Companies in Turkey within the Scope of Corporate Governance Rules
Abstract
In this article, the general review and formations of the companies regarding corporate governance principles will be examined. Also, sources of Capital Market Law in Turkish Law and types of the companies will be explained regarding Principles whether if it is applicable or not.
Turkey is a country that has a significant place in the world with its economy, politics and geopolitical location affecting international trade.
The corporate governance understanding in Turkey shapes around various factors:
According to Ararat et al, “(i) minority shareholders’ and creditors’ rights; (ii) enforcement of law and regulations; (iii) ambiguities and weaknesses in legal/regulatory framework.”[1]Also, the corporate ownership structure in Turkey is insider-controlled which affects the management process.
In this article, the focus will be to evaluate the company law and structure of the companies in Turkey in order to grasp the corporate governance understanding and practice regarding last changes.
1. Sources of the Capital Market Law in Turkish Law
The main source of company law in Turkey is the new Turkish Commercial Code numbered 6102, which was promulgated in the Official Gazette on February 14, 2011 and has entered into force as of July 1, 2012. This Code consists of five books, which are commercial enterprise, company law, law of commercial papers, maritime law and insurance law.
The corporate governance understanding in the Turkish Commercial Code is based upon transparency, fairness, responsibility and accountability. The most significant change regarding corporate governance has been made within this new Code in the scope of application. Corporate governance principles should be applied to all enterprises whether it is a publicly traded company or not. The corporate governance understanding has been identified more detailed and in accordance with the recent changes around the world.
The new Turkish Commercial Code has provided transparency in the context of annual reports, auditing standards and the duties of board of directors. Having empowered the Capital Market Board as an authority for corporate governance regulations, it will lead to comprehend and follow the changes across the world.
One of the most significant changes made by the new Code is that every capital stock company should have a website. More significantly, annual reports of the companies have to be on this website considering the stakeholders and shareholders.
Sources of capital market law in Turkish law are;
✓ Capital Market Board Law
✓ Communiqués
The structure of the Turkish Capital Market has a different system than other global market regulations. The Turkish Capital Markets Board (CMB) and ISEare both one of the most significant institutions of the Turkish Capital Market. The CMB is authorized to publish communiqués about capital market regulations, public disclosure, auditing, market abuse, capital systems, mergers and demerges etc.[2] In 1986, the ISE has been established as a nonprofit organization in order to organize financial statements in accordance with the requirements of the CMB.
The CMB has authorized to adopt communiqués with the purpose of implementation of corporate governance principles in Turkey. The Communiqués consist of certain regulations such as; minority rights, auditing standards, disclosure and accounting rules in order to encourage getting the appropriate implementation of the principles. To illustrate some issued
Communiqués, here are some examples; Communiqué X/22 Independent Audit Standards in Capital Markets, Communiqué VIII/45 International Valuation Standards in Capital Markets,
Communiqué VIII/40 Principles Regarding Rating Agencies.
To specify corporate governance compliance reports and to bring obligatory effect to these reports; to compose an index in the ISE based on corporate governance principles are some of the studies in that field. All of the Communiqués aim to promote benefits of the principles to the companies within the shortest time.
With the proper implementation of corporate governance, the economic “image” of Turkey will improve and the capital flow will gradually rise, especially if applied and constituted sustainable. The CMB suggests that, the improvement of corporate governance should encourage international capital and financial actors; thus, institutions should be under the obligation of public disclosure requirements.3 In accordance with the Communiqués, companies need to establish regulations into their management processes in a limited time period.
In the context of corporate governance, the CMB has adopted the Turkish Corporate Governance Principles in 2004 and revised them in 2005 regarding the purposes of the OECD Principles. These principles are foremost based upon equality, transparency, accountability and responsibility. According to Nilsson, the CMB has considered the developments about the good governance understanding and examined various types of codes from different countries in order to meet the needs of the Turkish financial market and conditions.[3]
In the light of these developments, Turkey has made a good effort to follow the international agendas about corporate governance and took serious steps in order to have appropriate solutions to enhance the regulations in that context.
In order to understand the application in this field, there is a need to look at the structure of the companies, which is a subject of the corporate governance principles
The company ownership is an important issue including owners, shareholders, and groups affected by companies, in order to evaluate the corporate governance rules and practice. The Turkish corporate governance system’s main characteristic is to be close to the insider system. According to Yurtoglu, the rationales of this system can be explained as such; the number of the traded companies is less than in other countries, companies are mainly established in family-based structures and the financial market is deprived of activity within the companies.[4]
Further, according to Nilsson’s findings, a market-oriented system does not exist as a result of control mechanisms over the company represented by the majority of the shareholders.[5] In that context, corporate governance principles have been reshaped in order to correspond to the expectations of the shareholders, thereby strengthening the power of the majority rather than the individual. Thus, as can be seen these significant variations cause different corporate governance implementations within the respective countries.
According to the Turkish Commercial Code Articles 124 to 644[6]; the types of companies are as below:
2.1. Limited Company: A limited company can be established with at least two real or legal person and the liability of the shareholders are limited in the ratio of their shares. The companies are not accessible to the public.
2.2. Joint Stock Company: A joint stock company can be established with at least five real or legal person and the shareholders have liability according to their share proportion.
