about internal audit, existence of risk committee, frequency of internal audits, and questionnaire responses coded to a 0–1 index.
Control variables: control variables included firm size in terms of log total assets, firm age, leverage ratios and year dummies to capture macro trends. Control choices reflect prior regional studies and the need to reduce omitted variable bias
| [5] | Al-Faryan, M. A. S., 2020. Corporate governance in Saudi Arabia: An overview of its evolution and recent trends. Risk Governance and Control: Financial Markets&Institutions, 10(1), pp. 23-36. |
[5]
.
3.2. Data Analysis Techniques and Software
Python scripts were used to perform all data cleaning and initial exploratory analysis due to its reproducibility and plotting capabilities. The main inferential econometric analysis was performed using the IBM SPSS v.26 to be consistent with typical reporting of the research study. Diagnostics after post-estimation, fixed-effects regressions and SPSS panel procedures were utilised.
The following steps were carried out:
1) Descriptive statistics and Pearson correlations to examine distributions and bivariate relationships.
2) Collinearity diagnostics via Variance Inflation Factors (VIF) to ensure regressors are not highly collinear.
3) Panel model estimation using pooled OLS, random effects and fixed effects estimators. The Hausman test determined the preferred model.
4) Robust (White) standard errors used to account for heteroskedasticity following Breusch-Pagan test results.
5) Sensitivity tests included estimating the main models with alternative dependent variable specifications (ROA volatility, Tobin’s Q) and adding lagged governance variables.
These procedures are appropriate because panel methods exploit within-firm variation and reduce bias from unobserved, time-invariant firm heterogeneity. The estimation of pooled OLS and random-effects and fixed-effects models and the Hausman test to select one of them isolate firm-specific effects and can be used to help ensure that coefficient estimates do not measure cross-sectional differences but instead measure changes within firms across time. Diagnostic tests that involve Variance Inflation Factors to test multicollinearity and Breusch Pagan test that is followed by a robust (White) standard errors to test heteroskedasticity to avert common estimation threats that may otherwise corrupt inference. In addition to sensitivity checks, additional sensitivity checks like re-estimating models using alternative outcome measures such as ROA volatility and Q of Tobin as well as adding lagged governance variables test the extent to which they are results of the model specification or of time. The combination of Python to perform clear data cleaning and exploratory plots with IBM SPSS v.26 to panel estimate gives reproducibility and adherence to traditional reporting practices. It is this comprehensive approach that enhances the interpretability of policymakers and practitioners and minimizes the likelihood of spurious relationships in practice.
The hypotheses informed the analysis and the structure of the results and discussion.
H1: Larger board size reduces financial risk exposure in oil and energy firms.
H2: CEO duality increases financial risk exposure in oil and energy firms.
H3: Stronger internal control systems reduce financial risk exposure in oil and energy firms.
These hypotheses are based on agency and monitoring theory and the literature on regional governance which has associated board form and internal controls with firm results. According to agency theory, there might be conflict between managers and the shareholders since the managers would tend to work towards personal interests that are not necessarily compatible with the interests of owners
| [45] | Khandelwal, V., Tripathi, P., Chotia, V., Srivastava, M., Sharma, P. and Kalyani, S., 2023. Examining the Impact of Agency Issues on Corporate Performance. Journal of Risk and Financial Management, 16(12), 497.
https://doi.org/10.3390/jrfm16120497 |
[45]
The corporate governance systems like board structure and internal control systems are hence meant to check on the actions of managers and minimize these conflicts. The increase in the size of the board can bring in more expertise and enhance supervision, which possibly can assist the firms to recognize and address financial risks better Conversely, CEO duality, in which the chief executive officer and the board chair are held by the same individual, can undermine monitoring since the power to make decisions is centralized
| [46] | Cersosimo, C. and Colasanti, N., 2025. Board Size and Financial Performance as a Driver for Social Innovation. Administrative Sciences, 15(7), 247.
