THE WORLD BANK GROUP A World Free of Poverty

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1. Corporate Governance Assessment

Section Contents:

1. Summary fact sheet

2. Market overview

2.2 Structure of the corporate sector and capital market in the country

2.3 Legal, regulatory and professional/best practice bodies

3. Registration and listing requirements

3.1 Capital markets regulator

3.2 Stock exchange

4. Treatment of shareholders

4.1 Legal rights/treatment of shareholders

4.2 Minority shareholders

4.3 Statutory and other remedies

4.4 Insider trading and self-dealing

4.5 Share registration

5. Oversight of management

5.1 Structure and powers of the ultimate body governing the corporation

5.2 Legal duties owed by the members of the governing body

5.3 Process for nominations to the governing body

5.4 Independent oversight of management

6. Disclosure and transparency

6.1 Disclosure of material financial and non financial performance

6.2 Independent audit

6.3 Disclosure of ownership

6.4 Disclosures relating to the company’s directors, managers and advisers

6.5 Disclosures for related party transactions

6.6 Other disclosure provisions, risk management

Annex Turkey OECD principles matrix

1 Summary fact sheet

Market and Regulatory Overview


Market Cap (percent of GDP)

As of 12/31/1999: TL 61,137,073 billion (US$ 113 billion), or 79% of 1999 GDP

Turnover Ratio


Number of Listed Companies

As of 12/31/1999: 285

Legal System (Origin)

Civil Law system with a comprehensive legal framework

Autonomy of the Capital Markets Regulator

CMB; 7 board members appointed by council of ministers for a 6 years.

Powers of the Capital Markets Regulator

Can initiate investigations on its own or upon request of third parties and impose penalties and fines.

Stock Exchange Governance

ISE; Public organization governed by executive council & supervised by CMB.

Corporate Ownership Structure

In 45% of listed companies one shareholder controls >50% of voting rights. In majority of cases, the controlling shareholder is a holding company which in turn is controlled by a family.

Shareholders' Rights

Voting Rights

Bearer and registered shares. Privileged shares with multiple voting rights permitted.

Proxy Voting


Notarization required. No postal ballots.

Cumulative Vote/Proportional Representation


The law has been amended to allow for cumulative voting. The publication of the corresponding communiqué is pending.

Ownership % required to call Shh Meeting


Redress against Violations/ Minority Oppression Remedies


No class action provisions, no derivative actions. CMB hears shareholder complaints against oppression by management.

Take-over Code


Ownership concentration makes takeovers difficult in practice.

Mandatory Tender Offer in Change of Control


At 25%; or if stake of 25-50% is increased by ≥ 12 months.

Insider Trading & Self-Dealing Prohibition


Criminal offense, punishable with fines and imprisonment up to 5 years.

Preemptive Rights


Within same class on an equal basis, but they can be limited by the board of companies in the "registered capital system" or by shareholders.

Relationship to OECD Principles of CG

See annex.

Oversight of Management

Board Structure

Single tier structure. Appointed/removed by shareholders at AGM (except government representatives).

Independent Directors


Board members must be shareholders (except government representatives)

Committee Practices


Audit committee of 1-5 members. Members are appointed for max. 3 years at AGM. Other committees may also be formed under the law.

Relationship to OECD Principles of CG

See annex.

Disclosure and Transparency

External Auditors


Appointed/removed by board, approved by AGM. Annual and semi-annual audits. Special audits may be requested by CMB.

Consolidated Statements



Segment Reporting


Disclosure of Price Sensitive Information


To CMB and ISE.

Accounting – Standards and Enforcement

Not full compliance with IAS. Also, inflation accounting is not mandatory despite high inflation.

Company Officers related Disclosures


Aggregate remuneration available in prospectus and in audit reports. Changes of directors, internal auditors, & management reported to ISE.

Related Party Transactions


Procedures to be followed and disclosures required not clearly specified by CMB. Manipulative practices carry jail sentences and financial penalties. High incidence of alleged cases reported to CMB.

Disclosure of Ownership .


Disclosure to CMB and ISE if ownership passes threshold of 10% of share capital or for purchase/sale of 1% for holders of ≥10%.

Risk Management and other Disclosures

Only general and market segment information available.

Relationship to OECD Principles of CG

See annex.


CMB/CML: Capital Market Board/Law IAS: International Accounting Standards

ISE: Istanbul Stock Exchange AGM: Annual Shareholder Meeting


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2 Market overview

2.1 Structure of the corporate sector and capital market in the country

As of December 31, 1999, the market capitalization of the Istanbul Stock Exchange (ISE) stood at Turkish Lira (TL) 61,137,073 billion (US$ 113 billion), or 79 percent of 1999 GDP1. Its turnover/liquidity ratio was 103 percent. There were 2852 companies listed on the exchange of which 16 were joint venture companies. There were 19 companies with GDR /ADR programs as of February 2000. Domestic primary market activity varies widely from year to year: In 1997 there were 29 public offerings, in 1998 the total was 20 and in 19993 ten. Activity has picked up this year and ISE reports already 30 public offerings as of June, 2000.

