General Overview
According to a 2006 Organization for Economic Cooperation and Development (OECD) report, corporate governance is improving in Turkey but some key issues, including the potential for unfair treatment of minority shareholders, need to be tackled if Turkish firms are to take full advantage of opportunities to grow in coming years. (OECD website)
"Corporate Governance in Turkey: A Pilot Study" evaluates Turkish corporate governance standards and practices in light of recommendations in the OECD Principles of Corporate Governance, which were first issued in 1999 and revised in 2004. According to the OECD study, good corporate governance has become essential for any company or country that wants to compete effectively in the global marketplace and attract long-term capital to grow their businesses. (OECD website)
Turkey has a strong regulatory framework for corporate governance. Disclosure to the market by listed companies is improving, and international standards for accounting and auditing are being introduced. The OECD report urges the Turkish government to adopt as soon as possible proposed amendments to Turkish company law, including a proposal to centralize the process for setting accounting standards under the Turkish Accounting Standards Board (TASB). (OECD website)
But some challenges remain. Family-controlled groups of companies are a common feature of the Turkish business scene, often with a high degree of cross-ownership between companies, the report notes. Controlling shareholders often play a leading role in the management and strategic direction of company groups, many of which include companies that are listed on the Istanbul Stock Exchange. This is not a problem in itself. Without effective safeguards, however, there is potential for abuse, for example in situations where controlling shareholders impose commercial conditions that go against the interests of the company as a whole and minority shareholders. Market discipline - defined as the power of financial markets to persuade companies to meet corporate governance standards or risk public criticism, lawsuits or a sell-off in their shares - is still relatively weak. (OECD website)
To address this, the OECD recommends that Turkey strengthen the laws on deals involving related parties, for example by implementing proposed amendments to Turkish company law requiring more disclosure about deals between companies that belong to a group and requiring controlling companies to compensate controlled companies for losses resulting from the exercise of control. (OECD website)
The OECD report also recommends that publicly held companies be required to give more detailed and easier-to-understand disclosure about who owns them and controls them, proposes tougher penalties for breaking the law and encourages the authorities to focus more resources on enforcing these laws. (OECD website)
In parallel, the OECD urges Turkey to give greater scope to institutional investors in the exercise of their rights as shareholders. At present, pension and mutual funds regulated by the Capital Markets Board (CMB) cannot participate actively in governance of the companies in which they invest and are subject to portfolio limits that restrict their incentives to monitor corporate governance practices. These restrictions should be eliminated and funds should disclose the corporate governance policies that they apply to their investments. (OECD website)
Elsewhere, the report emphasizes the vital role of boards in improving company performance and ensuring fair treatment for all shareholders. To fulfill this role, boards must be both able and willing to exercise objective and independent judgment. With this in mind, the report recommends that all publicly held companies disclose adequate information to shareholders about how their boards work and to fully implement the board structures and practices recommended by the OECD. (OECD website)
Finally, the report stresses the need for supervisory, regulatory and enforcement authorities to have the power, integrity and resources to act professionally and objectively. Independent regulators like the CMB need stable funding, freedom to decide how they spend their budget and clear support from government, it says. The continued strong leadership and independence of the CMB and other independent financial sector authorities are crucial for the long-term vitality of the corporate sector in Turkey and the economy as a whole. (OECD website)
According to a 2005 report published by the Institute of International Finance (IIF), as is the case in many emerging markets, Turkey has an underdeveloped equity culture. In recent years, market capitalization has fluctuated at around 20 to 25 percent of GDP, which is significantly below the OECD average of 135 percent. Only 290 companies are listed on the exchange, and of the 500 largest Turkish companies by revenue, only about one-fifth are listed. Free float is small, in the range of 20 to 25 percent. Market transactions are highly concentrated with the 25 most actively traded companies representing about three-fourths of the volume of the stock exchange. Also, most large Turkish companies are part of conglomerates, typically organized around a group-owned bank. The five largest business groups account for about half of the total market capitalization of the Istanbul Stock Exchange (ISE). Frequently, when one or more companies in a conglomerate are listed, the holding company, which generally exercises control over members of the group, is not. Income shifting and transfer pricing has been a problem in pyramidal and cross shareholding structures. Mandatory consolidated reporting, which begins this year [2005], will improve the transparency of such abuses. (IIF 2005, p. 6)
The Principles
Principle I: Ensuring the Basis for an Effective Corporate Governance Framework |
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According to a 2006 Organization for Economic Cooperation and Development (OECD) study on corporate governance in Turkey, all four subprinciples of Principle I are partly implemented. (OECD 2006, pp. 10, 13, 17, 22)