https://doi.org/10.3390/admsci15070247 |
[46]
. Such a power concentration can diminish the level of board independence and augment the chances of augmented financial risk exposure. On the other hand, high-level internal control systems promote transparency, accountability and adherence to financial norms, which may assist organizations to identify abnormalities and help mitigate the escalation of risks. Previous empirical research has demonstrated that the corporate financial performance and the risk management practices are highly dependent on governance structures and monitoring mechanisms. Consequently, the hypotheses are established on the basis of theoretical views that have been developed and underpinned by the regional governance studies that highlight the significance of board attributes and internal quality of control in determining the firm performance and financial stability.
4. Overview of Sample and Descriptive Statistics
Table 1 summarizes descriptive statistics for the main variables across 270 firm-year observations. The data form a balanced panel of 30 firms from 2016 through 2024.
Table 1. Descriptive statistics.
Variable | Mean | Std. Dev. | Min | Max |
Risk exposure (volatility) | 0.1609 | 0.0382 | 0.0644 | 0.2559 |
Board size (directors) | 9.8926 | 3.1422 | 4 | 15 |
Independent directors (count) | 3.8037 | 2.1423 | 0 | 11 |
CEO duality (1=yes) | 0.1333 | 0.3406 | 0 | 1 |
Board diversity (women ratio) | 0.1701 | 0.1026 | 0 | 0.3942 |
Internal control index (0–1) | 0.6214 | 0.1745 | 0.10 | 0.95 |
Firm size (log assets) | 8.5010 | 1.0120 | 5.525 | 10.120 |
Firm age (years) | 23.855 | 13.750 | 5 | 58 |
The empirical analysis is supported by the descriptive statistics of the balanced panel of 270 firm year observations that give what the regression estimates will be able to identify. The dependent variable which is measured risk exposure has a mean value of 0.1609 and a standard deviation of 0.0382 with a range of values between 0.0644 and 0.2559. This spread indicates significant cross time and cross firm volatility variability and statistical strength in the model estimates. The directors are 9.8926 in board size with a standard deviation of 3.1422 and four to fifteen board sizes. The mean number of independent directors is 3.8037, and the range of the independent directors is zero to eleven, thus portraying the fact that there exist companies with very high independent directors and also companies with none. CEO duality seems to be quite rare with an average of 0.1333 and a standard deviation of 0.3406 indicating that only an estimated 13 percent of firm years have combined CEO and chair roles. The mean of board gender diversity is 0.1701 and a standard deviation of 0.1026 with the observed proportion ranging between 0.000 and 0.3942 that reflects a lack of female representation in the sample. Internal control index has a mean of 0.6214 with a standard deviation of 0.1745 and a range of 0.10 to 0.95, which shows that there is a significant variation in the control quality among firms. Firm size and firm age have a mean log asset of 8.5010 and mean age of 23.855 years respectively. Data cleaning and visual exploratory plotting were done using reproducible Python scripts and the main panel estimation using IBM SPSS v.26. Because the panel covers firms from 2016 through 2024 in a regional context the findings should be read with awareness of local governance norms in Saudi Arabia.
4.1. Correlation
Table 2. Correlation matrix.
