There is very little information publicly available about corporate governance practices in Iran, let alone on its compliance with the Organization for Economic Cooperation and Development's Principles of Corporate Governance. A 2000 publication on doing business in Iran reported that Iran's business and investment environment is governed by unclear and unpredictable laws. The 2006 report on the International Monetary Fund's Article IV Consultation with Iran indicates that investor protection is weak, measured by an index including different aspects of corporate governance. However, the 2006 Securities Act is intended to protect investors against unfair and practices and fraud, and ensure the adequate and timely disclosure to the public of information on companies issuing securities.

General Overview

With respect to Iran's legal business climate, Frischenschlager explains, in a 2000 publication, that Iran's business and investment environments are governed by unclear and unpredictable laws for two reason: Iran's ongoing power struggle and the Iranian Constitution. First, as a whole, Iran is focused on opening its economy to foreign investment, but certain powerful groups that stand to lose monopoly power exert their influence to slow the process. Consequently, many economic laws contain compromises between the opposing sides and unclear wording that allows either side to interpret them in their interest. Second, the Constitution contains few economic necessities. However, because amending it is very difficult, the government is forced to change its interpretation. The 2006 report on the International Monetary Fund's (IMF) Article IV Consultation with Iran indicates that investor protection is weak, measured by an index including different aspects of corporate governance. On the other hand, in the TSE Corporation's "Managing Director's Message, Dr. Ali Rahmani, reports that "implementation of the new Securities Act of 2006... ought to be able to guide industries towards a new horizon and greater opportunities" and " become a highly liquid secondary market for securities to raise funds and win confidence from all stakeholders." The Act protects against insider trading and strengthens disclosure and information sharing regulations. However, there is insufficient publicly available information that comprehensively addresses this principle.

The International Monetary Fund, in its 2004 Islamic Republic of Iran--Selected Issues report indicates that, since 1998, the size of Iran's capital market has been rapidly increasing. At the end of April 2004, the capitalization of the Tehran Stock Exchange (TSE) was US$37.5 billion as a result of a more than 600 percent increase in the TSE share price index and an increased number of listed securities. It follows that the rapid increase in equity valuation calls for a capital markets reform agenda. The TSE Corporation's TSE Handbook reports that the 2006 Securities Act protects investors against unfair and practices and fraud, and also ensures that investors and the public receive adequate and timely information on companies issuing securities.

The Investor Protection Index is a subcomponent of the World Bank's 2007 Doing Business Indicators. The Investment Protection Index consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indexes vary between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Iran scores 5 in the Disclosure Index, against a regional average of 5.8 and an OECD average of 6.3. It scores 4 in the Director Liability Index, against a regional average of 4.6 and an OECD average of 5.0 and 0 in the Shareholder Suits Index against a regional average of 3.5 and an OECD average of 6.6.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

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With respect to Iran's legal climate, Frischenschlager explains that Iran's business and investment environments are governed by unclear and unpredictable laws for two reasons: Iran's ongoing power struggle and the Iranian Constitution. First, as a whole, Iran is focused on opening its economy to foreign investment, but certain powerful groups that stand to lose monopoly power exert their influence to slow the process. Consequently, many economic laws contain compromises between the opposing sides and unclear wording that allows either side to interpret them in their interest. Second, the Constitution contains few economic necessities. However, because amending it is very difficult, the government is forced to change its interpretation (2000). The 2006 report on the IMF Article IV Consultation with Iran indicates that investor protection is weak, measured by an index including different aspects of corporate governance. On the other hand, in the TSE Corporation's "Managing Director's Message, Dr. Ali Rahmani, reports that "implementation of the new Securities Act of 2006... ought to be able to guide industries towards a new horizon and greater opportunities" and " become a highly liquid secondary market for securities to raise funds and win confidence from all stakeholders." The Act protects against insider trading and strengthens disclosure and information sharing regulations. However, there is insufficient publicly available information that comprehensively addresses this principle.

Principle II: The Rights of Shareholders and Key Ownership Function

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The Iran Trade Point Network reports that "shareholders of a joint company participate in the ownership, profit, losses and liquidation of a company in direct proportion to their share holding. The liability of each shareholder is limited to the par value of his/her shares and in the absence of fraud there is no recourse to shareholder. As such, a joint stock company under Iranian law holds a separate juridical personality and can sue or be sued in its own name. The minimum share capital at the time of formation is Rls. 1 million for private company and Rls. 5 million for public company's. Payment can be made either in cash or in kind for a public joint stock company and a minimum of 20% of the share capital should be made available to the general public" (2000). At an extraordinary meeting, a majority is considered two-thirds of present voting. At an ordinary general meeting, it is 51 percent. A shareholder with 20 percent or more of a company has the authority to call a shareholders' meeting or go to court (2000). Also considering shareholders rights, the 2006 report on the IMF Article IV Consultation with Iran indicates that investor protection is weak, measured by an index including different aspects of corporate governance. However, there is insufficient publicly available information that comprehensively addresses this principle.

Principle III: The Equitable Treatment of Shareholders

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According to the 2000 IMF Recent Economic Developments report, highly concentrated ownership leaves, on average, the five largest shareholders with more than 82 percent ownership. Only a small number of institutional investors, including government institutions, state-owned banks, or their subsidiaries dominate the market. The TSE Corporation's TSE Handbook indicates that the 2006 Securities Act protects investors against insider trading. However, there is insufficient publicly available information that comprehensively addresses this principle.

Principle IV: The Role of Stakeholders in Corporate Governance

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There is no requirement for labor to be represented on the board or in management. (Iran Trade Point Network 2000) However, there is no publicly available information that comprehensively addresses this principle.

Principle V: Disclosure and Transparency

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The Iran Trade Point Network reports that companies are required to submit an audited balance sheet to the Ministry of Economy and Finance within either the first four months of the Iranian calendar year (beginning March 21) or the company's own fiscal year (2000). Also, according to the TSE Corporation's TSE Handbook, the 2006 Securities Act provides for relegation of listed companies that fail to properly disseminate information to the Unofficial Board, which has the authority to temporarily de-list a company until it meets certain requirements. However, there is insufficient publicly available information that comprehensively addresses this principle.

Principle VI: The Responsibilities of the Board

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The structure of Iranian companies is very centralized with little delegation of responsibility to lower levels. Both in private and government-owned companies, the managing director's approval is needed for nearly all decisions; and the managing director requires the consent of various boards and committees (Frischenschlager 2000). The Iran Trade Point Network notes that the board of directors is elected by shareholders. If a board member is abroad, power may be delegated to resident board members with authorization from the articles of association of the company. Shareholders rights are typical of those in other countries. They have the right to attend shareholder meeting, receive financial reports, elect or replace board members and vote on important company decisions (2000). However, there is insufficient publicly available information that comprehensively addresses this principle.