by Angel Gurría, OECD Secretary-General
Delivered at a seminar organised by the Capital Markets Board of Turkey
17 October 2006
Mr. Ambassador, Ladies and Gentlemen
It is a great pleasure for me to present, here in Istanbul, this report on corporate governance in Turkey. This is a very important topic – good corporate governance is essential for any company or country that wants to compete effectively in the global marketplace and attract long-term capital to grow their businesses.
The OECD’s report Corporate Governance in Turkey: A Pilot Study is the first of its kind for a member country. This report will be very important for the future work of the OECD and for countries around the world. As you may be aware, the OECD Principles of Corporate Governance are a global standard. They are used by many countries and by the World Bank and IMF to evaluate national corporate governance frameworks. The Pilot study done with Turkey has helped the OECD to develop a new method for evaluation that will give policy makers a better understanding of the steps they should take. So I want to thank the Turkish authorities for their excellent cooperation in making this happen.
In my remarks this morning, I will highlight the main conclusions of this report which evaluates Turkish corporate governance standards and practices in light of the OECD Principles of Corporate Governance. Corporate governance is improving in Turkey but some key issues, including the potential for unfair treatment of minority shareholders, need to be tackled if Turkish firms are to take full advantage of opportunities to grow in coming years.
Progress made and remaining challenges
Turkey has a strong regulatory framework for corporate governance. Disclosure to the market by listed companies is improving, and international standards for accounting and auditing are being introduced. Our report urges the Turkish government to adopt as soon as possible proposed amendments to Turkish company law, including a proposal to centralise the process for setting accounting standards under the Turkish Accounting Standards Board.
But some challenges remain. Family-controlled groups of companies are a common feature of the Turkish business scene, often with a high degree of cross-ownership between companies. Controlling shareholders often play a leading role in the management and strategic direction of company groups, many of which include companies that are listed on the Istanbul Stock Exchange. This is not a problem in itself. Without effective safeguards, however, there is potential for abuse, for example in situations where controlling shareholders impose commercial conditions that go against the interests of the company as a whole and minority shareholders.
In the past few years, more effective supervision by the Capital Markets Board (CMB) has reduced investors’ concerns to some extent. However, another important safeguard in the form of market discipline – defined as the power of financial markets to persuade companies to meet corporate governance standards or risk public criticism, lawsuits or a sell-off in their shares – is still relatively weak.
What we recommend
To address this, we recommend that Turkey strengthen the laws on deals involving related parties, for example by implementing proposed amendments to Turkish company law requiring more disclosure about deals between companies that belong to a group. The proposed law would also require controlling companies to compensate controlled companies for losses resulting from the exercise of control.
We also recommend that publicly held companies be required to give more detailed and easier-to-understand disclosure about who owns them and controls them, proposes tougher penalties for breaking the law and encourages the authorities to focus more resources on enforcing these laws.
In parallel, our report urges Turkey to give greater scope to institutional investors in the exercise of their rights as shareholders. At present, pension and mutual funds regulated by the Capital Markets Board (CMB) cannot participate actively in governance of the companies in which they invest and are subject to portfolio limits that restrict their incentives to monitor corporate governance practices. These restrictions should be eliminated and funds should disclose the corporate governance policies that they apply to their investments.
We also emphasise the vital role of boards in improving company performance and ensuring fair treatment for all shareholders. To fulfil this role, boards must be both able and willing to exercise objective and independent judgement. With this in mind, we stress that all publicly held companies should disclose adequate information to shareholders about how their boards work. They should also fully implement the board structures and practices recommended by the OECD.
We also recommend that the CMB and other financial sector authorities tighten, focus and coordinate their regulatory activities. The authorities have performed well in a challenging and volatile environment, but there is always room for improvement. For example, we recommend that the CMB ensure that it systematically focuses its resources on critical corporate governance risks and encourage all of the financial sector authorities to coordinate their work to prevent costly duplication of regulatory effort and avoid supervisory gaps.
Finally, we highlight the need for supervisory, regulatory and enforcement authorities to have the power, integrity and resources to act professionally and objectively. Independent regulators like the Capital Markets Board (CMB) need stable funding, freedom to decide how they spend their budget and clear support from government. The continued strong leadership and independence of the CMB and other independent financial sector authorities are crucial for the long-term vitality of the corporate sector in Turkey and the economy as a whole.
To conclude, although Turkey has made significant progress, there is still more to be done – as is also the case in other countries around the world. As long as the authorities and business community remain committed to pursuing international best practices, we can be confident that the remaining weaknesses in Turkish corporate governance will be addressed soon. Thank you for your attention.