The Capital Markets Board (CMB) is an independent statutory authority appointed through a largely non-political process. Board members have a fixed tenure and do not appear to be subject to undue political or other pressures. CMB staff has been praised as being highly qualified and professional, although some observers have noted that many of the staff is young and relatively inexperienced in the operations of the capital markets. Existing compensation ceilings imposed by the government limit the prospects of the CMB to retain qualified senior staff. (IIF 2005, p. 18)
The CMB has extensive standard-setting and supervisory powers. It has often used its standard-setting powers to good effect to persuade publicly held companies to improve their corporate governance practices. It also has extensive investigation powers. Some questions arise, however, about the adequacy of its enforcement powers. For example, the potential penal and administrative penalties that wrongdoers can incur do not seem to operate as adequate deterrents to certain types of misconduct. Although further reforms are planned, the CMB has already started to move into the next important phase of its work program, i.e. pro-actively and systematically monitoring the implementation of the new standards, evaluating their impact, improving the effectiveness of its enforcement activities and fine-tuning its operational processes. (OECD 2006, pp. 23, 24)
According to a 2005 report published by the Institute for International Finance (IIF), the government established the Istanbul Stock Exchange (ISE) in 1985, which is the only stock exchange in Turkey. While independent, the ISE does not establish its own listing requirements, which are determined by law or by the CMB. The ISE works closely with the CMB on rule implementation and has been known to take disciplinary action where warranted, including through warnings, putting stocks on the watch list, and eventual de-listing. Plans to privatize the exchange in 2003 were delayed due to the passage of a new state procurement law, but the government plans to complete the privatization this year. (IIF 2005, p. 18)
In Turkey, transparency is improving in some areas, particularly with respect to: (a) financial reporting; (b) accessibility of company disclosures; (c) basic information about share attributes and the largest direct shareholders; (d) basic information about boards and senior management; and (e) stakeholder policies. However, disclosures relating to the sensitive topics of ownership and control, actual decision-making processes and structures, related party transactions, self-dealing and the effectiveness of internal controls continue to vary in terms of the amount of information disclosed. (OECD 2006, p. 10)
The variability in companies' disclosure practices limits to some extent the effectiveness of some formal enforcement mechanisms and remedies and makes it more difficult for market forces to operate. This is because it limits the amount of information that could assist regulators, current and potential investors and observers in monitoring the behavior of companies, board members, management and controlling shareholders. As noted above, however, there is a positive trend toward enhanced transparency. (OECD 2006, p. 10)
The Framework Law on Public Administration adopted by Parliament in 2004 was vetoed by the President in 2004 on the grounds that it conflicted with constitutional provisions related to the unitary character of the State. This Law was intended to be the centerpiece of a reform package and provided for, among other things, the rationalization of administrative bodies and increased responsiveness and transparency vis-à-vis the citizen. (OECD 2006, p. 13)
Some progress has been made in adopting anti-corruption measures. For example, the implementation of the Law on Access to Official Information in 2004 has significantly enhanced transparency with respect to authorities' operations. An Ethical Board for Public Servants has started to operate and a regulation on the code of ethics for public employees came into force in 2005. Surveys continue to indicate, however, that corruption remains a serious problem in Turkey and the scope of parliamentary immunity has been identified as a significant problem area. (OECD 2006, p. 14)
Although no concerns or evidence were presented to suggest that the relevant authorities or adjudicative bodies have, in relation to corporate governance matters, acted in a manner that is grossly incompatible with general norms regarding the rule of law, recent studies and reports suggest that there continue to be relatively widespread concerns among firms about the fairness, honesty and impartiality of the court system. Concerns have also been expressed by informed commentators, such as the European Commission, about whether the structure of the judicial system adversely affects to some extent the judiciary's independence. Further, although no fundamental, broad-based concerns about the enforceability and consistency of enforcement of corporate governance standards were expressed in the context of the OECD study, some concerns were expressed about selected issues with respect to the enforceability and consistent enforcement of standards. Finally, there is a lack of clarity regarding the status of various standards incorporated into the CMB Principles. (OECD 2006, p. 17)
There are overlaps with respect to some of the responsible authorities' functions that raise some concerns about regulatory efficiency and market participants' compliance costs. For example, staff of both the CMB and Ministry of Trade and Industry (MTI) sequentially review documentation for and grant or withhold approval for certain proposed fundamental changes, such as amendments to company articles and mergers. MTI staff focuses only on corporate law issues, while CMB staff focuses primarily on issues relating to compliance with capital markets laws but also consider corporate law issues. There is also some overlap in the existing oversight structure for audit firms. At the same time, there appear to be some gaps in the regulatory and supervisory framework applicable to external auditors. (OECD 2006, p. 18)
