The new Banking Law1 ("Law"), enacted in the last quarter of 2005, sets forth significant provisions regarding corporate governance and is the first Turkish law to include specific references to corporate governance principles. The pending drafts of the new Turkish Commercial Code and the new Capital Markets Law also contain provisions related to corporate governance, but are yet to be enacted.
Perhaps the most significant provision regarding corporate governance affecting banks concerns the composition of the board of directors ("Board"). According to the Law, the Board must include only members appointed in accordance with the corporate governance based criteria set forth within the relevant section of the Law, which mainly address qualifications such as occupational competence, independence and efficiency. Furthermore, the directors of a bank’s branch should have the occupational adequacy and qualifications as set forth within the "Corporate Governance" section of the Law.
The Law provides that the corporate governance related principles, structures and periods should be regulated by the Banking Regulation and Supervision Agency ("BRSA") in consultancy with the Capital Markets Board ("CMB").
Unlike certain laws governing other regulated sectors, the Law includes a separate "Corporate Governance" section where many principles, criteria and qualifications are set forth, such as ones relating to the above-mentioned matters. This section consists of four sub-sections: (i) Management; (ii) Internal Systems; (iii) Authorized Organizations; and (iv) Financial Reporting.
Management and the Board
The Law requires the Board to be composed of at least five persons, including the general manager. The chairman and the general manager cannot be the same person. Similar to the Board’s requirements, the Turkish branches of foreign banks must be managed by a ‘board of managers’, consisting of at least three members, and such members must fulfill certain qualifications set forth by the Law.
The Law’s provisions regarding the duties and structure of internal and external audit mechanisms have been amended in order to more fully comply with corporate governance principles, in particular the principle of accountability. Furthermore, specific qualifications are set forth for general managers and vice-presidents, such as minimum professional experience and occupational restrictions. The bank’s administration should provide the BRSA with documents confirming that the candidates for these positions are in full compliance with such criteria. Furthermore, the managers and Board members must declare their wealth.
Transparent and efficient internal systems, such as internal control, risk management and internal auditing, should be established and operated within the bank’s management. A quarterly internal audit report must be prepared by the internal auditors and provided to the Board.
Authorized organizations are the external audit, rating or consultancy companies, which are authorized by the CMB to enter into transactions with banks. The Law sets forth provisions concerning the qualifications and working principles of the authorized organizations for realization of the bank’s external audit, appraisal, rating and consultancy services in order to maintain transparent and efficient banking operations.
Under Article 37 of the Law, banks must prepare their financial reports and statements in accordance with reporting systems set forth by the Turkish Accounting Standards Board and the BRSA. Furthermore, banks cannot close their balance sheets without consulting with their legal and supplementary financial books and records with their branches, domestic and foreign agents.
According to the Law, the Board shall be fully responsible for supervising the preparation of financial reports and charts, as well as their approval, auditing and submission to the relevant authorities. In addition, the Board must ensure the establishment of an adequate information system within the bank.
Other Corporate Governance Related Developments in Turkey
The World Bank, the International Finance Corporation and Lex Mundi recently published a corporate governance report named "Protecting Investors – Doing Business" based on research conducted with contributions by Harvard University and Dartmouth College. The report utilizes the corporate governance appraisal methodology in order to evaluate the level of investor protection in 155 countries. It contains a listing in which the "protecting investors" mechanisms are compared in terms of the extent of director liability, ease of shareholder suits and extent of disclosures.
Turkey achieved a rating of 5.0 out of 10 points, with well practiced disclosure applications and unsatisfactory director liability and shareholder lawsuit possibilities. As per the listing, New Zealand has the highest evaluation rating of 9.7, whereas the USA scored 8.3, and Italy, Spain and Greece scored 4.7 each.
1. Banking Law No. 5411, published in the Official Gazette dated 1 November 2005 and numbered 25983.
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