Corporate Governance in Turkey

Corporate Governance in Turkey
A PILOT STUDY
Corporate
It is widely expected that there will be rapid growth in Turkey in the coming decade. This
will fuel companies’ demand for external finance to expand their businesses or establish
new ones. To attract such finance on competitive terms, domestic equity markets need
Governance
to expand and foreign investment needs to increase. This will happen only if corporate
governance standards are high, meaning both a well-established and cost-effective
legal and regulatory framework and company practices that favour transparency and the
in Turkey
protection of minority shareholders.
This report evaluates the extent to which the OECD Principles of Corporate Governance
have been implemented in Turkey, looking at both the legal and regulatory framework as
well as company practices. It makes use of a newly developed assessment methodology A PILOT STUDY
and, accordingly, is an experimental, pilot study. The report finds that significant reforms
to the corporate governance framework have already been introduced, with regulatory
authorities playing a leading role in setting and enforcing corporate governance standards
as well as fostering market integrity. The report supports additional legislative reforms
that are already in progress. Looking ahead, the report argues that it is time to move
into the next important phase in policy reform. This will involve systematically monitoring
implementation of the new standards, evaluating their impact, focusing enforcement efforts
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The full text of this book is available on line via these links: CORPO OVERN Y COR ORPOR
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http://www.sourceoecd.org/governance/9264028633 PORAT VERNA NANCE
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http://www.sourceoecd.org/industrytrade/9264028633 TURKE OVER NANCE
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Those with access to all OECD books on line should use this link:
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A PILOT STUDY
information about this award-winning service and free trials ask your librarian, or write to us at
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ISBN 92-64-02863-3 T U RK E C E TURKE
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Corporate Governance
in Turkey
A PILOT STUDY
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

ORGANISATION FOR ECONOMIC CO-OPERATION
AND DEVELOPMENT
The OECD is a unique forum where the governments of 30 democracies work together
to address the economic, social and environmental challenges of globalisation. The OECD
is also at the forefront of efforts to understand and to help governments respond to new
developments and concerns, such as corporate governance, the information economy and
the challenges of an ageing population. The Organisation provides a setting where
governments can compare policy experiences, seek answers to common problems,
identify good practice and work to co-ordinate domestic and international policies.
The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech
Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy,
Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland,
Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom
and the United States. The Commission of the European Communities takes part in the
work of the OECD.
OECD Publishing disseminates widely the results of the Organisation’s statistics
gathering and research on economic, social and environmental issues, as well as the
conventions, guidelines and standards agreed by its members.
This work is published on the responsibility of the OECD Steering Group on

Corporate Governance.
Also available in French under the title:

Gouvernement d’entreprise en Turquie
UNE ÉTUDE PILOTE
© OECD 2006
No reproduction, copy, transmission or translation of this publication may be made without written permission.
Applications should be sent to OECD Publishing: rights@oecd.org or by fax (33-1) 45 24 99 30. Permission to photocopy a
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3
Foreword
In 2004, the OECD’s Steering Group on Corporate Governance decided

to establish an ongoing dialogue to support the implementation of the
revised OECD Principles of Corporate Governance (OECD Principles) in
member countries. As part of this initiative, the Steering Group sought to
develop a coherent, analytical framework for assessing corporate
governance in the form of a Methodology for Assessing Implementation of
the OECD Principles (Methodology). It also recommended that a study of
corporate governance in at least one member country be conducted
concurrently with the development of the Methodology. The Turkish
authorities volunteered to participate in this study, which was carried out in
2005 and early 2006 by the OECD Secretariat.
The OECD Secretariat prepared the draft Report for the Steering Group,
using a working draft of Methodology. The study has served two purposes.
It provided a factual context against which the Steering Group could assess
the draft Methodology’s relevance, completeness and usefulness. The
Report is also providing a basis for policy dialogue within the Steering
Group, among the Turkish authorities and in the wider community. Given
the study’s experimental nature and reliance upon a draft assessment
methodology, it is considered to be a pilot study.
The Steering Group discussed the draft Report at its meeting on
14 March 2006. The draft Report was then revised in the light of the
discussions and given final approval as the agreed Report of the Steering
Group on 4 September 2006. The Report, including the assessment and
policy options, does not necessarily reflect the views of the Turkish
authorities.
The draft Report was prepared for the Steering Group by Janet Holmes,
with the assistance of Candan Turker, under the supervision of Grant
Kirkpatrick.
CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

5
Table of Contents
List of Abbreviations and Terms.................................................................................... 9
Executive Summary....................................................................................................... 11
Summary of Assessment and Policy Options .............................................................. 15

Assessment................................................................................................................... 15
Policy Options.............................................................................................................. 21
Chapter 1. Introduction................................................................................................. 33
Chapter 2. Overview of the Corporate Governance Landscape................................ 37

2.1 The structure of ownership and control.............................................................. 37
2.2 Historical conditions that have influenced corporate governance...................... 39
2.2.1 A corporate culture and capital markets are relatively
recent phenomena.................................................................................... 39
2.2.2 An era of macro-economic instability distorted incentives ..................... 40
2.2.3 The business environment has improved significantly
since the 2000-01 crisis ........................................................................... 40
2.3 Overview of the corporate governance framework ............................................ 41
2.3.1 Sources of corporate governance standards............................................. 41
2.3.2 Principal authorities and SROs................................................................ 42
Chapter 3. Assessment................................................................................................... 47
3.1 Introduction ........................................................................................................ 47
3.2 General – corporate governance standards and practices................................... 48
3.2.1 Comprehensive corporate governance standards exist ............................ 48
3.2.2 Additional reforms to corporate governance standards
are well underway.................................................................................... 50
3.2.3 The authorities are committed to pursuing reforms................................. 53
3.2.4 Awareness of international good practice standards is rising
in the private sector ................................................................................. 54

6 TABLE OF CONTENTS
3.2.5 Corporate governance practices in some important areas

are improving........................................................................................... 55
3.2.6 But challenges remain in some areas....................................................... 57
3.3 Economic incentives and market discipline ....................................................... 60
3.3.1 Demand for and supply of external capital have been increasing ........... 60
3.3.2 Development of a domestic equity culture .............................................. 61
3.3.3 The potential disciplinary influence of domestic institutional
investors might not be realised ................................................................ 62
3.3.4 Potential impact of the Corporate Governance Index.............................. 64
3.3.5 Certain proposed reforms could enhance investors’ ability
to exert discipline .................................................................................... 64
3.3.6 Role of sell-side analysts ......................................................................... 65
3.3.7 Key decision makers in company groups have the potential
to serve as catalysts for reform ................................................................ 66
3.4 Disciplinary effect of civil remedies, enforcement mechanisms
and regulatory oversight..................................................................................... 66
3.4.1 Civil remedies and enforcement mechanisms ......................................... 66
3.4.2 The CMB has often made good use
of its extensive supervisory powers......................................................... 69
3.5 Protection of shareholders in the context of tender offers.................................. 70
3.5.1 Existing standards and practices.............................................................. 70
3.5.2 Proposed amendments to the tender offer laws ....................................... 71
3.6 Effectiveness, efficiency, transparency and accountability
of regulatory processes....................................................................................... 73
3.6.1 CMB staff are professional and motivated .............................................. 73
3.6.2 Some risks associated with certain regulatory approaches...................... 74
3.6.3 Some threats exist to the CMB’s ability to exercise
its powers effectively and objectively ..................................................... 77
3.6.4 Transparency of the CMB’s standard-setting, supervisory
and enforcement processes ...................................................................... 78
3.6.5 Proposed amendments to the CML could enhance
the CMB’s accountability....................................................................... 79
3.7 Financial reporting and auditing: standard-setting, supervisory
processes and enforcement................................................................................. 80
3.7.1 Some inconsistencies in supervisory processes....................................... 80
3.7.2 Centralised standard-setting for financial reporting ................................ 80
3.7.3 Financial reporting and audit practices – transition issues ...................... 83
3.7.4 Audit standards, the standard-setting process and auditor oversight....... 84

TABLE OF CONTENTS 7
Chapter 4. Policy Options ............................................................................................. 91

4.1 Introduction ........................................................................................................ 91
4.2 Increase the potential for market disciplinary forces
to operate more effectively................................................................................. 93
4.2.1 Increase free float requirements for all listed companies ........................ 93
4.2.2 Amend the pension and mutual fund laws............................................... 94
4.2.3 Expand investor education initiatives...................................................... 96
4.2.4 Fully implement the IOSCO Principles for Sell-Side Analysts............... 97
4.3 Enhance standards addressing risks associated
with prevailing ownership and control structures .............................................. 98
4.3.1 Additional compulsory standards could be necessary in some areas ...... 98
4.3.2 Enhance disclosure standards relating to ownership and control ............ 99
4.3.3 Require shareholder approval for most significant
related party transactions ....................................................................... 100
4.3.4 Enhance disclosure requirements about related parties ......................... 101
4.3.5 Require more detailed disclosure about actual board
and management practices..................................................................... 102
4.4 Amend the tender offer laws ............................................................................ 103
4.5 Introduce a risk-based approach to supervision, investigation
and enforcement ............................................................................................... 104
4.5.1 The CMB should develop a comprehensive, risk-based strategic plan . 104
4.5.2 The authorities should work together to develop coordinated
risk-based approaches............................................................................ 106
4.5.3 Amend the CMB’s fee structure to strengthen incentives to improve
corporate governance............................................................................. 107
4.5.4 Incorporate corporate governance factors into supervisory risk
assessment criteria ................................................................................. 108
4.5.5 Focused monitoring of disclosure quality in key corporate
governance risk areas ............................................................................ 109
4.5.6 Prioritise enforcement in key corporate governance risk areas ............. 109
4.6 Provide more context-specific and general guidance to market participants ... 109
4.7 Enhance remedies, enforcement mechanisms and adjudicative procedures..... 111
4.7.1 Provide for more affordable and accessible remedies ........................... 111
4.7.2 Increase penal and administrative penalties and enhance the CMB’s
enforcement powers............................................................................... 115
4.7.3 Continue enhancing the judiciary’s capacity to deal with complex
company law issues ............................................................................... 118
4.8 Complete the centralisation of the financial standard-setting process.............. 118
4.9 Adopt ISAs in full; restructure and deepen the audit oversight process........... 119
4.10 Preserve the CMB’s operational independence; enhance its capacity
and accountability ............................................................................................ 120
4.10.1 Preserve the CMB’s operational independence..................................... 120

8 TABLE OF CONTENTS
4.10.2 Enhance the CMB’s capacity to recruit, retain

and train top-quality staff ...................................................................... 121
4.10.3 Strengthen accountability mechanisms ................................................. 122
4.10.4 Enhance the transparency and rigour of the CMB’s
consultation processes ........................................................................... 123
4.11 Other independent authorities .......................................................................... 123
Bibliography................................................................................................................. 126
Annexes I & II................................................... see www.oecd.org/daf/corporate-affairs
Boxes
Box 1. Summary Assessment of Implementation of OECD Principles ...................... 27
Box 2. Summary of Policy Options ............................................................................ 31

9
List of Abbreviations and Terms
BRSA Banking Regulation and Supervision Authority

capital markets Collectively, the CML, all of the compulsory
laws subordinate instruments relating to the CML (e.g.
Communiqués) and CMB decisions of general
application
CEO Chief executive officer
CGFT Corporate Governance Forum of Turkey
CGI Corporate Governance Index
CMB Capital Markets Board
CMB Principles CMB, Corporate Governance Principles
CML Capital Markets Law, 1981, as amended
COGAT Corporate Governance Association of Turkey
Central Registry Central Registry Agency Inc.
EC European Commission
EU European Union
FSC Financial Sector Commission
GDI General Directorate for Insurance of the
Undersecretariat of Treasury
GDP Gross domestic product
IASB International Accounting Standards Board
IFAC International Federation of Accountants
IFRS International Financial Reporting Standards
IMF International Monetary Fund
IOSCO International Organisation of Securities
Commissions
IPO Initial public offering
ISAs International Standards of Audit

10 LIST OF ABBREVIATIONS
ISE Istanbul Stock Exchange

listed company company listed and trading on the ISE
Methodology OECD Methodology for Assessing
Implementation of the OECD Principles on
Corporate Governance
MTI Ministry of Trade and Industry
MoF Ministry of Finance
MoJ Ministry of Justice
OECD Organisation for Economic Co-operation and
Development
OECD OECD Principles of Corporate Governance
Principles (revised, 2004)
OGM Ordinary general meeting of shareholders
publicly held joint stock company whose shares have been
company offered to the public and/or that has more than
250 stockholders
Report OECD, Report on Corporate Governance in
Turkey
Secretariat Staff of the OECD Secretariat who prepared the
draft Report
SRO Self-regulatory organisation
Steering Group OECD Steering Group on Corporate
Governance
TAS Turkish Accounting Standards
Takasbank ISE Settlement and Custody Bank Inc.
TASB Turkish Accounting Standards Board
TCC Turkish Commercial Code, 1956, as amended
TSPAKB Association of Capital Markets Intermediary
Institutions of Turkey
TÜRMOB Union of Chambers of Certified Public
Accountants of Turkey
7h6ø$' Turkish Industrialists and Businessmen’s
Association
WFE World Federation of Exchanges
YOIKK Coordination Committee for the Improvement of
the Investment Climate

11
Executive Summary
This study is an evaluation, based upon a draft assessment methodology

(Methodology), of the extent to which the OECD Principles of Corporate
Governance (OECD Principles) have been implemented in Turkey. Given
the study’s experimental nature, it is considered to be a pilot study. The
assessment reflects the situation existing as of February 2006, although the
discussion of policy options takes into account proposed reforms and other
developments expected in the near future.
Turkey has been assessed according to high standards. This is because
the Methodology calls for an assessment of actual corporate governance
practices, not just the regulatory framework. The effectiveness of
enforcement mechanisms and remedies is also considered. It also should be
emphasised that some OECD Principles advocate practices that many
countries have only just begun to implement.
The corporate governance landscape in Turkey is characterised by
concentrated ownership, often in the form of family-controlled, financial-
industrial company groups. Free floats are often low, pyramidal structures
are common and there is a high degree of cross-ownership within some
company groups. Controlling shareholders often play a leading role in the
daily management and strategic direction of publicly held companies. An
organised equity market is a relatively recent phenomenon, with the Istanbul
Stock Exchange (ISE) being established only in 1985. From the mid-1980s
until 3-4 years ago, economic conditions were difficult for companies. Thin
markets, relatively few active institutional investors and an unpredictable
macro-economic environment limited incentives for companies to adopt
good corporate governance practices. More recently, however, the return of
foreign investors, greater opportunities for Turkish companies to do business
abroad and increasing competition for foreign capital appear to be
encouraging more companies to make good corporate governance practices
a competitive advantage.
The corporate governance framework rests primarily upon a “public
enforcement” model, with the Capital Markets Board (CMB) playing a
leading role in setting corporate governance standards for publicly held
companies, enforcing the applicable standards and fostering market

12 EXECUTIVE SUMMARY
integrity. In recent years, it has adopted a state-of-the-art corporate

governance code (CMB Principles) and implemented a wide range of other
fundamental regulatory reforms. The CMB’s effective exercise of its
supervisory powers has compensated to some extent for weaknesses in
market disciplinary forces and limitations in civil remedies. Although this
public enforcement model is, on balance, a source of strength in the existing
environment, it also presents some challenges. The authorities face the
difficult task of balancing the need to pro-actively use their powers to
prevent harm against the need to pull back in order to encourage market
participants to assume greater responsibility for their conduct and facilitate
the development of market discipline.
It is widely expected that there will be rapid growth in Turkey in the
coming decade, fuelling demand among companies for external finance to
expand their businesses. Historically, in many other countries where
companies grew rapidly, serious corporate governance problems surfaced,
operating as a brake on development. In many respects, Turkey is better
positioned to address this challenge because:
x the authorities have already adopted, or are introducing, high quality
corporate governance standards (including audit standards);
x transparency has improved significantly, particularly in the area of
financial reporting;
x a positive trend toward widespread implementation of a number of
key corporate governance standards can be observed; and
x the authorities are now focusing their attention on monitoring
implementation, identifying the remaining gaps and risk areas,
focusing their resources on these risk areas and implementing
institutional reforms as needed to strengthen supervisory,
enforcement and remedial processes.
Although the overall corporate governance outlook is positive, the
assessment reveals some key areas for improvement by companies and the
authorities. In view of the corporate structure and market characteristics of
Turkey, it is important to improve further in the areas of control and
disclosure of related party transactions and self-dealing, the protection of
minority shareholders and the role of the board in overseeing not only
management but also controlling shareholders. Some of the existing
shortcomings can be addressed only by the private sector, including
controlling shareholders, board members, senior management, company
advisers, auditors and investors. In particular, board members and
controlling shareholders need to show they are adhering to the spirit, and not
just the letter, of the relevant standards. Investors need to become better
informed and to exert more effective market discipline.

