Author: | Published: 9 Oct 2003
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Although a latecomer to the international corporate governance arena, Turkey has been taking strong and decisive steps towards attaining international standards in its governance practices. Since 2001, Turkey has made considerable progress in establishing the principles of corporate governance in its private sector.

The benefits to be derived from implementing the four principles of corporate governance, namely fairness, transparency, accountability and responsibility are highly valuable, if not essential, for all companies, regardless of their legal nature, and for all administrative bodies and entities. Companies that focus on the importance of corporate governance principles are likely to attract capital and encourage foreign investors. Despite its geopolitical advantages and the potential for a booming economy, Turkey has not yet become an appealing environment for foreign investment. As an emerging market, Turkey's need for good governance principles is not just sufficient in terms of its private sector, but also for all entities that are in need of more effective governance standards. This makes the establishment of corporate governance principles in Turkey even more essential.

Both the Code of Best Practice introduced by TÜSIAD (Turkish Industrialists and Businessmen Association established by private sector with a strong lobbying power) in 2002 and the Draft Corporate Governance Guide by the Capital Markets Board (CMB) have attempted to address the needs of joint stock corporations, although they tended to ignore the principles that should be applicable to limited liability partnerships and other forms of legal entities. However, in a country where approximately 645 of the 85,000 joint stock corporations are publicly held and only 289 are listed on the Istanbul Stock Exchange (ISE), it will certainly be difficult to monitor the private sector's implementation of corporate governance principles. After all, approximately 99% of Turkish companies are family conglomerates, generally uninformed about the concept of an independent and professional governance system.

The private sector, through business associations and universities, and the administrative bodies through the CMB is endeavouring to disseminate corporate governance principles in Turkey with an understanding of the difficulties involved in encouraging the implementation of corporate governance principles.


A milestone in the development of transparency and accountability requirements, the Sarbanes-Oxley Act in the US has had an indirect influence in Turkey, which was reflected by the CMB's legislative amendments concerning independent auditing, special event disclosure rules and other amendments to certain legislation taking into account the specifics of the Turkish market.

The EU has reacted strongly to the new US regulations and believes that the scandals there resulted from problems in the GAAP, which are irrelevant to the European situation. The report prepared by the High Level Group of Company Experts commissioned by the EU (Winter Report) stresses, among other things, that there is no clear best type of corporate governance for Europe. Although the goals are similar to those of the US regulations, the strategies proposed are different, reflecting the challenges of harmonizing standards while respecting national and corporate diversity. While the European approach would allow companies the option, in some contexts, either of complying with suggested national regulation or explaining their refusal, the US prefers a more rigid standardization of principles.

Turkey seems to follow both trends to a certain extent while retaining the flexibility to reflect its own national and cultural identity in the corporate governance principles it adopts.


The board of directors

The duties and liabilities of a board of directors are dealt with under various provisions of the Commercial Code. There are also specific provisions in other legislation such as the Banks Act and the Capital Markets Law (CML).

The Commercial Code provides that only individuals can become members of a board and directors must be elected from among the company's shareholders or be representatives of legal entity shareholders. The Commercial Code does not require directors to be Turkish citizens and therefore permits foreign citizens to be elected as directors. These requirements are not exhaustive. Internal regulations and the company's articles of association may introduce additional requirements.

Duties and liabilities of directors

Directors are required to participate in all activities regarding the company's management. In particular, they are required to attend board meetings, raise questions and make suggestions at these meetings, and note their dissenting opinion in circumstances where they believe the resolutions are not in the company's best interests. Directors must also ensure that the business is running in accordance with the law, the articles of association and the company's interests.

Another important duty of directors is that they are precluded from entering into transactions with the company unless specifically permitted by the shareholders. If any party to such a transaction suffers a loss, directors may be held liable to compensate the company's loss and damage incurred by the company's shareholders or creditors. Furthermore, although the Commercial Code prohibits directors from competing with the company, this non-competition rule may be lifted by a shareholders' resolution.

Other liabilities

In addition to the above, the CML, the Corporate Tax Law, the Social Security Law and the Banks Act impose several further liabilities on the directors of companies that are subject to these specific laws.