Apart from general provisions in the laws governing the relevant authorities enabling them to cooperate with other authorities and requiring other authorities to cooperate with them, there are no systematic procedures in place for such cooperation. Authorities cooperate with each other on an ad hoc basis upon request, but an efficient system for cooperation and communication does not exist. (OECD 2006, p. 20)
Unlike in some other countries, the authorities in Turkey do not rely to any significant extent upon non-public sector bodies such as self-regulatory organizations (SROs) in relation to matters involving corporate governance. The CMB, however, is considering the appropriateness and feasibility of delegating certain of its responsibilities to existing private sector organizations and/or providing for the establishment of new SROs, e.g. for rating agencies, external auditors, institutional investors and publicly held companies. (OECD 2006, p. 21)
Principle II: The Rights of Shareholders and Key Ownership Function |
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According to a 2006 Organization for Economic Cooperation and Development (OECD) study on corporate governance in Turkey, seven subprinciples of Principle II are fully implemented, two subprinciples are broadly implemented, seven subprinciples are partly implemented and two subprinciples are not implemented. Subprinciple II.E.2, which states that anti-takeover devices should not be used to shield management and the board from accountability, is not applicable. As of 2006, there is no incentive or need for the board members or management of most companies to adopt anti-takeover devices. The existing ownership and control structures operate as natural anti-takeover devices. (OECD 2006, pp. 27-36, 38, 39, 41, 45-47)
In Turkey, companies are required to maintain a register of record shareholders and of shares issued in bearer form. Shareholders, however, are not entitled to inspect the full register, unless either the board permits them to do so or the shareholders adopt a resolution at a general meeting permitting them to do so. (OECD 2006, p. 27)
Although listed companies in Turkey are not supposed to have share transfer restrictions in their articles or obstruct the transfer of shares, unlisted but publicly held companies are not subject to this prohibition. Some of these publicly held companies do impose such transfer restrictions and the transfer of shares in such companies is often quite cumbersome. (OECD 2006, p. 28)
The Turkish Commercial Code (TCC 1956) provides that, subject only to very limited exceptions, a shareholder's right to attend and vote at shareholder meetings cannot be undermined, revoked or limited, even with the shareholder's consent. The Capital Markets Board (CMB) Principles reinforce this proposition, stating that the right to vote is an indispensable right that cannot be abolished or interfered with, any actions that complicate the use of voting rights must be avoided, and each shareholder should be given the opportunity to exercise voting rights in the most appropriate and convenient manner. (OECD 2006, p. 29)
All shareholder meetings are supervised by an Ministry of Trade and Industry (MTI) Commissioner. The CMB can exercise its power to send an observer to meetings at any time, for example if it has reason to believe that the meeting will be controversial or if there have been complaints by shareholders. (OECD 2006, p. 29)
The TCC 1956 confers upon shareholders at the Ordinary General Meeting of Shareholders (OGM) the exclusive power to elect and remove board members, except that board members can temporarily fill a vacancy that arises between board meetings. (OECD 2006, p. 30)
The corporate governance framework provides that shareholders of the same class are to be treated equally with respect to the distribution of profits. The CMB's detailed requirements regarding dividends have facilitated more consistent practices in companies regarding the declaration, calculation and payment of dividends, emphasize equal treatment of shareholders within a class and provide for timely disclosure of board and shareholder decisions regarding proposals to distribute dividends. (OECD 2006, p. 30)
Access to timely information about proposed amendments to a company's articles has improved as, increasingly, publicly held companies make the relevant information available to shareholders on their websites. The implementation of the Public Disclosure System, which - as of 2006 - is operating on a trial basis, is expected to improve the timely provision of and consistency of access to information. (OECD 2006, p. 31)
The Capital Markets Law (CML 1981) permits publicly held companies to adopt the "registered capital" system in their articles. Under the registered capital system, the company's articles give the board discretionary power to issue share capital up to a maximum amount specified in the articles, subject to compliance with certain regulatory conditions. Companies must obtain the CMB's permission to adopt the registered capital system and, thereafter, must notify the CMB and make timely disclosure of any board decision to issue share capital. (OECD 2006, p. 32)
The TCC 1956 requires shareholder approval of a company's dissolution (e.g. in connection with a significant loss of capital, bankruptcy or amalgamation). The CMB imposes detailed substantive, disclosure and procedural requirements with respect to mergers involving publicly held companies, reviews the extensive documentation provided to it by the merging companies and pre-clears the proposed transaction and disclosure documents before the transaction is submitted to shareholders for approval. The MTI also reviews the documentation for conformity with the TCC 1956. Once the authorities have reviewed the relevant documentation and decided that the proposed transaction can proceed, the merging companies must publish a merger announcement in the media at least 30 days before the shareholder meeting, send the announcement and merger agreement to the stock exchange and make more extensive information available for inspection by shareholders. (OECD 2006, p. 33)