EXECUTIVE SUMMARY 13
The Report outlines a number of policy options intended to strengthen

market disciplinary forces as well as to tighten and focus regulatory activity.
Proposed amendments to the company law provisions in the Turkish
Commercial Code (TCC) should be implemented as soon as possible. In
particular, the Report supports the proposals to improve disclosure about
company groups and require controlling companies to compensate controlled
companies for losses incurred as a result of their exercise of control. This
should strengthen the protection of minority rights. The proposed amendment
designating Turkish Accounting Standards (TAS), as translated from
International Financial Reporting Standards (IFRS) under the authority of the
Turkish Accounting Standards Board (TASB), as the sole source of general
purpose financial reporting standards for all companies (including financial
firms), is also a welcome reform, as is the proposal requiring all companies to
make investor-related information available on company websites.
Proposed amendments to the Capital Markets Law (CML) are at a much
earlier stage of development. The Report endorses a number of the concepts
underlying several of the proposed amendments and urges their timely
implementation. The proposed amendments providing for administrative
penalties as an alternative to the existing penal sanctions for financial crimes
should be included in the final law, although consideration should be given
to substantially increasing the proposed fixed penalties. The current proposal
to provide statutory civil remedies in some instances is supported, although
greater attention will need to be paid to clarify rules covering matters such
as who bears the burden of proof. Greater powers for the CMB, however,
should be accompanied by stronger accountability mechanisms and
proposals to this end are generally welcome. However, to preserve the
CMB’s operational independence, reference to the need for the CMB to
consider “government programmes” should be deleted and the CMB’s fee
base should be broadened in a market-friendly manner.
The Report also recommends that the relevant authorities place more
emphasis on comprehensive and coordinated risk-based approaches to
standard-setting, supervision and enforcement and that the CMB include
corporate governance factors in its risk assessment criteria. Formalising and
enhancing the transparency of the CMB’s consultation practices, including
the publication of regulatory impact analyses, is also recommended.
Turkey has gone a long way to achieving many of the outcomes
advocated by the OECD Principles. In several key areas, however, more
needs to be done to ensure satisfactory outcomes. It is important to tackle
these remaining weaknesses in a systematic and timely manner, including
through the enactment of the proposed amendments to the CML and
company law provisions in the TCC.

15
Summary of Assessment and Policy Options
Assessment
This summary assessment of the extent to which the OECD Principles

have been implemented in Turkey provides an overview of the main
strengths and weaknesses of the corporate governance system as a whole. A
more detailed, thematic assessment is set out in Chapter 3 of the Report,
while Annex I (available electronically at www.oecd.org/daf/corporate-
affairs) contains a comprehensive, OECD Principle-by-Principle
assessment. In general terms, the Methodology calls for an assessment of the
corporate governance framework’s: (a) completeness, i.e. whether it requires
or encourages the achievement of the outcomes recommended in each
OECD Principle; and (b) effectiveness, i.e. whether the recommended
corporate governance practices are widespread and whether companies or
individuals who do not adhere to the relevant standards can be, and are in
fact, held accountable. Thus, a “Partly Implemented” or even a “Not
Implemented” assessment might result even where the corporate governance
framework incorporates the recommended standards, if, for example, many
companies have not implemented these standards.
Individual assessments of the OECD Principles do not lead
automatically to a ranking of priorities for reform. For example, the
standards, practices or systems that lead to a particular OECD Principle
being assessed as Partly Implemented or Not Implemented might not play a
very important role in the overall functioning of a particular jurisdiction’s
corporate governance system. On the other hand, the standards, practices or
systems leading to a Broadly Implemented assessment of another OECD
Principle could be very important, so that measures to improve the level of
implementation could be a high priority. Furthermore, individual
assessments should not be taken out of context. Therefore, Box 1 (which
lists the assessments of each OECD Principle) should not be read or used in
isolation; it has been provided as a tool to improve the readability of the full
Report.

16 SUMMARY OF ASSESSMENT AND POLICY OPTIONS
Basic shareholder rights: Many of the OECD Principles included in

Chapter II, which focuses on basic rights of shareholders and key ownership
functions, were assessed as Fully or Broadly Implemented. Chapter II covers
matters such as the rights to secure methods of ownership registration,
convey or transfer shares, participate and vote in shareholder meetings,
participate and be sufficiently informed about decisions concerning
fundamental changes and share in company profits. Several OECD
Principles in Chapter III relating to the equitable treatment of shareholders,
including OECD Principles III.A.1 (equality of rights attaching to shares),
III.A.4 (cross-border voting) and III.A.5 (equitable treatment of shareholders
at meetings) were also assessed as Fully or Broadly Implemented. The
attendance of Commissioners from the Ministry of Industry and Trade
(MTI) and observers from the CMB at shareholder meetings likely has a
disciplinary effect, while approval processes for fundamental changes
provide the CMB and MTI with an opportunity to verify that companies
comply with the relevant laws.
Exercise of ownership rights by institutional investors: Recently,
greater attention has been paid in many countries to the role of institutional
investors in corporate governance. These investors can be an important
source of market discipline if they have the right incentives to participate
actively in the governance of the companies in which they invest. Some
authorities have adopted standards in this area, but it is a new issue for many
authorities. OECD Principles II.F.1 and II.F.2, which concern the role of
institutional investors who act in a fiduciary capacity, were assessed as Not
Implemented in Turkey. CMB-regulated pension funds and mutual funds are
subject to restrictions on their ability to participate actively in the
governance of the companies in which they invest. They also are subject to
portfolio limits that restrict their financial incentives to pro-actively monitor
corporate governance practices. They are not required or encouraged to
disclose to their beneficiaries the corporate governance policies they apply
in respect of their investments or how they manage material conflicts of
interest that might affect their exercise of key ownership rights. OECD
Principle IV.C, which involves an assessment of the regulatory framework
for company-sponsored participatory pension funds, has been assessed as
only Partly Implemented. This is because these funds are not required or
encouraged to appoint trustees who are capable of exercising objective
judgement and who are charged with responsibility for managing such funds
for the benefit of all beneficiaries.
Disclosure and transparency: Improving transparency levels are
reflected in the assessments of a number of the OECD Principles in Chapter
V, particularly those relating to the disclosure of financial and operating
results, company objectives, risk factors and issues relating to employees

SUMMARY OF ASSESSMENT AND POLICY OPTIONS 17
and other stakeholders. It is too early to definitively assess the quality of

companies’ disclosures under the CMB’s new IFRS-based standards.
Investors and analysts, however, believe that the quality and consistency of
companies’ financial reporting is improving as they gain experience with
IFRS and that listed companies’ publication of Corporate Governance
Compliance Reports is improving the volume and accessibility of
information about companies’ corporate governance practices. Although
further improvements by companies are needed to reach the disclosure
levels called for in the CMB Principles, this is not surprising, since the
CMB’s standards reflect international best practice standards for disclosure
in many areas.
The annotations to OECD Principle V.F note that analysts, brokers and
rating agencies can serve as an important source of market discipline if they
operate with integrity and free from material conflicts of interest. The CMB
regulates these entities. A CMB Communiqué prescribes high-level
compulsory standards intended to ensure, among other things, that
investment advisory firms and their staff, including analysts, avoid conflicts
of interest, disclose potential conflicts to their clients and carry out their
activities fairly and objectively. Similar standards apply to rating agencies.
Nevertheless, this OECD Principle was assessed as Not Implemented in
Turkey. A number of market participants expressed concern that, in many
securities firms, structural conflicts (e.g. arising from close working
relationships among investment banking, brokerage and research groups) are
present and not adequately addressed through internal controls. The
assessment also indicated that many of the core measures recommended by
the International Organisation of Securities Commissions (IOSCO) in its
Principles for Addressing Sell-Side Securities Analyst Conflicts of Interest
(Principles for Sell-Side Analysts) have not been incorporated into the
regulatory framework.
Protection of minority shareholders: The authorities have made
progress setting standards in this area and further reforms are expected in the
near future. Nevertheless, many of the relevant OECD Principles were
assessed as Partly Implemented, including OECD Principles III.A.2
(protection of minority shareholders from abusive actions by controlling
shareholders), III.C (disclosure by board members and senior executives of
matters affecting the company in which they have an interest) and V.A.5
(disclosure of related party transactions). In general terms, this is because
the recommended standards do not appear to have been widely implemented
and it seems relatively difficult to hold the responsible persons accountable
for misconduct. Other OECD Principles that play an important role in
protecting minority shareholders and that have been assessed as Partly
Implemented include OECD Principles II.D (disclosure of capital structures

and arrangements enabling some shareholders to obtain a degree of control

disproportionate to their equity ownership), II.E.1 (protection of
shareholders in connection with acquisitions of corporate control) and II.G
(ability of shareholders to consult each other on issues concerning their
basic shareholder rights). This is because there are some discrepancies
between the outcomes recommended in the relevant OECD Principles and
the standards that apply in Turkey, as well as some concerns about
companies’ implementation of the existing standards. The importance of
these OECD Principles and the related assessments stems from the
concentration of ownership and decision-making power in many Turkish
companies. These conditions are not inherently problematic, but they
present opportunities for the abuse of control. Many of the market
participants and other informed observers contacted as part of the pilot study
believe that, although more effective monitoring by regulatory authorities
and greater transparency have reduced concerns to some extent, abusive
related party transactions continue to occur with some frequency in a
significant minority of publicly held companies. Amendments to the TCC
requiring all companies to prepare financial statements in accordance with
IFRS, requiring more disclosure about intra-group relations and requiring
controlling companies to compensate controlled companies for losses
incurred as a result of control exerted by the controlling company could
enhance protections for minority shareholders. The outcome will depend,
however, on whether key decision makers in companies and gatekeepers
such as independent auditors fulfil their responsibilities in this regard.
Board practices: Chapter VI of the OECD Principles, focusing on the
board’s responsibilities, takes on special significance in jurisdictions like
Turkey, where ownership is concentrated and controlling shareholders often
play a very active role in company management. In this environment, it is
particularly important for board members to be able and willing to act
objectively so they can monitor the conduct of controlling shareholders and
ensure that the company’s best interests are served and that minority
shareholders are treated fairly. The CMB and others involved in developing
the CMB Principles relating to board responsibilities must be commended
for introducing comprehensive, leading-edge standards in this area. A
number of high-profile companies have started to implement fundamental
reforms to board structures and practices. Organisations like the Turkish
Industrialists and Businessmen’s Association (TÜSøAD) are raising
awareness about the efficiency-related and other benefits associated with
empowering boards to operate effectively and objectively.
Nevertheless, most of the OECD Principles in Chapter VI were assessed
as Partly Implemented. A sufficiently large number of companies do not
appear to have fully adopted the structures and practices recommended in

the relevant OECD Principles. This is partly a transition issue relating both
to the relative youth of the capital markets and recent adoption of the CMB
Principles. Naturally, it will take time for companies to restructure their
boards, enhance decision-making processes and then provide meaningful
disclosure to the public about board performance. This implementation gap,
however, also seems to be partly due to a lack of incentives for key decision
makers to implement some of the recommended standards, especially those
that might restrict the powers of controlling shareholders. Many publicly
held companies have relatively low free floats and, to date, their controlling
shareholders have not expressed an interest in expanding the company’s
equity base. Most minority shareholders (except foreign institutional
investors) have not exerted pressure on companies to make changes to board
composition or practices. Overall therefore, public shareholders have not
had much influence yet on company boards. Moreover, in the volatile
economic environment that existed until very recently, the long-term
strategic planning function of boards might have been undervalued, with
more emphasis being placed on avoiding risk, diversifying into multiple
lines of business and centralising control within a few hands. Consequently,
private sector associations interested in promoting good corporate
governance practices and the authorities face challenges in their efforts to
convince companies that strong boards have a vital role to play in improving
corporate performance and not just with respect to monitoring the potential
misuse of assets by management or controlling shareholders.
Financial reporting standards, audit standards and auditor oversight:
Significant reforms to financial reporting standards have been or are being
introduced. There are, however, still some discrepancies between Turkish
financial reporting standards and those recommended in the OECD Principles.
For example, publicly held banks are exempt from the CMB’s IFRS-based
financial reporting standards, including the requirement to consolidate the
financial information of all companies they control. A question also arises
about whether CMB staff employ sufficiently comprehensive and systematic
processes to enable them to detect and cause the correction of significant
disclosure deficiencies during the transition period to IFRS. Primarily for
these reasons, OECD Principles V.A.1 and V.B were assessed as Partly
Implemented. Significant reforms to external audit requirements were adopted
in 2003 and further reforms are being introduced. OECD Principle V.C was
regarded as Partly Implemented as of the assessment date (February 2006),
primarily because: (a) the then existing audit standards were not sufficiently
detailed, although high-level standards based on International Standards of
Audit (ISAs) applied to audits of most CMB-regulated entities; (b) some
questions arose, due to the transition to IFRS-based and ISA-based standards,
about some external auditors’ capacity to fulfil their responsibilities; and (c)
boards are not required or encouraged to report to shareholders, except upon

request by shareholders at a meeting, on the actions they have taken to ensure

that the external auditor was independent and qualified and that it performed
its functions with due professional care. A new CMB Communiqué on Audit
Standards that includes, among other things, detailed, ISA-based standards
was published in the Official Gazette in June 2006. Some of its provisions
came into force on publication, while the new audit standards will apply to
audits of annual financial statements for periods ending on or after 31
December 2006. The CMB also plans to establish a new self-regulatory
organisation (SRO) for independent auditors of capital market institutions.
This entity could make a significant contribution to professional education and
the promotion of high quality audit practices.
Ensuring the basis for an effective corporate governance framework:
Assessing Chapter I of the OECD Principles involves a consideration of the
corporate governance framework’s completeness, coherence and integrity, as
well as a consideration of whether it promotes efficiency and establishes
appropriate incentives for market participants. No fundamental weaknesses or
gaps in the corporate governance framework were identified. The authorities
have performed well in a challenging and volatile environment. Nevertheless,
each of the four OECD Principles in this Chapter was assessed as Partly
Implemented, indicating that further improvements could be made to enhance
the authorities’ effectiveness, efficiency and transparency and strengthen
incentives for companies to implement good corporate governance practices.
For example, although the CMB and other financial sector regulators have
established reputations for integrity and effectiveness, some questions remain
as to whether they: (a) have systems enabling them to focus their resources on
key corporate governance risks; (b) can and do work together effectively to
prevent duplication of effort and avoid supervisory gaps; and (c) have
sufficient resources to maintain their operational independence so that they
can fulfil their responsibilities. A particular concern exists that the CMB’s
narrow financing base and lack of control over its own budget might be
jeopardising its ability to exercise its powers effectively and objectively.
Moreover, given the importance of public enforcement of corporate
governance standards in the current environment, concerns arise as to whether
the CMB’s enforcement powers are extensive enough to operate as a
meaningful deterrent to certain types of misconduct. Also, while the
authorities’ public consultation practices have improved, there is no standard
practice and they do not consistently publish explanations of how they have
evaluated the potential costs and benefits of their proposals or how they have
taken public comments into account. Similarly, it is somewhat difficult to
assess the effectiveness of the CMB’s operations, even though it publishes a
great deal of information about its activities, because it does not
comprehensively report on its performance against objectives and with regard
to emerging regulatory risks.