Under the Commercial Code the following are entitled, subject to certain circumstances, to file a lawsuit against the directors concerning their liabilities:

  • the company;
  • shareholders;
  • creditors;
  • third parties;
  • bankruptcy administrators or trustees in bankruptcy; and
  • certain regulatory authorities.


Role of shareholders in the company's management

As the General Assembly of Shareholders is the ultimate decision-making body of a corporation, shareholders have a considerable level of power in determining the way a company is run.

Individual shareholders' rights

Individual rights arise from owning a share in the company and do not necessitate being a part of majority or minority shareholders. The rights related to governance of the company are, among other things:

  • filing lawsuits against board members and/or statutory auditors who have violated the Commercial Code or the articles of association or who have otherwise failed to perform their duties;
  • filing lawsuits for cancellation of a shareholders' resolution;
  • attending voting in shareholders' meetings; and
  • requesting information regarding the activities and financial situation of the company.

Minority rights

The Commercial Code defines minority shareholders' rights as the rights of a shareholder or a group of shareholders owning shares representing at least one-tenth (one-twentieth in publicly-held corporations) of the share capital of a joint stock corporation.

The main rights to which minority shareholders are entitled in connection with governance monitoring are to:

  • request that the company file a lawsuit against the board members and auditors concerning personal liabilities for their unlawful acts;
  • request appointment of an independent auditor;
  • file complaints before the statutory auditors of the joint stock corporation; and
  • request that the board of directors call the shareholders for a meeting and request the inclusion of additional items in the agenda of the meeting.

However, minority shareholders face a number of legal constraints in exercising these rights, thereby preventing minority shareholders from constituting a threat, or acting as a watchdog over the company's actions.


The CMB has amended many of its communiqués or issued new communiqués to impose basic corporate governance principles on publicly-held joint stock corporations. Among others, a significant amendment was made on the Communiqué on Independent Auditing. This communiqué prohibits companies already rendering auditing services to a company from providing bookkeeping, financial management, valuation, consulting and other related services. Another important amendment was made to the Communiqué on Special Event Disclosures. This communiqué improved the specific events that should be disclosed to the public in order to provide transparency and keep the investors informed. A new Communiqué on Cumulative Voting was issued and this is favourable to minority shareholders, enabling them to weigh all their voting rights toward one particular board candidate or disperse their voting rights equally among other candidates.


Largely inspired by the OECD's Code of Best Practice, TÜSIAD issued a Code of Best Practice setting out a number of guidelines regarding the duties and responsibilities, composition, appointment and decision-making mechanisms of the board. It also proposed a number of means to monitor the performance of the board, and the board's relationship with other bodies of the company. The Code introduces new committees such as the Corporate Governance Committee, the Audit Committee and the Senior Management Training, Career and Remuneration Committee. Although the Code is not legally binding, TÜSIAD intends to influence its members and emphasize the importance of corporate governance.

The Code introduces the concept of CEOs that does not legally exist under the Turkish Commercial Code. It encourages companies to appoint a CEO, and urges companies to make sure that the CEO is a different person than the chairman of the board. In an effort to strengthen independence, the Code also states that at least 25%, and preferably 50% of the members of the board should be independent, a goal which may be gradually achieved, although it is difficult in practice.


Corporate Governance has also been a concern for a skilled group of senior executives and professionals who have formed the Corporate Governance Association in order to pioneer the establishment, adoption and development of corporate governance in Turkey.

The association plans to organize meetings and seminars aimed to educate businessmen and company shareholders in cooperation with the CMB and the ISE. One of the main targets of the association is to spread corporate governance throughout Turkey and provide assistance when needed.


The CMB's Corporate Governance Guide, which is not binding, emphasizes the principles that have already been set out in the Commercial Code, and also provides a number of new guiding principles to enhance the implementation of corporate governance. According to the preamble, the principles set out by the Guide are the so-called "implement, or explain why you do not implement" principles. Because the CMB is an independent authority that regulates capital markets and establishes rules for publicly-held corporations, the Guide does not address closely-held corporations.

The guidelines set out by the Guide may be examined under the following headings:


The foremost right of shareholders that has been emphasized by the Guide is the shareholders' right to obtain information about the company's activities and decisions. It requires that a Corporate Governance Committee be formed, and a sub-unit for relations with shareholders be established under the Corporate Governance Committee. Furthermore, it provides that all information that should be known by the company's shareholders must be disclosed on the company's website.

