Turkey: Independent Board Of Directors’ Members Under Corporate Governance Principles

Last Updated: 13 September 2013
Article by Revan Sunol

Introduction

Corporate governance principles came into effect through the Turkish Commercial Code No. 6102 ("TTC"). By these principles, the disposition of rights and obligations of the companies' board of directors, managers, auditors and the decision mechanism in company business are regulated. Thus, corporate governance plays an important role in protecting the interest of the shareholders by observing the decision-making structure of the company.

In actualizing the corporate governance principles, formation the board of directors and the existence of independent members have a significant importance.

Board of Directors' Members under Corporate Governance Principles

The Communiqué on the Determination and Application of Corporate Governance Principles (Serial: IV, No: 56) ("Communiqué") by the Capital Markets Board, which was published in the Official Gazette dated 30.12.2011 and numbered 28158, regulates the corporate governance principles for companies that are within the scope of the Capital Market Legislation.

As is known, one of the characteristics of the companies subject to Capital Market Legislation is the difference between executive and non-executive board members. When executive board members participate in the daily decision-making and operational mechanism of the company, the non-executive board members are liable for determining and overseeing the general policy and strategy of the company.

Therefore, as the executive board members act as if they work for the company, the non-executive board members are supposed to be independent in order to supply objectivity. This carries importance in procuring transparency and accountability.

Independent Board of Directors' Members

Generally accepted applications have been established with regards to the existence of the board members, the duties of independent members and the formal requirements thereof and some certain criteria concerning the board member as an independent member, as stated in the Communique.

Members who are qualified as independent board members: (i) should not have direct or indirect commercial relations with the company, a related party of the company or with shareholders who directly or indirectly have 5% or more shares in the capital of the company (certain family members as determined within the Communique should also not be a party to such relations) (ii) should not work or be a member of the board of directors in companies which conduct all or some part of the activities and organization of the company and not; and (iii) should not be a shareholder, worker or board of directors' member; where he is a shareholder, his shares should not be more than 1% and be privileged, and he should reside in Turkey pursuant to Income Tax Law.

The independent board members are supposed to have occupational education, knowledge, occupational respectability and the experience to complete their tasks properly. In order to protect the rights of the beneficiaries within the company and to remain impartial, a person who can make decisions independently, has strong ethical values and the time to deal with company business should be elected as an independent member.

Election of Independent Board of Directors' Members

The Nomination Committee ("Committee") was established in order to elect independent board members who fulfill the above-stated criteria. This Committee receives requests for nominations from board members and shareholders, takes them into consideration and then presents its evaluation for the approval of the board of directors. Then, the board of directors submits the Committee report to the Capital Markets Board ("CMB") and if the CMB presents a negative opinion thereof, the related candidate cannot be nominated as an independent member of the board of directors to the general assembly of the company.

The board members appointed as independent members may lose their independence where they have to resign, are not available to fulfill their duties or an event occurs that causes them to lose their independence. In such cases, the board of directors should be informed promptly. Any board member losing his independence must resign as a matter of principle.

When a vacancy occurs in independent board membership, the Committee steps in and makes evaluations for the election of an independent member and then makes its candidate list and finally submits its report to the board of directors. The evaluations submitted by the Committee to the board will then be submitted to the CMB for evaluation, as stated above.

Economic Independence and Liabilities of Independent Board of Directors' Members

An independent board member should have economic independence in order to be considered "independent". If the independent board member relies on the income gained from his position on the board of directors, he cannot act independently while fulfilling his duty. Independent board members condoning issues without consideration and involvement in corporate operation is not acceptable in respect of the aim of independent board membership. Therefore, the income of the independent board members should be such that it affords protection of their independence.

Additionally, the TCC has brought a regulation on the liabilities of board members. Under Art. 553 of the TTC, the liability of the board of directors is limited by law and by the articles of association. Pursuant to the article, in the event the founders, board of directors' members, administrators and official liquidators breach their duties arising from the law and the articles of association by their "fault", they shall be held responsible for damages they cause to the company, shareholders and company receivables. Therefore, it is possible to set forth that, where the board members, of their own fault, breach their responsibilities arising from the law and the articles of association, they shall be held liable.

Conclusion

Regulations on corporate governance, imposed on companies by the Capital Markets Board with the Communiqué, provide for the determination and actualization of corporate governance principles. Within the scope of such corporate governance principles, objectivity and transparency is required from the non-executive board members while when determining the general policy and strategy of the companies. Therefore, independence is the criteria taken into consideration primarily in the election of independent board members.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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