Policy Options
The OECD Principles recognise that there often are a number of

functionally equivalent ways to achieve the same objective. Therefore,
concluding that a particular OECD Principle is less than fully implemented
does not lead to a clear-cut policy recommendation. Rather, policy options
need to take into account the existing corporate governance landscape and
varying significance of different OECD Principles within the corporate
governance framework as a whole. They should also take into account the
potential impact on overall economic performance, market integrity,
transparency and efficiency, as well as the incentives they create for market
participants. The policy options discussed in the Report are described very
briefly here (see Box 2 for a high-level summary).
Increase the potential for market disciplinary forces to operate
more effectively: To fulfil this objective, several related measures could be
pursued. A new ISE regulation requiring the ISE Executive Council to de-
list companies whose publicly offered shares either do not have a nominal
value equal to or greater than 25% of the company’s paid-in or stated capital
or a market capitalisation of at least 30 million New Turkish Lira is a step in
the right direction. A requirement focusing on the proportion of shares
belonging to the true “free float”, however, might be preferable (since shares
that previously were publicly offered might come to rest in the hands of
controlling shareholders, related persons or other persons who do not
constitute “public shareholders”). Another option is to require listed
companies to have a specified minimum number of shareholders holding a
minimum number of shares. The ISE is also encouraged to ease restrictions
on voluntary de-listing, subject to appropriate safeguards, so that only those
companies wishing to be publicly held continue to be so. Pension fund and
mutual fund laws (including the relevant provisions in the TCC) should be
amended to clarify that these entities can exercise all of the rights (including
voting rights) attaching to their investments. The portfolio restrictions that
apply to CMB-regulated funds should be replaced with a more general and
sophisticated “prudent person” principle. These funds should also be
required or encouraged to develop and disclose their corporate governance
and voting policies, as well as their policies for managing material conflicts
of interest that might affect their exercise of ownership rights. Existing
investor education initiatives should be expanded to better equip investors to
exercise their rights as shareholders. The CMB is also encouraged to assess
the extent to which structural conflicts might be impairing the ability of sell-
side analysts to act with integrity and fully incorporate all the core measures
recommended in IOSCO’s Principles for Sell-Side Analysts.

Enhance standards addressing corporate governance risks

associated with prevailing ownership and control structures: The
assessment concluded that the existing system regarding the disclosure of
ownership and control structures has not been a fully effective tool to achieve
the outcomes associated with several OECD Principles. Wider
implementation of IFRS-based standards and proposed amendments to the
TCC calling for disclosure about company groups are expected to enhance
transparency but some gaps are likely to remain. It is recommended that the
existing recommendations be converted into compulsory standards and
expanded, as needed, to require disclosure of: (a) all capital structures
enabling certain shareholders to exercise a degree of control disproportionate
to their ownership interests or cash flow rights; (b) the ownership structure of
the entire company group; (c) intra-group relations (including with respect to
related parties that fall outside the definition of “related party” in IFRS); and
(d) formal or informal voting agreements by the parties to such agreements.
Companies should publish such disclosure (together with a summary of
voting agreements known to them) periodically or make it available
continuously in a comprehensive, easy-to-use format so that interested
persons can obtain a complete picture without having to consult or cross-
check more than a few online documents. The expected launch of a joint
ISE/CMB online Public Disclosure System and amendments to the TCC
requiring all companies to make investor-related information available on
their websites are expected to further improve investors’ access to
information. The Report also recommends amending the CML to require
shareholder approval of and enhanced timely disclosure about significant
related party transactions. The tender offer regime should be amended to
require, among other things, more detailed disclosure by the offeror as well
as a detailed disclosure statement by the offeree board responding to the offer
and supplementing the offeror’s disclosure statement.
Introduce a comprehensive and coordinated, risk-based approach to
standard-setting, investigation and enforcement: Currently, the CMB
engages in assessment and planning exercises to identify areas where further
reform is needed or where operations can be improved, but further
improvement is called for to ensure that they consistently assess emerging
regulatory risks. Proposed amendments to the CML requiring the CMB to
report on its performance against stated objectives, assess and disclose the
implications of its standard-setting and decision-making and carry out its
activities in accordance with a development plan and annual plan are
welcome reforms, as is the CMB’s plan to develop a regulatory impact
assessment system. To complement these initiatives, the Report recommends
that: (a) following public consultation, the CMB should develop a 3-5 year
strategic plan based on a comprehensive assessment of the most significant
risks to the achievement of its regulatory objectives; and (b) the Turkish

authorities should work together to develop coordinated risk-based

approaches to reduce duplication of effort and close any remaining
regulatory/supervisory gaps. The CMB’s fee structure could be amended to
give incentives to companies to improve corporate governance practices. The
CMB could incorporate corporate governance factors into supervisory risk
assessment criteria. There should be focused monitoring of disclosure quality
in key corporate governance risk areas, as well as prioritised enforcement
with respect to breaches of key corporate governance requirements.
Enhance remedies, enforcement mechanisms and adjudicative
processes: Market discipline needs to be backed up by a credible threat that
shareholders and/or other interested parties could successfully and swiftly
pursue remedies. Since ongoing reforms likely will take some time to
improve the efficiency and reliability of judicial processes, the Report
recommends that the CMB should encourage or in some situations require
companies to provide remedies to investors that can be pursued, at the
investor’s option, either through the courts or private, binding arbitration.
These remedies could be provided in respect of: (a) significant transactions
such as public offers, tender offers and mergers where there has been a
material breach of the law; (b) material breaches of duties or failures to
comply with the law; and/or (c) materially misleading disclosure (including
failures to make required disclosures). The current CMB proposals to
provide statutory civil remedies where there has been a breach of the
prospectus disclosure requirements and/or non-compliance by auditors,
rating agencies or appraisal firms with applicable requirements are positive
developments. However, intensive consultations with all concerned parties
and careful regulatory impact analysis are required to clarify matters such as
which elements of a case must be established by the claimant and which
must be proved/disproved by the defendants.
Proposed amendments to the CML providing for administrative
penalties as an alternative to the existing penal sanctions for financial crimes
such as insider dealing and increasing administrative penalties should be
enacted as soon as possible, but consideration should also be given to
substantially increasing the proposed fixed penalties. The Report also
recommends that the CMB be given the power, at least on an interim basis
until a final court decision is rendered, to remove board members of publicly
held companies and/or require the appointment of new board members.
Certain refinements to the proposed legislation governing settlement of
potential criminal proceedings are also recommended. Finally, the Report
recommends that the CMB be granted certain additional enforcement
powers, such as powers to: (a) publicly reprimand anyone who has
contravened the capital markets laws; (b) require regulated entities including
publicly held companies and independent auditors to submit to an

independent review of practices and make changes as ordered by the CMB;

and (c) order any publicly held company, board member, senior officer,
significant shareholder and/or person making a tender offer to cease
engaging in conduct that contravenes capital markets laws.
Complete the centralisation of the financial reporting standard-
setting process: The proposed amendments to the TCC designating TAS, as
translated from IFRS by the TASB, as the sole source of general purpose
financial reporting standards should be enacted as soon as possible. Going
forward, it will be important to ensure that any supplementary standards
developed by the CMB or other financial regulators for special purposes
relating to their mandates do not conflict with TAS.
Restructure and deepen the audit oversight process: The CMB’s
proposal to establish an SRO that would assume certain standard-setting,
disciplinary and capacity-building responsibilities for independent auditors
of CMB-regulated entities is a welcome initiative. To obtain this initiative’s
full benefits, however, it is recommended that all of the financial regulators
transfer primary responsibility for the oversight of the audit firms they
license to this SRO, while retaining oversight with respect to that entity.
This should reduce duplication of regulatory effort and promote a consistent
approach to oversight. To take advantage of the expertise and resources that
exist in the audit profession, this SRO should be encouraged to hire an
appropriate combination of staff with relevant private sector experience, as
well as staff with regulatory experience, and to involve senior professionals
with current private sector experience in an advisory capacity to the SRO’s
board. The authorities and this new SRO are encouraged to evaluate the
suitability, costs and benefits of the leading-edge reforms to auditor
oversight processes that are currently being evaluated and implemented in
other countries. They are also encouraged to regularly report on their auditor
oversight programme to provide guidance to the profession and the public
about appropriate standards of professional conduct and promote confidence
in the public oversight process.
Adopt ISAs in full: The CMB’s adoption of detailed, ISA-based
standards is a welcome reform. It is recommended that the other financial
regulators adopt the CMB’s standards as the core standards for the firms
they regulate, even though it might be necessary to introduce supplementary
standards to address unique features of audits for these entities. Going
forward, the authorities either should assign to the new SRO for auditors
responsibility for translating new ISAs into Turkish or, at a minimum,
coordinate their resources with those available in the private sector to
translate new ISAs and issue them as a common set of core standards
applicable in respect of all entities regulated by these authorities.

Preserve the CMB’s operational independence: It is important for the

Government to continue pursuing reforms designed to tighten fiscal
controls, reduce government debt and ensure that independent regulators are
subject to appropriate expenditure controls. The pursuit of these important
objectives, however, should not be permitted to adversely affect the
regulators’ ability to fulfil their responsibilities and act objectively.
Therefore, the Report recommends that the Ministry of Finance (MoF)
reconsider its decision requiring the CMB and other independent authorities
to turn over on a quarterly basis a significant proportion of their surplus over
budget. Additional reforms are also recommended, such as broadening the
CMB’s fee base and giving it greater authority to determine its own budget,
subject to appropriate accountability measures. It is also important to ensure
that the CMB has sufficient flexibility and adequate resources to recruit,
retain and train top-quality staff, including some staff with extensive, private
sector experience. While the policy options outlined in the Report focus on
the CMB, similar policy options also may be relevant to other financial
sector authorities.
Enhance accountability mechanisms: Increasing the CMB’s powers
makes a reconsideration of accountability mechanisms appropriate. This is
also important for efficiency. In a jurisdiction where the corporate
governance framework relies to a great extent upon a public enforcement
model, the authorities will always face the difficult task of balancing the
need to pro-actively use their supervisory powers to prevent harm against
the need to pull back in order to encourage market participants to assume
greater responsibility for their conduct and facilitate the development of
market discipline. Stronger accountability mechanisms, including
requirements for the CMB to provide more extensive disclosure about its
own performance against objectives and about regulatory and compliance
costs, is expected to enhance public confidence in the CMB, supporting its
independent status and the grant of additional powers to it. Formalising and
enhancing the transparency of the CMB’s consultation practices also will
contribute to greater accountability and greater confidence in its
effectiveness and efficiency as a regulator.
The Report supports the proposed amendments to the CML intended to
enhance the CMB’s accountability, with one exception. While the proposal
to have the CMB take into account a development plan and annual plan in
exercising its powers is appropriate, it is recommended that the reference in
the draft CML to a “government programme” be deleted. There is a concern
that requiring the CMB to consider government programmes in deciding
how to exercise its powers and fulfil its responsibilities could compromise,
or appear to compromise, its status as an independent regulator.

Significant reforms to the corporate governance framework have been

introduced in Turkey in the past few years and further, important reforms
are expected soon. While these efforts reflect, in part, a response to external
developments, they also reflect a deeply held, domestically inspired
commitment among authorities and leaders in the private sector to pursuing
best practice standards to strengthen Turkish companies’ and the markets’
efficiency and competitiveness. The authorities should be commended for
responding swiftly to emerging regulatory risks and for introducing
standards modelled on international best practices. Opportunities now exist
to move into the next important phase in policy reform. This stage involves
pro-actively and systematically monitoring the implementation of the new
standards, evaluating their impact, improving the effectiveness of
enforcement activities and fine-tuning operational processes to improve
efficiency. It also will be important for the authorities to facilitate the
development of market mechanisms and encourage decision makers in
companies and their advisers to adhere to the spirit, as well as the letter, of
the law. Constructive dialogue between the authorities and the private sector
should remain a priority. In such an environment, it is expected the many of
remaining weaknesses in the corporate governance framework will be
addressed soon.

Box 1. Summary Assessment of Implementation of OECD Principles

OECD Principles assessed as Fully Implemented
x II.A(3) – Shareholders able to obtain relevant and timely information on

the company
x II.A(4) – Shareholders able to participate and vote in shareholder meetings
x II.A(5) – Shareholders able to elect and remove board members
x II.A(6) – Shareholders able to share in profits of the corporation
x II.B(1) – Shareholders able to participate in and be sufficiently informed
about decisions relating to amendments to company’s governing
documents
x II.B.(2) – Shareholders able to participate in and be sufficiently informed
about decisions relating to the authorisation of additional shares
x II.C.4 – Shareholders have the right to vote in person or in absentia
x III.A.1 – Equal rights attach to all shares of same class; disclosure about
share rights
x IV.A (Criterion 1) – Rights of shareholders established by law or mutual
agreement are protected
OECD Principles assessed as Broadly Implemented
x II.A(2) – (Criterion 1) – Shareholders have the right to convey or transfer

shares
x II.C.2 – Shareholders can ask questions of the board, place items on the
agenda and propose resolutions
x III.A.3 – Custodians and nominees cast votes in a manner agreed with
shares’ beneficial owner
x III.A.4 – Impediments to cross-border voting should be eliminated
x III.A.5 – Procedures for shareholder meetings allow for equitable treatment
of shareholders
x IV.D – Stakeholders participating in corporate governance have access to
relevant, sufficient and reliable information on a timely and regular basis
x V.A.2 – Disclosure should include material information about company
objectives
x V.A.6 – Disclosure should include material information on foreseeable risk
factors
x V.A.7 – Disclosure should include material information regarding
employees and other stakeholders
x V.D – External auditors are accountable to shareholders and owe a duty of
professional care to company
x VI.C – Board applies high ethical standards and takes stakeholder interests
into account

OECD Principles assessed as Partly Implemented
x I.A – Impact of overall corporate governance framework

x I.B – Transparency and enforceability of legal framework, compatibility
with rule of law
x I.C – Division of regulatory responsibilities is clear and serves public
interest
x I.D – Authorities have the authority, integrity and resources to fulfil their
duties in a professional and objective manner; rulings are timely,
transparent and fully explained
x II.A(1) – Shareholders have the right to secure ownership registration
x II.B(3) – Shareholders able to participate in and be sufficiently informed
about decisions relating to extraordinary transactions
x II.C.1 – Shareholders are furnished with sufficient and timely information
about shareholder meetings
x II.C.3 – Effective shareholder participation in key corporate governance
decisions is facilitated
x II.D – There is disclosure of capital structures and arrangements allowing
certain shareholders to obtain a degree of control disproportionate to their
equity ownership
x II.E.1 – Rules and procedures governing acquisitions of corporate control are
clearly disclosed; transactions occur at transparent prices and under fair
conditions protecting all shareholders according to their class
x II.G – Shareholders are able to consult each other on issues relating to
basic shareholder rights
x III.A.2 – Minority shareholders are protected from abusive actions by
controlling shareholders
x III.B – Insider dealing and abusive self-dealing are prohibited
x III.C – Board members and key executives disclose material interests in
matters affecting company
x IV.C – Performance-enhancing mechanisms for employee participation are
permitted to develop
x IV.E – Stakeholders are able to freely communicate concerns about illegal
or unethical conduct
x V.A.1 – Disclosure should include material information on the company’s
financial and operating results
x V.A.3 – Disclosure should include material information on major share
ownership and voting rights
x V.A.4 – Disclosure should include material information on remuneration
policies for board members and key executives and about board members
x V.A.5 – Disclosure should include material information on related party
transactions
x V.A.8 – Disclosure should include material information on governance
structures and policies