The CMB Principles encourage companies to adopt procedures and practices that facilitate shareholders' ability to pose questions to the board and place items on the meeting agenda. The TCC 1956 requires company boards to place items on the meeting agenda upon the written request of a shareholder or group of shareholders (Minority Shareholders) holding at least 10% of a company's capital. The CML 1981 lowers this threshold in respect of publicly held companies to 5%. Minority Shareholders can apply to the court for an order directing that such action be taken if the board does not comply, or fails to comply within a reasonable time. To pursue a remedy in court, however, they must deposit shares representing at least 5% of the company's capital with a bank as a pledge until the end of the first session of the shareholders meeting. (OECD 2006, p. 35)
The CMB Principles encourage companies to adopt procedures and provide disclosures that facilitate active shareholder participation in decisions about the nomination and election of board members. (OECD 2006, p. 36)
A shareholder who wishes to exercise voting rights must attend the shareholder meeting in person or appoint a proxy who attends the meeting in person. The corporate governance framework does not specify whether or not the proxy form must enable shareholders to instruct proxies to vote for or against particular resolutions and/or give them discretion to vote as they see fit. The proxy forms that many companies use, however, enable shareholders to include whatever instructions they wish to specify for proxyholders. (OECD 2006, p. 38)
The existing corporate governance framework in Turkey concerning disclosure of control structures, cross-shareholdings, company groups and intra-group relations comprises a mixture of requirements and recommendations that cover, to some extent, most of the disclosure items referred to in the Essential Criteria for this OECD Principle. (OECD 2006, p. 39)
With respect to institutional investors, some authorities have adopted standards in this area, but it is a new issue for many authorities. In Turkey, there is a low level of awareness among locally-based institutional investors of their responsibilities in this regard. (OECD 2006, p. 46)
CMB Communiqués regulating the activities of pension funds and mutual funds include provisions addressing certain types of conflicts of interest that can arise in connection with the establishment, operation and management of such funds. They do not, however, require funds to develop and disclose policies to deal with conflicts that might affect their decisions regarding the exercise of key ownership rights. (OECD 2006, p. 47)
The CMB Communiqué on Proxy Solicitation and Tender Offers prescribes procedures to be followed if proxies are solicited by representatives or agents of the company or by any other person. The Communiqué provides that "calling for voting contracts" is subject to the proxy solicitation requirements but does not clearly exclude from the scope of this provision consultations among shareholders about the exercise of their shareholder rights. (OECD 2006, p. 47)
Principle III: The Equitable Treatment of Shareholders |
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According to a 2006 Organization for Economic Cooperation and Development (OECD) study on corporate governance in Turkey, one subprinciple of Principle III is fully implemented, three subprinciples are broadly implemented and three subprinciples are partly implemented. (OECD 2006, pp. 49, 50, 53-56, 58)
The capital markets laws require publicly held companies to disclose sufficient, relevant information about the material attributes of all the company's classes and series of shares on a timely basis to prospective investors. Publicly held companies are also required to provide updated summary information about the material attributes of the company's share capital on a regular basis. Publicly held companies generally provide adequate basic information about their share capital in prospectuses and periodic disclosure documents such as annual financial statements. (OECD 2006, p. 49)
The Capital Markets Board (CMB) Principles encourage companies to disclose information about the conduct of, and participation levels, at shareholder meetings. Many listed companies appear to be willing to provide the recommended disclosures. The Turkish Commercial Code (TCC 1956) requires shareholders either to attend a meeting in person or appoint a proxyholder to attend the meeting in person, thereby making it more difficult and/or expensive to cast votes. If the proposed amendments to the TCC 1956 and capital markets law facilitating electronic attendance at shareholder meetings are implemented, however, a 'Fully Implemented' assessment would likely be appropriate. (OECD 2006, p. 55)
The CMB Communiqués on Public Disclosure of Material Events require timely disclosure of all purchases and sales of company shares by, among others, persons who directly or indirectly hold 5% of more of the company's votes or capital and anyone acting jointly or in concert with any such person. The Capital Markets Law (CML 1981) prohibits insider dealing, market manipulation, and the creation of false and misleading impressions. The prohibition on insider dealing does not expressly apply to significant shareholders, although some of them could become subject to the prohibition if they are in a position to acquire material non-public information through relationships to persons included in the definition of "insider", such as board members, managers or staff of companies. The CML 1981 provides for penal liability (including fines and compulsory prison sentences) in respect of these offences. (OECD 2006, p. 56)
The TCC 1956 prohibits board members from entering into transactions with the company, competing with the company or carrying on any business falling within the scope of the company's objects without obtaining shareholders' consent at a meeting. Such consent, however, is readily obtained on a routine basis on very broad terms, so that the restriction in the legislation has very limited effect in practice. (OECD 2006, p. 59)
