Turkey Sets the Tone In International Corporate Governance Standards
Turkey and Corporate Governance. Good Governance for all of us.
Turkey should align its laws with that of its European counterparts, and particularly the European Directives on Takeover Bids
A recent study prepared by Gide Loyrette Nouel, an international law firm, and published by EBRD in May 2009 discusses that capital markets regulations as well as justice system in the context of mandatory tender offer are still not sufficient to deliver rights and justice.
Capital Markets Board has the regulatory responsibility to protect shareholders of publicly traded companies in Turkey. Indirect acquisitions are not expressly regulated under the CMB regulations. However the CMB has adopted a practice in indirect acquisitions of calculating the offer price based on the weighted average exchange trading price of the shares of the listed subsidiary for the three-month period before the date of the acquisition triggering the tender offer.”
Here is a significant example from the study published by EBRD to show how regulations are lacking to guide market participants.
Finansbank in April 2006 officially announced that National Bank of Greece signed agreement to purchase a 46% stake in Turkey's Finansbank from Fiba Holding and Fiba Group companies for US$2.8 billion (€2.3 billion).
With its decision dated December 6, 2006, the CMB approved the mandatory tender offer price proposed by the acquirer which had been calculated based on a weighted average of the subsidiary’s stock price during the three months preceding the change of control over the target. However this calculated mandatory tender offer price was lower than the actual trading price on the date of the CMB’s approval.
“In relation to the acquisition of Finansbank by the National Bank of Greece one of the shareholders of the listed company of Finansbank, Finansal Kiralama A.S., namely East Capital Asset Management challenged the decision of the CMB claiming that the offer price should not be less than the trading price of the shares.
The Administrative Court reviewing the matter ruled for the claimant shareholders, cancelling the CMB decision approving the tender offer with immediate effect at May 16, 2008. The CMB initially appealed the ruling of the Administrative Court thereafter adopted a second decision requiring the purchaser, National Bank of Greece, to apply to the CMB for a second tender offer and provide with this application the calculation on the shares of the listed subsidiary. The purchaser, the National Bank of Greece, provided the valuation for the shares, but challenged the CMB decision requiring a second tender offer to be launched by filing an administrative lawsuit on the grounds, among others, that the tender offer was already completed. So to say litigation path is a long and burdensome one for the minority shareholders with no guaranteed time frame and outcome.
Market participants are still waiting draft CMB communiqué prepared in April 2009 to be valid for further clarification.
As study concludes it is time for Turkey to revisit and improve the protection of minority shareholders’ rights in the context of mandatory tender offer rules. In so doing, Turkey should also align its laws with that of its European counterparts, and particularly the European Directives on Takeover Bids, in line with its commitment to adopt the European Union’s acquis communautaire.
ISS Corporate Services, the corporate governance research house, has awarded Sekerbank 7.1 out of 10.0 rating for its corporate governance. This is the first rating ISS has awarded a Turkish finance institution. The rating is based on the corporate governance regulations issued by Turkey's Capital Markets Board (SPK) in July 2003. Companies that get a rating of 7.0 or above out of 10 from ISS Corporate Services can be included in the Corporate Governance Index of Istanbul Stock Exchange (IMKB).
So far seven listed companies have been rated in accordance with CMB corporate governance rules. These are; Dogan Yayin Holding (DYHOL.TI), Hurriyet Gazetecilik (HURGZ.TI), Tofas (TOASO.TI), Turk Traktor (TTRAK.TI), Tupras (TUPRS.TI), Vestel (VESTL.TI), Y&Y GYO (YYGYO.TI).
Following the wave of macroeconomic restructuring in Turkey in the wake of the 2001 financial crisis, and the privatisation trend of the last decade, many major Turkish corporates have materially improved their corporate governance practices, driven primarily by their expansion and integration within the international capital markets. Visible progress has been achieved in transparency, particularly with regard to financial information disclosure and ownership structures. However, challenges remain with regard to board quality and related-party transactions due to the predominance of family ownership, combined with wealth concentration and sometimes complex ownership structures.
Turkey is currently implementing structural reforms and striving to improve its corporate governance as part of its long-term strategy to prepare for European Union membership. Fitch expects that the long-awaited Turkish Commercial Code will increase investor focus on corporate governance and improve transparency of ownership structures as well as intra-group transactions, key areas in Fitch's corporate analytical work.
Fitch believes that companies with poor corporate governance tend to have lower ratings. While it is important to emphasise that no single factor, but rather a combination of factors, determines a rating, weak governance tends to be pervasive and have a negative impact on business operations, and consequently on financial performance - which is then reflected in the rating.