Table1: List of sectors represented on ISE as of December 31, 1999.

Macro sector/sector

Market value

Billion TL.

Market cap. %

Macro sector/sector

Market value

Billion TL.

Market cap. %

Manufacturing Industry



Financial Institutions



Chemicals petroleum, rubber & plastic


Banks & Special Finance Corporations


Fabricated metal products, machinery


Holding & Investment Companies


Non-metallic mineral products


Insurance Companies


Food, beverage and tobacco


Investment Trusts


Basic metal industries


Leasing & Factoring Companies


Textile, wearing apparel &leather


Brokerage houses


Paper & paper products, printing


Wholesale & Retail trade, Hotels





Transportation, Communication



Electricity, Gas, Water



Regional markets


Construction &Public Works









Source: ISE Monthly Bulletin, January 2000.

Under Turkish law, joint stock companies (Anonim Sirket) with 250 shareholders are considered public and automatically subject to capital markets law. These companies may apply for listing and be traded on the stock exchange. As of January 2000, there were approximately 84,000 joint stock companies incorporated in Turkey, of which 285 were traded, representing 0.3 percent of the total4. The average free float was 22 percent consisting mostly of common shares, although a few privileged shares were traded at different prices. According to ISE, approximately half of the free float was held by foreign institutional investors and there were approximately 1.2-1.3 million retail investors5. In January 2000, the ten most actively traded companies represented 48 percent of ISE’s trading volume. One company alone (Yapi Kredi Bank) represented nine percent of average daily turnover6.

In 1998, a study conducted by Prof. Aytac and Prof. Sak of Ankara University, on a sample of 243 listed companies found that in 45 percent of cases, one shareholder controlled more than 50 percent of voting rights. In the vast majority of cases, the controlling shareholder was a holding company controlled by a family such as the Koc, Sabanci, Dogan, Karamehmet, and Sahenk families. According to the survey, less than 20 holding groups were actively using the capital market for funding purposes. As of January 2000, ten listed companies were majority owned by the state. Their paid-in capital amounted to US$ 550 million out of a total paid-in capital of US$ 6.3 billion; their market capitalization was US$ 24 billion or 19 percent of ISE’s total market capitalization7. According to ISE, while foreign ownership is mainly institutional, Turkish institutional investors, namely mutual funds, own only a negligible amount of listed equities8. There is a lack of domestic institutional investors in the form of insurance companies and pension funds. The only significant non-mutual fund institutional investor is OYAK, the army pension fund which has a relatively large portfolio of listed securities9. In addition, some listed banks have significant equity stakes in listed companies (Işbank, Akbank, YKB) and some listed holding companies list their subsidiaries.

TAKASBANK is Turkey’s central securities depository (CSD), ISE’s clearing and settlement center, and Turkey’s numbering agency. ISE owns one third of TAKASBANK, with the rest distributed among the members of the exchange, who may own up to five percent each. For all trades executed on ISE, TAKASBANK is the authorized settlement center and solely responsible for the physical safekeeping of securities. Account holders can transfer securities from their pool account to other accounts automatically. Records are transferred via online connection. Cash transactions are paid in book-entry form. Transactions are settled finally and irrevocably in TAKASBANK at 3pm on settlement day which take place on a rolling settlement basis at T+2. Netting is accomplished by ISE for the two trading sessions of one settlement cycle on net basis for securities and cash. TAKASBANK is compliant with ISSA G30 recommendations, except with respect to trade comparison and affirmation between indirect market participants.

2.2 Legal, regulatory and professional/best practice bodies

Turkey is a civil law country. The legal and institutional frameworks governing Turkey’s listed companies comprise the Commercial Code 1956 (the Code), the Capital Markets Law 1981 as amended; the Decree-law No. 91 1983; the Capital Market Board (CMB); and ISE. Specific legislation regulate the banking and insurance sectors.

The Code sets forth the framework of corporate governance in Turkey10. It deals with topics such as different types of shares, shareholder assemblies and shareholder rights. The Capital Markets Law (CML) governs the securities markets; establishes CMB; defines the types of securities that can be issued; sets out issuance/public offering procedures as well as initial and continuous disclosure requirements; and licenses, monitors and supervises financial intermediaries and institutional investors operating in the market. The Decree-law No. 91 regulates the establishment and activities of stock markets.

CMB develops, regulates and supervises Turkey’s securities markets. It drafts statutory laws to be submitted to parliament for approval and issues regulations. These rules are known as "communiqués" and published in the official gazette after receiving clearance from the ministry. CMB is located in Ankara and has ample administrative powers, capable of directly imposing administrative penalties such as warnings, fines, suspension or cancellation of licenses11. It is governed by an executive board composed of seven members including a chairman. The members of the board are appointed by the council of ministers for a six year term. A CMB board member must have a required minimum level of education and professional experience; he/she cannot own shares of a Turkish company. Board members cannot be removed from their posts unless they disqualify themselves, violate restrictions or are condemned by a court. The Prime Minister’s approval is necessary for removal.