The Guide encourages the drafting of articles of association in a manner that enables minority shareholders to exercise their minority rights more easily, and makes it easier for all shareholders to freely transfer their shares.

Special importance is paid to the effective election of the board of directors. The Guide requires companies to provide, to all shareholders, detailed information regarding the board nominees' relations with the company and other companies, their personal and educational backgrounds, assets and whether or not they meet the required criteria for independence. In addition, the Guide requires that shareholders be informed as to what information the candidate member has refused to provide about himself or herself.

The Guide also recommends that companies avoid using privileged voting rights, and emphasizes equality among shareholders. In an effort to ensure equality among shareholders, the Guide further encourages companies to include a provision in their articles of association that would entitle the owners of publicly-held shares to nominate at least one board member. In this respect, it encourages the inclusion of terms allowing cumulative voting.

Public disclosure and transparency

The Guide encourages greater transparency and requires publicly-held corporations to disclose all significant information that could influence stakeholders' investment decisions, without limiting such information to the legal disclosure requirements.


The term 'stakeholders', which is not recognized by the Commercial Code, was first introduced to the Turkish corporate world by the Guide. It defines stakeholders as "any person, entity or group that has an interest in a company's accomplishment of its objectives and the performance of its activities". The Guide further provides that the stakeholders of a company include, without limitation, the company's shareholders, employees, creditors, debtors, customers, suppliers, labour unions, the government and potential investors in the company.

The Guide recommends that companies work towards a balanced policy, protecting each stakeholder's interests independently. It further suggests that companies devise mechanisms and models to ensure the participation of stakeholders in the company's management, in a manner that would not impede the activities of the company.

Furthermore, the Guide states that a company's human resources policies and their relations with their customers and suppliers be carefully treated, taking into account the principles of equality, fairness and confidentiality. Finally, the Guide places emphasis on companies' social responsibility, and provides that companies must be sensitive to the needs of the environment, consumers, public health and ethics.


The Guide attempts to set out clearer duties for the board, and provides a list of their duties. In addition, it suggests that board members be divided into two classes: executive members and non-executive members. More importantly, the Guide recommends the presence of independent board members.

It is also recommended that the articles of association include terms requiring board members to:

  • return any and all monetary benefits received from the company that exceed the monetary benefits provided to board members of other companies in the event that the company goes bankrupt; and
  • declare in writing that they will comply with the relevant legislation and the company's internal policies and regulations and that they will be severally liable for any breaches thereof.

In an effort to further enhance the independence of the board, it requires that the chairman of board, the CEO and the general manager be different persons in order to prevent any conflicts of interest.


Both the Code and the Guide are mere guidelines, with no binding effect over companies that fail to implement them. This makes Turkish corporate governance a set of voluntary principles that are aimed at improving a company's performance. Looking at this from a different angle, it may be asserted that although these principles are not legally binding, they can become practically binding.

The ISE has recently announced that it will soon issue a separate corporate governance index for companies that implement the principles set out by the Guide. This champions league of companies will certainly encourage listed, publicly-held corporations to accommodate the principles of good governance and to implement them to the extent possible. In this respect, it could be said that the Guide could have a negative binding effect over publicly-held companies.

Moreover, it is likely that the content of the Code and the Guide will provide a basis for the corporate governance ratings of rating agencies. Therefore, although compliance with the Guide and the Code is voluntary, benefits that can be gained by good rating notes and being ranked in the ISE's future corporate governance index can at least render good governance a crucial requirement for listed, publicly-held corporations.


Like its political structure and multicultural population, Turkish corporate structure can be considered as special compared to that of other countries. This is particularly due to the large number of family conglomerates. It is inevitable that Turkey will face some difficulty in adopting corporate governance principles because of the lack of confidence in each other amongst businessmen, which is one of the main reasons for the large number of family businesses. It is certain that once corporate governance principles become an objective rather than a legal obligation, the private sector will enhance its already powerful status in Turkey. The results of such enhancement are likely to provide more investment, higher efficiency and more democratically and fairly run companies.

Hergüner Bilgen Özeke
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Süleyman Seba Caddesi
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