Emily Vogl, Frank Vogl
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Corporate Governance Seen as Key Issue in the Development of Turkey's Stock Markets
Institute of International Finance Proposes Reforms IIF's Equity Advisory Group Releases Report
Washington, D.C., April 12, 2005 — The legal and institutional framework for corporate governance in Turkey has improved significantly in the last few years. Nevertheless, a report released today by the Institute of International Finance (IIF) finds that new steps are needed by the country's government and regulatory authorities to secure compliance and enforcement of essential rules and regulations.
The IIF, the global association of financial institutions with 340 members, established an Equity Advisory Group (EAG) in 2001 that has been reviewing the state of corporate governance in the leading emerging market economies. EAG Chairman Edward Baker, Chief Executive Officer and Chief Investment Officer of Emerging Markets Equities, Alliance Capital, Ltd., who headed a Task Force that reviewed conditions in Turkey, stated that, "The legal and institutional framework for corporate governance in Turkey has improved, especially in recent years, in parallel with the structural reforms carried out in cooperation with the IMF. However, some problem areas remain and we would like to see the authorities build on the substantial platform that is now in place."
Mr. Baker said, "In our assessment, corporate governance in Turkey could be strengthened further by making compliance with the Capital Markets Board (CMB) Principles mandatory where similar laws and regulations do not already exist. The Turkey Task Force believes that the protection of minority shareholders' rights is crucial to fostering investment and that voluntary guidelines are insufficient to push corporate governance practices to the extent needed to lower the cost of capital and attract both foreign and domestic investment."
In preparing its report the members of the Task Force met with officials from the Turkish government, the Central Bank, the CMB, the Istanbul Stock Exchange (ISE), private companies, rating agencies, law firms and consultancies involved in corporate governance, as well as with various private sector associations and groups active in corporate governance including the Corporate Governance Forum of Turkey (CGFT), the Corporate Governance Association (KYD), and the Foreign Investors Association (YASED).
The report noted that international investor interest in equities in Turkey has increased and that the Turkish authorities have made progress in a number of areas, including:
- Transparency of ownership structures.
- Adoption of international financial reporting standards (IFRS), inflation accounting, and consolidated reporting.
- Establishment of audit committees with non-executive members and strengthening of audit standards.
- Regulatory oversight of public companies.
- Regulatory and supervisory framework of banks and other financial institutions.
However, the Task Force stressed that Turkey is only now developing an equity culture, and at this time relatively few companies list on the ISE. The majority of listed companies are controlled by a single family as the controlling shareholder, which renders many protections for minority shareholders ineffective. "There is little evidence to suggest compliance with CMB Principles by listed companies. Serious implementation and enforcement weaknesses overshadow the ambitious efforts made by Turkish regulators to address structural weaknesses in the corporate governance framework," the report noted.
The Task Force did suggest that given the prospect for integration with the European Union as an important catalyst for change, Turkey's corporate governance practices could improve quickly. The Task Force's recommendations for improvement in corporate governance included the following:
- Steps to eliminate multiple voting rights, such as requiring elimination over a set period of time.
- Eliminate privileges held by majority shareholders to nominate directors and limit director nominations to those selected by corporate governance nomination committees and grant nomination rights to shareholders controlling a minimum percentage of voting power.
- Arbitration as a means to resolve shareholder conflicts.
- Creation of a sub-set of key, objective governance rules based on IIF Guidelines to be used for a separate ISE listing reflecting adherence to good corporate governance.
- Empower CMB to disqualify directors in case of wrongful act.
- Convert CMB Principles to legally binding rules, regulations or to listing requirements as appropriate.
The report pointed out that Turkish companies are often controlled through the use of founders' shares that carry multiple voting rights and/or board nomination rights. As a result, the protection of minority shareholder interests rests primarily on full disclosure and accurate financial reporting. In these two areas, Turkey has made some significant progress in the past few years. Nevertheless, the IIF said that most boards still do not operate with much independence from the shareholder who controls the majority of voting rights and according to one survey, 80 percent of listed companies had at least one board member who was a member of the controlling family. On average, more than one-third of the board members are members of the controlling family based only on having the same family name(excluding in-laws and other kinships).
The Task Force added that Amendments to the Commercial Code are now being drafted that may address some of these issues. Government officials assured the Task Force that the draft will be discussed thoroughly with the private sector, and their comments taken into account, before a bill is sent to parliament.
Emily Vogl, Frank Vogl