Turkey: Corporate Governance In Turkey – Big Steps Ahead

Last Updated: 18 January 2007

Article by Paul Wouters and Ali Kosklu


There are various definitions of "Corporate Governance" ("CG"). CG is mostly considered as a set of processes, policies, laws that affect the way a corporation is directed / administered or controlled. It generally deals with the relationships / rights and obligations between the so-called "stakeholders" (shareholders, management, employees, board of directors, creditors and suppliers, regulators, environment and the community at large).

The importance of CG lies in its contribution both to business prosperity and to accountability. One prominent theme that is covered in CG is the accountability and fiduciary duty of the corporation and the directors of the corporation towards it’s’ stakeholders. Good mechanisms and guidelines have to be drafted and implemented to ensure the effective and reliable management within the corporation (avoiding conflicts of interest, abuse of position, guarantee compliance ...) and to protect the rights of the stakeholders. Good governance ensures that constituencies (stakeholders) with a relevant interest in the company’s business are fully taken into account (information, accountability …).

It will be clear that a good CG environment is a predominant necessity for any economy that desires to attract / enhance (long-term capital) investments and compete effectively in the global marketplace.

When one cannot trust the accounting figures that are produced, is not sure that the Board of Directors is not enriching themselves, that all regulations are complied with … one will hardly be enticed to participate in the life of the corporation (as a shareholder, supplier …). Furthermore, good governance can make a significant contribution to the prevention of malpractice and fraud. Society as a whole also suffers from any wrongdoings, since any insolvency resulting from such bad governance leads to the loss of capital, jobs, tax revenues, consequential damages …

CG has become an important issue in all industrial and emerging economies and it is accepted as an important pillar in the architecture of the 21st century global economy. As all trade barriers fall, markets expand, information flows improve, and restrictions on investment disappear it will become easier for investors of one country to invest in corporations in another.


As a transition and emerging economy, Turkey builds a strong regulatory framework for CG, which rests primarily upon a public enforcement model, with the Capital Markets Board (SPK) which is the major Authority in setting CG standards for publicly held companies, for enforcing the applicable standards and for fostering market integrity.

Most corporation structures in Turkey are characterized by concentrated (cross-) ownership, often in the form of family-controlled financial industrial company groups (concentrated shareholdership that also dominates management, strategic decision making within conglomerates of companies, many of which are listed on the Istanbul Stock Exchange). The legal form of most holding companies has a structure very similar to the Japanese keiretsu. A Group of companies are the outcome of the investments by a single family or a small number of allied families. As it is seen in the cross shareholding systems, some of the company groups own a bank that serves as the main bank of group companies. The companies are generally linked to each other by a web of inter-corporate shareholdings. Families hold control of a holding company which has shares in several other companies giving rise to a pyramidal structure.

The economy structure is not a problem in itself, provided that good and effective safeguards are in place that prevent potential abuse, protect market and minority shareholders and ensure market discipline.

Turkey has recognized for some time now the importance of good CG and various, serious initiatives have been taken. Adopting CG principles in accordance with the international standards even is considered to be a corner stone of stabilizing and enforcing the Turkish economy.

Therefore, Turkish authorities have been investing significant resources to implement programs designed to harmonize CG standards related laws and institutions with European and international standards and practices ..., the OECD principles of CG (last revised 2004) and so on.

In this regard, awareness of international good practice of CG principles is rising. The Turkish Industrialists and Businessmen Association ("TUSIAD") plays a leading role in coordinating and presenting the views of publicly held companies in Turkey on a wide range of issues including CG matters. Code of Best Practice, published by TUSIAD is a guideline for all publicly held companies. Although the CG landscape is much better then in the past, there are some areas such as control and disclosure of the related party transactions, the protection of minority shareholders, the role of the management board and the role played by the institutional shareholders in Turkish companies that could need further improvement. For the purpose of minimizing the defects and to level the Turkish system with the internationally accepted standards, Turkish Commercial Code proposed amendments which is estimated to be in force in 2007, includes CG measures among others. These are broadly:

  1. All companies will have to publish financial statements in accordance with Turkish Accounting Standards (that are compatible with International Financial Reporting Standards – "IFRS"). Furthermore, a significant minority of the publicly held companies have been preparing their financial statements in accordance with the IFRS for several years.
  2. All companies will be required to have web sites and make investor related information available on their site as a consequence of the improving weight of the stakeholders’ in the companies and transparency requirements. The introduction of a "comply or explain" requirement for the Capital Markets Board ("SPK") principles and better demand and supply conditions are improving the quantity and accessibility of the information.
  3. Proposed amendments are expected to clarify the board’s legal responsibility and fulfill certain key supervisory and strategic functions, encourage board members to play a more active role and provide motivated board members who whish to assume a more active role with legal justifications for taking such responsibilities.
  4. There will be special requirements for company groups with the aim of providing an enhanced transparency in the intra-group relations and reduced risk for abuse of minority shareholders.
  5. Parent companies will have enhanced rights in their affiliates. The proposed amendments will prohibit parent companies from abusing their power to control the subsidiary. A controlled company that had cross shareholdings in a controlling company would only be permitted to exercise 25 % of the voting, dividend and other rights attaching to that cross shareholding.
  6. Another improvement is the opening up the shareholders meeting to the stakeholders, and media.

There are also some amendment proposals regarding the CG framework to the Capital Markets Law made by the SPK. These are mainly:

  1. Proposed amendments to the Capital Markets Law would increase the range of the Executive Board’s enforcement powers and increase the applicable sanctions for the non-compliance with capital markets laws.
  2. The draft of Capital Markets Law introduces a statutory civil right of action for misleading disclosure in prospectuses and reverses the onus of proof. The issuer board members and intermediary institutions could be held jointly and severally liable, as well as auditors and selling shareholders.
  3. SPK is also in an effort to create a CG index to rate companies based on their adherence to the SPK’s CG principles introduced in 2003. In cooperation with the Turkish CG principles and the decision of SPK on 07.02.2005, Istanbul Stock Exchange ("IMKB") introduced the CG index principles. The creation of the index will increase the market pressure to put investors back in control of companies, creating a corporate culture of transparency.

Giving greater scope to institutional investors in the exercise of their rights as shareholders is a big deal of CG and most of the largest shareholders in other parts of the world are institutional shareholders. The role played by the domestic institutional investors in the form of insurance companies and pension funds has been rising. The most significant non-mutual fund institutional investor is OYAK. In addition, some listed banks have significant equity stakes in listed companies (Işbank, Akbank, YKB).

In the mean time also international standards for accounting and auditing are being introduced and implemented.

Turkey is likely to experience strong growth in the coming decade, which will fuel demand from companies for external finance and it is believed that the application of global CG principles and enforcement of the new Commercial Code will provide the necessary attention to be drawn on Turkish companies that they already deserve.

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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