| 1. Risk | 2. BoardSize | 3. IndepDir | 4. CEO_Duality | 5. BoardDiv | 6. IntControl |
1. Risk | 1.00 | | | | | |
2. Board Size | 0.6923 | 1.00 | | | | |
3. Independent Dir. | 0.8706 | 0.4975 | 1.00 | | | |
4. CEO Duality | -0.3194 | 0.3909 | 0.4962 | 1.00 | | |
5. Board Diversity | 0.0588 | -0.0614 | -0.0693 | 0.2002 | 1.00 | |
6. Internal Control | -0.4121 | 0.2735 | 0.3612 | -0.4508 | 0.2107 | 1.00 |
The correlation matrix provides a rough initial version of the relationships and the figures provide certain clues regarding patterns that the multivariate models have to consider. Board size has a positive correlation with risk of 0.6923 and count of independent directors of the board with risk, indicating that higher observed volatility would be observed in the larger board and higher number of independent directors. Meanwhile the negative correlation between internal control and risk is -0.4121 that is consistent with the concept that more robust control systems are linked with reduced volatility. The bivariate correlation between CEO duality and risk is negative with a -0.3194 coefficients and board diversity exhibits a small positive coefficient of 0.0588 with risk. Structure is also manifested in pairwise correlations between governance variables. The correlation between the board size and number of independent directors is 0.4975 which implies that there is moderate positive correlation between the two characteristics of governance. Independent directors and CEO duality have 0.4962 correlation and internal control has positive correlation with the board size and independent directors 0.2735 and 0.3612 respectively. These statistical trends are informative in the sense that they determine possible confounding relationships to be adjusted by multivariate models. Notably correlations do not make cause and effect. Independent directors bivariate correlation of risk at 0.8706 is high, which would make one question the omitted variables or reverse causality, which may be causing both the governance configuration as well as volatility. To solve these problems the empirical approach incorporates fixed effects estimators and covariates in such a way the subsequent regression outcomes conditional upon firm fixed traits and minimize the possibility of spurious inference.
4.2. Regression Analysis Arranged by Hypothesis
All regressions use robust standard errors. Results reported are pooled OLS, random effects (RE) and fixed effects (FE) models. The Hausman test indicated a preference for fixed effects in the principal specifications. The tables below present the main coefficients and diagnostic statistics.
Hypothesis 1 (H1): Board size reduces financial risk exposure
Table 3. Board size effect.
Model | Coefficient (Board Size) | Std. Error | t | p |
Fixed Effects (FE) | −0.0080 | 0.0024 | −3.33 | 0.001 |
Random Effects (RE) / Pooled OLS | −0.0044 | 0.0006 | −7.22 | <0.001 |
Observations | 270 | | | |
R² (within) | 0.625 | | | |
The association between fixed effects and random effects models indicates a negative relationship between board size and financial risk and the exact estimates measure the relationship. The fixed effects coefficient is -0.0080 with a standard error of -0.0024, a t statistic of -3.33 and a p value equal to 0.001. The random and pooled estimates indicate that the coefficient has a value of -0.0044 with a standard error of 0.0006 and t statistic of minus 7.22. The within firm relationship is identified in the fixed effect estimate. The implication of this is that, with one director added to the board of a firm, other covariates held unchanged, the risk exposure is measured to be on the order of 0.008 units. The risk mean of 0.1609 such a value is economically significant in that a small variance in the volatility measure will cause corresponding appropriate changes in risk. The R squared of 0.625 is an indication that the model explains a significant proportion of within firm variation which supports the interpretive assertion. Such mechanisms as could generate the following empirical pattern are better monitoring, more access to expertise, and better deliberation which accompany slightly larger boards. However, the fixed effects estimator cannot completely eliminate the time varying confounders. As an example companies can raise the size of the board at the same time risk reduction activities or strategic actions that have an independent effect on volatility. The statistical significance and consistency of negative sign of FE and RE models in both substantively and statistically suitable standard errors contribute to substantively interpreting that the improvement in board size is correlated with a reduction in the financial risk in the sampled companies and encourages further caution regarding causal assertions and the importance of additional robustness tests.
Hypothesis 2 (H2): CEO duality increases financial risk exposure
Table 4. CEO duality effect.