Article 49 of the Capital Markets Law sets forth the procedures for taking violators to court. CMB’s board may request the courts to prosecute violators by submitting a written complaint to the public prosecutor's office. If the prosecutor decides not to press charges, CMB is empowered to raise an objection in compliance with the criminal procedure code. All board decisions and public disciplinary measures, including nature of charge and identity of perpetrator are published in the weekly bulletin and on CMB’s website. In 1999, the majority of cases12 brought before the public prosecutor were cases of violation of CMB’s regulations; second in rank came 12 cases filed for carrying out intermediary operations without license; in third position came nine cases dealing with non compliance of disclosure requirements; and finally eight cases were related to failure to provide CMB with adequate information. In addition, a relatively large number of cases could not be brought to court due to incompleteness of files or lack of expertise in the court.

ISE is a public, non profit organisation established in its present state in 1986. It does not have a share capital, but it owns its assets and is financially independent. ISE’s members are brokerage houses and banks and it is governed by a general assembly, a board of directors, auditing and other committees, and the chairman’s office. The chairman/CEO is appointed by the government for a five year term13. He or she can only be removed for gross misconduct. CMB closely supervises the exchange, conducts yearly audits, and has the right to reject decisions of ISE’s general assembly.

Both CMB and ISE are active in developing corporate governance standards. In December 1999 the Capital Markets Law was amended and the scope of authority and duties of CMB were expanded. Additions to the law include a provision that permits CMB to attend shareholder meetings; provisions that enhance the protection of shareholders rights, and increased penalties for violations in related party transactions.


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3 Registration and listing requirements

3.1 Capital markets regulator

The registration requirements are set out in article five of the Capital Markets Law and the relevant communiqué (1/26). Applicants must submit a registration form including financial and non-financial information as determined by CMB's board together with a prospectus. In addition to audited financial statements, management discussion and analysis of operations and financial condition; the prospectus must provide detailed information on the company, including a description of the business and management structure; a description of any transactions between the corporation, its main shareholders and subsidiaries; the use of proceeds; equities issued; and selling principles14. Much progress in the level of disclosure has been made and CMB today essentially follows a disclosure approach15. However, CMB has the power to redefine requirements depending upon changing conditions and to turn down an application based on other considerations than full disclosure, if the board decides that an exploitation of the public may occur. While CMB does not in practice intervene in the pricing of a public offering, companies must indicate a price range in the prospectus submitted for registration. If registration is accepted, the prospectus must be registered with the trade registry and published. If registration is denied, CMB must state the reasons for such denial.

3.2 Stock exchange

Companies seeking a listing must submit their latest independently audited annual and quarterly financial statements to ISE. If the audit opinion is qualified, such qualification must be explained in the footnotes. At least three calendar years must have elapsed since incorporation, or two years if the free float is at least 25 percent. The company must show profits before tax in the last two consecutive years, or in the previous year only, if the free float is at least 25 percent. The profitability and minimum time requirements do not apply in certain cases involving mergers or spin-offs. Paid-in or issued capital must be at least TL 750 billion (US$ 1.2 million)16. For companies with a capital of up to TL 750 billion the free float after the issue must be at least 15 percent; for companies with a capital within the range of TL 750 billion to TL 1,500 billion (US$ 2.5 million), ten percent; and five percent if capital is greater than TL 1,500 billion17. ISE must examine the company’s financial situation and consider that it is viable as a going concern. The company’s articles of association must not include any provisions limiting the transfer and trading of its securities or preventing shareholders from exercising their rights. Material legal disputes which may affect the company’s activities must have been settled or be about to be settled. The company must not have suspended its activities for more than three months in the previous year, nor applied for liquidation of its assets or entered into negotiations or any other arrangement with its creditors, nor have faced other similar situations. Finally, the securities to be listed must comply with the criteria envisaged by ISE’s management in terms of current and potential trading volume. Companies must appoint a specific person responsible for the coordination and timely transmission of information to ISE and investor relations. Companies that fail to fulfill ISE’s listing requirements for the national market may still be admitted for trading on a "regional market" where they will be traded together with companies de-listed temporarily or permanently from ISE.


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4 Treatment of shareholders

4.1 Legal rights/treatment of shareholders

The fundamental document governing shareholder rights are the company’s articles of association. Whilst the Code refers to them on many issues, it does make certain general mandatory provisions. According to the Code, the fundamental rights of shareholders consist of the right to participate in the general assembly; the right to vote; the right to acquire information; the right to have the company audited; the right to file a complaint; the right to take civil or legal action. These rights are strengthened by provisions of the Capital Markets Law. The Capital Markets Law provides that shareholders have the right to acquire information; the right to go to court to abolish decisions; the right to vote; and the right to receive share certificates. Companies have the right, subject to shareholder approval to issue privileged shares and to limit some shareholder rights (CML article 12). These rights may be delegated to the board of directors, if the company adopts the so-called "registered capital system" and the articles of association allow for it18.