OECD Principles assessed as Partly Implemented (cont.)
x V.B – Information is prepared according to high quality standards of

accounting and financial and non-financial disclosure
x V.C – Annual audits are conducted by independent, competent and
qualified auditors
x V.E – Information dissemination channels provide for equal, timely and
cost-efficient access to information
x VI.A – Board acts with due care, in good faith and in the best interests of
company and shareholders
x VI.B – Board treats all shareholders fairly where its decisions may affect
shareholder groups differently
x VI.D.1 – Board should review and guide corporate strategy, major plans of
action, risk policy and annual budgets and plans; set and monitor corporate
performance objectives; and oversee major expenditures, acquisitions and
divestitures
x VI.D.2 – Board should monitor effectiveness of company’s governance
practices
x VI.D.3 – Board should select, compensate, monitor and, if necessary,
replace key executives
x VI.D.4 – Board should align key executive and board remuneration with
the long terms interests of company and shareholders
x VI.D.5 – Board should ensure a formal and transparent board nomination
and election process
x VI.D.6 – Board should monitor and manage potential conflicts of interest
x VI.D.7 – Board should ensure the integrity of company’s accounting and
financial reporting systems
x VI.D.8 – Board should oversee the process of disclosure and
communications
x VI.E.1 – Board should consider assigning a sufficient number of non-
executive members capable of exercising independent judgment to tasks
where there is a potential conflict of interest
x VI.E.2 – Board committee mandates, composition and working procedures
are well-defined and disclosed
x VI.E.3 – Board members are able to effectively commit themselves to their
responsibilities
x VI.F – Board members should have access to accurate, relevant and timely
information

OECD Principles assessed as Not Implemented
x II.F.1 – Institutional investors acting as fiduciaries should disclose

corporate governance and voting policies
x II.F.2 – Institutional investors acting as fiduciaries should disclose how
they manage material conflicts of interest that may affect the exercise of
key ownership rights
x V.F – Corporate governance framework is complemented by an approach
that promotes advice and analysis by analysts, rating agencies, brokers and
others that is relevant and free from material conflicts of interest
OECD Principles where one or more Essential Criteria were Not Assessed
x II.A(2) (Criterion 2) – Shareholders have the right to convey or transfer

shares
x IV.A (Criterion 2) – Rights of shareholders established by law or mutual
agreement are protected
x IV.B – Stakeholders have an opportunity to obtain effective redress for
violation of rights protected by law
x IV.F – There is an effective, efficient insolvency framework and effective
enforcement of creditor rights
OECD Principles that were Not Applicable
x II.E.2 – Anti-takeover devices should not be used to shield management

and board from responsibility
Note: The description of the OECD Principles listed in this box is a

summary. Reference should be made to the full text of the OECD Principles
and relevant annotations.

Box 2. Summary of Policy Options
Increase the potential for market disciplinary forces to operate

effectively
x Enhance the free float requirements for all listed companies
x Amend the pension and mutual fund laws to enable and encourage
them to pro-actively exercise their rights as shareholders
x Expand investor education initiatives
x Evaluate the extent and potential impact of structural conflicts affecting
sell-side analysts in securities firms; fully implement the IOSCO
Principles for Sell-Side Analysts
Enhance standards addressing risks associated with prevailing

ownership and control structures
x Enhance disclosure standards relating to ownership and control
x Require shareholder approval for most significant related party
transactions
x Enhance disclosure requirements about related parties
x Require more detailed disclosure about actual board and management
decision-making processes
x Amend the tender offer laws
Introduce a risk-based approach to supervision, regulation and

enforcement
x The CMB should develop a comprehensive, risk-based strategic plan
x The authorities should work together to develop coordinated, risk-
based approaches
x Amend the CMB’s fee structure to provide incentives to improve
corporate governance
x Incorporate corporate governance factors into supervisory risk
assessment criteria
x Provide for focused monitoring of disclosure quality in key corporate
governance risk areas
x Prioritise enforcement in key corporate governance risk areas
x Provide more context-specific and general guidance to market
participants

Enhance remedies, enforcement mechanisms and adjudicative

procedures
x Provide investors with more affordable and accessible remedies
x Increase penal and administrative penalties and enhance the CMB’s
enforcement powers
x Continue enhancing the judiciary’s capacity to deal with complex
company law issues
Centralise the financial reporting standard-setting process and achieve

full alignment with IFRS
Restructure and deepen the audit oversight process
Strengthen the capacity and accountability of key regulators
x Preserve the CMB’s operational independence
x Enhance the CMB’s capacity to recruit, retain and train top-quality
staff
x Strengthen accountability mechanisms
x Enhance the transparency and rigour of the CMB’s consultation
processes
x As appropriate, consider similar reforms for other key authorities

33
Chapter 1
Introduction
The OECD Principles and Methodology emphasise outcomes and

recognise that there are potentially many different, functionally equivalent
ways of achieving them. Therefore, the conclusions in this Report do not
represent an a priori, universally applicable value judgment about the means
employed in Turkey to achieve the outcomes recommended in the OECD
Principles. Rather, the Report is intended to be an assessment of the existing
corporate governance framework’s effectiveness and efficiency. It involves
an assessment of each OECD Principle, as well as a consideration of how
the assessed elements inter-relate to form a corporate governance system.
The related recommendations involve a consideration of options in the
specific economic, legal, political and institutional context that exists in
Turkey.
Jurisdictions assessed under the Methodology are held to high standards.
This is because the Methodology focuses on whether there is widespread
implementation of the relevant OECD Principles, as well as considering the
associated regulatory and compliance costs and effectiveness of enforcement
mechanisms and remedies. Assessments based on the Methodology could
deviate from what might be obtained using other standards that focus
primarily on the formal design of the corporate governance framework
(instead of emphasising actual practices) and/or give less weight to
efficiency considerations. It also should be emphasised that, unlike some
standards that are generally considered to be “minimum standards”, the
OECD Principles are aspirational in nature. For example, some OECD
Principles advocate practices or outcomes that many countries have only just
begun to implement. Therefore, a finding that an OECD Principle has been
less than fully implemented in a jurisdiction does not in any way reflect a
ranking of that jurisdiction against any other jurisdiction, an average or a
baseline.
Consistent with the OECD Principles, the Report focuses on publicly
held companies. In Turkey, capital markets legislation provides that

34 1. INTRODUCTION
companies that have offered their securities to the public (such as listed
companies) and companies with more than 250 shareholders are considered
to be publicly held companies. The assessment reflects the situation existing
as of February 2006, although the discussion of policy options takes into
account proposed reforms and other developments expected in the near
future.
The OECD Principles address a wide range of standards, systems and
institutions, including: (a) corporate laws; (b) accounting and auditing
standards and practices; (c) securities regulatory systems; (d) the functions
and operations of capital market infrastructure providers such as stock
exchanges and securities depositories; (e) judicial systems; and (f) laws
protecting the interests of certain non-shareholder stakeholders such as
creditors and employees. Each of these sub-topics could be the subject of a
detailed assessment and there are standards and comprehensive assessment
methodologies for many of them. The Secretariat drew upon relevant, recent
and reliable evaluations of such standards, systems and institutions as
appropriate without attempting to duplicate their exhaustive analyses.
Although the Methodology specifies assessment criteria (Essential
Criteria) for each OECD Principle, it was concluded that, in the context of
the Pilot Study, it either was impracticable or premature to assess the
implementation of certain Essential Criteria. These are listed in Box 1. The
reasons for deciding not to assess these Essential Criteria are set out in the
OECD Principle-by-Principle assessment contained in Annex I to this
Report, under the headings for the relevant OECD Principles.
Some aspects of a jurisdiction’s corporate governance framework and
practices can be assessed through a review of relevant documents, such as
the text of laws, samples of company disclosure documents, publications by
authorities and various reports. In a given country, statistical data and
systematic studies of various aspects of the corporate governance framework
and practices might also be available. The amount of information available
varies from country to country. It also should be noted that some seemingly
objective and systematic research about certain aspects of corporate
governance sometimes fails to yield reliable answers, e.g. about how boards
really function. Consequently, the Secretariat took into account opinions
expressed by knowledgeable commentators, as well as publications and
other data sources. The Secretariat conducted interviews with company
representatives, their advisers, auditors, investors, analysts, consultants,
academics and representatives of market infrastructure providers. It is not
the OECD’s practice to attribute statements or opinions to particular
individuals or to private sector organisations, unless those statements or
opinions have been published. The absence of such documentation and the
inherently impressionistic and anecdotal nature of the commentators’ views,

1. INTRODUCTION 35
however, should not detract from the relevance of their opinions. Even if
some commentators’ views diverge from the authorities’ views, these
perceptions are nevertheless relevant to the assessment of the quality of
corporate governance practices and effectiveness and cost-efficiency of the
corporate governance framework. The challenge for the Steering Group has
been to weigh appropriately these sometimes contradictory impressions.

37
Chapter 2
Overview of the Corporate Governance Landscape
This Section of the Report gives an overview of the corporate

governance landscape in Turkey. It is supplemented by more detailed
information in Annex II, available at www.oecd.org/daf/corporate-affairs.
Turkey has a population of approximately 71.8 million and gross
domestic product (GDP) per capita (Purchasing Power Parity method) of
approximately USD 7 700 per person in 2004, approximately 28% of the
OECD average in this period. Estimated GDP per capita for 2005 is
USD 8 000.1
Approximately 105 000 joint stock companies are registered to carry on
business. As of December 2005, there were 625 publicly held companies,
including 303 ISE-listed companies, twelve temporarily de-listed companies
trading off-exchange and 298 publicly held but unlisted companies. The
total market capitalisation of all ISE-listed companies (excluding investment
funds) was approximately USD 161.5 billion at the end of 2005, a 64%
increase since December 2004 and the third largest increase in year-to-year
equity market capitalisation among members of the World Federation of
Exchanges (WFE). This is about 19% of the average market capitalisation
for WFE members (versus 13% of average market capitalisation at the end
of 2004). Market capitalisation was approximately 18% of GDP in 2004 and
28% of estimated GDP in 2005. In 2005, the total value of share trading
(including investment funds) on the ISE was approximately USD 201.1
billion, a 36.1% increase over 2004. This is about 19% of the average total
value of share trading for WFE members (versus 17.4% of average total
value of share trading in 2004).2
2.1 The structure of ownership and control
The Turkish corporate sector is dominated by family-controlled,

complex financial-industrial company groups, usually comprising both
publicly held and privately held companies.3 Pyramidal structures are

38 2. OVERVIEW OF THE CORPORATE GOVERNANCE LANDSCAPE
common and there is often a high degree of cross-ownership within the

groups.4 Controlling shareholders often hold shares with nomination
privileges and/or multiple voting rights.5
Approximately 30% of ISE-listed companies (excluding investment
trusts) had “flotation ratios” of less than 25% as of the end of 2005.6 This
flotation ratio represents the percentage of a company’s stock held by the
central securities depository (CSD) in Turkey, excluding shares that are not
eligible for trading.7 This flotation ratio could be considered as
approximating the maximum free float percentage, as it represents most of
the shares that are theoretically tradeable.
When assessing a corporate governance framework and practices and
making recommendations, it is crucial for the reviewer to consider, among
other things, the prevailing board structures and decision-making processes
in the jurisdiction. Acquiring the relevant and reliable data, however, can be
particularly challenging. In Turkey, as in many other countries,
comprehensive and systematic studies of board structures and decision-
making processes are rare. The fact that boards in Turkish companies
(especially publicly held companies) are evolving and vary from group to
group and even within groups makes the reviewer’s task even more
challenging. Moreover, since the reviewer is trying to gain insight with
respect to activities that she or he cannot observe directly, an assessment
will have to based at least in part on: (a) anecdotal and frequently
impressionistic evidence reported by participants or knowledgeable
observers; and (b) related data from which certain inferences can be drawn,
such as the amount of detail in company disclosures about board structures
and decision-making processes.
Although Turkish board structures and processes vary and are evolving,
a number of commentators suggested that many (although by no means all)
family-controlled company groups have employed the following decision-
making structure. At the holding company level, there would be: (a) a
formal, statutory board whose members are elected by shareholders; (b) a
“designated” board member to whom the controlling shareholders entrusted
principal day-to-day responsibility for overseeing the group’s operations;
and (c) an extended executive committee consisting of top management. The
“designated” board member, commonly known as the Murahhas Aza, often
(but not always) is a member of the family that controls the corporate group.
He or she will, in effect, serve as a link between the board and the
executives. If he or she is the most senior member of the family involved in
the group’s affairs, he or she likely serves as the executive chair of the
board. If the family selects a member of the second or third generation to
serve as the Murahhas Aza, he or she will serve on the board while the most
senior member of the family will likely serve as the honorary chair of the

2. OVERVIEW OF THE CORPORATE GOVERNANCE LANDSCAPE 39
board. Board members who represent other shareholders in the control

group often choose to delegate many of their powers and responsibilities
with respect to day-to-day decision-making to the Murahhas Aza. Formally
delegating powers pursuant to the TCC also involves a release from liability
for some matters, although the legislation specifies certain matters for which
all board members can be held liable. For example, they could be held liable
for failing to exercise reasonable diligence in selecting the individuals to
whom they have delegated their powers. The Murahhas Aza generally works
closely with a few board members. This group meets frequently to develop
strategies and make board-level decisions within the scope of the powers
delegated to them.8 Other matters requiring the full board’s participation
might be decided through a written procedure.
The role of senior executives in Turkish companies is evolving and
varies between and within company groups. A number of commentators
suggested that, historically, senior executives in many Turkish companies
implemented but generally did not develop or approve strategies. It was
unusual for them to sit on the board. More recently, however, senior
executives in many publicly held companies, in particular a number of the
larger, publicly held operating companies, have been assuming more
strategic roles within the company. Senior employees of holding companies
also often sit on the statutory boards of the group’s companies and report to
the chair or board-level committee of the parent company. Although they
might meet the statutory definition of “non-executive” board members
(since they do not serve as executives in the subsidiary), they are not
independent. Some commentators expressed the view that a significant
minority of these individuals appear to consider that their primary loyalty is
to the parent company’s controlling shareholders, rather than recognising
that they have dual (and sometimes conflicting) loyalties as employees of
the parent company and board members of the subsidiary.
2.2 Historical conditions that have influenced corporate

governance
2.2.1 A corporate culture and capital markets are relatively

recent phenomena
From the Turkish Republic’s establishment until relatively recently, the
state played a dominant role in Turkey’s economic development. Although a
pro-market philosophy started to develop in the mid-twentieth century,
significant state involvement in the economy continued through the 1970s,
with the state often acting as a significant producer and/or subsidising

private enterprises.9 Beginning in the 1980s, a trend toward liberalisation

started to expose Turkish companies to global competition while providing
some of them with opportunities to attract foreign investment. Following the
establishment of a regulatory framework for the capital markets in the early
1980s, the ISE opened in 1985.
2.2.2 An era of macro-economic instability distorted

incentives
Economic conditions have been difficult for publicly held companies
since the ISE opened, but the situation has changed dramatically in the past
few years. From the mid-1980s until recently, inflation usually exceeded
60% per year. High levels of government borrowing crowded out private
debt and equity. Until recently, high nominal corporate tax rates in
inflationary conditions threatened to de-capitalise companies so that, in
combination with unpredictable tax administration and poor enforcement,
companies had incentives to conceal profits and organise their own captive
sources of finance by establishing or acquiring banks.10
Some commentators suggest that the absence of a rule-based macro-
economic policy framework likely undermined the Government’s credibility
in setting and enforcing corporate governance standards.11 Furthermore,
weak and unstable macro-economic conditions significantly increased the
costs of firms’ access to external capital, minimising the benefits associated
with implementing good corporate governance practices through less
expensive access to external financing sources. Also, given the low risk of
enforcement action, some companies might have opted to obtain a
competitive advantage by keeping their compliance costs low.12
The mixed industrial-financial conglomerate structure can also be seen
as a response to macro-economic instability. Families diversified their
business operations, organising them in separate companies, to spread and
minimise the risk of sudden changes in Government policy. To address the
risks associated with a diversified conglomerate structure, effective
managerial control of the conglomerate was concentrated in the hands of
one or a few controlling shareholders at the parent company level.
2.2.3 The business environment has improved significantly

since the 2000-01 crisis
Responding to the economic crisis of 2000-01, the Turkish authorities
implemented measures to address the causes of financial and fiscal
instability, facilitate a quick recovery and establish the conditions for further
integration with the EU. After contracting by almost 7.5% in 2001, real

GDP growth has increased every year at an average of 7.1%. Consumer

price inflation fell from 54% in 2001 to 8.2% in 2005, the consolidated
budget deficit fell from 16.3% of GDP in 2001 to an estimated 2.1% in 2005
and public sector debt dropped from 106% in 2001 to an estimated 74% in
2005. The Turkish economy is now among the OECD’s fastest-growing
economies. As discussed in Subsection 3.3 below, improved economic
conditions are stimulating the demand for and potential supply of external
capital.
The economic crisis of 2000-01 led to severe capital losses in the
banking and broader corporate sectors, a large number of bankruptcies and
an extraordinary number of non-performing loans. Responding to these
problems, the Turkish authorities implemented a bank restructuring
programme as well as regulatory reforms. Significant progress has been
made in a short period of time. The Banking Regulation and Supervision
Authority (BRSA) has introduced stricter standards for banks (e.g. with
respect to internal controls and risk management), as well as more effective
supervisory practices. A number of insolvent, private banks have been taken
over by the Savings Deposits Insurance Fund, recapitalised, restructured
and/or liquidated. Further reforms to the Banks Act, including enhanced
corporate governance standards and restrictions on lending to related parties,
came into force in November 2005.
Proposed reforms to the tax administrative structure to improve its
effectiveness, efficiency and fairness and plans to lower corporate tax rates
as well as the rates applicable to non-salary income received by individuals,
combined with lower inflation levels, are expected to significantly reduce
incentives for companies and individuals to delay recognition of, or conceal,
gains or profits. These reforms are expected to, among other things, improve
the integrity of companies’ public disclosures.
2.3 Overview of the corporate governance framework
2.3.1 Sources of corporate governance standards

Turkey is a civil law country. The principal sources of general
mandatory corporate governance standards are the joint stock companies
provisions in the TCC, the CML and subordinate instruments published
under the CML, generally in the form of CMB Communiqués. The term
“capital markets laws” is used to refer collectively to the CML and all of the
compulsory subordinate instruments relating to the CML, including
Communiqués, regulations and CMB decisions of general application.