Model | Coefficient (CEO Duality) | Std. Error | t | p |
Pooled / Random Effects | +0.0715 | 0.0045 | 15.79 | <0.001 |
Fixed Effects | (omitted; time invariant for many firms) | | | |
Observations | 270 | | | |
According to the pooled and random effects specification, the coefficient of CEO duality is positive and statistically significant of 0.0715 with a standard error of 0.0045 and t = 15.79. This big positive estimate implies that firm years where the CEO is also the chair of the board are correlated with an increase in measured risk of approximately 0.0715 units compared to non-duality observations. This is a large proportional increase when there is a mean risk of 0.1609. In the same specification, the fixed effects estimation did not allow to generate a within firm estimate due to the time invariance of CEO duality in many panel firms. The empirical implication is that the pooled coefficient confounds both within and between firm variation such that interpretation should reflect that constraint. The positive pooled relationship is in line with theoretical expectations that the concentration of decision rights by duality reduces independent checks and balances and can allow taking more risks. However, one of the credible alternative explanations is selection. Companies whose yearly volatility bases are larger may find it easier to make the combined leadership structure or boards may merge the roles as a result of specific governance or performance situations. The minus 0.3194 negative correlation between CEO duality and risk in the correlation matrix highlights the complexity and explains why multivariate conditioning is necessary. Lagged measures of duality, natural experiments or instrumental variables can also be used to bolster causal arguments that will be exploited by future analysis. To infer the present, the evidence indicates some relationship between CEO duality and increased pooled risk within the sample, however, this should be approached with caution and should not be presumed to be causal.
Hypothesis 3 (H3): Strong internal control reduces financial risk exposure
Table 5. Internal control effect.
Model | Coefficient (Internal Control Index) | Std. Error | t | p |
Fixed Effects (FE) | −0.2573 | 0.0198 | −13.01 | <0.001 |
Random/ Pooled (RE) | −0.2504 | 0.0095 | −26.34 | <0.001 |
Observations | 270 | | | |
Measured risk is strongly and negatively related with internal control quality in both fixed effects and random effects models and the coefficients reported measure this relationship. The coefficient in the fixed effects model is -0.2573 having a standard error of 0.0198 and -13.01 t statistic. The random effects and pooled estimate is -0.2504 and standard error is -0.0095 and t statistic is -26.34. These magnitudes suggest that as one goes up the internal control index, the changes produced are large decreases in the financial volatility. Considering the internal control index mean of 0.6214 and a standard deviation of 0.1745, when the within firm improvement in the quality of control is one unit it would cause a decrease in risk of the order of magnitude of about 0.044 units under the constant effects coefficient. The change is significant compared with the average risk of 0.1609. The uniformity between FE and RE estimators helps build the confidence that the relationship between them is not model dependent. These statistical findings are in line with theoretical assumptions that better controls lead to better monitoring, less reporting errors and less opportunistic behavior all of which may suppress short run earnings and cash flow volatility. The negative sign and statistical significance were kept in robustness checks involving other dependent variables. The policy implication is that enhancing internal control systems seems to be an appropriate mechanism in reducing measured financial risk in the sampled firms. Additionally, the internal control index is an index that combines many elements and future studies may unravel which particular control practices contribute to the greatest volatility reductions. The outcome, however, is a good indication that the quality of internal controls is related to a low financial risk.
4.3. Robustness Checks and Diagnostics
The reported numerical diagnostics and robustness checks of the analysis provide reasons to believe in the direction and significance of the main governance coefficients as well as explain the existing limitations. Multicollinearity diagnostics showed variance inflation factors below two of significant regressors indicating that the estimates of parameters are not likely to be overstated due to collinearity and the standard errors are not inflated unnaturally. The Breusch Pagan tests showed that there was a mild heteroskedasticity hence the implementation of the robust White standard errors was correct and required to get the correct inference. The Hausman test was statistically significant and preferred fixed effects that supports the use of within firm estimates as the conservative basis of the causal language in case of opportunity. The sensitivity analyses further expanded the baseline models to other operationalizations of the dependent variable such as ROA volatility and the Q and the core governance variables retained the sign and statistical significance in terms of those alternative measurement. The other checks with lagged governance variables and filtering out of possible outliers also did not change the key inferences. Combined these numerical diagnostics indicate that the observed associations are not due to a single estimator choice or an extreme subset of observations. Important caveats remain. It is possible that time varying omitted variables and reverse causality may affect some of the coefficients, especially those associated with variables such as CEO duality which exhibit limited within firm change. Techniques like dynamic panel estimators, or instrumental variable, would assist in digging deeper into causal channels. On the whole, the tendency toward low VIFs, strong standard errors, a Hausman test with a preference of fixed effects and stable sensitivity findings make one more confident that the estimated relationships are empirically significant and strong.