Fitch's full report 'Corporate Governance - The Turkish Perspective' is available on the agency's public website at 'http://www.fitchratings.com/'.
SAHA Kurumsal Yönetim ve Kredi Derecelendirme Hizmetleri A.Ş. has declared the corporate governance rating of TOFAŞ Türk Otomobil Fabrikası A.Ş. as 75.72 (7.57 over 10). This has proven that the Company showed a good performance within the scope of the existing Corporate Governance applications in accordance with the Corporate Governance Principles of CMB.
As a result of the Corporate Governance Rating Report consisting of 4 main titles in accordance with the Corporate Governance Principles of the Capital Market Board, namely; Shareholders, Public Information and Transparency, Stakeholders and Board of Directors, Tofaş is rated with 7.57 over 10 as a general average.
The evaluation is based on the Corporate Governance Principles of CMB issued on the basis of OECD regulations.
This has proven that Tofaş showed the value and importance attached to the public and its shareholders by implementing the Corporate Governance applications.
The issuance of report has finalized one of the prerequisites on implementation of Corporate Governance Index that will become an important reference with regards to compliance of Companies listed in Istanbul Stock Exchange with the Corporate Governance Principles.
A recent note on the dispute is coming from www.footballeconomy.com; several investors in the merchandising arm of leading Turkish club Galatasaray are locked in a dispute with the club's owner over minority shareholding rights. These investors, including several London-based fund managers, object to a proposal by the club's unlisted parent company to merge the merchandising division, known as Galatasary Sportif, with its footballing side. They claim that such a move, among other things, contradicts statements in the prospectus issued when they invested in the division that ring fenced its revenues from those of the rest of the club. QVT Financial, a $5.5bn investment management firm, that owns about $20m of Galatasary Sportif stock, has complained to the Turkish market watchdog, the Capital Markets Board. The firm, and other shareholders, want the watchdog either to block the merger or to order the parent company to buy them out at the price the stock traded at before the merger was proposed last summer, which is at least 50 per cent higher than its current share price. QVT says the CMB's approach to the merger proposal is a crucial test to verify the Turkish market's reliability in the eyes of international investors, but the watchdog seems to be more inclined to view it as a dispute between shareholders which may not break any laws.
Vestel performed satisfactorily in all of the four main components (Shareholders, Public Disclosure & Transparency, Stakeholders, Board of Directors) of the rating, though showing particular strength in its Shareholders area.
Technical Committee of IOSCO (INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS) in consultation with the Organisation for Economic Co-operation and Development (OECD) prepared a detailed report to gather information and identify dominant trends with respect to corporate governance standards, more particularly with respect to the independence of boards, not to pass judgement on actual corporate governance standards or practices in individual jurisdictions or, even less, to determine “best practice” with respect to standard-setting or company practices.
The report is composed of two main parts. These are "the corporate governance environment" and "standards related to board independence".
Here is a summary of
Overview of Listed Companies
* 316 companies are listed in Istanbul Stock Exchange with a total market capitalization of 162,392 Million USD as of December 2006.
Ownership Patterns
* Ownership pattern may be classified as block share ownership pattern (that is, listed companies whose shareholder base consists of one or a small number of shareholders who each own a relatively large block of shares).
Board Oversight Structures
* The traditional single-tier oversight structure used but the current situation is continuing to evolve through the creation of specialist sub-committees, such as audit, nomination and remuneration (or compensation) committees. Where such sub-committees are required, all these jurisdictions either require or recommend that the sub-committee include board members who meet specified criteria for independence.
Corporate Governance Guidelines
* Securities regulator (Capital Markets Board of Turkey) is directly responsible for the development of corporate governance guidelines.
* Companies are required to not only disclose in their annual report the extent to which they have implemented the corporate governance principles and the reasons for any non-compliance, but to also indicate whether the company plans to change its corporate governance practices in the future.
Rules on personal liability
* There are specific rules discharging board members from liability for board decisions taken without their participation or with their opposition.
* Shareholders holding more than 5% of the capital can force the company to initiate legal action, even if the general meeting voted against, although they are required to deposit their shares as a guarantee.
Disclosure of personal and professional information
* There are requirements for public disclosure (not only towards shareholders) of biographical and professional information about all board members, including those who are not candidates for re-election.
Availability and dedication
* Companies are recommended to adopt rules restricting the number of outside board memberships or other external commitments that board members can assume.
Induction courses and training
* Companies are encouraged to offer their newly appointed board members orientation courses about the business of the company.
* Companies are encouraged to offer continuous trainingfor board members.