In late 2005, draft legislation based on a comprehensive package of

reforms to the TCC developed by an expert Commission was tabled in
Parliament. Parliament is considering the reforms and the amendments could
come into force by the end of 2006. The proposed amendments relating to
joint stock companies are discussed in more detail throughout this Report.
The ambitious and comprehensive CMB Principles, adopted in 2003, are
the principal source of non-binding corporate governance standards for
publicly held companies. They were revised in 2005 to take into account
revisions made to the OECD Principles in 2004. Listed companies must
publish an annual Corporate Governance Compliance Statement, disclosing,
among other things, which CMB Principles have not been adopted and the
reasons for not doing so. A subset of CMB Principles (e.g., those whose
implementation is difficult to assess) are not subject to this “comply or
explain” requirement.
In August 2005, the CMB published draft amendments to the CML for
comment. The draft amendments are at a relatively early stage of
development and likely will not be considered in Parliament before late
2006. The proposed amendments relating to the corporate governance
framework are discussed in more detail throughout this Report.
2.3.2 Principal authorities and SROs

The CMB consists of a seven-member, full-time executive board
(Executive Board), supported by a staff of approximately 450. The CMB
develops corporate governance standards for publicly held companies and
approves the ISE’s listing standards for companies that trade on the National
Market. The CMB also has extensive supervisory powers. Its approval is
required for a wide range of fundamental changes, including the issuance of
new shares, amendments to company articles, tender offers and mergers.
CMB staff monitor publicly held companies’ disclosures and can attend
shareholder meetings as observers. The CMB sets financial reporting and
external audit standards for publicly held companies and capital markets
institutions (except banks and insurance companies) and authorises and
supervises rating agencies, market intermediaries and the external auditors
of most publicly held companies. It has wide investigation powers. Its
Executive Board can also exercise certain enforcement powers, such as: (a)
order or cause the disclosure of information; (b) ban individuals and entities
from participating in organised capital markets if the Executive Board finds
that they have committed certain financial crimes; (c) initiate suits in court
where there appears to have been non-compliance with the capital markets
laws; (d) refer suspected financial crimes such as insider dealing to the

Public Prosecutor; and (e) impose administrative pecuniary penalties for

breaches of Communiqués and Executive Board decisions.
The MTI administers the TCC and oversees the operation of the Trade
Registry Gazette, in which companies are required to publish various
documents such as notices of shareholder meetings, information circulars
and outcomes of shareholder meetings. Like the CMB, the MTI reviews and
approves certain fundamental changes in company affairs; in the case of
publicly held companies, it usually carries out such a review after CMB staff
complete their review. An MTI Commissioner’s presence is required at all
shareholder meetings in order for actions taken at the meeting to be valid.
He or she verifies, among other things, that: (a) the invitation to the meeting
complied with legal requirements; (b) a quorum is maintained throughout
the meeting; (c) decisions were made pursuant to the appropriate majority of
votes properly cast at the meeting and in compliance with the TCC; and (d)
amendments to the company’s articles are made in compliance with legal
requirements.
The BRSA is the principal competent authority for banks. There are
twelve ISE-listed banks. In 2005, their market capitalisation represented
approximately 29% of the total market capitalisation of the ISE’s National
Market and the total traded value of their stock represented approximately
23% of the total traded value of all ISE-listed stocks (excluding exchange-
traded funds). Many privately held banks are part of family-controlled
corporate groups. The General Directorate for Insurance (GDI) of the
Undersecretariat of Treasury is the principal competent authority for
insurance companies. There are five ISE-listed insurance companies. In
2005, their market capitalisation represented approximately 1.6% of the total
market capitalisation of the ISE’s National Market. The BRSA and GDI,
among other things: (a) establish financial reporting standards for the firms
they regulate; (b) monitor their compliance with those financial reporting
standards and exercise enforcement powers where appropriate; (c) set
standards for external audits of such firms; (d) authorise and monitor the
conduct of external auditors for such firms; and (e) establish and monitor
compliance with a range of other prudentially-oriented standards that affect
the corporate governance of banks and insurance companies (including
standards relating to internal controls, related party transactions and the
structure and operation of boards). Although the CML exempts publicly
held banks and insurance companies from the CMB’s financial reporting
and external audit standards, they are subject to other capital markets laws
and are expected to implement the CMB Principles.
The ISE, a self-funded public entity, sets and administers listing
standards. It plays an important role in disseminating information about

listed companies through its daily bulletin and in conducting market

surveillance.
The TASB, a public entity associated with the MoF, commenced
operations in 2002. It has a nine-member non-executive board, supported by
a Secretary-General and a small, full-time staff. Its mandate has included
translating IFRS into Turkish and issuing these as TAS. 13
The Union of Chambers of Certified Public Accountants of Turkey
(TÜRMOB), an SRO, has a broad membership base. Its members include
professionals who provide bookkeeping services, prepare financial
statements, prepare tax declarations, perform internal audit functions,
conduct tax audits, serve as the statutory auditors of joint stock companies
as provided for in the TCC, provide consultancy services and/or serve as
external auditors of regulated firms including publicly held companies.14 It
plays a significant role in providing post-university pre-qualification training
to the accounting and auditing professions and manages the examination
programme for trainee accountants. These training and exam programmes
focus on general purpose and tax-focused accounting and auditing standards,
rather than financial and auditing standards for publicly held companies.

Notes
1. See Annex II, Table 1 – Selected Economic Indicators.

2. See Annex II, Table 3 – Selected Indicators for Turkish Capital Markets
(2001-2005) and Table 4 – Market Capitalisation of Selected Exchanges.
3. See generally, Annex II, Section 3. See also, e.g. <XUWR÷OX DQG
<XUWR÷OX
4. See Annex II, Table 9 – Ultimate Control and Control Leverage in
Turkish Listed Companies (1998) and Table 11 – Ultimate Ownership
and Control in Turkish Listed Companies (2001). These tables are
reproduced from taEOHVLQFOXGHGLQ<XUWR÷OX DQG<XUWR÷OX
5. See Annex II, Table 12 – Selected Indicators for Largest Listed
Companies in Turkey (2005).
6. See also Annex II, Table 5 – Concentration Measures of Ownership in
Turkish Listed Companies (1998) (repURGXFHGIURP<XUWR÷OX DQG
Table 6 – Flotation Ratios of ISE-Listed Companies (2006).
7. Until recently, the ISE Settlement and Custody Bank Inc. (Takasbank)
served as the CSD in Turkey. It recently transferred this function to the
Central Registry Agency Inc. (Central Registry) in connection with the
transition to a fully dematerialised and centralised system for holding
securities.
8. Ararat and Ugur (2006) state that anecdotal evidence suggests that board
meetings are often short and that important decisions are made by the
controlling families.
9. See, e.g., Ararat and Ugur (2003) and Yurto÷OX
10. Ararat and Bradley (2004).
11. See, e.g. Ararat and Ugur (2006).
12. Ararat and Ugur (2005).
13. The CML was amended in 1999 to provide for the establishment of the
TASB as a public legal entity with administrative and financial autonomy
and conferring upon it a mandate to: (a) encourage the development and
adjustment of national accounting standards for financial reports; and (b)

publish national accounting standards. More recently, oversight

arrangements were altered to provide for it to be administratively
associated with the MoF.
14. Article 16 of the CML requires most publicly held companies (except
banks and insurance companies) and capital markets institutions to have
their financial statements audited by independent auditors who have been
authorised by the CMB to conduct such audits. The regulatory framework
for these audits is described in more detail in Annex I in relation to OECD
Principles V.C and V.D. The BRSA and GDI set external audit standards
for banks and insurance companies, respectively. The TCC also requires
most joint stock companies to have between one and five “auditors”,
whose function is to check the company’s transactions and accounts and
ensure the formal correctness of certain company actions. If there is more
than one auditor appointed under the TCC, they form a “Board of
Auditors”. As described in more detail in Annex I, the TCC also provides
certain remedies to shareholders, exercisable through requests to these
auditors, e.g. to inquire into certain matters, report on certain matters or
apply to the court for certain remedies. Although these auditors perform
certain tasks that might be considered to constitute an external review of a
company’s affairs, transactions or records, the functions performed by
auditors appointed under the TCC do not correspond what is commonly
considered to be an “external audit” of a company’s financial statements.
Thus, references to external audits and external auditors in this Report and
Annex I are references to the audits prescribed under the securities,
banking and insurance law and conducted by auditors authorised to
conduct such audits by the CMB, BRSA and GDI, respectively. The terms
“board of auditors” and “statutory auditors” are used to refer to the
auditors appointed under the TCC.

47
Chapter 3
Assessment
3.1 Introduction
This Chapter of the Report is a thematic, summary assessment of the

implementation of the OECD Principles. A more detailed, OECD Principle-
by-Principle assessment is set out in Annex I. In the interests of readability,
references to the assessments of specific OECD Principles generally are not
included in the body of this Chapter of the Report.
Given the OECD Principles’ focus on publicly held companies, the
assessment in this Chapter and policy options described in Chapter 4
emphasise the CMB’s role and operations, since it is the principal authority
responsible for setting, monitoring and enforcing corporate governance
standards for such companies. Of course, other authorities and institutions
also play, or have the potential to play, an important role in the corporate
governance framework. In particular, in light of the prominent role of banks
in Turkish capital markets and the Turkish economy as a whole, the BRSA’s
initiatives and operations are expected to continue having a significant
influence upon certain aspects of banks’ corporate governance that are
central to prudential oversight, especially financial reporting, internal
controls, risk management and related party lending. It was beyond the
scope of this Pilot Study, however, to conduct a comprehensive assessment
of the corporate governance aspects of the regulatory framework for banks
and of the BSRA’s operations. Given the importance of the banking system
in the Turkish economy, however, it is recommended that a study be
conducted that focuses on the corporate governance framework for banks,
their corporate governance practices and the impact of banking sector
reforms on the corporate governance of company groups that include listed
or unlisted banks.
It also should be emphasised that certain shortcomings can only be
addressed by the private sector, including controlling shareholders, board

48 3. ASSESSMENT
members, senior management, company advisers, auditors and investors.

Private sector organisations have a vital role to play by, e.g.: (a) convincing
companies that better corporate governance practices can improve corporate
performance and facilitate access to external capital at a lower cost; (b)
engaging in constructive dialogue with the authorities on the practical
implications of regulatory initiatives; (c) educating investors; and (d) raising
public expectations about corporate governance practices in Turkey.
The discussion in this Chapter of the Report is organised around the
following topics:
x general – corporate governance standards and practices;
x economic incentives and market disciplinary forces;
x disciplinary effects of civil remedies, enforcement mechanisms and
supervisory practices;
x tender offers;
x effectiveness, efficiency and accountability of regulatory processes;
and
x accounting and auditing.
3.2 General – corporate governance standards and practices
3.2.1 Comprehensive corporate governance standards exist

The CMB Principles represent a comprehensive, high-level statement of
recommended governance practices that reflect international good practice
standards in many areas. For example, the CMB Principles encourage
companies to:
x facilitate investors’ equal, timely and cost-effective access to
information about the company through various media, including
company websites;
x conduct shareholder meetings in a way that encourages all
shareholders to participate actively;
x enable all shareholders (including foreign investors) to exercise their
voting rights in the most convenient way;
x ensure that their boards include qualified and experienced
individuals (including some independent members), operate in a

3. ASSESSMENT 49
transparent manner, assume responsibility for key functions,

establish independently-led corporate governance and audit
committees, meet regularly and conduct self-assessments of board,
committee and individual performance;
x establish a secretariat to maintain appropriate records and ensure
that board members obtain sufficient, timely information to fulfil
their responsibilities; and
x recognise stakeholders’ rights established by law or through mutual
agreements.
The CMB monitors implementation of the CMB Principles. For example,
in 2005, it reviewed all listed companies’ 2004 Corporate Governance
Compliance Reports, published a survey about listed companies’
implementation of the CMB Principles and held follow-up discussions with
company representatives and advisers to discuss the survey results and
provide additional guidance about what is expected under the CMB
Principles. A similar review and more in-depth survey are planned for 2006.
The CMB has issued financial reporting standards based on the IFRS
that were in effect as of January 2003. For the financial years 2003 and
2004, the CMB permitted publicly held companies to satisfy the CMB’s
financial reporting obligations by complying either with the CMB’s new
IFRS-based standards (specified in Communiqué XI: No. 25) or the pre-
existing CMB standards (specified in Communiqué XI: No. 1). Since 2005,
all listed companies (except banks) have been required to publish audited
financial statements prepared either in accordance with the CMB’s IFRS-
based standards (in Turkish) or current IFRS (i.e. the original text published
in English by the International Accounting Standards Board (IASB).1
Unlisted but publicly held companies can prepare their statements in
accordance with current IFRS, the CMB’s IFRS-based standards or
Communiqué XI: No 1.
In line with international standard-setting initiatives, in 2003 the CMB
revised its standards for external audits of CMB-regulated entities to
strengthen the effectiveness and integrity of this function. Among other
things, these new standards: (a) prohibit external auditors and any associated
persons from providing non-audit services (other than tax services) to audit
clients; (b) require listed companies to establish audit committees of the
board and assign to them key functions relating to financial reporting, audit
and internal controls; and (c) require external auditors to provide written
reports addressing key topics to the audit committee on a timely basis. The
CMB recently issued more detailed, ISA-based standards to complement
and expand upon its existing, high-level ISA-based standards. The new