In Turkey, some investors (especially foreign investors), arrange for brokerage firms or banks to act as custodians with respect to their investments and, in some circumstances, to exercise voting rights on their behalf. A CMB Communiqué on Intermediary Activities and Institutions permits brokerage firms to provide services such as exercising voting rights in accordance with authorizations given in framework agreements with their customers. The CMB Communiqué on Proxy Voting and Tender Offers requires persons who have been granted proxies (including custodians who have been authorized to exercise voting rights on behalf of clients) to act in accordance with instructions specified on the proxy forms. Brokerage firms are also subject to general prohibitions, such as prohibitions on operating against a client's "good will" by "deteriorating" their rights or benefits and/or using capital market instruments belonging to customers for their own benefit or the benefit of third parties. (OECD 2006, p. 53)
The enactment of the Foreign Direct Investment Law in 2003 helped to level the playing field for foreign and domestic investors by establishing the principle of equal treatment. Foreign investors have the same voting rights as domestic investors under the corporate governance framework. The CMB Principles encourage companies to adopt procedures, including cross-border voting procedures, that facilitate the exercise by all shareholders of their voting rights. (OECD 2006, p. 54)
Principle IV: The Role of Stakeholders in Corporate Governance |
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According to a 2006 Organization for Economic Cooperation and Development (OECD) study on corporate governance in Turkey, one subprinciple of Principle IV is fully implemented, one subprinciple is broadly implemented and two subprinciples are partly implemented. (OECD 2006, pp. 62, 64-67)
Part III of the Capital Markets Board (CMB) Principles is intended to provide guidance to companies on why and how they should respect the interests of stakeholders established by law or through mutual agreement. The CMB Principles encourage companies to: (1) act as pioneers in overcoming and solving any possible conflicts or disputes that arise between it and its stakeholders; (2) provide sufficient information to stakeholders about the company's policies and procedures aimed at protecting their rights; (3) effectively and swiftly compensate stakeholders whose legal or contractual rights are violated; and (4) with respect to stakeholder rights that are not protected by legislation, preserve the stakeholders' interests in good faith and within their capabilities, without permitting damage to their brand image. (OECD 2006, p. 62)
Turkish companies are not required to include stakeholders in the corporate governance process. The CMB Principles, however, recommend that companies establish mechanisms and models to encourage stakeholders' participation in management, while giving priority to employees and without hindering the company's operations. (OECD 2006, p. 65)
The corporate governance framework in Turkey does not appear to inhibit companies from developing, in consultation with employees, performance-enhancing mechanisms for employee participation. The CMB Principles encourage companies to develop and publicly disclose summaries of their human resource policies. Companies are also encouraged to foster the development of a collaborative working environment by regularly holding meetings with employees to inform them and provide for discussion about the company's financial situation, remuneration policies, career planning, training and health. Turkey does not explicitly set standards regarding the oversight of company-sponsored participatory pension funds. (OECD 2006, p. 64)
The CMB Principles do not specifically recommend that companies make sufficient and reliable information available to other stakeholders who participate in corporate governance decisions. They do, however, encourage companies to: (1) permit stakeholders to attend Ordinary General Meetings of Shareholders (OGMs); (2) make a significant amount of information about their policies (including human resource policies), procedures, operations and management publicly available on their websites; and (3) hold regular information meetings with employees and disclose to them or their representatives any significant development or company decision that clearly affects them. (OECD 2006, p. 66)
The CMB Principles were amended in early 2005 to add a recommendation that stakeholders, including employees and their representative bodies, should be able to freely communicate their concerns about any illegal or unethical practices to the board and their rights should not be compromised for doing so. (OECD 2006, p. 66)
There is no legislation in Turkey protecting the right of stakeholders generally (or specific stakeholder groups) who wish to communicate concerns about illegal or unethical practices in companies. This is a novel issue for many countries and it is not surprising, therefore, that Turkey has not introduced such legislation yet. The CMB Principles were amended in early 2005 to add a recommendation that stakeholders, including employees and their representative bodies, should be able to freely communicate their concerns about any illegal or unethical practices to the board and their rights should not be compromised for doing so. (OECD 2006, pp. 66, 67)
Principle V: Disclosure and Transparency |
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According to a 2006 Organization for Economic Cooperation and Development (OECD) study on corporate governance in Turkey, four subprinciples of Principle V are broadly implemented and eight subprinciples are partly implemented. One subprinciple was assessed as not implemented. (OECD 2006, pp. 69, 72-75, 77-79, 84, 88, 89, 92)