Article 373 of the Code requires every share to have at least one vote19. However, article 14/A of the Capital Markets Law provides that joint stock companies may issue nonvoting preferred shares provided that such provision exists in the articles of association of the company. In practice non voting shares are seldom used. Multiple voting rights are permitted and frequently benefit the company’s founders. In this case, the number of votes per share is determined by the company’s articles of association and registered with the trade registry.

Privileged shares are defined under article 401 of the Commercial Code. According to the Code, there is no limit regarding the subject and extent of privileges to be granted. In practice, most privileges take the form of multiple voting rights, pre-determined dividend rate, or seniority in the allocations of proceeds when the company is liquidated. CMB exerts pressure on listed companies with articles of association that allow minority shareholders to be harmed and rejects company requests to create additional privileges.

Under the Code, shareholders have preemptive rights in the case of a capital increase. They must be offered the chance to participate on an equal basis. However, article 12 of the Capital Markets Law allows the board of companies in the "registered capital system" to issue new shares up to the authorized capital limit, without abiding by the provisions of the Code regarding capital increases. CML also stipulates that the limitation of pre-emptive rights must not violate the equality of shareholders within a class20. Therefore, the board of directors usually limits preemptive rights by selling the shares directly to the public at large.

According to the Code, shareholder approval must be obtained in the case of a merger or acquisition. CML mandates that any person or legal entity acquiring individually or collectively more than 25 percent of share ownership or voting rights, must make a tender offer for the remaining shares. The same rule applies where a shareholder’s share or voting rights are between 25 to 50 percent and then increased by another ten percent in twelve months21. There have been several examples of such tender offers on ISE. However, to date there is no takeover code in Turkey. The concentrated ownership structure of Turkish companies restricts takeover attempts in practice.

Merger ratios may be calculated by taking the market value or the book value as the basis for calculation22. CMB has the power to oblige companies to change the method used, if it considers the result unfair to the shareholders of either company. However, shareholders have not always been able to prevent transactions that they deem unfavorable as demonstrated by the failure of Koc Yatirim’s shareholders to block the merger of their company with Koc Holding in 1997, in spite of the fact that the merger ratio was unfavorable to them23.

4.2 Minority shareholders

Until recently, only the Code had provisions for the protection of minority shareholders. The CML amendment bill of December 1999 is addressing minority shareholder rights for the first time. According to the provisions of the Code24 and the amendment bill, minority shareholders representing five percent of the share capital of a public company25 can veto the release of management, demand that the company’s internal auditor or an outside attorney take legal action against members of the board of directors26, demand that a special controller be appointed, call an extraordinary general assembly or add an item to the agenda, and demand postponement of the discussions on the balance sheet for one month. In addition, the ministry of industry and commerce may assist shareholders in ensuring that companies comply with their legal obligations. However, it does not have the right to initiate action. Any non-resident shareholder holding ten percent or more of a company is required to notify the foreign investment general directorate of his/her investment in order to participate and vote in annual general meetings (AGM). Such shareholder may be required to provide information relating to his/her corporate and financial standing in connection with the application.

AGMs must be convened by the board of directors within three months after the end of the accounting period27, although in practice most AGMs take place two to three months later due to the time needed to comply with the external audit requirement28. The board of directors must submit the balance sheet and a summary of operations, as well as a report indicating the commercial, financial and economic situation of the company, and formulate a written proposal regarding dividend pay-out and reserves. This information must be put at the disposal of shareholders and advertised in the gazette at least fifteen days prior to the AGM and up to one year thereafter. Every shareholder has the right to a copy of the financial statements upon request. A press announcement including the agenda and the resolutions to be discussed must be made at least two weeks in advance. Shareholders holding bearer shares must deposit their shares or a deed proving ownership with the company one week before the meeting. The agenda includes a reading of the board of directors' and auditors' reports; the approval, amendment or rejection of the financial statements and dividend policy; the setting of director's and auditor's fees; the election of directors and auditors; and any other matter to be discussed. The Code does not unequivocally give shareholders the right to ask questions. The quorum is 25 percent of capital for the first meeting (no quorum requirement at the second meeting) and decisions are taken on the basis of simple majority, unless otherwise stipulated in the articles of association. It is mandatory that minutes be kept, notarised, and registered with the trade register. Auditors or shareholders representing at least five percent of the share capital may convene extraordinary general meetings29.

Shareholder rights may not be altered without the agreement of the majority of shareholders present at a meeting where at least half of share capital is represented. In case of adjournment the quorum requirement is reduced to 33 1/3 percent30. In meetings for the alteration of the articles of association each share carries one vote. No shareholder is entitled to vote on resolutions where he, his spouse, his ancestors or descendants have a vested interest in the outcome. Similarly, any person having made a contribution in kind may not vote when his/her contribution is being estimated; and founders and other shareholders desiring certain privileges may not vote during the discussions concerning the approval of these privileges. Shareholders who have taken part in the conduct of the business of the company are not entitled to vote on resolutions concerning the release of directors. This prohibition does not extend to auditors.