Access to advice and information
* There are two general standards focusing on board members’ access to information. The first is access to external legal, accounting or other specialist advice, at the company’s expense.
* The second standard is access to the company’s records, management and staff. Board members may request this information during board meetings.
Evaluation
* A periodic evaluation of each board member is recommended.
Standards relating to compensation levels
* The recommendation is to calculate compensation on the basis of the time actually devoted to the company and the hourly compensation of the company’s CEO.
Persons or committees determining compensation
* The remuneration of independent board members must be approved by the shareholders’ general assembly.
Classifications of Board Members
* Board members are classified as executive and independent.
Negative criteria
* Relationship to significant shareholders is seen as one of the negative criterion relating to the board member’s status.
* Negative criteria apply to relationships that the board member may have with companies related to the company and not just the company itself. The relevant relationship for the criteria of not being a member of the management of the company or an employee or a business associates is "between the company, its subsidiaries, affiliates or any other group company.
* Not to have material business relations with the company or its group, within a look-back periods ranging from 1 to 3 years.
* Not to be an employee of the company or a company in the group.
* Not to receive compensation from the company or its group other than directorship fees.
* Not to have been an employee of the external auditor of the company or of a company in the group within 2 years period.
* Not to exceed some maximum tenure as a board member. This tenure is 7 years, the board member may remain on the board but cannot be considered as independent.
* Not to be or represent a significant shareholder. Being, representing, or having links with a significant or substantial shareholder deemed as a negative criterion for independence. The definition of “significant shareholder” is defined as 1%.
Determination and disclosure of independence of individual board members
* Independent directors must submit to the company an annual statement declaring their compliance with the independence criteria and this has to be filed with the Stock Exchange by the company.
* The minimum recommended proportion of independent board members to total board members is one third.
Audit Committee
* The existence of an audit committee is mandatory for listed companies.
* It is recommended that independent board members should constitute at least one half of the committee members.
* It is recommended that an independent board member chair this committee.
Other Committees
* There standards recommending or requiring the establishment of other standing committees such as: risk management committees, board evaluation committees.
Eliminating the discriminatory treatment of company shareholders by introducing the principle of "one-share, one-vote" is one of the most important pillars of Corporate Governance. A wide range of dual-class structures exist. In some cases, the superior class benefits from dividends more than others. Essentially, the term covers any structure that confers a disproportionate amount of control on one group of shareholders in relation to their equity participation in the company.
Dual-class structures are unfair and give economic power to superior shareholders while facing the same financial risk.
Akbank is awarded with a prize by Turkish Shareholders Association after repurchasing of founder's shares in order to comply with “one share-one vote pricipal”. This attempt is accepted as revolutionary by the Association because Akbank is the first company eliminating dual class shares.
At the Extraordinary General Meeting of Shareholders and the Meeting of Founders and Usufructuary Shareholders on June 23, 2005, a decision was taken to buy-back 2,538 founder and usufruct shares using the Bank’s extraordinary reserves, after which these shares were to be cancelled and disposed of. This procedure had to be undertaken because the existence of these securities, corresponding to a 10% profit share out of the Bank’s distributable profit and having no voting rights, was not compatible with the principles of contemporary corporate governance and that unnecessary pressure was being exerted on the value of Akbank shares
Accordingly, this repurchasing transaction resulted in:
Large-Cap Banks | Voting Rights | Dividend Rights |
AKBANK | No privileges | No privileges |
GARANTI | No privileges | % 10 of payable dividend will be paid to founder shares |
ISBANK | No privileges | No privileges |
YKB | No privileges | No privileges |
Mid -Cap Banks | Voting Rights | Dividend Rights |
BANKASYA | Board of Directors and Statutory Auditors are elected from those nominated by the minimum 51% of the total votes of the Group (A) shareholders present at that meeting. | No privileges |
DENIZBANK | No privileges | |
FINANSBANK | No privileges | % 10 of payable dividend will be paid to founder shares |
FORTIS | No privileges | No privileges |
TEB | No privileges | No privileges |
TSKB | No privileges | % 10 of payable dividend will be paid to founder shares |
Turkey welcomes first licensed Turkish corporate governance rating company, namely Saha Rating.
Saha Rating provides rating services especially to the companies aim to be included in Istanbul Stock Exchange Corporate Governance Index and to Institutional Investors, such as pension funds.
