Turkey: Corporate Governance In Turkey In Light Of The Major Systems

Last Updated: 11 January 2008
Article by Ali Kosklu


Corporate governance is accepted as an important pillar in the architecture of the 21st century global economy. It is defined by OECD as "Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs"1.

The purpose of corporate governance is to achieve a responsible, value-oriented management and control of companies. Corporate governance rules promote and reinforce the confidence of current and future shareholders, lenders, employees, business partners and the general public in national and international markets.

The governance profile of a corporation has become an essential factor that investors take into consideration when deciding how to allocate their investment capital. Investors are interested primarily in the growth of their investments, but they also need to be confident that growth rests on secure foundations. It is to prove that companies and governments have been trying to attract investors and by the close of the century there were more than 60 governance codes and 30 markets, as well as numerous international codes. In this sense OECD offered a global set of principles under five headings2:

  1. The rights of shareholders,
  2. The responsibilities of shareholders,
  3. The rights of stakeholders,
  4. Disclosure and transparency,
  5. The role and structure of the board.

The OECD Code acts rather reference point for companies that wish to amend their governance practices.

Although the general principles are set, no two countries handle corporate governance in precisely the same way. Since comparative research explored two main distinctive patterns among advanced industrial countries, the main issue arises as where Turkey stands. First is the Anglo-American system which also goes by names as the "shareholder system" or "market-outsider system". At present Anglo-American type of corporate governance is primarily used in the United States and, with modifications, in the United Kingdom and Ireland. The other is the stakeholder system which also has been called as the "stakeholder" or "insider" system. This is the model that mainly prevails in Germany and Japan.

The following tables compare two major systems in different ways.

Shareholder Oriented

Stakeholder Oriented

Maximise shareholder value and look after shareholder interests,

Look after all stakeholder interests, especially public

seek profitability and efficieny

Less concerned about with profit than value for money

hard-nosed and commercial

Look for survival, long term growth and stability

Widely Held (Shareholder oriented)

Narrow Ownership (Stakeholder Oriented)

Ownership scattered with managers given a great of freedom but subject to market forces such as takeovers and proxy fights.

Ownership Concentrated in a few hands with strong power over management sometimes through an executive chairman.

All shareholders need protection with close attention to management actions.

Minority shareholders poorly protected and need independent director support.


Another difference arises from the boards' traditional structures: the single tier board going usually hand-in-hand with the shareholder model and the two tier board more common in Germany, Eastern Europe, France and a few other European countries.


Single Tier Board (Shareholder Oriented)

Two Tier Board (Stakeholder Oriented)

Anglo-American model where executive and non-executive directors sit together

Continental European model where a Supervisory board consists solely of non-executive s and a lower level management board consists of full-time managing directors.

Chairman works closely with CEO, and there are board committees for audit, remuneration and nomination.

Supervisory board totally independent from management board.

What is the corporate governance trend of Turkey as an emerging economy and a candidate at the threshold of the European Union? Is Turkish corporate governance system a shareholder or stakeholder oriented one? Are necessary steps taken in this regard?

The paper is going to continue by evaluating the Turkish corporate governance regime under four headlines and display the main issues handled in two major systems by making comparisons.

The Evaluation of Turkish Corporations In The Light Of Two Major Systems:

1. The Board of Directors (Management Board):

One of the most striking differences between Anglo-American and German Company Law is the presence of single-tier board in Anglo-American companies. Single-tier board model in the United Kingdom entrusts both management and control to the hands of the board of directors, who are vested with universal powers. Although it is not regulated by the Law the directors are referred to as executive and non-executive directors in order to perform their duties efficiently. Executives report to the non-executives regarding the day to day business of the company.

The German equivalents of "non-executives" are segregated from their executives in a separate independent board3. The central feature of internal corporate governance lies in the organizational and personal division of management and control by a two-tier structure that is mandatory for all joint stock corporations, regardless of the size. The composition of management board is determined by the supervisory board4. Management board must report to supervisory board at regular intervals on matters of strategy, profitability and state of the company. Committees are less common compared with the United Kingdom or the United States.

Although German legislation seems more influential on Turkish Law, Swiss effect is obviously observed on the board structure. One-tier board structure in Turkish companies is a consequence of Swiss effect. The board of directors of Turkish companies is mainly composed of the major shareholders or in other words, the owners. The members of the board are elected by the general assembly of the shareholders for a period of three years at the most. The minimum number of the board members should be three. Number of board members varies in accordance with the company's size and boards are mainly dominated by the insiders. In middle and small sized companies board members are directly involved in day to day business of the enterprise. However in large scale companies boards mostly allocate their time for resource acquisition activities, monitoring the management and involvement in strategic issues5.