50 3. ASSESSMENT
standards were published in the Official Gazette in June 2006. Some of the
provisions came into effect on publication, while the provisions governing
external audits of annual financial statements for years ending on or after 31
December 2006 will come into effect at the end of 2006.
3.2.2 Additional reforms to corporate governance standards

are well underway
Proposed amendments to the TCC could come into force by the end of
2006. Some of the most significant reforms to corporate governance
standards include the following measures, among others:
x Financial reporting: All companies will have to publish financial
statements in accordance with TAS that are fully compatible with
IFRS, except to the extent the TASB permits the use of different
standards in a sector or for a group of companies, such as small or
medium-sized enterprises (SMEs). Using a translation process
approved by the IASB, the TASB has already finalised a complete
set of TAS reflecting IFRS and published the final versions of all
but two standards.
x Transparency: All companies will be required to have websites and
make investor-related information available on their websites.
x Clarification of the board’s responsibilities: The board’s powers to
oversee and instruct management, dismiss executives, publish the
company’s corporate governance statement, determine the principles
of financial reporting and accounting and organise the ordinary
general meeting (OGM) will constitute “Reserved Powers” that
cannot be delegated. These reforms are expected to clarify the board’s
legal responsibility to fulfil certain key supervisory and strategic
functions, encourage board members to play a more active role and
provide motivated board members who wish to assume a more active
role with legal justification for taking on such responsibilities.
x Special requirements for company groups: A new section on
company groups is intended to enhance transparency with respect to
intra-group relations and restrict opportunities for abuse of
controlled (and controlling) companies’ minority shareholders.
Among other things, the TCC will prohibit parent companies from
abusing their power to control the subsidiary. The controlled
company’s board will have to prepare a report within three months
of each year-end describing in detail: (a) all of the formally
documented transactions entered into with the parent company, with
other affiliates or for the benefit of the parent company or other

3. ASSESSMENT 51
affiliates in the preceding year; (b) any actions (such as changing the
line of business, expanding or contracting the business or closing
down facilities) taken or not taken for the benefit of the parent
company or other affiliates; and (c) any losses incurred by the
controlled company as a result of such transactions or actions. The
parent company’s board members can also request a detailed report
relating to transactions with affiliates and request that the report be
included in the parent company’s annual report. The parent
company’s shareholders can request reports on the financial status
of affiliates at the parent company’s OGM. The parent company will
have to compensate affiliates that, on balance for the year, suffer
any losses resulting from control exerted by the parent company.
This duty will arise independently of any demand by the controlled
company, its board or its shareholders. If no compensation is
provided, the controlled company’s shareholders (or creditors) can
sue the parent company for compensation. That part of the
controlled company’s report analysing the results of the intra-group
activities, a description of any losses that the controlled company
suffered and a statement as to whether the losses have been
compensated must be included in the controlled company’s annual
report and published on its website. If the controlled company’s
board fails to prepare the required report or fails to prepare a report
that meets the required standards, board members can be held civilly
liable and the company itself can be prosecuted.
Although these proposed amendments are expected to increase
transparency regarding intra-group relations and reduce the risk of
abuse of minority shareholders, a few questions remain about
whether the regime will provide sufficient incentives for controlled
companies’ board members to ensure that intra-group activities are
properly disclosed and that compensation is paid in appropriate
circumstances. First, the duty to prepare the intra-group report could
be delegated, e.g. to management, and such a delegation would
result in a transfer of liability to the delegate except where the board
members fail to exercise reasonable diligence in choosing the
delegate. Second, the proposed amendments do not expressly
impose liability on the members of the controlled company’s board
if they fail to pursue compensation on the company’s behalf
(although general principles of liability might apply). Board
members could also contract out of their liability through “hold-
harmless” clauses included in their employment or service contracts,
with the parent company agreeing to cover any liability they might
incur. On the one hand, expressly imposing liability on the
controlled company’s board could discourage well-qualified

52 3. ASSESSMENT
professionals from serving on the boards of controlled companies,

as they could face the dilemma of choosing between standing up to
the parent company or bearing the full burden of the parent
company’s conduct. On the other hand, limiting their liability could
limit the disciplinary effect that controlled companies’ board
members could exert with respect to intra-group relations.
x Cross-shareholdings: Although cross-shareholdings would
continue to be permitted, a controlled company that had a cross-
shareholding in a controlling company would only be permitted to
exercise 25% of the voting, dividend and other rights attaching to
that cross-shareholding. This restriction would not apply as between
companies where each held at least 25% of the shares of the other
company and each was considered to control the other by virtue of
the broad definition of “control” in the revised TCC.
The CMB has also proposed reforms to the corporate governance
framework in some key areas, including the following:
x Market abuse: Proposed amendments to the CML are intended to
bring Turkish laws on insider dealing, selective disclosure, market
manipulation and the creation of false or misleading impressions
into harmony with EU directives.
x Related party transactions – disguised profit transfers: Proposed
amendments to the prohibition on disguised asset transfers in the
CML could make it somewhat easier to prosecute offences
involving disguised profit transfers by eliminating the requirement
for the prosecutor to identify a comparable arm’s-length transaction
for the purpose of proving that the related party transaction was
effected on considerably more favourable terms.
x SROs: Proposed amendments to the CML provide for the
establishment of several new SROs. If the amendments are enacted,
firms wishing to act as external auditors of CMB-regulated entities will
have to join the Association of Capital Market Auditing Firms of
Turkey (Capital Market Audit Firms Association). CMB-regulated
investment companies, portfolio managers and pension fund companies
will have to join the Association of Institutional Investors of Turkey
(Institutional Investors Association). Listed companies, mutual funds
and corporate governance rating agencies will have to join the
Corporate Governance Association. While the proposed amendments to
the CML do not specify in detail these new SROs’ responsibilities, the
draft legislation indicates that these SROs would have some standard-
setting, compliance, disciplinary and/or educational functions.

3. ASSESSMENT 53
x Enforcement powers and sanctions: As discussed in more detail

below, proposed amendments to the CML would increase the range
of the Executive Board’s enforcement powers and increase the
applicable sanctions for non-compliance with capital markets laws.
x Civil liability provisions: The draft CML introduces a statutory
civil right of action for misleading disclosure in prospectuses and
reverses the onus of proof. The issuer, board members and
intermediary institutions could be held jointly and severally liable,
as well as auditors (solely with respect to the financial tables and
information in the prospectus) and selling shareholders (solely with
respect to information relating to them). The existing provisions in
the CML regarding independent auditors’ responsibility would be
amended to provide that audit firms and signatories to audit reports
would be jointly liable for all damage resulting from non-
compliance with the CMB’s auditing standards and principles as
well as for any incorrect, incomplete and/or misleading information
or opinions with respect to financial statements and reports. The
burden of proving that the relevant disclosures are complete would
lie with the defendant. Similar liability provisions would apply in
respect of rating agencies and valuation firms.
3.2.3 The authorities are committed to pursuing reforms

Pursuant to the EU-Turkey Accession Partnership and various
programmes involving international organisations, advice and resources are
being made available to Turkish authorities to strengthen the corporate
governance framework, as well as related laws and institutions that affect
corporate governance practices. In turn, the Turkish authorities have been
investing significant resources to implement programmes designed to: (a)
harmonise Turkish corporate governance standards, related laws and
institutions with European and international standards and practices; (b)
stabilise and strengthen the economy; and (c) improve the business
environment. For example, to follow up on a comprehensive gap analysis
carried out in 2004 with the assistance of EU experts, the CMB has initiated
a two-year twinning project with German authorities to, among other things,
complete the alignment and proper implementation of capital markets laws
in accordance with the EU acquis and ensure that the CMB has the
administrative capacity to meet EU and international standards. The project
also provides for: (1) the development of operational manuals designed to
ensure that market monitoring and enforcement practices meet EU
standards; (2) staff training with respect to the new legislation; (3)
development of a regulatory impact assessment system for analysing the

54 3. ASSESSMENT
effects of new laws on market efficiency; and (4) a public awareness

programme about the Turkish investment environment.
While these efforts reflect, in part, a response to external developments,
they also reflect a deeply held, domestically inspired commitment to
pursuing best practice standards to strengthen Turkish companies’ and
markets’ efficiency and competitiveness. Consequently, there are significant
opportunities, substantial resources and strong incentives to pursue wide-
ranging reforms in the near future with respect to corporate governance
standards, regulatory practices and related institutions. For example, as
noted above, significant reforms to the TCC are planned and generally
appear to have widespread support. There is also appetite and support for
reforms to the capital markets laws, although a consensus has not been
established yet as to the specific content of those changes.
The existence of such opportunities, resources and incentives for reform
has significantly affected the recommendations in this Report. In some
jurisdictions, concluding that a number of OECD Principles had not been
implemented or only partly implemented would be problematic if there were
limited opportunities, resources or incentives for reform in the near future.
Given the current opportunities that exist in Turkey, however, it is expected
that many of the remaining weaknesses in the corporate governance
framework will be addressed soon.
3.2.4 Awareness of international good practice standards is

rising in the private sector
Many high-profile private sector organisations, academics and
professional advisers are promoting corporate governance reforms. Among
others:
x 7h6ø$' SOD\V D OHDGLQJ UROH LQ FRRUGLQDWLQJ DQG SUHVHQWLQJ WKH
views of publicly held companies in Turkey on a wide range of
issues, including corporate governance matters. It has been playing a
very active role in raising awareness in the private sector of
international corporate governance standards and good practices. It
sponsors a wide range of initiatives and studies in this field and
participates actively in consultations on proposed reforms to the
corporate governance framework. It also is involved in director
training initiatives.
x The Corporate Governance Forum of Turkey (CGFT) is developing
educational programmes for directors of large publicly held
companies as well as SMEs.

3. ASSESSMENT 55
x The Corporate Governance Association of Turkey (COGAT)

commissioned a study of corporate governance in Turkey by the Boston
Consulting Group, is working with local chambers of commerce to
promote awareness of corporate governance standards, including the
CMB Principles, and has conducted director training programmes.
x 6RPH RI WKH IDFXOW\ RI 6DEDQFÕ 8QLYHUVLW\ D &*)7 VSRQVRU KDYH
been carrying out empirical research on corporate governance
practices in Turkey and contributing expertise to training
programmes and regulatory reform initiatives.
x The expert Commission, chaired by Professor Ünal Tekinalp, to
develop the revised TCC has engaged a large cross-section of
private sector specialists in dialogue about existing Turkish
corporate governance practices and models for reform and made a
significant contribution to raising awareness in the private sector
about the benefits of good corporate governance practices.
x In late 2005, the joint public-private sector Coordination Committee
for the Improvement of the Investment Climate (YOIKK), an
advisory committee to the Turkish Council of Ministers, established a
technical sub-committee focusing on corporate governance and gave
it a mandate to develop and encourage the implementation of
corporate governance standards for all Turkish companies, as well as
to conduct studies about corporate governance practices in Turkey.
An increasing number of key decision makers in companies (including
significant individual shareholders) are demonstrating an awareness of and
interest in adopting international best practices. This is reflected in, among
other things, their participation in the activities described above, in
interviews with the Secretariat and in companies’ disclosure documents.
3.2.5 Corporate governance practices in some important

areas are improving
Corporate governance practices, at least among the larger listed
companies and company groups that include listed companies, appear to be
improving in some important areas, including the following:
x Financial reporting: A significant minority of listed companies
have been voluntarily preparing financial statements in accordance
with IFRS for several years. Since 2005, all listed companies
(except banks) have had to prepare their financial statements either
in accordance with the CMB’s IFRS-based standards or current
IFRS. Some unlisted but publicly held companies have also started

56 3. ASSESSMENT
to prepare IFRS-based financial statements voluntarily. Investors

and analysts expressed the view that the increasingly widespread
adoption of IFRS-based financial reporting standards in the past few
years has contributed to better quality and more consistent
disclosures in some areas. Recent surveys of the largest listed
companies’ disclosure practices also support this view.2
x Quantity and accessibility of information: The introduction of a
“comply or explain” requirement for the CMB Principles and better
demand and supply conditions for capital are improving the quantity
and accessibility of information. For example, consistent with the
CMB Principles, many listed companies are making information
relating to their financial and annual reports, shareholder meetings,
news releases, investor relations contact details and Corporate
Governance Compliance Reports available on their websites. Some
companies are also putting the company’s articles, answers to
shareholders’ frequently asked questions and easy-to-access data
about direct ownership structures (e.g. the company’s largest direct
shareholders and the company’s major direct ownership interests in
other companies) on their websites. More than half the listed
companies surveyed by the CMB in 2004 had published a dividend
policy.3
x Shareholder meetings: Consistent with the CMB Principles, some
listed companies are encouraging greater participation by minority
shareholders in shareholder meetings. Also, some companies that
previously restricted attendance at shareholder meetings are opening
up such meetings to stakeholders, analysts and the media. Some
companies report in their Corporate Governance Compliance
Reports on shareholder attendance at meetings and whether or not
shareholders asked questions and publish summaries of shareholder
meetings on their websites.4
x Disclosure of related party transactions: The wider
implementation of IFRS-based standards is also expected to lead to
more detailed periodic disclosure about related parties and related
party transactions. Although it is too early to assess the quality of
companies’ disclosures in this respect, it is already apparent that the
amount of information disclosed about the types of related party
transactions that fall within the scope of IFRS is increasing.5
x Some company groups implementing fundamental reforms:
Several company groups are pro-actively pursuing wide-ranging
reforms to their corporate governance structures and practices.
These reforms involve, among other things, amendments to

3. ASSESSMENT 57
company articles, establishing new board-level committees,

enhancing internal controls, recruiting independent board members,
establishing investor relations teams, establishing company
secretariats to serve the board, training programmes for board
members, senior management and investor relations staff, designing
performance-based board and executive compensation policies,
and/or adopting ethics and stakeholder relations codes.
3.2.6 But challenges remain in some areas

Although corporate governance practices in some important areas are
improving, some challenges remain in certain areas, including the following.
x Involvement of independent board members: To date, relatively
few companies have implemented the CMB’s recommendations
regarding board independence. For example, the CMB Survey of
listed companies in 2004 indicated that only 27% of respondents
had at least two board members who they considered to be
independent. A number of key decision makers, however, have
expressed an interest in implementing the relevant recommendations
and some companies have made some progress in this regard. In
particular, a trend toward increasing the proportion of professional,
non-executive members who are unrelated to controlling
shareholders can be observed in some companies (although these
non-executive members are often current or former senior managers
of group companies). It will take some time for companies to
identify and recruit experienced and knowledgeable candidates who
also meet the CMB’s strict independence criteria. This is an ongoing
challenge for companies in many countries.6
x Shareholder participation in nomination and election of board
members: Many companies do not appear to have implemented the
CMB recommendations intended to facilitate active shareholder
participation in decisions about the nomination and election of board
members. Many of the market participants and observers contacted
as part of the Pilot Study expressed the opinion that, in many
companies, the lead controlling shareholder, or shareholders,
informally decide on nominees with little or no input either from
other board members or other constituencies such as public
shareholders. This opinion is consistent with the finding that only
18% of the listed companies responding to the CMB Survey in 2005
had established a corporate governance committee of the board by
the end of 2004. The market participants and observers referred to
above also suggested that, in many companies, the “official”

58 3. ASSESSMENT
nomination of candidates at the OGM, as required under the TCC

and the company’s articles, is merely a formality; the controlling
shareholders exercise their decisive voting power at the OGM to
elect the nominees they previously selected. Although minority
shareholders are not restricted from speaking up at meetings, they
have limited power to influence the election of board members or
cause board members to be removed, unless: (a) the company has
adopted cumulative voting procedures;7 and (b) minority
shareholders have sufficient votes at the meeting to influence the
election or removal of one or more board members.8
x Board decision-making: In most, if not all, countries, governance
experts and board members themselves have indicated that one of
the greatest challenges board members face is how to overcome
structural, cultural and/or psychological factors that tend to inhibit
them from objectively raising issues for discussion during board
meetings in a way that contributes to constructive dialogue and
improves decision-making without damaging trust or undermining
working relationships. The factors that inhibit such behaviour,
however, might vary from country to country. The Secretariat was
not able to identify any systematic studies relating to factors that
influence board decision-making in Turkey. Many observers,
however, suggested that the prevalence of family-controlled
companies combined with traditions that discourage younger or less
powerful people from expressing doubt or asking questions in
meetings make it more difficult for many (although certainly not all)
board members and executives in such companies to openly
disagree with or express doubt about proposals or decisions made by
the company’s key decision maker. These observers suggested that,
if a board member has concerns about the company or a matter to be
considered by the board, he or she is more likely either to raise the
issue privately before the meeting or keep silent during the meeting.
This affects the transparency of board decision-making processes.
These opinions, however, are inconsistent with the survey results
obtained by the Boston Consulting Group and COGAT. Of the 123
companies that responded to the survey, 86% stated that board
members could freely suggest new subjects for the board agenda
and 93% indicated that all subjects are discussed at a sufficient
level.9
x Disclosure about boards: To date, companies’ disclosures about
board nominees, board members and board committees have tended
to be less extensive than the disclosures recommended in the OECD
Principles10 and the CMB Principles. For example, only six of the