In order to be included in the Corporate Governance Index companies should be rated minimum 6 out of 10. The related rates designated by Saha Rating are as follows;
Rate | Deficiency |
9 - 10 | Company is in full compliance with the Corporate Governance principles set by Capital Markets Board of Turkey. Management and internal control mechanisms are well defined and working. all kings of risks pertaining to Corporate Governance issues are defined and managed effectively. |
7 - 8 | Company mostly in compliance with the Corporate Governance principles set by Capital Markets Board of Turkey. The management anf internal control mechanisma are defined and working, although minor amendments are needed. |
6
| Company is moderately in compliance with the Corporate Governance principles set by Capital Markets Board of Turkey and also exercising some of the policies designated. Improvements to management and internal control mechanisms are needed. |
Denizbank is very well known in Turkish Banking sector with high quality of Corporate Governance practices.
Franco-Belgian Bank Dexia SA is also one of the leading banks in Europe and one of the main roles of their Board is to ensure compliance with good governance principles.
As of October 2006, Dexia Group acquired 75 % of Denizbank. After the merger of two banks, Board of Directors of Denizbank decided to change some of the articles of association related to Corporate Governance principles.
The application of Denizbank for changing some articles of association is rejected as Capital Markets Board of Turkey find the changes against the principles of Corporate Governance and underline their existence in the course of IPO.
Dexia attempted to amend articles below;
Article 14. The shareholders who hold minimum 1% of the Bank’s available shares may demand from the General Assembly to appoint a Special Auditor especially to follow and clarify a certain financial situation. If this demand is rejected, the minority shareholders can demand from the court to appoint a special auditor to examine and clarify the situation.
Article 17.In the Board of Directors there are minimum 2 (two) and maximum 5 (five) independent members, the explanation related with the independency of the members of board of directors is given in the corporate management statement and annual operation report of the board of directors. Bank’s General Directorate and Board of Directors Presidency functions cannot be executed by the same person.The Chairman or Deputy Chairman of Board of Directors must be an independent member.
Article 20.In addition to these, the minority shareholders and beneficiaries can demand in writing from the Chairman of Board of Directors to take a certain subject into the agenda of the board of directors. Upon such a request the Chairman of Board of Directors may have the subject added to the agenda of the following Board of Directors meeting.
Article 23.The Corporate Management and Appointment Committee is responsible from following the compliance of the Bank to the corporate management principles.
Capital Markets Board of Turkey retreated from the previous decision about Turk Tuborg Bira ve Malt Sanayii A.Ş.
If you follow our blog you will be heard of the decision of Capital Markets Board of Turkey accusing Turk Tuborg with paying unfair amount to Carlsberg, the parent company, as license fee. While the payment was awaited, because the last decision was given to extent the due date of payment, now it is understood that the decision was in the process of reexaminaion.
As far as I know, this will be the first time CMB retreating from their decision. It is not so common for a public body in Turkey to accept such kind of advocacy from a someone under their rule. Mostly they prefer to change their mind after the issue is brought to a lawsuit.
What is problematic for us is that, Turk Tuborg is not disclosing any information about this issue. 95 % of the company is owned by Carlsberg, 18 % of Turk Tuborg is publicly traded and the estimated number of shareholders is 2200, but the company is not having a professional Investors Relations Department. As we take Corporate Governance is not only for shareholders, we believe every company should have a sound Corporate Governance practices.
1. SHAREHOLDERS (1.1) There is no Investor Relations Department set up, Legal Affairs Department and Financial Control Department are responsible from investor relations. (1.2) The request for appointing a special auditor as an individual right is not stipulated. (1.3) There is no addition to provision to the articles of association to authorize the General Assembly in matters concerning important decisions. (1.4)There is no privilege granted to controlling shareholders regarding one share-one vote principal, (1.5)The accumulated voting method is not applied for minority shareholders and there is no board member appointed to represent minority shareholders. (1.6)There is no policy set for dividend distribution. (1.7)There is no provision restricting the transfer of shares. | 2. TRANSPERANCY and PUBLIC DISCLOSURE (2.1) There is no “disclosure policy” published by the company. - Investor announcements are made on time and published in their web site. - Internet web page of the company contains information but only in Turkish. (2.2) The ultimate controlling beneficial shareholder is disclosed. (2.3) Financial statements and annual reports are prepared and disclosed. (2.4) The company did not disclose any information about independent audit and consultancy services. (2.5) The list of those who have access to insider information is disclosed. | |
4. BOARD STRUCTURE (4.1) There are no independent members at the Board of Directors. The resume of the Board Members are not disclosed. (4.2) There are no provisions included in the Article’s of Association concerning the qualifications of the Board Members. (4.3) The company’s mission and vision is published in the web site. (4.4) The risk management and internal control mechanisms of the company are not disclosed. (4.5) Duties and responsibilities of the company’s Board Members are included in the Articles of Association. (4.6) There is no operating principles of the Board of Directors designated. (4.7) Prohibiton of transactions with company and prohibition of competition are not granted. (4.8) The company has not published a code of ethics. (4.9) An Audit Committee have been formed but the members of the committee are not independent. (4.10) Although company disclosed that no compensation/salary is paid to board of members but on the otherhand company did not disclose the remuneration policy of the company regarding Board of Directors and executives. | ||
3. STAKEHOLDERS (3.1) There is no program/policy disclosed by the company for informing stakeholders. (3.2) There is no system for stakeholders to attend the company’s management. (3.3) There is no policy disclosed by the company regarding protection of company assets. (3.4) There is no human resources policy dislosed, although the company stated that this policy is announced internally. (3.5) There is no policy disclosed regarding relations with customers and clients. (3.6) The company disclosed that the company is working in compliance with ISO-14001 (Environmental Management Standard) |
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In Turkey,
- there are only two licensed rating companies: Core Ratings and Institutional Shareholder Services,
- there are only two rated companies IsBank and Dogan Yayin Holding,
- three more rated companies are missing in order to establish a Corporate Governance Index as five companies have to be rated and receive 6 out of 10.