2. Ownership Structures:

Anglo-American companies exhibit a dispersed shareholding. The capital market structure is highly developed with the contribution of institutional shareholders holding large amounts of shares. The ratio of listed companies is much higher than the continental Europe.

Almost all large German corporations have one or a few major shareholders, which may be other companies, wealthy families or banks and insurance companies, but it is to say that the most important shareholders are other enterprises rather than wealthy families and financial institutions (banks like Deutsche Bank, Dresdner Bank, Commerzbank and Allianz) Germany has fewer than 800 quoted companies, compared with nearly 3000 in the United Kingdom, and 85% of the largest quoted companies have a single shareholder owning more than 25% of voting shares. Corporate ownership is characterized by a strikingly high concentration of ownership, primarily in the hands of families and other companies. Corporate holdings frequently take the form of complex webs of control and pyramids of inter-corporate holdings6.

Ownership of Turkish companies exhibits a highly concentrated structure. In a substantial fraction of companies, the management coincides with the family of the controlling owner. The separation of ownership and control is mainly achieved through pyramidal or complex ownership structures and by using dual-class shares.

The ultimate owners of listed companies are mostly individual family members exercising control on cash flow rights through the said pyramidal ownership structures. In some cases ownership structure is organized within a legal form of a holding company which the groups of companies are very similar to Japanese keiretsu. The companies in a group hold shares of each other as it is the case in cross-shareholding.

Some of Turkish listed companies adopt dual or multiple class shares that take the form of non-voting shares or shares with low and high voting power. On the other hand some other companies issue founders' shares with extremely high voting rights.

3. Internal Controls and Auditing:

The importance of auditing arises from the universal agency problem. The dispersed ownership of the companies gives rise the issue whether or not shareholders' interest can be effectively protected by the managers and directors. Since shareholders have to delegate control to a few directors and managers to run the company on behalf of the shareholders, there is a potential risk that directors and managers may serve their own interest at the expense of all the shareholders.

In this context, the capital market impact over Anglo-American companies where the shareholding culture is considerably developed is the most prominent control mechanism. The pressure of capital markets and takeovers can heavily discipline managerial discretion of deviating from shareholders value of profit maximization. Thus, the control mechanism is referred to as either "outsider-external" or "market based". The rules established by the central authority are transparency and disclosure oriented7.

German companies rely on their inner control mechanisms. The control lies in the hands of the banks and two-tier board system. Contrary to the Anglo – American companies German companies prefer bank credits in order to finance their investments. It is a result of the long-term time horizon of investment decisions in coordinated market economies in Germany which requires long-term company financing. This type of financing is only possible if institutions enable banks to carry out company monitoring for an indefinite period. This monitoring is supported by interlocking directorates and shares owned by banks and insurance companies8. Thus, Germany is considered as the bank oriented system. Major German banks and insurance companies which exert an important influence in widely held companies, they protect themselves from hostile takeovers and other forms of outside control via a complex system of cross-shareholdings9.

Turkey, in this regard, may be labeled as an insider system country, since Turkish companies exhibit a highly concentrated and centralized ownership structure. In insider system countries that are classified by lack of external devices for managerial control, internal control such as board of directors become more important for corporate governance. Turkish Commercial Code sets two control mechanisms; first is the insider and second is the external audit. Insider control mechanism of Turkish joint-stock companies is performed by an audit committee which is assigned by the general assembly for a period of three years at the most. However, the audit committee is insufficient, especially in the companies where the shareholders are not a few. External audit is made in two ways. The appointment of a private outsider made upon the request of the shareholders who possess the 10% of the shares of the company. The second is the auditing made by the Ministry of Industry and Trade representatives.

On the other hand listed companies are subject to supervision of Capital Markets Board (CMB), Ministry of Finance and independent auditing firms. Auditing of the listed companies by CMB mostly reveals in the field of issuance of capital market instruments and public offerings. Independent auditing firms supervises the companies quoted to the stock exchange in financial and account issues. The external auditors have to be certified by CMB.

4. Joint Stock Approach:

The American point of view corporate governance is about shareholders controlling managers for purposes of shareholder profit10. In the United Kingdom, the objective of the corporation is basically the same as it is in the United States. English law makes it clear that the shareholders are the owners of the company, as it is accepted in American system shareholders are the owners of the company but not of its assets11, and that a company's board of directors is required to advance the interest of the shareholders as a whole. In other words, the shareholder expectation is that directors will maximize shareholder welfare and act in the best interest of the company, and directors will act ethically in the pursuit of profit12.