Shareholders have the right to vote by proxy by appointing a representative through a power of attorney. Proxies must be notarised. In order to exercise his/her proxy right, the shareholder must obtain a certificate of ownership from TAKASBANK through his/her custodian. TAKASBANK will block the subject shares until one business day after the meeting. According to market analysts, the regulations pertaining to the use of voting rights through proxies are complicated, time consuming and costly. Nevertheless, it is common practice for foreign shareholders to vote by proxy through their custodians.

4.3 Statutory and other remedies

While neither the concept of class action nor derivative action exist under Turkish law, shareholders can seek redress through several channels. If the violation is the prevention of the right to acquire information or non-compliance with disclosure and transparency requirements, shareholders representing at least five percent of share capital can ask the company’s internal auditors to remedy the situation31. Complaints deemed valid by the auditors are mentioned in their annual report. If decisions taken at the AGM are against the law, articles of association or good faith, any shareholder who was present and opposed the resolution or was illicitly deprived of his/her voting rights or claims that the procedures were not followed, may request the court to nullify the resolution in question. If the decision was any one director’s or auditor’s responsibility, the shareholder can take civil action against the alleged perpetrator. Shareholders may file a complaint with the ministry of industry and commerce, CMB and ISE. CMB can suspend trading, stop public offerings, change time limits of subscription periods, ask for special reports to be prepared, require minority shares to be purchased by the majority at market prices, ask for remedial measures if the company’s financial health is in trouble, require disguised profit transfers to stop, and ask for the liquidation of financial intermediaries.

The number of violation reports on breaches of CML is high, particularly with respect to disguised profit transfers to non listed subsidiaries or affiliates. In practice, CMB is often unable to get a definite ruling from the courts. For example, in the early 1990s, CMB received a complaint from the Templeton group that Çukurova Elektrik was withholding information. Despite the fact that a disguised profit transfer was found, CMB could not get any pronouncement from the court proceedings. According to market analysts, shareholders generally refrain from bringing their case to court as the legal system is complex, the process lengthy, and sometimes expensive. There are no specialized courts and judges. Finally, there is anecdotal evidence that shareholders are seldom aware of the means available to them to protect their rights.

4.4 Insider trading and self-dealing

Insider trading, the dissemination of misleading or false information and manipulative practices are criminal offences. Article 47/A of the Capital Markets Law as amended provides that the penalties for insider trading range between a period of imprisonment of two to five years and a fine which varies depending on the scope and severity of the act. CMB is responsible for investigating insider trading and self-dealing cases and file its findings with the public prosecutor as plaintiff. ISE has established a market surveillance unit in compliance with Capital Markets Law. Since 1992, eight suspected insider trading cases were brought to court by CMB. Two cases have been sentenced and are now in the process of appeal, eight cases were rejected by the courts and one is still pending. During the same time period, 56 cases involving manipulative practices were investigated and submitted to court, of which ten were concluded32. In 1998, insider trading was only one among the 61 cases brought before the public prosecutor by CMB, and none in 199933. It is believed that a high percentage of suspected cases of insider trading and manipulative practices are not prosecuted because of the difficulties to prove the prima facie case together with a lack of effective surveillance, technical capacity, and enforcement. There is anecdotal evidence that insider trading and self dealing are still quite common due to the shallow market of many stocks which makes it easy to artificially inflate share prices and the high turnover ratio on ISE.

4.5 Share registration

There are two types of equity securities in Turkey: bearer shares (Hamiline Yazili Kiymetler) and registered shares (Nama Yazili Kiymetler). Most of the shares traded on ISE are bearer shares immobilized at TAKASBANK34. The latter requires broker members to open sub accounts on behalf of their clients. Ownership simply changes by settlement of a trade on ISE via the central depository. Under the Code, the board of directors must keep a register of shareholders holding registered shares. The transfer of registered shares is possible, unless prohibited by the articles of association, but it can be a cumbersome process. According to articles 416 and 418 of the Code, registered shares are regarded as transferred only after being registered with the company’s share register. The company has the right to refuse to register the transfer –either for reasons specified in the articles of association or without stating any reason, if the articles permit this. The acquirer of the shares does not acquire full ownership status and is prevented from exercising his governance rights, such as the right to vote, until the registration is completed. Some companies are reported to resist registration of significant minority shareholders. On the other hand, at the time of listing, the board of directors resolves that it will not obstruct the transfer of shares and registration of ownership and that registered shares will be transferred through blank endorsement35.


