The corporate scandals in global markets over recent years and institutional investors’ power to lead companies have made corporate governance principles a substantial and noteworthy investment criteria. This is especially true for developing countries, due to concerns over distinguishing the company’s ownership and management, independent functioning and the exercise of rights for the minority.
In 2003, when the concept of corporate governance was introduced in Turkey, the Capital Markets Board (CMB) announced corporate governance principles for publicly traded firms. These regulations brought into force the “comply or explain” principle that had already been established in developed markets. It was expected that companies would observe and comply with these principles at the demand of investors.
However, the number of firms that have adopted and complied with the principles has remained relatively low. Corporate governance principles have not gone beyond being a checklist for small and medium-sized enterprises, and while the Istanbul stock exchange, the İMKB, established the Corporate Governance Index in 2007, the number of the firms listed in the index was only 38 at the end of 2011.
Investors, who could be the most active party in seeking company compliance, have not done so and the style of “shareholder activism” experienced in the US during the 1990s has not as of yet been forthcoming in Turkey’s business environment.
Instead, corporate governance principles have been placed on the agenda following the problems among shareholders at a few firms. At the end of 2011 the CMB adopted several resolutions that could be considered radical, and firms have been obliged to practice compliance in ways different from global practice. Thus, Turkey has, maybe for the first time, leapt ahead with respect to international practices. The enforcement of such regulations led to some discussions. In general, the principles were adopted, though a few of them were criticised by some for being mandatory.
The critics were addressing mainly the regulations governing the number of the independent members who can serve on a board, the requirement that their independent members be approved by the CMB and the privileges granted to independent members in relation to certain board resolutions.
Pursuant to these regulations, for companies with a minimum market capitalisation of $560m and a free-float market cap of at least $140m, no less than one-third of the members on their boards must be independent members. Thus, roughly 50 large firms listed on the İMKB are obliged to increase the independent presence on their boards to the one-third minimum, while other firms may continue operating so long as they have at least two independent members.
Another issue that has garnered a reaction from the public is the fact that the execution of certain significant transactions, especially related party operations without the assenting votes of the majority of the independent board members, will require a shareholders’ assembly resolution. This has been perceived as a transfer of control from the majority to the minority in Turkey, a country that has many family-owned businesses. However, we have seen that publicly traded companies are quickly complying with the new regulations, without too much trouble.
While investing in developing countries, international investors pay significant attention to matters like shareholding culture and the exercise of the minority shareholders’ rights. These investors generally apply discounts to firms in such countries to accommodate possible deficiencies in these areas.
Turkey has moved ahead of developed nations with respect to corporate governance, and we believe that such discounts will not be in effect much longer.
Investors should be acquainted with the new regulations and should closely monitor these matters when it comes to the companies in which they have invested. Unless the investors claim for corporate governance practices, the principles shall remain on paper.
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