Professional board structure under the new Turkish Commercial Code (1)

The aim of the newly introduced regulations of the New Code is to bring the Turkish business environment in line with European Union legislation by bringing into force international financial reporting and auditing principles, the democratic organization of shareholders and rules of corporate governance that meet international standards.

Corporate governance is defined in the document “Principles of Corporate Governance” set out by the Organisation for Economic Co-operation and Development (OECD) as follows. “Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.”

The corporate body most affected by the corporate governance rules stipulated in the New Code is the board of directors of joint stock companies, particularly the provisions related to the professionalism of the board. According to the newly adopted rules:  Board members are not required to be shareholders of the company;  At least a quarter of the board members must be university graduates (except for single-member boards);  Legal entities may be appointed as board members; and  Board meetings may be held online and endorsed with electronic signatures.

One of the most challenging conditions under the current Commercial Code is the requirement that individuals be shareholders in order to be appointed as board members. The logic behind this was to ensure board members are aware of the responsibilities of shareholders. However, this requirement led companies to arrange for board members to hold shares on paper alone, which does not reflect the actual representation of shareholdings. Therefore, such a provision causes dysfunction in companies’ administration, especially in those companies which are publicly listed.

The amendment in the New Code that enables non-shareholders to become board members in joint stock companies offers the following advantages:

Independent board members will help improve the professionalism of company management;  The holding of shares on paper alone will be eliminated; and  Disputes arising from such shareholdings will be prevented.

A board of directors is not a body in which shareholders should necessarily be represented; a professional board should act separately from shareholders, in accordance with market requirements, fulfill its internal audit duties independently and perform risk management. The importance of forming a professional board can be seen from the perspective of corporate governance. Good corporate governance will bring forth capital, enable the company to meet higher financial targets and improve the ability of the company to overcome crises. The independence of board members will contribute to the performance level and success of the board and, as a result, will directly affect the success of the company. Independent board members will be objective in decision-making and will equally consider the interests of the company and its shareholders.

Accordingly, a board should be composed of professionals who will bring the utmost efficiency and who will carry out their decision-making, management and representational duties independently, free of any conflict of interest or influence.

Newly adopted changes to the current Turkish Commercial Code have also had a positive effect on the regulations for capital markets. The Capital Markets Board (SPK) prepared advisory rules and principles for private, government-owned and public companies that were published in its Corporate Governance Rules in 2003. However, since these rules and principles were not compulsory, they were often not put into practice. Consequently, these were converted into a communiqué, the Communiqué Regarding the Designation and Application of Corporate Governance Rules of serial number IV, No. 54, which was published in the Official Gazette dated Oct. 11, 2011. I will expand on this in my next piece.