5. Empirical Results and Discussion
The statistics indicate that there is statistically significant negative correlation between the size of board and exposure to financial risks. On the fixed-effects specification, bigger boards are correlated with slightly reduced risk. This observation supports the monitoring explication of the governance theory. In oil and energy companies the scope of technical experience and multiplicity of points of view which accrue as boards become larger can enhance the criticism of more massive project plans and the assessment of commodity and market risk. Due to capital intensity and extended duration of the projects in the sector, another voice on the board will assist in identifying the downside scenarios and can put procedural checks like pre-investment gate reviews and stricter capital budgeting practices that minimize volatility.
Recent applied work on the Saudi context and in other developing markets suggests that this empirical pattern is positive when it comes to positive governance effects of better staffed boards; however, it is also accompanied by functioning committees and sector experience. The economic size of the effect is small. This small size reflects a number of recent researches that state that bigger size of the board may not be necessary, but that the quality of the board, competence of the committees and new members with the related expertise matter
| [47] | Inès Kateb and Inès Belgacem, 2023. Navigating governance and accounting reforms in Saudi Arabia’s emerging market. International Journal of Disclosure and Governance.
https://doi.org/10.1057/s41310-023-00193-5 |
[47]
. Therefore, H1 is accepted. Lager boards are connected to the lower measured financial risk in this oil and energy sample. In practice, reformers should focus on bringing in directors who have competence in areas such as industry and risk-management and not focus on pure numerical growth.
On the second hypothesis the combined estimates show that CEO duality is strongly associated with an increase in financial risk exposure. This lends credibility to historic agency reasoning that the concentration of formal authority within a single person lowers the independence of boards and undermines internal restraints on the managerial risk-taking. The dual CEO/chair could more easily push large, leveraged projects through with little resistance in oil and energy companies. Positive association observed is strong in the pooled and random effects estimations and is aligned with multiple findings in the modern times that indicate that duality is positively correlated with increased risk and managerial discretion in developing markets
| [48] | Tiloiu, N., 2026. Exploring Gender Diversity, Board Heterogeneity, and Corporate Risk Outcomes. Journal of Risk and Financial Management, 19(2), 113.
https://doi.org/10.3390/jrfm19020113 |
[48]
. Additionally, the literature demonstrates circumstances in which CEO duality can be helpful. Indicatively, when speed of response is critical or when crisis response requires a quick and coordinated decision, combined leadership can have a positive effect on speed and can reduce the likelihood of short-term default such as evidence during the COVID-era analysis. The period of data used in this research includes stable years and volatile years. The positive association with duality net of risk indicates that, on the average of 2016 to 2024, the governance cost of concentrated power had been more significant than any benefit during the crisis period in the sample of Saudi oil and energy companies. Therefore, H2 is accepted because CEO duality has a positive relationship with financial risk exposure. Policy implications as to this are either the encouragement of role separation or the countering of duality through more independent committees and outside scrutiny.