3. ASSESSMENT 59
listed companies surveyed in 2005 included declarations of

independence from their independent board members in connection
with their 2004 disclosure documents, notwithstanding that the
CMB Principles call for such disclosure. Many companies disclose
brief biographical descriptions of candidates for election to the
board and board members but do not consistently provide the more
detailed information recommended in the CMB Principles. Very few
companies disclose information either about remuneration policies
or remuneration and benefits actually provided to board members.
Likewise, although a number of companies disclose whether or not
they have established certain committees, indicate how often they
met and identify the committee members, comprehensive and clear
disclosure about committee mandates and working procedures is not
widespread.
x Disclosure about ownership and control structures: The existing
corporate governance framework in Turkey concerning disclosure of
control structures, cross-shareholdings, company groups, intra-
group relations and insiders’ shareholdings and transactions
comprises a mixture of requirements and recommendations that
cover, to some extent, most of the disclosures recommended in the
OECD Principles. However, some disclosures are required only
upon the occurrence of certain events (e.g. a public offering, a
change in the ownership and control arrangements or a transaction
by an insider). Compliance with the disclosure requirements and
recommendations is inconsistent.11 Even companies that do comply
with all of the requirements and recommendations tend to disclose
the relevant information in a range of documents that must be read
together and cross-checked in order to develop a complete picture.
This makes it more difficult for interested persons to easily and
quickly acquire an understanding of a company’s ownership and
control structures.
x Related party transactions: Given the prevalence of concentrated
ownership structures, pyramidal corporate groups, cross-
shareholdings and owner/manager-dominated companies, related
party transactions might be expected to occur frequently. Informed
observers have suggested that such transactions are common. Many
commentators and some studies suggested that, until recently,
related party transactions that unfairly disregard the reasonable
expectations of minority shareholders occurred with some frequency
in a significant minority of company groups.12 While
acknowledging that, in the past few years, more effective
monitoring by regulatory authorities (including by the CMB) and

60 3. ASSESSMENT
improving transparency levels have reduced concerns to some

extent in this area, most investors and analysts interviewed as part of
the Pilot Study indicated that the frequency of unfair related party
transactions continues to be one of their principal concerns about
publicly held companies in Turkey.
x Selective disclosure: Although there is an improving trend with
respect to the quantity, accessibility and timely disclosure of
investor-related information, some market participants and
observers also expressed the view that, despite requirements for
timely disclosure of material developments and prohibitions on
selective disclosure, selective disclosure occurs frequently. They
suggested that such disclosure often occurs: (a) within corporate
groups, even where such disclosure is not in the necessary course of
business; (b) by board members and executives to controlling
shareholders and/or their associates; and (c) by company
representatives to certain influential investors or analysts.13
3.3 Economic incentives and market discipline
The Methodology emphasises that high quality corporate governance

standards are insufficient in themselves. The key issue is whether they are
widely implemented. Furthermore, standards are unlikely to be adopted
unless there are strong incentives (such as the prospect of obtaining
economic benefits) or effective disciplinary forces encouraging adherence to
the standards. The Methodology does not favour particular incentives or
disciplinary forces over others, but it does call for an assessment of their
overall effectiveness in a particular jurisdiction. In this Subsection, various
factors that are affecting the strength of economic incentives and market
disciplinary forces are discussed. In Subsection 3.4, the disciplinary effects
of civil remedies, regulatory supervision and enforcement mechanisms are
considered.
3.3.1 Demand for and supply of external capital have been

increasing
Demand for external capital appears to be increasing for several reasons.
After several stops and starts, the Government’s privatisation plans seem to
be moving forward. The major Turkish conglomerates have been bidding
and likely will continue to bid in various auctions, sometimes in consortia
with foreign investors. Some bidders will turn to external sources to fund all
or part of such acquisitions. Also, if the recent experience of southern and
central European countries who were candidates for and subsequently

3. ASSESSMENT 61
became EU members is repeated in Turkey, Turkish companies probably

will pursue growth and make significant investments to take advantage of
greater opportunities to do business in the EU while dealing with the
prospect of more competition. In such an environment, there likely will be
greater demand among Turkish companies for financing and competition
among Turkish companies to attract foreign capital. These conditions appear
to be encouraging more Turkish companies to make good corporate
governance practices a competitive advantage.
The enactment of the Foreign Direct Investment Law in 2003
established the principle of equal treatment between domestic and foreign
investors. Although restrictions on foreign investment in certain sectors still
exist, there is a programme to gradually eliminate them pursuant to
conditions arising from the EU accession process. Foreign strategic and
institutional investors, as well as foreign analysts, have already started to
return to Turkish capital markets. The ratio of securities held in custody for
foreign investors to total securities held in custody at Takasbank increased
from 43% in 2002 to 66.34% in 2005. Foreign investors and analysts are
already starting to influence to some extent the corporate governance
practices of Turkish companies, especially their disclosure practices.
Improving economic conditions and prospects for future growth likely
will enable more domestic investors to save. Some of these savings probably
will be directed to tax-advantaged pension funds, especially in light of
uncertainty about the likely future payout from the government-funded
pension plan, and/or mutual funds. If real interest rates and government
borrowing continue to decrease, investors likely will invest a greater
proportion of their assets in funds that invest all or a proportion of their
assets in equities. If these funds’ assets under management increase, these
domestic institutional investors could become an increasingly important
source of market discipline.
3.3.2 Development of a domestic equity culture

Nevertheless, these forces of demand and supply do not yet appear to
have provided a sufficient incentive for many controlling shareholders to:
(a) disclose sensitive information about company groups, control structures,
related party transactions or actual decision-making structures and
processes; or (b) modify behaviour that adversely affects the reasonable
interests of minority shareholders.14 Given the relatively recent
establishment of equity markets and the challenging economic conditions
that prevailed until very recently, it is not surprising that a deep, domestic
equity culture has not fully developed yet. Most of the relatively few
minority shareholders (except foreign institutional investors) do not

62 3. ASSESSMENT
participate actively in corporate governance, express their concerns about

suspected misconduct to companies or pursue remedies in court. With
relatively few exceptions, neither the domestic media nor locally-based
analysts have demonstrated a willingness to thoroughly investigate and
publicly report instances of suspected misconduct or publicly criticise
companies or controlling shareholders.
3.3.3 The potential disciplinary influence of domestic

institutional investors might not be realised
Recently, greater attention has been paid in many countries to the role of
institutional investors in corporate governance. While the OECD Principles
do not seek to prescribe the optimal degree of investor activism, OECD
Principle II.F recommends that institutional investors acting in a fiduciary
capacity develop and disclose corporate governance and voting policies with
respect to their investments, as well as how they manage material conflicts
of interest that might affect the exercise of key ownership rights regarding
their investments. Some authorities have adopted standards in this area, but
it is a new issue for many other authorities.
Although CMB-regulated pension funds and mutual funds are relatively
small, they are growing. Consequently, they could become an important
source of market discipline if they have the right incentives to participate
actively in the governance of the companies in which they invest. Currently,
however, they are subject to restrictions on their ability to do so. Because
the TCC does not confer legal personality on such funds, a question arises
whether the votes attaching to shares held by the funds can be exercised at
all. CMB Communiqués also prohibit such funds from pursuing the aim of
“participating in the management” of companies in which they invest. This
restriction clearly would prohibit fund representatives from serving on the
board of a company in which the fund has invested. It is less clear whether
the restriction would also operate to prohibit the fund’s asset managers from
engaging in dialogue with the company’s board about how the company’s
management or governance could be improved. Restrictions and limits like
these can help address certain conflict-of-interest concerns (e.g. that a fund’s
managers will allow their interests as managers or board members of a
company to influence the fund’s investment decisions with respect to that
company). On the other hand, unclear restrictions on participation in
governance can discourage funds from exercising their basic shareholder
rights. CMB-regulated funds are also subject to portfolio limits with respect
to their investments in companies and groups. These restrictions usually
address prudential concerns (e.g. that a fund will not sufficiently diversify
its investments). On the other hand, portfolio limits can have the effect of

3. ASSESSMENT 63
restricting their financial incentives to pro-actively monitor the conduct of

the companies in which they invest. In light of such restrictions and in the
absence of standards encouraging or requiring institutional investors to pro-
actively exercise their rights as shareholders, the potential disciplinary
influence of domestic institutional investors might not be realised.
Another emerging corporate governance issue in many OECD countries
relates to the oversight of company-sponsored participatory pension funds.
In some jurisdictions, commentators and/or authorities have expressed
concern where company representatives have retained control over the
fund’s investment decisions and/or the voting rights attaching to the shares
held by the funds. This is because, in some companies, the company
representatives have: (a) caused the funds to invest a disproportionate
amount of the fund’s assets in the company’s shares (exposing the fund
participants to risks due to the lack of diversification in the fund’s portfolio);
(b) exercised the voting rights attaching to company shares held by the funds
without regard to the best interests of the fund participants; and/or (c)
refrained from exercising the fund’s voting rights at all. Such arrangements
can adversely affect the fund’s participants. More generally, such
arrangements can limit the potential disciplinary influence of such funds on
corporate governance. Accordingly, one of the Essential Criteria for OECD
Principle IV.C provides that the corporate governance framework should
require or encourage company-sponsored participatory pension funds to be
overseen by trustees who are capable of exercising objective judgment and
are charged with the responsibility of managing the fund for the benefit of
all beneficiaries.
As in many other countries, the corporate governance framework in
Turkey does not explicitly set standards in this area. An estimated 200
private sector companies, including some publicly held firms, have
established participatory pension plans for their employees. These funds are
managed in-house by company representatives. The General Directorate of
Foundations (GDF) is the principal regulatory authority for such funds but
its supervisory role is relatively limited. Currently, these funds are not
subject to any asset allocation restrictions designed to prevent them from
investing a disproportionate amount of their assets in company shares. A
World Bank study carried out in 2003 found that several such funds
appeared to have excessive asset concentrations in the company’s own
securities.15 For example, the pension fund of one high profile company is
the company’s largest shareholder and, as of 2003, had invested 90% of the
fund’s assets in the company’s shares. Although this is a corporate
governance issue, the CMB has not addressed it either in the CMB
Principles or its other corporate governance standards. This is because it
does not have the authority to directly regulate the funds themselves. On the

64 3. ASSESSMENT
other hand, regulatory concerns relating to the potential adverse effect on

corporate governance of company-sponsored pension funds do not seem to
fit within the GDF’s core responsibilities. Consequently, a gap arising from
the division of responsibilities between the GDF and the CMB has arisen.16
3.3.4 Potential impact of the Corporate Governance Index

To strengthen incentives for companies to adopt high corporate
governance standards, the CMB wants to create a Corporate Governance
Index (CGI) on the ISE. Companies receiving a rating of at least 6/10 from a
recognised or licensed rating agency using a methodology based on the
CMB Principles are entitled to a 50% discount in their annual listing fees
and will be included in the CGI, once at least five companies qualify for
inclusion. The CMB has authorised two firms specialising in corporate
governance assessments to carry out such rating activities. To date, two
high-profile listed companies, IúEDQN DQG 'R÷DQ <D\Õn Holdings, have
published their corporate governance ratings of 9/10 and 8/10, respectively.
Some commentators suggest that only the top twelve to fifteen listed
companies would find that the discount in listing fees offset the cost of
obtaining a rating, and these are the companies that already attract
institutional investors. For them, the incremental benefit (in terms of a lower
cost of capital) of obtaining a rating is small or non-existent. Some
companies, however, might nevertheless be interested in obtaining a
corporate governance rating because the reputational benefit of a good rating
is of value more generally in their business (e.g. in attracting customers or
commercial partners). Listed banks might also be interested in obtaining
good corporate governance ratings to support their credit ratings. If
corporate bond markets develop in Turkey, other companies might also
conclude that corporate governance ratings could enhance their credit
ratings. At this time, however, it is difficult to predict whether the proposed
CGI will generate the hoped-for incentives to improve corporate governance
practices.
3.3.5 Certain proposed reforms could enhance investors’

ability to exert discipline
The wider implementation of IFRS-based standards and proposed
amendments to the TCC regarding company groups are expected to improve
transparency with respect to intra-group relations, intra-group transactions
and ownership and control structures. Greater transparency is expected to
improve the ability of investors, analysts and the media to monitor the
activities of companies, significant shareholders and other related parties.

3. ASSESSMENT 65
The joint ISE/CMB Public Disclosure System is expected to enhance access

to timely material information about publicly traded companies through a
single website, while proposed amendments to the TCC regarding company
websites would improve access to information about privately and publicly
held companies.
Proposed amendments to the “registered capital”17 system could
strengthen incentives for publicly held companies to limit the voting and/or
nomination privileges enjoyed by certain shareholders. The CML currently
permits publicly held companies to adopt the registered capital system in
their articles. Under this system, the company’s articles give the company
board discretionary power to issue share capital up to a maximum amount
specified in the company’s articles, subject to certain regulatory conditions.
Approximately 70% of listed companies and 16% of unlisted but publicly
held companies have adopted this system. Companies that do not opt for this
system must obtain shareholder approval before issuing any additional
shares. Proposed amendments to the CML would restrict companies
employing the registered capital system from having shares with voting
privileges or nomination privileges enabling holders of such privileged
shares to nominate or elect more than one third of the board members.
Companies whose share structures did not comply with this restriction could
opt out of the registered capital system with the CMB’s permission, but, if
they did so, they would lose the flexibility associated with this system.
Minority shareholders of companies that keep (or adopt) the registered
capital system could have more influence in the election of board members.
Key decision makers in companies, in turn, could find it necessary to attach
more weight to the reasonable interests of minority shareholders.
Proposed amendments to the TCC and CML enabling companies to
adopt procedures for electronic voting and participation in shareholder
meetings could enhance absentee investors’ ability to participate pro-
actively in meetings.
3.3.6 Role of sell-side analysts

In recent years, a number of countries have taken steps to ensure the
integrity of those engaged in the business of providing investment advice or
analysis to the market. Intermediaries such as sell-side analysts, among
others, can facilitate the exercise of market discipline, if they operate free
from material conflicts of interest that could affect their judgment. A
number of market participants and other informed observers expressed
concern that in some securities firms in Turkey, structural conflicts (e.g.
arising from close working relationships among investment banking,
brokerage and research groups) exist and are not adequately addressed

66 3. ASSESSMENT
through internal controls. A CMB Communiqué prescribes high-level

compulsory standards intended to ensure, among other things, that
investment advisory firms and their staff, including analysts, avoid conflicts
of interest, disclose potential conflicts to their clients and carry out their
activities fairly and objectively. The regulatory framework, however, does
not incorporate many of the specific core measures recommended in the
IOSCO Principles for Sell-Side Analysts. Consequently, some questions
arise as to whether structural conflicts might be impeding the delivery of
objective advice and analysis.
3.3.7 Key decision makers in company groups have the

potential to serve as catalysts for reform
Because decision-making power is so concentrated and centralised in
many Turkish companies, a small number of motivated, well-informed and
powerful leaders could influence corporate governance practices throughout
the private sector. In addition to implementing changes within their own
groups, they could persuade unrelated, private companies with which the
group does business to improve aspects of their governance (e.g. internal
controls) that are important to the group’s competitive position or
compliance levels. They could also set an example for other corporate
groups. As noted above, leaders in several high profile corporate groups
have already started to implement wide-reaching changes in the groups’
corporate governance practices.
3.4 Disciplinary effect of civil remedies, enforcement mechanisms

and regulatory oversight
3.4.1 Civil remedies and enforcement mechanisms

The OECD Principles do not advocate perfect deterrence or avoidance
of all harm to investors. Such an objective could, among other things,
generate excessive regulatory and compliance costs, relative to the
anticipated benefits, thereby discouraging firms from participating in capital
markets. It also might induce investors not to take any responsibility for
protecting themselves. As provided for in OECD Principle I.A, the corporate
governance framework should be developed with a view to its overall
impact on economic performance, market integrity and the incentives it
creates for market participants and the promotion of transparent and efficient
markets. Remedies and enforcement mechanisms, however, must be
sufficiently reliable to inspire investor confidence in the overall integrity of
the corporate governance framework and in company practices.