Publicly held companies, including banks and insurance companies, are required to make audited annual financial statements publicly available or available to their shareholders. These statements must include a balance sheet, profit and loss statement, cash flow statement, statement of changes in ownership equity and notes to financial statements at an entity level. The applicable disclosure standards vary, depending on which regulatory authority has primary jurisdiction over the entity. Listed companies subject to the Capital Markets Board's (CMB) oversight can prepare their financial statements either in accordance with the CMB's International Financial Reporting Standard (IFRS) -based standards (which are based on IFRS that were in effect at the beginning of 2003) or current IFRS. (OECD 2006, p. 69)
In contrast with some jurisdictions where financial reporting standards are developed by private sector organizations such as industry associations, in Turkey financial reporting standards are developed by authorities, i.e. the CMB, the Banking Regulation and Supervision Authority (BRSA), the General Directorate for Insurance of the Undersecretariat of Treasury (GDI), the Ministry of Finance (MoF) and, more recently, the Turkish Accounting Standards Board (TASB). If the Turkish Commercial Code (TCC 1956) is enacted as proposed, the centralization of the standard-setting function within the TASB could resolve the existing inconsistencies in the financial reporting standards for publicly held companies and prevent such inconsistencies from arising in the future. The TASB has translated all of the existing IFRS into Turkish, finalized a complete set of Turkish Accounting Standards (TAS) after public consultation and published the final versions of all but two TAS. The BRSA has formally expressed its intention to adopt TAS as replacements for its existing core standards. Whether or not this centralization of the standard-setting function within the TASB will prevent inconsistencies from arising in the future will depend on whether or not the other authorities refrain from adopting standards that are inconsistent with TAS. (OECD 2006, p. 79, 80)
Not all publicly held companies are required to prepare fully consolidated financial statements. Further, publicly held companies are not required to provide comprehensive MD&A-type disclosure. In addition, there is evidence to suggest that the quality and consistency of financial reporting is uneven (although there is an improving trend). A question also arises whether CMB staff have developed sufficiently comprehensive and systematic processes to enable them to identify and cause companies to correct significant disclosure deficiencies, especially during the transition period to IFRS. The proposed amendments to the TCC 1956 recognizing the TASB as the sole standard setter for general purpose accounting standards and restricting the authority of other authorities to adopt inconsistent or conflicting accounting standards could, if enacted, resolve existing inconsistencies in financial reporting standards for different types of publicly held companies. (OECD 2006, p. 72)
The capital markets laws require disclosure about the recorded owner and holdings of persons who hold substantial (but well below controlling) ownership interests in publicly held companies at least annually, as well as on a timely basis when certain ownership thresholds are crossed. The CMB has the power to obtain information about beneficial owners of shares. (OECD 2006, p. 73)
The CMB Principles recommend that companies disclose in their annual reports the company's position with respect to defined strategic objectives and many listed companies disclose some information about their commercial objectives in their annual reports. The CMB Principles encourage companies to disclose in their annual reports board members' qualifications, whether they are regarded as independent and certain other material information but do not specifically recommend that disclosure be provided with respect to selection processes. The TCC 1956 requires companies to include information in their articles about formal nomination and election procedures, but not the steps taken before the shareholder meeting that result in the formal nominations. (OECD 2006, pp. 72, 74)
Effective January 1, 2005, listed companies are required to disclose financial risks in their financial statements prepared in accordance with IFRS and the CMB Principles recommend that all publicly held companies include detailed explanations of foreseeable risk factors affecting future operations. (OECD 2006, p. 77)
The CMB Principles recommend that companies disclose information about stakeholder policies and employees' rights. They do not, however, emphasize that such disclosure should be provided in the interests of investors, not just in the interests of stakeholders. Listed companies are required to publish an annual Corporate Governance Compliance Report disclosing the information specified in the form, as well as providing reasons for not implementing any recommended practices to which the "comply or explain" requirement applies. (OECD 2006, p. 78)
The CMB requires publicly held companies, other than banks and insurance companies, to prepare and publish financial statements that have been audited by CMB-authorized external auditors who meet the CMB's independence criteria. (OECD 2006, p. 84)
The existing corporate governance framework generally does not require companies to send detailed disclosure documents to their shareholders as a matter of course. Instead, companies are required to file certain documents in the local Trade Registry Office where the company's head office is situated, publish brief notices about certain company actions either in the Trade Registry Gazette, national newspapers or the Istanbul Stock Exchange (ISE) Daily Bulletin (or some combination of these methods) and, for certain actions, make detailed disclosure documents available for inspection by shareholders. (OECD 2006, p. 89)