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5 Oversight of management

5.1 Structure and powers of the ultimate body governing the corporation

According to the Code, companies are governed by a one tier board comprised of at least three directors appointed for a maximum term of three years. Every year, the board elects a chairman and a vice chairman. The board of directors represents the company in its dealings with third parties and is ultimately responsible for managing the company’s business. Day-to-day management may be vested in a registered general manager appointed by the board or the general assembly. The board’s duties include drawing up the annual financial statements, reporting on the business to the shareholders, proposing dividend resolutions, calling shareholder meetings, and informing the court of the district where the company is registered, if the company’s liabilities exceed its assets.

Unless otherwise stipulated in the articles of association, the directors are required to meet at least once a month. Decisions of the board have to be recorded in the minutes book. Under the Code directors can agree not to meet physically. In this case, discussion matters are circulated among board members together with the proposed text of the minutes. Decisions are binding once they are recorded in the minutes book and signed.

5.2 Legal duties owed by the members of the governing body

Directors must represent the company rather than any specific shareholder. Their duty and responsibility is to the corporation, not to the shareholders. According to the Code, members of the board of directors have a general duty of due diligence, care, foresight and good faith. Its members are accountable to the company for losses created by their actions, such as appointing incapable managers or tolerating their harmful acts, but they are not directly responsible for the losses created by managers. While directors are not personally liable for transactions or contracts concluded on behalf of the company, they are jointly liable if payments for shares are not exact; dividends fictitious; books not kept in accordance with the law; general assembly resolutions not executed without specifying a reason; or other duties not fulfilled intentionally or by neglect. If an obligation has been entrusted to one particular director exclusively, the others are not jointly liable. The same applies for a board member who voted against a transaction or was not present when the allegedly harmful decision was taken. Any board member who deceives a third party about the condition of the company, is personally liable for any loss caused. Also, newly appointed board members must inform the auditors of irregularities committed by their predecessors. Otherwise they share their predecessors’ liability.

CMB does not have the power to disqualify or sanction directors for non-performance. In most cases, control over listed companies is firmly in the hands of majority shareholders. Anecdotal evidence suggests that minority attempts to influence operations, strategy, or the management structure are seldom successful.

5.3 Process for nominations to the governing body

Board members are appointed and dismissed by the shareholders at the AGM. The first board can also be appointed by the articles of association. Even in this case, board members can be dismissed at any time by the shareholders. Public institutions, such as the state, province or municipality may be granted the right of delegating a representative to serve on the board of directors of companies having as object a public service. Such board members are exempt from the rule of dismissal and only the government can remove them.

The board of directors has the right to appoint one of the directors as general manager of the company, unless such right is reserved to shareholders under the articles of association. The articles may also grant shareholders or the board the right to delegate certain duties to selected directors or employees. All such decisions must be communicated to the commercial register if they are to have effect with third parties. Shareholders do not have the right to limit the powers of the board of directors collectively.

With the exception of government representatives, board members must be shareholders or represent legal entities that are shareholders36. They may not be bankrupt, lack minimum legal qualifications, or be convicted of forgery, embezzlement, theft or fraud. The Code does not generally require special skills, but there are provisions for specific industries such as banks, insurance companies and financial intermediaries. There are no nationality considerations nor mandatory employee representations. Any foreign shareholder who owns ten percent or more of the shares of a company must inform the foreign investment general directorate of the under-secretariat of the treasury, if he/she wishes to attend board meetings. The 1999 CML amendment authorizes CMB to draft new regulation with regards to cumulative voting for the appointment of directors.

5.4 Independent oversight of management

According to the Code, every joint stock company must have an audit committee comprised of one to five members appointed for a maximum of three years. The audit committee is appointed and dismissed by the shareholders at the AGM. Its function is to audit the company’s accounts on behalf of the shareholders and ensure compliance with the law and the company’s articles of association. In practice, the procedures by which the audit committee is to fulfill its function are not clearly defined. Anecdotal evidence suggests that members of the audit committee are often employees of the company or related companies rather than truly independent and that the committee itself has traditionally been regarded as a formality. The general meeting may also appoint a special controller for the examination and control of certain determined matters. Besides this requirement, there are no recommendations or requirements regarding the inclusion of independent board members that are not part of management37. Similarly, there are no requirements to form an independent remuneration committee or an appointment committee. According to anecdotal evidence, non-executive directors are appointed on recommendation of controlling shareholders and are replaced at their will. Indeed, companies controlled by holding companies are usually under the strong influence of the latter, and this is reflected in the composition of their boards. Nevertheless, a few companies such as Turcas and Brisa have appointed independent board members. These companies usually have a significant foreign shareholder.


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6 Disclosure and transparency

6.1 Disclosure of material financial and non financial performance

Current regulation regarding disclosure and transparency standards have their basis in the Code. Before CMB was established, accounting was purely tax driven and there were no general accounting standards in Turkey. Today, CMB sets accounting standards for public companies, financial intermediaries, and institutional investors38. These are not in full compliance with international accounting standards, especially with respect to consolidation and inflation accounting, which are not mandatory. Given that Turkey’s inflation averaged 60 percent over the last ten years, this deficiency is a serious shortcoming which prevents the assessment of financial performance over several years. CMB has set up regulations and standards for consolidated financial statements and any company willing to publish consolidated financial statements should comply with these regulations. The 1999 CML amendment mandates the formation of a "Accounting Standards Board" which will be in charge of enforcing the adoption of internationally accepted accounting standards across the board.