On the third hypothesis quality of internal control comes out as the most effective predictor of reduced financial risk exposure. The fixed-effects and pooled model indicate significant negative coefficient which is not insignificant in robustness tests. This is intuitively natural and has been supported by extensive recent evidence that operational and information risk are significantly mitigated by internal audit functions, well-resourced risk committees, and strict reporting protocols
| [48] | Tiloiu, N., 2026. Exploring Gender Diversity, Board Heterogeneity, and Corporate Risk Outcomes. Journal of Risk and Financial Management, 19(2), 113.
https://doi.org/10.3390/jrfm19020113 |
[48]
. One of the possible mechanisms is that internal controls identify and stop accounting anomalies, implement procedure in procurement and project management, and generate timely risk reporting to the board. In industries like oil and energy small control failures can quickly increase into significant financial exposures so better control systems have had disproportionate risk benefits. Considering the high empirical coefficient and the theoretical explanation H3 is accepted.
5.1. Summary Findings
1) Lager boards are connected to the lower measured financial risk in this oil and energy sample. In practice, reformers should focus on bringing in directors who have competence in areas such as industry and risk-management and not focus on pure numerical growth.
2) CEO duality has a positive relationship with financial risk exposure. Policy implications as to this are either the encouragement of role separation or the countering of duality through more independent committees and outside scrutiny.
3) Quality of internal control comes out as the most effective predictor of reduced financial risk exposure. The fixed-effects and pooled model indicate significant negative coefficient which is not insignificant in robustness tests.
5.2. Overall Synthesis and Theoretical Implications
Combined, the findings imply the existence of a risk mitigation governance hierarchy in Saudi oil and energy companies. Internal controls provide the greatest and most direct decrease in quantifiable financial risk. Board size has a contribution but relatively small and mainly in cases where expansion goes hand in hand with an increased board competence. CEO duality is risk enhancing unless governance offsets exist.
The results support the agency theory focus on board monitoring and also indicate the practical significance of the institutional mechanisms not based on board composition; control structure and committee functioning mediate the impact of composition. This finding is consistent with recent regional studies that emphasize the importance of audit functions and committee effectiveness as the close-to-the-line mechanisms that mediate the impact of board characteristics on financial performance
| [48] | Tiloiu, N., 2026. Exploring Gender Diversity, Board Heterogeneity, and Corporate Risk Outcomes. Journal of Risk and Financial Management, 19(2), 113.
https://doi.org/10.3390/jrfm19020113 |
[48]
.
5.3. Managerial and Policy Recommendations
1) Enhance internal controls.
Companies need to invest in internal audit capabilities, codify risk committee requirements, and disclose internal control evaluations publicly. Internal audit capabilities demonstrated that these investments lead to great risk reductions. To facilitate market monitoring, regulators might demand greater disclosure of internal control. This is in line with recent Saudi research that singles out audit committee impacts on disclosure and reduction of risks.
2) Staff quality should be put above quantity of the board.
Expanding boards firms would be advised to hire persons who have experience in the energy industry and also have knowledge in risk management. The composition of board committees should be streamlined in such a way that audit and risk committees have independent directors who are technically competent.
3) Reconsider CEO duality.
Where the CEO is the board chairperson should tighten the external control by insisting on the presence of independent directors on the audit committee and risk committee and increasing the frequency of external audits. It is aimed at balancing the concentrated power with strong institutional checks.
4) Promote transparency and ability building.
The rules of exchange that promote voluntary disclosure on controls and committee action can enhance investor confidence and decrease information asymmetry. Directors should be trained and continue their education in the field of project evaluation and risk governance.
5.4. Limitations and Suggestions for Future Research
The sample is sector-specific and limited to 30 firms and findings may not generalize to small firms or other industries. Internal control measurement depends in part on disclosure and self-reported questionnaire items that include noise, audit-quality proxies or third-party measures can be used in future research. Endogeneity is also an issue because it is possible to use the exogenous governance shocks, regulatory changes or instruments to uncover causal effects in future research. External validity would be tested by comparative research across GCC markets or cross-sectoral research. Lastly, a qualitative study which is interviews with directors would be needed to elucidate the mechanisms that connect the behavior of boards and control practices to project selection and risk results.