Contrary to limited companies, it is open for public access.
2.3. Commandite Company: In a commandite company, some of the shareholders are solely liable regarding their share percentage, whilst some of the shareholders have unlimited liability.
2.4. Collective Company: A collective company is almost similar to the commandite company. However, this company is only capable of having real person as a shareholder.
Considering the information evaluated about company law in Turkey, it will be more appropriate to mention the scope of these Principles. In accordance with the Turkish Corporate Governance Principles, the scope of the principles will only be applicable for publicly held joint stock companies. On the other hand, other joint stock companies, as privately held ones may also use the Principles optionally.
In regard to the ownership structure of the companies, the power of the family and individual groups should be mentioned. From the beginning, the family groups have held the majority rights of their respective companies. According to Demirag and Serter, familycontrolled holdings have shares of each company they already own within the holding and this situation causes a cross shareholding, which ultimately affects the capital rising. [7] Changes in corporate governance have to be made with regard to uncertainties of the economic and political environment in Turkey and the family-oriented structure of companies.
In this regard, the family and individual structure cause issues in the management process, especially concerning the application of the Principles. Needles, Turel and Sengul suggest that compatibility and effectiveness within the company have certain problems because of the ownership structure and the expectations of related parties.[8]
Furthermore, the ineffective control systems and ambiguity about the management process precipitate deficiencies in the direct and right implementation of the Principles.
Another important issue is the position of minority shareholders in the case of the separation of ownership within the company structure. In that context, the minority shareholders need extra protection from the family-owned companies. According to Orbay and Yurtoglu, regarding the pyramidal structure of companies in Turkey, it is evident from the fact that one share one vote principle affects minorities’ rights which is the case for 43 percent of publicly listed companies.[9]
And this situation causes an increased focus and analysis of control mechanisms in the company rather than the profit and loss count.
The main features of the companies in Turkey illustrate the various dimensions, including the economic and political environment, to be effective actively and passively within every company. Even if regulations were implemented word by word as set forth by the OECD, on the merit it would not serve the cause corporate governance tries to solve. Moreover, the main issue is how to adapt those rules to the certain legal systems.
To clarify the company structure in Turkey, some survey findings will be analyzed in the following chapter.
3. Some Survey Findings about Corporate Governance
An increase in the application of corporate governance throughout the world has led to augmented detailed researches in that field. In this regard, it will be useful to examine findings about the treatment of corporate governance both on national and international level regarding globalization.
As usually with applicable theories is, still conflicts about what good governance is occur. On the other hand, the connection between financial and legal systems creates an approach to evaluate good governance reforms. According to findings of Shleifer and Vishny, as long as large investors occur, the system, which protects both small and large investors of a company, is a sine qua non of the good governance approach.[10] Furthermore, it is a better way to produce legal protection mechanisms within the country to encourage the investors, rather than adopting certain types of good governance practices, which carry different types of implementation. Hence, the variability of legal systems, financial resources, company structures and interest groups lead to different implementations within the countries. According to the findings of Yurtoglu and Claessens, identification of the channels of corporate governance can be organized as such;
• “The first is the increased access to external financing by firms. This in turn can lead to greater investment, higher growth, and greater employment creation.
• The second channel is a lowering of the cost of capital and associated higher firm valuation. This makes more investments attractive to investors, also leading to growth and more employment.
• The third channel is better operational performance through better allocation of resources and better management. This creates wealth more generally.
• Fourth, good corporate governance can be associated with a reduced risk of financial crises. This is particularly important, as highlighted recently again, given that financial crises can have large economic and social costs.
• Fifth, good corporate governance can mean generally better relationships with all stakeholders. This helps improve social and labour relationships and aspects such as environmental protection, and can help further reduce poverty and inequality.”[11]
In the light of the information given above, the main features of corporate governance are based upon external factors, which are related to the internal matters. Stakeholders such as regulatory bodies, investors, creditors, analysts, activists and media; are looking for the correspondence of their expectations within the company. Furthermore, to protect their rights and to ensure their place within society will meet the interests of the shareholders and external factors as a starting point.
Having explained the main features of corporate governance on an international scale, there is a need to look at the approaches on a national level to observe the reflections of these findings. The Turkish Commercial Code does not include certain provisions about corporate governance principles. However, it has founding provisions, which embody main features such as fairness, accountability, responsibility and transparency.
The scope of the provisions about corporate governance is applicable to all equity companies, rather than only joint stock companies. The Code protects the beneficiary parties as a whole and refuses to strengthen the rights of shareholders, such as increasing the share of the owners.
Another important function inherent to the Code is the enumeration of the CMB as a regulatory body for the corporate governance principles, which leads to procure the certainty in that field. It is evident that in order to obtain international standards, there are certain objectives followed by Turkey in the Turkish Commercial Code as a starting point. All of the measures mentioned in the Code are preliminary for sustainable and good governance regulations.
In this article, the sources of company and capital market law, structure of the companies and related survey findings illustrate that Turkey has moved further with these regulations to follow the international developments of corporate governance. The findings about corporate governance indicate that Turkey needs
regulations regarding the conditions of the national capital market. Especially, the main features of Turkish companies have shaped these regulations with their family based and individual ownership structure. 05.04.2023
Atty. Med. Deniz YAHŞİ, LL.M