Listed companies are required to file balance sheet, income statement, and legal auditors’ report with ISE and CMB on a quarterly basis. Each year, they must also publish the financial statements in the official commercial gazette and in at least two daily newspapers. Conditional reporting requirements refer to additional information to be filed with CMB and ISE under certain conditions. These include changes in ownership or management; purchase, sale or lease of assets with a value above a certain threshold in relation to total assets; changes in business activities; changes in investments; ownership interests in other companies; managerial problems such as strikes or labour disputes; block sales; and unusual share price fluctuations.

According to market analysts, companies comply quite promptly with these disclosure requirements. In case of non-compliance, ISE and CMB have the power to issue private and public warnings, impose financial penalties or suspend trading. These powers are regularly exercised. ISE may also decide to put companies on a "watch list"39. This means that the shares of the affected company may trade only thirty minutes per day. Critics claim that the "watch list" status can provide large shareholders with the legal opportunity to buy back their shares at a discount. Irregularities and non-compliance in disclosure and transparency regulations can also be subject to jail sentences in accordance with the provisions of the law on manipulative practices.

6.2 Independent audit

Listed companies are required to have their year-end and half year results independently audited by auditors certified by CMB. External auditors are required to produce an opinion certifying that the financial statements have been prepared in compliance with Turkish GAAP and that they provide a fair and accurate assessment of the financial health of the company. Auditors are liable to civil action if their letter of opinion is proved to have mislead investors. CMB’s list of approved auditors includes a long list ranging from international firms to small local companies of unknown track record.

External auditors are appointed by management. They can also be imposed by CMB. CMB requires independent audits (called "special audits") in public offerings, as a registration requirement, and may require one in mergers and acquisition transactions, and in cases where there is a change of business.

The Independent Audit Association was founded in 1988. The association does not have statutory authority to control the profession, and exercises no control over standards, training, and qualification. Law No. 3568 of 1990, the Independent Accountancy, Independent Accountant Financial Advisor and Sworn Financial Advisor Law, regulates these professions with exclusive rights and responsibilities.

6.3 Disclosure of ownership

Under CMB’s disclosure requirements, CMB and ISE must be immediately notified of any purchase or sale of shares amounting to one percent of the share capital by any acquirer or group of acquirers acting in concert who already hold ten percent or more of the share capital or of voting rights, or who cross the ten percent threshold upward or downward. The acquirer must disclose to CMB and ISE the number of shares purchased, the price paid for the shares, and the date of the transaction within the first week of the following month in which the transaction took place.

Purchases or sales of bank shares crossing upward or downward the ten percent, 20 percent, 33 percent or 50 percent ownership thresholds, are subject to the approval of the under-secretariat of the treasury. Without such approval, the company may not register the purchase or transfer and the purchaser will no be entitled to vote the shares.

Companies are required to disclose information about their share ownership structure, including information about the identity of their major shareholders to ISE and CMB. Companies should also disclose the identity of shareholders holding more than ten percent and changes in ownership in their annual reports40.

6.4 Disclosures relating to the company’s directors, managers and advisers

The chairman, board members, the general manager and deputy general manager must comply with the disclosure rule discussed in section 6.3 above. In addition, the Capital Markets Law requires them to inform CMB and ISE of any material information relating to the ownership of their shares. However, while local authorities, CMB and ISE expect that directors’ dealings in securities be published systematically, according to market analysts, there is considerable laxity in compliance and enforcement; and the quality of information provided by companies on this matter varies from one company to the next.

Directors must inform the board of directors of conflicts of interest between themselves or their relatives and the company. They may not participate in the deliberations of the board on this specific matter matter (article 332). Without express permission from the AGM they must not enter into business relations with the company nor undertake similar commercial activities either directly or indirectly (articles 334 and 335).

6.5 Disclosures for related party transactions

Article 15 of the CML deals with profit distribution and "disguised profit transfers", a form of insider expropriation in which funds and assets of the public corporation are transferred to a related company by using non-market prices or other mechanisms. Such transfers are not only unlawful, but carry heavy fines and stiff jail sentences of two to five years. While the penalties for violation are clear, CMB has decided against more detailed specifications about what procedures to follow and the type of disclosure required in related party transactions. CMB regulations only stipulate that the footnotes to the financial statements must contain detailed information about commercial transactions and payments between related parties - which in turn can provide clues about potential "disguised profit transfers". Further, there are no specific rules requiring the disclosure of related party transactions other than with equity participants. Based on the number of requests to investigate potential "disguised profit transfers" regularly appearing in CMB's weekly bulletin and published on their website, there isstrong evidence that related party transactions remain a problem in Turkey to date. For example, CMB has been approached twice in recent years regarding Turk Tuborg Bira & Malt Sanayi A.S. and its relationship to majority owner, Yasar Holding A.S. In the first case, Yasar was ordered by CMB to compensate Tuborg for "a series of improper share and real-estate transactions"41 following an audit CMB performed on Tuborg's 1995 - 1997 accounts. In the second case, CMB audited Tuborg's records to investigate a claim against Yasar involving Tuborg and another Yasar subsidiary, Yasarbank42. In 1998 and 1999, Yasar authorized a series of transactions whereby Tuborg bought shares in Yasarbank, allegedly to save the bank from bankruptcy43. With losses totalling over US $1 billion, Yasarbank was placed under the supervision of the Central Bank Deposit Insurance Fund in 199944. CMB found no substantial evidence of any wrong doing45.