OECD Principle V.F states that the corporate governance framework should be complemented by an effective approach that promotes the provision of analysis or advice by analysts, brokers, rating agencies and others that is relevant to decisions by investors and free from material conflicts of interest that could compromise the integrity of that analysis or advice. The essential criteria in the draft methodology focus on the activities of credit rating agencies (CRAs), sell-side equity analysts and professional investment advisers. This OECD Principle has been assessed as Not Implemented for the following reasons. Observers have expressed concern that, at least in a number of securities firms other than those operating as part of a global network, structural conflicts (e.g. arising from close working relationships among the investment banking, brokerage and research groups) appear to be present and appear not to be adequately addressed through internal controls. In Turkey, many analysts work for integrated financial services firms that belong to larger company groups. The structural conflicts might be particularly acute in such environments. Many of the core measures specified in the International Organization of Securities Commissions (IOSCO) Principles for Sell-Side Analysts have not been specifically incorporated into the regulatory framework (either as recommendations, e.g. in the form of a code of conduct, or requirements). In particular, a number of core measures designed to address structural conflicts in firms that employ analysts have not been implemented. The CMB has not inquired as to whether or not the licensed and/or approved CRAs operating in Turkey have implemented and disclosed how they have implemented the IOSCO CRA Fundamentals. Although the CMB does license/approve CRAs and imposes standards on them regarding the avoidance or mitigation of conflicts of interest, it has not incorporated some of the key measures recommended in the IOSCO CRA Principles. As there is only one domestically established CRA in Turkey and the other three CRAs are foreign-based, globally active firms, the assessment of the first Essential Criterion relating to CRAs is of less significance to the overall assessment. (OECD 2006, pp. 92, 96)
Principle VI: The Responsibilities of the Board |
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According to a 2006 Organization for Economic Cooperation and Development (OECD) study on corporate governance in Turkey, one subprinciple of Principle VI is broadly implemented and fourteen subprinciples are partly implemented. (OECD 2006, pp. 98, 100-106, 108-111, 113)
The Turkish Commercial Code (TCC 1956) and the Capital Markets Board (CMB) Principles define the board's duty of care, with most of the detailed guidance provided in the form of nonbinding recommendations in the CMB Principles. The elaboration of these duties, however, is a relatively recent phenomenon. Likewise, the TCC 1956 and the CMB Principles define a duty of loyalty for board members and, to a lesser extent, managers, with more detailed guidance in the form of non-binding recommendations. (OECD 2006, p. 98)
Market participants and observers have suggested that many board members perceive their primary duty of loyalty to the controlling shareholders who appointed them and generally do not take into account the minority shareholders' reasonable interests. Furthermore, to date, formal enforcement mechanisms and civil remedies generally do not seem to have operated as effective deterrents to inappropriate conduct on the part of a significant minority of board members. (OECD 2006, p. 100)
The TCC 1956 empowers Minority Shareholders to pursue a claim in damages against board members, even if the shareholders at the general assembly refuse to adopt a resolution in favor of such an action. This remedy, however, appears to be solely derivative in nature, rather than personal. In other words, this provision enables Minority Shareholders to pursue a claim on behalf of the company where board members have engaged in conduct only where that conduct caused damage to the company as a whole. While such a remedy is important and valuable, it could in some circumstances be of limited use to Minority Shareholders where the board members have engaged in conduct that abuses the minority or unfairly disregards their interests but does not cause harm to the company generally. (OECD 2006, p. 100)
Under the Capital Markets Law (CML 1981), any shareholder whose rights have been violated by a decision of the board to issue capital under the registered capital system in violation of the capital markets laws governing such activities can apply to the court within thirty days of the announcement of the board's decision to annul the board's decision. (OECD 2006, p. 100)
The CMB Principles encourage companies to develop ethical rules under the board's supervision and disclose these rules to the public. They also recommend that the board develop monitoring mechanisms to detect non-compliance with the rules. There is little guidance, however, specifying the kinds of matters that should be addressed in such ethical rules. (OECD 2006, p. 101)
The CMB Principles provide relatively detailed guidance to companies and boards about the responsibilities that the board should assume with respect to the review and guidance of corporate strategy. If the proposed amendments to the TCC 1956 are enacted, the powers to oversee and instruct management, dismiss executives, publish the company's corporate governance statement, determine the principles of financial reporting and accounting and organize the Ordinary General Meeting of Shareholders (OGM) will constitute "Reserved Powers" that cannot be delegated. These reforms are expected to clarify the board's legal responsibility to fulfill certain key supervisory and strategic functions, encourage board members to play a more active role and provide motivated board members who wish to assume a more active role with legal justification for taking on such responsibilities. (OECD 2006, p. 102)
The CMB Principles recommend that boards establish corporate governance committees and provide detailed guidance on the functions that such committees should assume with respect to, e.g.: (a) overseeing implementation of compulsory and recommended corporate governance standards; (b) monitoring the board's structure and operations; and (c) making recommendations to improve practices and structures as appropriate. (OECD 2006, p. 102)