6. Conclusion
This study examined the relationships between board size and CEO duality and internal control quality and financial risk exposure in thirty Tadawul listed oil and energy firms over 2016 to 2024. The panel estimates of the negative relationship between larger board size and financial risk exposure supported the hypothesis that the larger board size lowers financial risk exposure. Combined estimates which corroborate the hypothesis that combined CEO and chair position is associated with an increased risk supported the hypothesis that CEO duality increases financial risk exposure. The economic impact of the governance variables was greatest on the hypothesis that better internal control systems decrease exposure to financial risk. Quality of internal controls lowers risk due to more lucid processes and augmented audit functions and earlier reporting of risks. Boards that emphasize hiring members who have industry experience and enhancing audit and risk committees aggressively reduce risks compared to boards that simply increase headcount. In situations where a CEO in addition to board chair firms need to balance concentrated power with independent oversight and stronger committees and increase in number of audits. Regulatory authorities must insist on the reporting of the internal control evaluations and promote training of directors to evaluate projects and manage risks. The research involved panel techniques but only one industry and 30 companies. The causality test with exogenous shocks ought to be tested in the future and extended to other industries as well as complement research with interviews of directors. Therefore, the evidence indicates that the best way to substantially reduce financial risk in Saudi oil and energy companies is by enhancing internal controls and improving boards.
Abbreviations
CEO | Chief Executive Officer |
ROA | Return on Assets |
NEDs | Non-Executive Directors |
FE | Fixed Effects |
RE | Random Effects |
SPSS | Statistical Package for the Social Sciences |
VIF | Variance Inflation Factor |
OLS | Ordinary Least Squares |
Author Contributions
Abdelmotalab Dalil: Conceptualization, Data curation, Formal Analysis, Methodology, Supervision, Writing – original draft, Writing – review & editing
Conflicts of Interest
The author declares no conflicts of interest.
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Cite This Article
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APA Style
Dalil, A. (2026). Corporate Governance and Financial Risk Exposure:
An Analytical Study of Oil and Energy Companies in Saudi Arabia’s. Journal of Finance and Accounting, 14(2), 101-114. https://doi.org/10.11648/j.jfa.20261402.13
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ACS Style
Dalil, A. Corporate Governance and Financial Risk Exposure:
An Analytical Study of Oil and Energy Companies in Saudi Arabia’s. J. Finance Account. 2026, 14(2), 101-114. doi: 10.11648/j.jfa.20261402.13
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AMA Style
Dalil A. Corporate Governance and Financial Risk Exposure:
An Analytical Study of Oil and Energy Companies in Saudi Arabia’s. J Finance Account. 2026;14(2):101-114. doi: 10.11648/j.jfa.20261402.13
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@article{10.11648/j.jfa.20261402.13,
author = {Abdelmotalab Dalil},
title = {Corporate Governance and Financial Risk Exposure:
An Analytical Study of Oil and Energy Companies in Saudi Arabia’s},
journal = {Journal of Finance and Accounting},
volume = {14},
number = {2},
pages = {101-114},
doi = {10.11648/j.jfa.20261402.13},
url = {https://doi.org/10.11648/j.jfa.20261402.13},
eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20261402.13},
abstract = {This paper examines the relationship between corporate governance institutions and financial riskiness in Saudi Arabia oil and energy market, using a balanced sample of thirty companies followed across 2016-2024 (270 firm-years). The study examines the relationship between board size, independent (non-executive) director proportion, CEO duality, board gender diversity and quality of internal control systems with the measured financial risk. The secondary data were based on annual reports and exchange disclosures by the firms and a short structured questionnaire conducted on the senior managers and board members was used to develop an index of internal control quality. Some of the important control variables are firm size (log assets), firm age, leverage, and year dummies in order to appreciate macro trends. The analysis is methodologically divided into descriptive statistics, correlation diagnostics and panel regression. Random effects and fixed effects estimates, based on the Hausman test and model selection, were estimated and the robust (White-corrected) standard errors and a set of post-estimation diagnostics (VIF, Breusch-Pagan) were calculated to confirm the reliability of inferences. Conventional robustness tests used different risk