6.6 Other disclosure provisions, risk management

Most annual reports do not include discussions on risk management beyond a general statement about the macro economic environment and the market segment in which the company operates. However companies with ADR/GDR programs have somewhat more extensive annual reports, though according to market analysts they still do not meet best practice standards.

Listed companies are not required to be rated, even though Capital Markets Law discusses rating


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1 1999 GDP TL 77,374,802 billion (source: ISE)
2 256 on ISE, 10 on regional, 1 on the "new companies" and 18 on the "watch list" market (source: ISE's Annual Factbook 1999).
3 Ibid.
4 Source ISE (June 2000).
5 Out of a total population of approximately 65 million (=50% below the age of 30).
6 Source: Paribas Capital Market.
7 Source: Paribas Capital Market.
8 US$ 830 million (0.7% of market capitalization) as of Jan 2000.
9 Isbank also has a pension fund.
10 The commercial code is in the process of being overhauled by the ministry of justice.
11 As of 12/31/99 CMB's enforcement department employed a total of 48 employees (source: CMB).
12 42 out of 79 according to CMB (
13 The candidate can have any professional background, including broker or public servant (source: ISE).
14 According to CMB, the prospectus content is in line with IOSCO's disclosure standards.
15 No matter how risky the investment, the offering prospectus complies with CML and related by-laws if all material facts and risks are fully, clearly, and accurately disclosed (CML article 6).
16 The minimum paid-in capital requirement is expected to be increased due to inflation.
17 CMB requires the free float to be as follows: 15% if capital = TL 1,140,750 million; 10% if capital =1,140,750 and = 2,281,500 million; and 5% if capital =2,281,500 million.
18 Source: Paksoy & Co., Attorneys at Law.
19 If a share has several owners, the owners may exercise their right to vote through a representative.
20 Unless the shareholders, when approving the capital increase, allow for it.
21 CMB communiqué number IV/8.
22 CMB resolution number 106/1273 (April 11, 1999).
23 Koc Yatirim's shareholders were offered Koc Holding shares based on book value. However, Koc Yatirim shares were trading at a discount to net asset value, whereas Koc Holding shares were trading at a substantial premium over net asset value.
24 Articles dealing specifically with minority shareholders rights: 310, 341, 348, 356, 359, 366, 367,d 377.
25 10% for non-public companies.
26 This right is apparently quite ineffective in practice, since the internal auditor who goes to court on behalf of the shareholders is appointed pursuant to the recommendation of the board. Dissenting shareholders have to pledge their shares as guarantee for potential damages. In case of dismissal, dissenting shareholders are liable to compensate the company. In addition the loss has to be quantified before going to court but the shareholders do not have access to the books.
27 Article 364 of the Commercial Code.
28 Source: ISE (June 2000).
29 Ten percent for non-public companies.
30 Source: Paksoy & Co., Attorneys At Law (July 2000).
31 Ten percent for non-public companies.
32 Four penalized and six rejected (source: CMB Department of Legal Affairs, June 2000).
33 Source: CMB (
34 Shares of certain companies, e.g. banks, insurance companies, brokerage houses, are registered. They are endorsed in blank so that they can be transferred as if they were bearer shares.
35 "Issues regarding Corporate Governance found in Istanbul Stock Exchange Regulations", CMB, June 2000 ("… this contradiction can create problems and should be corrected in parallel with capital market regulations.").
36 Upon taking office board members must purchase qualifying shares worth 1 percent of equity or the symbolic value of TL 5,000 in nominal value (US$ 0.01).
37 Except in the case of real estate trusts ("REITs") where one third of the directors must be independent.
38 CML articles 16 and 22/e.
39 As of 12/31/99, 18 companies were traded on the "watch list" market (source: ISE).
40 CMB Communiqué, Series: XI, No:1
41 Source: Dorsey, James M., "Turkish Regulator to Audit Brewery at Soros's Request", Wall Street Journal, August 16, 2000.
42 Source: Daily Sabah, "Turkish News for Week Ending August 5, 2000".
43 Source: Munir, Metin, "The Indiana Jones of Central Bankers", Euromoney, September 2000.
44 Source: Dorsey, James M., Wall Street Journal, August 16, 2000.
45 Source: CMB, February 15, 2001

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