With a view to giving joint stock companies a more transparent and balanced management structure, a series of regulations has been made in Turkish law along the axis of the Corporate Governance Principles. The first indications of this can be seen in the text of the Turkish Commercial Code. The Code provides that publicly held companies are to be structured in accordance with the corporate governance principles, while leaving the power to determine the content of those principles to the Capital Markets Board (CMB).
Relying on that power, the Board has issued the Corporate Governance Communiqué, which regulates both the corporate governance principles and the manner in which independent members are to be determined. The Communiqué has imposed on companies whose shares have been offered to the public an obligation to have independent members on the board of directors, and has laid down a staged chain of steps for their election.
Both in international practice and in Türkiye, the underlying rationale for moving towards these principles is to prevent the corruption of power in joint stock companies and to protect the interests of all stakeholders. Below we address which companies the obligation covers and the procedure followed in determining the independent member.
The Concept of Corporate Governance
At the core of the corporate governance approach lies the separation of the management and supervisory functions from one another; by that separation the position of both the managers and the interest groups is intended to be secured. The purpose behind the emergence of the concept is to ensure that the company is administered on an accountable, open, fair and transparent basis.
The statutory basis of this approach is the Turkish Commercial Code No. 6102, Article 1529:
Turkish Commercial Code No. 6102, Art. 1529 — E) Corporate governance principles
“(1) In publicly held joint stock companies, the corporate governance principles, the essentials of the board of directors’ declaration in that regard, and the rules and consequences of rating companies in that respect, shall be determined by the Capital Markets Board.
(2) Provided that the favourable opinion of the Capital Markets Board is obtained, other public institutions and organisations may make limited regulations of a detailed nature concerning corporate governance principles applicable solely to their own fields.”
The provision leaves the principles themselves, the essentials of the board of directors’ declaration, and the rules and consequences relating to rating, to the competence of a single authority. The regulatory scope afforded to other public institutions is limited both to their own fields and to matters of detail.
Overview of Independent Board Membership
Within the framework of the Corporate Governance Principles, the structure of the board of directors and in particular the institution of independent membership are addressed in detail. Under the provision conferring the power to determine the principles on the Capital Markets Board, the regulations on this subject are likewise to be made by that same authority. To that end, on 03.01.2014 the Board brought into force the Corporate Governance Communiqué.
That Communiqué regulates together the scope of independent membership, the procedure for election and, in general terms, the corporate governance principles. The purpose of the institution is twofold: to ensure transparency and impartiality in the structuring of the company, and to protect the interests of the company itself and of all interest groups.
For the stages of incorporation, our note entitled “Incorporation of a Joint Stock Company” may be consulted.
Companies Within the Scope of the Obligation
Rather than listing directly which companies are subject to the provisions on independent membership, the Communiqué has followed the reverse method. Article 1 sets out the companies to which those provisions do not apply, and the scope is thereby determined indirectly. Since the companies listed in that article are left outside the principles contained in the second chapter of the Communiqué, they are also not obliged to have independent members. The provision in question reads as follows:
Corporate Governance Communiqué, Art. 1
“(2) The companies listed below are not subject to the provisions contained in the Second Chapter of this Communiqué, relating to corporate governance principles:
a) Publicly held companies whose shares are not traded on the exchange.
b) Companies whose shares are traded on markets, exchanges or platforms other than the National Market, the Second National Market or the Collective Products Market.
c) Among the companies applying, or on whose behalf application is made, to the Board for their shares to be offered to the public for the first time and/or to begin to be traded on the exchange, those whose shares are to be traded on markets, exchanges or platforms other than the National Market, the Second National Market or the Collective Products Market.
ç) Companies deemed to be resident abroad under Decree No. 32 on the Protection of the Value of Turkish Currency, brought into force by Council of Ministers Decision No. 89/14391 dated 7/8/1989.
(3) The companies specified in subparagraphs (a) and (b) of the second paragraph are not subject to the provisions contained in Article 11 of this Communiqué, relating to the investor relations department.
(4) The companies specified in subparagraph (a) of the second paragraph are not subject to the Third Chapter of this Communiqué, relating to related party transactions, or to the provisions contained in Article 12, relating to collateral, pledges, mortgages and sureties.”
A converse reading of the provision yields the following result: the corporate governance principles and the rules on independent membership apply to companies traded on the National Market, the Second National Market and the Collective Products Market, and to publicly held companies whose shares are traded on the exchange.
Stages Followed in Determining the Independent Member
The Communiqué has not reduced the election of the independent member to a single general assembly resolution; it has laid down a multi-stage process in which different organs take part. That process, which operates under Article 4.3.7 of the Corporate Governance Communiqué, follows this sequence:
- Pool of candidates. Candidates are first determined by the management and by investors; the names are forwarded to the nomination committee.
- Committee assessment. The committee identifies the independent members and submits the report it has prepared on them for the approval of the board of directors.
- Board list. Having regard to the report, the board of directors draws up a list of candidates for independent membership.
- Board approval. The list, the resolution of the board of directors and the committee report are submitted for the approval of the Capital Markets Board.
- Review and elimination. The Board issues a negative opinion in respect of candidates it does not consider suitable; those persons may not be put before the general assembly. Those in respect of whom a favourable opinion is given are brought before the general assembly.
- Public disclosure. The company announces the list of candidates and, where applicable, the list of persons in respect of whom a negative opinion has been given, on the Public Disclosure Platform (KAP).
- Publication of the resolution. The general assembly’s resolution concerning the independent member is announced on the company’s website, together with any dissenting votes and the reasons for them.
This tiered structure ensures that the quality of independence is not left solely to choices made within the company; the Board’s intervention at an intermediate stage means that whether the candidate genuinely satisfies the criteria is verified before the general assembly.
Independent Legal’s Assessment
In practice independent membership is often treated as a formal compliance heading; yet the institution is decisive for the effective operation of the company’s internal balancing mechanisms. The elimination of a candidate who does not meet the criteria at the end of the process may disrupt the general assembly timetable and give rise to additional risk in terms of public disclosure obligations. In a concrete compliance exercise, the priority headings are as follows:
- Determining, market by market, whether the company falls within the scope of the second chapter of the Communiqué
- Constituting the nomination committee in accordance with the proper procedure and reviewing its report
- Collecting, before the application is made, the declarations and documents establishing that the independence criteria are met
- Planning the Board approval process so that it is compatible with the general assembly timetable
- Fulfilling in good time the obligation to publish on KAP and on the company’s website
Independent Legal provides advisory services on corporate governance compliance in publicly held companies, the structuring of the board of directors and the conduct of independent member election processes.