In Stakeholder oriented systems corporations based on a long term objective. Firms are social institutions, not just networks of private contracts or the property of their shareholders13 and as it is mentioned above, the long term objective does not consist of shareholder wealth maximization, but rather it ensures stability and growth, or stable growth.

On the other hand Turkish companies mostly take aim at short term value maximization. They mainly seek for the profit arising out of the difference purchase and sales and the reason behind they invest in stock options is the said difference. However, the Corporate Governance Principles published by CMB (2005 edition) sets the main objectives which should be pursued by the companies. The Turkish Corporate Governance Principles have been construed in the light of OECD principles. The company policies have started to change in this context. The stakeholder consideration takes parts in the debates more often.


CG reforms in emerging economies are driven by increasing need for extra-firm sources of capital in a period of globalization. Firms need higher investment levels to compete in global markets. Higher growth and increased profitability, accompanied with improved corporate governance standards may attract investors disappointed by the downfall of the US and European markets.

The investor confidence problem that Turkey used to face in the previous years has been overcome. Many Turkish companies have already begun IAS-compatible (International Accounting Standards) financial statements. The necessary steps are taken by the Turkish authorities in the relevant fields regarding the shortcomings of Turkish legal framework. The Commercial Code draft introduces executive and non-executives on the board, one-tier and two-tier board options, the restructuring of the shareholding concept allows equal treatment to shareholders and improves shareholder rights, the stakeholder rights are set under more protective articles, the accounting principles of the companies are re-set by taking into account the size of the enterprise, accountability and transparency principles take the place in the relevant articles and the insurance obligation of the company against the directors wrongdoings.

In conclusion corporate governance systems are the products of business culture and common behaviors where they are practiced. There are developments in all governance systems whether they represent a shareholders oriented system or a stakeholder one, but all the systems resemble around a generally accepted governance standard to the extent that their legal structure and business culture allow them. Since there is no one-size fits all corporate governance regime; the developments in Turkish corporate governance system should be considered and evaluated in this regard. The foreign direct investment need of Turkish economy and the economic growth are the main motivations behind the corporate governance studies which speed up the process of becoming a globally appreciated economy. The Turkish corporate governance framework is being developed in line with the financial and economic demands of the investors and, therefore, convergence occurs in accordance with the recent developments in Turkey and World.


1 OECD April 1999.

2 OECD, Principles of Corporate Governance 2004.

3Proctor,G and Miles,L;Corporate Governance, Cavendish Publishing, 2002, p. 88.

4 Malin, Christine; Corporate Governance, Oxford University Press, 2004, p. 127.

5 Kula, Veysel, The Impact of the Roles, Structure and Process of Boards on Firm Performance: Evidence From Turkey, Corporate Governance, Blackwell Publishing, Vol. 13, No. 2, March 2005 p. 265-276.

6 Franks, Julian and Mayer, Colin, Ownership and Control of German Corporations, The Review of Financial Studies, Vol 14, No.4, pp.943-977 Winter,2001, p 944.

7 Letza, Steve; Sun, Xiuping and Kirkbride, James, Shareholding Versus Stakeholding: A Critical Review Of Corporate Governance, Corporate Governance Alliance Digest, V. 12, No. 3, July 2004.

8 Höpner, Martin; Corporate Governance in Transition:ten empirical findings on shareholder value and industrial relations in Germany, Discussion Paper 01/5, Max Planck Institut Cologne, 2001, p.7.

9 Franks,Julian and Mayer, Colin, Ownership and Control of German Corporations,The Review of Financial Studies, Vol 14, No.4, pp.943-977 Winter,2001, p 952.

10 Salacuse, Jeswald W, Corporate Governance in the New Century,Company Lawyer, Vol.25,No.3,2004,p.73

11 Baums,Theodor and Scott, Kenneth E.; Taking Shareholder Protection Seriously? Corporate Governance in the United States and Germany, European Corporate Governance Institute, November, 2003, p. 3. available on http://papers.ssrn.com/abstract=473185

12 Sheikh, Saleem, A Practical Approach to Corporate Governance,Lexis Nexis UK, 2003, p. 2.

13 Streeck, Wolfgang, German Capitalism:Does It Exist? Can It Survive, MPIfG Discussion Paper 95/5, p. 9

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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