Recent Developments of Corporate Governance in the Global Economy and the New Turkish Commercial Draft Law Reforms

• Author: Cuneyt Yuksel
• Pages: 101-111

Key words: Corporate governance, corporate law, Turkish Commercial Draft Law, Turkish trade law, corporate governance in Turkey

This paper was first published in Kierkegaard, S.(2007) International Law and Trade: Bridging the East-West Divide. IAITL. pp.247-258

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1. Introduction

Recently, the corporate governance in a globalized economy has become one of the most important topics for the business environment and the governments. A series of corporate scandals caused billion dollars of loss and this made a destructive effect on the investors' trust (Macavoy and Millstein, 2004, pp. 1-3). Some of the biggest companies in the U.S.A. and Europe such as Enron, Worldcom, Arthur Andersen and Parmalat, became bankrupt rapidly (Widen, 2003, p. 961; Elson and Gyves, 2003, p. 855; Enriques and Volpin, 2007, p. 123). It is widely accepted that bad management practices have triggered these company scandals. Recent developments in global economy have proved that the companies shall have more responsibility against all beneficiaries including employees, directors, shareholders, stakeholders, customers, suppliers and the society as a whole. Today there is no doubt that the companies shall be more accountable and transparent. In U.S.A. and Europe the legislators enact rules that are based on the management system having ethical standards rather than just free market principles.

For example in the U.S.A., in response to these financial scandals and the demands raised by international investors to protect shareholders and the general public from fraudulent practices in the companies, a legislation called Sarbanes Oxley Act ¹ has been enacted (Lander, 2004; Chandler and Strine, 2004; Ribstein, 2002). The basic aim of this Act is to protect the rights of the investors by increasing the reliability and accountability of the financial reports that are disclosed to the public by the companies. According to this Act, the enforcement to abide by these principles has been assured by the immediate threat of excluding such firms from stock exchange markets and there are serious sanctions for the directors and consultants of these companies in case of violation. Despite these, the legal regulations are not sufficient to prevent high profile scandals. It should be noted that no matter how harsh rules are set and enforced the bottom-line in the ultimate goal relies heavily on the inner dynamics of the corporations, namely good and proactive governance.

In order to prevent the above-mentioned problems and ensuring the accountability, transparency and good management of the companies, a system called "corporate governance" has been invented. The term "corporate governance" was first used in USA and afterwards has been a subject for various debates, academic works and international documents (Gilson, 1996; Longstreth, 1991; Gilson and Kraakman, 1991; Williamson, 1984).

For years, the OECD has been working to promote use of the corporate governance principles since they were first issued in 1999 and revised in 2004 to support good corporate governance policy and practice both within OECD countries and beyond. ² In light of above-mentioned developments, the Capital Markets Board of Turkey (hereinafter "CMB") issued the corporate governance principles of Turkey ³ for the listed companies in June 2003 and amended these principles in 2005. The CMB principles set forth corporate governance principles under four Page 102 sections; shareholders, public disclosure and transparency, stakeholders and board of directors. For all corporations, the regulatory framework for corporate governance is in Turkish Commercial Code (hereinafter "TCC") and recent changes have been made to this regulation by Draft Turkish Commercial Code (hereinafter "The Draft Code"). This paper focuses on the developments of corporate governance in Turkey especially those made in the Draft Code.

2. Definition

Corporate governance has succeeded in attracting a good deal of public interest because of its apparent importance for the economic health of corporations and society in general. However, the concept of corporate governance is poorly defined because it potentially covers a large number of distinct economic phenomena. As a result different people have come up with different definitions that basically reflect their special interest in the field. It is hard to see that this "disorder" will be any different in the future so the best way to define the concept is perhaps to list a few of the different definitions rather than just mentioning one definition.

According to the OECD definition, corporate governance is the relationship between corporate managers, directors and the providers of equity, people and institutions who save and invest their capital to earn a return (OECD, 2004). It ensures that the board of directors is accountable for the pursuit of corporate objectives and that the corporation itself conforms to the law and regulations. A similar definition is made by Monks and Minow (1995) wherein corporate governance is the relationship among various participants [chief executive officer, management, shareholders, and employees] in determining the direction and performance of corporations. According to Sir Adrian Cadbury corporate governance is holding the balance between economic and social goals and between individual and communal goals (Cadbury, 2000). The aim is to align as nearly as possible the interests of individuals, corporations and society. The incentive to corporations is to achieve their corporate aims and to attract investment. The incentive for states is to strengthen their economics and discourage fraud and mismanagement. Margaret Blair( 1995, p. 19)states that "Corporate governance is about "the whole set of legal, cultural, and institutional arrangements that determine what public corporations can do, who controls them, how that control is exercised, and how the risks and return from the activities they undertake are allocated."

Governance is ultimately concerned with the alignment of information, incentives and capacity to act (Monks and Minow, 1995). It involves the monitoring of the corporation's performance and the monitor's ability to observe and respond to that performance. Insufficient and/or unclear information may hamper the ability of the markets to function, increase volatility and the cost of capital, and result in poor allocation of resources (La Porta et al., 2000). It is apparent that market forces for transparency would be weaker where ownership is concentrated. This partially explains the lack of strong disclosure tradition in Turkey. Weakness in standards of transparency and accountability allow corporate management (therefore major shareholders) to avoid disclosure and manipulate markets by misinformation. These weaknesses are conduit to asset transfers and asset stripping. Effective disclosure requires legally mandated disclosure requirements, good accounting standards, independent auditors, and enforcement. These standards are highly significant in ensuring that stakeholders have sufficient, timely, credible, comprehensible and cost-effective information to monitor the company's performance (Gilson, 1996).

Effective governance needs stem from the structure of these huge corporations, the fundamental conflict arising from the separation of ownership and control (Berle, 1958). Clearly, good corporate governance practices will emerge from effective application of full transparency, sound auditing and compliance mechanisms (Pound, 1993).

This shows the importance of the sound corporate management practices. Empirical studies indicate that international investors now better realize the significance of corporate governance practices on the financial performance of companies and while adopting investment decisions, international investors believe that this issue bears more importance for countries that are in need of reforms, and that they are more ready to pay higher premiums for companies having sound corporate governance practices (Lipton, 1987; Yuksel, 2004, p.38).

Several studies have been and are still being realized in the area of corporate governance. These studies emphasize the fact that no single corporate governance model is valid for every country (Roe, 2003; Roe, 1993). Accordingly, the model to be established should be compatible with the conditions peculiar to each country (Black and Kraakman, 1996). However, the concepts of equality, transparency, accountability and responsibility appear to be main concepts in all international corporate governance approaches that are widely accepted (Shleifer and Vishny, 1997). Equality means the equal treatment of share and stakeholders by the management in all activities of the company and thus aims to prevent all possible conflicts of interest. Transparency, on the other hand, aims to disclose company related financial and non-financial information to the public in a timely, accurate, complete, clear, construable manner and easy to reach at low cost, excluding the trade secrets and undisclosed information. Accountability means the obligation of the board to account to the company as a corporate body and to the shareholders. Finally, responsibility defines the conformity of all operations carried out on behalf of the company with the legislation, articles of association and in-house regulations together with the audit thereof.

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3. Corporate Governance in Turkey

In...