The CMB Principles encourage the full board to assume responsibility for selecting, compensating, monitoring and, where necessary, dismissing key executives. (OECD 2006, p. 102)
Market participants, observers and CMB staff indicated that, to date, excessive compensation for board members and senior executives has not been a problem in Turkey, as it has been in many other countries. In fact, the opposite problem seems to exist in some companies. The TCC 1956 requires board members to be shareholders; some also directly or indirectly held significant blocks of shares in their own right. Accordingly, they might be compensated in their capacity as shareholders, they might derive other (sometimes non-pecuniary benefits) from participating as board members or they might simply perceive that it is an honor (or at least an obligation) to serve on the board if asked to do so. With respect to board members, the CMB Principles address this challenge by providing that: (1) compensation for board members should be determined by the OGM taking into account the time invested and performance of the board member; (2) attendance fees should be paid to board members, provided that such fees do not exceed a certain percentage of their compensation; (3) compensation for board members should be close to the fixed wage per hour of the chief executive officer/general manager, taking into consideration the time a member has to spend in meetings, pre- and postmeeting preparations and special projects; and (4) compensation and attendance fees for independent directors should be provided at a level to sustain independence. (OECD 2006, p. 104)
The CMB Principles also encourage boards to: (a) develop a remuneration policy covering key executives and board members that aligns remuneration with the longer-term interests of the company and its shareholders; and (b) ensure that the policy's development and ongoing application is overseen by the corporate governance committee. Detailed guidance about the measures that should be taken is included in the CMB Principles. They do not, however, specifically recommend that the company disclose its remuneration policy (although they do recommend that the compensation, bonuses and other benefits received by board members be disclosed). (OECD 2006, p. 105)
The TCC 1956 provides that a company's articles must specify the method by which people entrusted with the company's administration and control are chosen. This generally worded requirement ensures that general principles governing the formal nomination of board members at the OGM will be specified in the company's articles. The CMB Principles recommend that corporate governance committees of the board develop a transparent system, as well as policies and strategies, for the identification and subsequent nomination of potential board candidates. These recommendations, however, are not backed up by any specific recommendations with respect to the disclosure that the company should provide about the board's nomination strategies, processes and/or activities. The CMB Principles also recommend that companies include disclosure about candidates for election in the company's annual report. To date, however, companies generally have not provided the detailed disclosure about candidates as recommended in the CMB Principles. (OECD 2006, p. 105)
With regard to conflicts of interest, it is unclear whether or not the obligations relating to internal controls (including disclosure about the operation of internal controls) extend to conflict-of-interest issues. Further, disclosure practices with respect to internal controls are not yet widespread. The enactment of the proposed amendments to the TCC 1956 regarding company groups could have a significant, positive effect on company practices in this area. The proposed amendments would require the boards of controlled companies to analyze and report on related party transactions and other benefits. Such a reporting requirement is likely to encourage boards to strengthen internal controls relating to the monitoring, assessment and disclosure of transactions involving related companies that present an actual or potential conflict of interest. (OECD 2006, p. 107)
The CMB Principles encourage boards to oversee the disclosure of material information about the company and take responsibility for the company's communications strategy with shareholders. An increasing number of companies have developed an information policy and established a shareholder relations department to serve as the first point of contact for shareholders and other interested persons and to liaise with the board. (OECD 2006, p. 109)
The CMB Principles encourage a proportion of the board to be independent, specify independence criteria that address the primary conflict of interest that arises in many Turkish companies (i.e. the conflict between controlling shareholders and minority shareholders) and place the onus on companies to declare who they regard as independent and why. The CMB Principles also encourage boards to adopt practices providing for the establishment of board committees, a majority of whose members should be non-executive board members, to oversee tasks such as: (a) oversight of the integrity of financial and non-financial reporting; (b) nomination of board members and appointment of key executives; (c) board and executive remuneration; and (d) oversight of the company's compliance with laws, company regulations and ethical rules. The CMB Principles also recommend that the chairs of such committees should be independent members. The CMB Principles do not, however, expressly provide for independent oversight of related party transactions. (OECD 2006, p. 110)
The TCC 1956 provides that, any board member can: (a) request in writing that the chair call a meeting of the board; (b) require managers and their authorized representatives to provide all information concerning the conduct of the business and individual transactions; and (c) move for the board to order the production of books, records and other documents. There does not, however, appear to be any provision expressly empowering a board member whose request has been refused to apply to the court for a compliance order. (OECD 2006, p. 113)
Turkey