One of the principal justifications for mergers is that they will produce greater efficiencies and streamline costs. But the rationale behind merger of two holdings will be far from this principal.
Alarko Holding A.Ş.(ticker:ALARK) disclosed Istanbul Stock Exchange that has decided to merge with its parent entity, Anmak Holding, which holds 69.4% of Alarko’s capital. Anmak Holding is not listed and equally ownd by Garih and Alaton families.
The impact of merger on the minority shareholders will depend on the financial condition of Anmak Holding. The equity researchers are concerned that Anmak Holding’s only asset is Alarko Holding and some small companies.
So far, there is no clear public announcement from Alarko Holding about the merger.
The table below is a short analysis of Alarko Holding’s Corporate Governance Compliance Report-2005 prepared by the company regarding Capital Markets Board of Turkey’s Corporate Governance Principles.
1. SHAREHOLDERS (1.1) There is an Investor Relations Department set up, but there has been no activity disclosed for meetings/presentations in the year of 2005. (1.2) The request for appointing a special auditor as an individual right is not stipulated. (1.3) There is no addition to provision to the articles of association to authorize the General Assembly in matters concerning important decisions. (1.4)There is no privilege granted to controlling shareholders regarding one share-one vote principal, (1.5)The accumulated voting method is not applied for minority shareholders and there is no board member appointed to represent minority shareholders. (1.6)There is no policy set for dividend distribution. (1.7)There is no provision restricting the transfer of shares. | 2. TRANSPERANCY and PUBLIC DISCLOSURE (2.1) There is no “disclosure policy” published by the company. - Investor announcements are made on time and published in their web site. - Internet web page of the company contains comprehensive information but only in Turkish. (2.2) The ultimate controlling beneficial shareholder is not disclosed. (2.3) Financial statements and annual reports are prepared and disclosed. (2.4) The company did not disclose any information about independent audit and consultancy services. (2.5) The list of those who have access to insider information is disclosed. | |
4. BOARD STRUCTURE (4.1) There are 3 independent members appointed at the Board of Directors. The resume of these independent members are not disclosed that it is not available to measure the independency. (4.2) There are no provisions included in the Article’s of Association concerning the qualifications of the Board Members. (4.3) The company’s mission and vision is published in the web site. (4.4) The risk management and internal control mechanisms of the company are not disclosed although the company stated that a Committee is founded. (4.5) Duties and responsibilities of the company’s Board Members are included in the Articles of Association. (4.6) There is no operating principles of the Board of Directors designated. (4.7) Prohibiton of transactions with company and prohibition of competition are not granted. (4.8) The company has published a code of ethics. (4.9) An Audit Committee have been formed but the members of the committee are not independent. (4.10) Although company disclosed that no compensation/salary is paid to board of members but on the otherhand company did not disclose the remuneration policy of the company regarding Board of Directors and executives. | ||
3. STAKEHOLDERS (3.1) There is no program/policy disclosed by the company for informing stakeholders. But it is a routine of the company to have annual meetings with company’s personnel. (3.2) There is no system for stakeholders to attend the company’s management. (3.3) There is no policy disclosed by the company regarding protection of company assets. (3.4) There is no human resources policy dislosed, although the company stated that this policy is announced internally. (3.5) There is no policy disclosed regarding relations eith customers and clients. (3.6) The company has an education and culture foundation to contribute to the social and cultural activities. |
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