measures and specification tests. Reproducible Python scripts were used to clean and plot data as the main econometric estimations were done in IBM SPSS v.26. The patterns of the empirical results are consistent. The quality of internal internal controls is found to have a negative and strong relationship with financial risk exposure among estimators, and this implies that an increase in audit functions, risk committee activity and formal control procedures prevents volatility and measurements based on default significantly. The lower measured risk is also linked to board size, especially when expansion is coupled with an increase in board competence and not with the number size. In contrast, CEO duality is positively associated with increased pooled estimates of risk, which indicates that combined CEO-chair positions can undermine oversight and opportunistic decision-making unless other governance controls are in place. These findings are strong to different specifications and resistant to various diagnostic tests. The implications of the policy and managerial issues are to focus on internal audit and risk management capacity, hire board directors who possess sectoral and risk-management skills instead of focusing on size alone, and revise governance models that concentrate executive authority. The research adds industry-specific data on one of the most strategically significant regional markets and provides viable advice to regulators, institutional investors and corporate boards in pursuit of greater financial resilience.},
year = {2026}
}
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TY - JOUR
T1 - Corporate Governance and Financial Risk Exposure:
An Analytical Study of Oil and Energy Companies in Saudi Arabia’s
AU - Abdelmotalab Dalil
Y1 - 2026/04/13
PY - 2026
N1 - https://doi.org/10.11648/j.jfa.20261402.13
DO - 10.11648/j.jfa.20261402.13
T2 - Journal of Finance and Accounting
JF - Journal of Finance and Accounting
JO - Journal of Finance and Accounting
SP - 101
EP - 114
PB - Science Publishing Group
SN - 2330-7323
UR - https://doi.org/10.11648/j.jfa.20261402.13
AB - This paper examines the relationship between corporate governance institutions and financial riskiness in Saudi Arabia oil and energy market, using a balanced sample of thirty companies followed across 2016-2024 (270 firm-years). The study examines the relationship between board size, independent (non-executive) director proportion, CEO duality, board gender diversity and quality of internal control systems with the measured financial risk. The secondary data were based on annual reports and exchange disclosures by the firms and a short structured questionnaire conducted on the senior managers and board members was used to develop an index of internal control quality. Some of the important control variables are firm size (log assets), firm age, leverage, and year dummies in order to appreciate macro trends. The analysis is methodologically divided into descriptive statistics, correlation diagnostics and panel regression. Random effects and fixed effects estimates, based on the Hausman test and model selection, were estimated and the robust (White-corrected) standard errors and a set of post-estimation diagnostics (VIF, Breusch-Pagan) were calculated to confirm the reliability of inferences. Conventional robustness tests used different risk measures and specification tests. Reproducible Python scripts were used to clean and plot data as the main econometric estimations were done in IBM SPSS v.26. The patterns of the empirical results are consistent. The quality of internal internal controls is found to have a negative and strong relationship with financial risk exposure among estimators, and this implies that an increase in audit functions, risk committee activity and formal control procedures prevents volatility and measurements based on default significantly. The lower measured risk is also linked to board size, especially when expansion is coupled with an increase in board competence and not with the number size. In contrast, CEO duality is positively associated with increased pooled estimates of risk, which indicates that combined CEO-chair positions can undermine oversight and opportunistic decision-making unless other governance controls are in place. These findings are strong to different specifications and resistant to various diagnostic tests. The implications of the policy and managerial issues are to focus on internal audit and risk management capacity, hire board directors who possess sectoral and risk-management skills instead of focusing on size alone, and revise governance models that concentrate executive authority. The research adds industry-specific data on one of the most strategically significant regional markets and provides viable advice to regulators, institutional investors and corporate boards in pursuit of greater financial resilience.
VL - 14
IS - 2
ER -
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