ANKARA
Investor interest in companies on Borsa Istanbul is expected to increase substantially, thanks to the special importance dedicated to corporate governance by the Capital Markets Board (CMB).
A joint Project of the European Bank for Reconstruction and Development (EBRD) and Turkey’s CMB is underway to upgrade corporate governance.
Corporate governance is the system through which companies are managed. It distributes responsibilities to everyone in the company, from workers to the board of directors.
Investors like companies with good corporate governance, because it gives them a clearer picture of what they are investing in.
“Corporate governance has a special importance in Turkey,” CMB chairman Vahdettin Ertas told Anadolu Agency in an interview on Friday.
“In Turkey, ownership is concentrated and controlling shareholders often plays a very active role in company management. It is particularly important for board members to be willing to act objectively, so that they can monitor the conduct of controlling shareholders and ensure that the company’s best interests are served,” Ertas said.
This is why the CMB has asked the EBRD to help it improve corporate governance standards. The initiative aims to strengthen the capacity of the Capital Markets Board, the regulatory and supervisory agency of Turkey’s financial markets, to monitor how companies on the Turkish stock exchange comply with standards of corporate governance, and how they report on that compliance.
Ertas stresses the importance of the project in an interview with Anadolu Agency on Monday. He pointed out that, since 2003, when governance was first introduced in Turkey, rules have been strengthened and improved.
“At this point, we believe it is important to strengthen the understanding and implementation of corporate governance principles,” Ertas said.
“At the same time as the securities regulator, we believe it is important for us to support our administrative, professional capacity for corporate governance surveillance. We believe that this would enhance market discipline and help the corporate sector raise its standards for corporate governance compliance, which is clearly good for listed companies and investors,” Ertas said.
- ‘Carrot and Stick method’
So the project is not about making new rules, because Turkey already has them, as Ertas said. Rather, the project is about getting the rules applied effectively, and complied with properly.
“It’s about making management at listed companies understand the rules entirely, and then giving them the tools to put them to work,” explained Stilpon Nestor, a consultant with Nestor Advisors which is working on the project. “Our approach is based on the ‘carrot and stick’ method, to put it crudely. Good governance practice should be rewarded, and non-compliance should be penalized.”
Companies have to believe that obeying the rules matters, and that they will be penalized when they do not, Nestor said. This means helping the CMB to reach a good level of compliance controls, so that the quality of corporate governance remains high, he added.
- ‘Comply or Explain’
Key to this implantation of corporate governance rules is the “comply or explain” principle – companies have to either obey corporate governance rules or, if they do not, explain why they chose to act otherwise.
The “Comply or explain” principle was first developed in the U.K. in the 1992 Cadbury Report, which formed the basis for corporate governance in that country. In 2013, the European Commission made it law across the EU with Directive 2013/34/EU.
“The ‘comply or explain’ approach stands at the core of the corporate governance implementation,” Ertas said. “However genuine commitment to good corporate governance and careful consideration to explanations are essential to the success of the “comply or explain approach.”
Although Turkey has followed the “comply or explain” approach since 2003, and the CMB made it mandatory for listed companies in 2011, Ertas said.
“But we observed that implementation and disclosure by the corporate sector in applying ‘comply or explain’ was not satisfactory.” The CMB has sometimes imposed fines in cases where explanations were insufficient, Ertas said.
The EBRD and Nestor’s consultancy will work with Turkish companies to provide them with the training and the tools to put the “comply or explain” system to work.
The consultancy will work with listed companies on improving the quality of their reporting, so that necessary information is available, and will help companies pull that information into a form in which it can be used in corporate governance compliance.
The consultancy will also work with the CMB to improve corporate monitoring.
“We attach great importance to improving the administrative capacity of the CMB for efficient corporate governance monitoring,” Ertas said. A methodology will be developed for the CMB for improving the assessment of corporate governance practices of listed companies; monitoring compliance with the corporate governance rules, monitoring reporting practices, reviewing the quality of the compliance statements and processing the information disclosed by listed companies in publishable reports, he explained.
Ertas believes that there has been progress in corporate governance practice in Turkey.
“I think that major companies have already built in a strong compliance culture. On the other hand, we think that this culture needs to be more widespread throughout the corporate sector regardless of size. Corporations should not fulfill compliance for its own sake but in order to make the functioning of their companies more robust and to ensure that investor confidence. This is another area where our current Project with the EBRD could be helpful through activities involving open dialogue with companies as well as running events on awareness with respect to corporate governance practices,” Ertas concluded.