3. ASSESSMENT 67
In Turkey, existing civil remedies do not seem to have a sufficient

deterrent effect on misconduct. The reasons for this are difficult to
determine. For example, some investors believe that judicial processes are
time-consuming and do not offer a sufficiently high probability of success to
justify, relative to the value of their investment and the out-of-pocket and
opportunity costs associated with pursuing a civil remedy. In a recent global
study18 carried out jointly by the International Finance Corporation (IFC)
and Lex Mundi (a global association of law firms) concerning the
effectiveness of investor protections against self-dealing, Turkey (and two
other countries) received the lowest score (4/10) among the 29 OECD
member countries included in the study with respect to the assessment of
shareholders’ ability to obtain a remedy where there has been misconduct.
The score reflects an assessment of:
x the range of documents available to the plaintiff from the defendant
and witnesses during trial;
x whether the plaintiff can directly examine the defendant and
witnesses during trial;
x whether the plaintiff can obtain any documents from the defendant
without identifying them specifically;
x whether shareholders owning 10% or less of the company’s share
capital can request an inspection;
x whether shareholders owning 10% or less of the company’s share
capital have the right to inspect transaction documents before filing
suit; and
x whether the standard of proof for civil suits is lower than that for a
criminal case. 19
While the data from this study focus on a particular fact situation and,
therefore, provide an incomplete picture of investor remedies in Turkey,
they nevertheless illustrate some of the challenges that investors face in
pursuing civil remedies.20
Other commentators, however, assert that the effectiveness of civil
remedies in the corporate governance context has not been fully tested. They
suggest that many domestic investors prefer to rely upon authorities like the
CMB to exercise enforcement powers, rather than pursuing civil remedies
on their own. It is difficult to determine, however, if this reluctance to
pursue civil remedies is grounded in a reasonable belief that adequate
remedies are hard to obtain on a timely basis or if this reluctance reflects the
view that the authorities should assume full responsibility for protecting
investors. Regardless of which interpretation is correct, the result is the

68 3. ASSESSMENT
same. The low probability of corporate governance-related civil suits means

that the possibility of such suits has not, to date, operated as a strong
deterrent to misconduct.
Proposed amendments to the CML creating a statutory civil remedy for
inadequate or misleading disclosure in prospectuses could make it somewhat
easier for investors to hold board members, market intermediaries, auditors
and selling shareholders accountable where they fail to meet CMB
requirements, thereby increasing incentives for these persons to comply with
the law. These amendments on their own, however, are unlikely to be
sufficient. Broader reforms affecting laws of general application (e.g. rules
of civil procedure) and institutions such as the judicial system are also
needed. Investor attitudes, e.g. regarding the utility of private remedies and
the role of regulators, might also have to change before the prospect of civil
suits could start to have a significant disciplinary effect.
There is also some evidence suggesting that existing enforcement
mechanisms do not constitute a sufficient deterrent to certain types of
misconduct.21 For example, the corporate governance framework provides
only for penal liability with respect to financial crimes such as insider
dealing. As acknowledged by the EU’s Market Abuse Directive, which
requires Member States to provide for administrative sanctions with respect
to market abuse, it can be difficult to successfully prosecute financial
crimes, limiting the deterrent effect of such prohibitions. Following the
completion of investigations by the CMB and the determination by the
Executive Board that there has been a breach of the CML, the Public
Prosecutor, however, has successfully prosecuted more than a dozen market
manipulation cases and one insider trading case in the past few years. It has
been somewhat more difficult, however, for CMB investigators to establish
the elements of the offence in the CML of a “disguised profit transfer”, a
type of related party transaction for which criminal sanctions apply, even
though the CMB is active in conducting such investigations. In the period
2000-2006, the Enforcement Department conducted investigations into 52
suspected cases of disguised profit transfer and the Executive Board
determined that a disguised profit transfer occurred in eleven cases. The
defendants in four of these cases subsequently agreed to settle the cases by
repaying the transferred profits, while seven cases were referred to the
Public Prosecutor. During the same period, the Enforcement Department
investigated six suspected cases of “breach of trust” under the Criminal
Code. All six cases were referred to the Public Prosecutor after the
Executive Board found that a breach of trust had occurred. Some market
participants expressed the view that unfair related party transactions, insider
dealing and selective disclosure occur frequently in some companies and
that it is time-consuming and difficult to detect and then successfully

3. ASSESSMENT 69
prosecute such cases. As described in Chapter 4 below, however, proposed

reforms to enforcement mechanisms could enhance their deterrent effect.
Penal and administrative penalties for some types of illegal conduct are
low. For example, although the CML provides that persons found guilty of
certain offences can be required to pay a penalty equal to at least three times
the benefit obtained (and face imprisonment), wrongdoers do not always
obtain a significant benefit as a result of their wrongdoing. Even when they
do appear to have received a significant benefit, it can be difficult to
determine its precise value. In such circumstances, significantly lower
financial penalties (currently in the range of approximately ¼ 000-84,500
after the stated penalties are adjusted for inflation) are likely to apply. The
penalties for breaching subordinate legislation such as Communiqués are
very low (e.g. approximately ¼ 800-34 000 after the stated penalties are
adjusted for inflation), and there is no risk of imprisonment. Many important
standards (such as the requirement to make a follow-up tender offer when
control is acquired) are set only in such Communiqués. Some companies
and individuals find that the benefits of non-compliance outweigh the costs
of such fines.
The CMB’s existing range of enforcement powers is somewhat limited,
in comparison with the powers that authorities in some other OECD
jurisdictions can exercise. For example, it cannot: (a) remove (or ask the
court to remove) a board member or senior executive from a publicly held
company; (b) enter into settlement agreements or accept enforceable
undertakings from market participants; (c) order a listed company or its
directors or senior executives to cease engaging in conduct that the CMB’s
Executive Board has found to contravene capital markets laws; or
(d) intervene, on its own initiative, as a “friend of the court” in civil
proceedings relating to corporate governance matters. As described in
Chapter 4 below, proposed amendments to the CML, if enacted, would
increase the CMB’s enforcement powers.
3.4.2 The CMB has often made good use of its extensive
supervisory powers
The CMB has often made good use of its wide powers to monitor
companies’ disclosures and the conduct of shareholder meetings, as well as
its powers to approve (or withhold approval for) certain fundamental
changes. Its effective exercise of such powers has compensated, to some
extent, for weaknesses in disciplinary forces and limitations in civil
remedies and formal enforcement mechanisms. These findings are reflected,
for example, in the assessments of a number of OECD Principles in
Chapters II and III relating to proposed fundamental changes (e.g.

70 3. ASSESSMENT
amendments to company articles, share issuances and major transactions

such as mergers) and shareholder participation in meetings. In light of
relatively weak incentives and disciplinary forces, it is understandable that
the regulatory framework for publicly held companies would emphasise ex
ante regulatory approval of fundamental changes, since such processes
provide CMB staff with an opportunity to verify that companies are
complying with relevant legislation applicable to such events.
3.5 Protection of shareholders in the context of tender offers
3.5.1 Existing standards and practices

One area where the existing combination of market disciplinary forces,
compulsory standards and enforcement mechanisms does not appear to be
consistently providing sufficient protection to shareholders is that of
compulsory tender offers.22 The applicable CMB Communiqué requires an
offeror who either acquires control, or a specified percentage of the capital
or voting rights, of a company to make a follow-up offer to the remaining
shareholders. It must offer them cash consideration equivalent to the highest
per share consideration paid to the shareholders in the transaction (or
transactions) that triggered (and in some instances preceded the triggering)
of the follow-up offer requirement. If there is a significant delay before the
offer is launched, the CMB can require the offeror to add an interest
component to the offer price. The offeror must obtain the CMB’s approval
before launching the offer, provide a disclosure document to offerees
summarising the terms of the offer and the offeror’s plans for the company
and keep the offer open for at least fifteen days. More than twenty
applications to proceed with compulsory tender offers (and nearly fifty
requests for exemptions from the compulsory tender offer requirements)
were made to the CMB in the past three years.
Some market participants expressed concerns about the existing
regime’s effectiveness at ensuring the equitable treatment of shareholders.
For example, some people believe that offerors have sometimes failed to
publicly disclose all of the material non-public information they obtained
from the significant shareholders whose shares they acquired in the
transactions that triggered the compulsory follow-up offer requirement.
CMB staff, however, indicated that they have not received any complaints
from shareholders in this regard and that no proceedings against the CMB
with respect to its supervisory role have been initiated. The offeree board is
not required to (and generally does not follow the practice of) issuing a
comprehensive statement responding to the follow-up offer and

3. ASSESSMENT 71
supplementing the offeror’s disclosure. Consequently, offerors do not have

to worry about the offeree board revealing that the offeror used material
non-public information and/or that the offer price seems inadequate in light
of the information in the offeror’s and the offeree board’s possession. Some
market participants also expressed concern that the offeree board generally
does not feel compelled to pursue value-maximising strategies (e.g.
soliciting a competing offer or persuading the offeror to raise its offer price).
Some market participants and other commentators said it can be difficult
to calculate the prescribed minimum follow-up offer price. This is because
privately negotiated transactions with significant shareholders often involve
hard-to-value combinations of pecuniary and non-pecuniary consideration.
Thus, CMB staff’s assessment of the offeror’s compliance with the method
for calculating the follow-up offer price often results in significant delays
between the initial acquisition of control and the launch of the follow-up
offer. During this period, offerors can, due to their prior acquisition of
control, effect changes in the company that could adversely affect the
reasonable interests of minority shareholders. Sometimes, offerors disagree
with CMB’s staff’s opinion about whether the proposed offer price complies
with the follow-up offer provisions and balk at making the offer. Recently, a
company that triggered the follow-up offer requirement refused to make the
offer, indicating that it would pay the relatively low administrative penalty
instead of incurring the costs associated with making the follow-up offer.
3.5.2 Proposed amendments to the tender offer laws

Draft amendments to the capital markets laws are expected to address
some shortcomings in the existing regulatory framework. A proposed
amendment to the CML authorising the offeree company, its shareholders
and/or the CMB to apply to the court for an order suspending the voting
rights attaching to shares held by offerors (or those acting in concert with
them) who are required to make a compulsory follow-up offer until such an
offer is completed is a welcome reform. Such an order could operate as a
more effective deterrent to non-compliance than a penalty, since freezing the
offeror’s voting rights would neutralise many of the benefits that the offeror
hoped to obtain in acquiring the shares in the first place. The revised
Communiqué would also introduce a minimum offer period of at least ten
days and a maximum offer period of 30 days for all tender offers (currently,
there is no maximum offer period, while compulsory tender offers must
remain open for at least fifteen days).23
The proposed reforms, however, might not be sufficient to fully address
the existing shortcomings in the regulatory framework for tender offers.
First, proposed amendments to the CML appear to limit the application of

72 3. ASSESSMENT
compulsory tender offer requirements to circumstances where an acquisition

of outstanding securities or solicitation of proxies in respect of a publicly
held company results in a change of control. Currently, the relevant CMB
Communiqué provides that the compulsory tender offer requirements can be
triggered either by an acquisition of control or by an acquisition of shares or
voting rights that results in an offeror holding more than a specified
percentage of shares or voting rights, even where such an acquisition does
not result in a change in control. A person who has triggered the compulsory
tender offer requirements, however, can apply to the CMB for a
discretionary exemption, which the CMB may grant if, for example, it
determines after an examination that there has been no change in control of
management. CMB staff indicated that the proposed amendment to the
CML is not intended to change the existing thresholds in the CMB
Communiqué for triggering the compulsory offer requirements and that the
CMB intends to retain the proposed exemption for transactions that do not
result in a change of control. The English translation of the draft amendment
to the CML, however, appears to define the CMB’s authority to regulate
tender offers as one that applies only in respect of transactions that result in
a change of control. Consequently, it could be argued that any provision in a
CMB Communiqué purporting to require a compulsory tender offer for
acquisitions resulting in a holding of less than legal control is outside the
scope of the CMB’s jurisdiction or rule-making power and invalid. In
essence, it appears that a discretionary exemption is being converted into an
automatic exemption. At the very least, the proposed amendment to the
CML introduces some uncertainty into the regulatory scheme for
compulsory tender offers. If the proposed amendment and/or the CMB’s
practice with respect to the grant of exemptions actually has the effect of
restricting the scope of the compulsory tender offer requirements only to
transactions resulting in a change of control, this would permit a number of
transactions to take place where some shareholders would receive a
significant premium for their shares because the transfer of their shares to
the offeror’s shares was sufficient to give the offeror sufficient control, or
greater control, over corporate strategy, while other shareholders would not
have an equivalent opportunity to participate. The CMB has indicated that it
is re-considering the proposed amendment to clarify the scope of the CMB’s
authority to issue Communiqués defining the circumstances in which the
obligation to make a compulsory follow-up offer is triggered.
A question also arises whether a follow-up offer requirement is the most
effective and efficient way to ensure that minority shareholders have an
opportunity to sell their shares on equivalent terms when a transaction
affecting control of the company takes place. Some jurisdictions (including
Turkey) have found that the follow-up offer requirement presents certain
problems in practice. As noted above, it can be difficult and time-consuming

3. ASSESSMENT 73
to determine whether or not the proposed offer price under the compulsory
offer provides equivalent consideration to that received by shareholders
whose shares were acquired in the transaction that triggered the follow-up
offer requirement. These difficulties and delays can generate uncertainty in
the market, make corporate planning difficult and cause those involved in
the proposed offer (and the authorities) to expend considerable resources to
resolve the uncertainties. Some concerns would also remain about: (a) the
absence of requirements or incentives for board members to pursue value-
maximising strategies; (b) the absence of requirements or incentives for
board members to consider the best interests of shareholders and exercise
independent judgment with respect to offers; and (c) the absence of
requirements to ensure that all material non-public information in the
possession of the offeror and the offeree company’s representatives is
disclosed to offeree shareholders.
3.6 Effectiveness, efficiency, transparency and accountability of

regulatory processes
In an environment characterised by limited economic incentives for

good corporate governance and weak market discipline, it is particularly
important for the principal regulatory authorities to effectively and
efficiently exercise their powers. OECD Principle I.D and the Methodology
emphasise that the authorities need to have the authority, integrity and
resources to undertake regulatory measures and take and enforce decisions
free from political or commercial interference. They also should be held
accountable for the exercise of their powers and use of resources through
appropriate scrutiny and review. Absent appropriate accountability
mechanisms, the Government and the public could lose confidence in the
regulator, jeopardising its ability to fulfil its responsibilities.
3.6.1 CMB staff are professional and motivated

Entry-level professionals hired by the CMB must be top-ranked
university graduates and obtain high marks in a general civil service exam
and a special CMB exam. Until recently, the CMB had very good success in
recruiting the top-ranked candidates. Junior professionals must have three
years’ experience and complete a research thesis before promotion to the
category of experts. Some CMB experts have obtained graduate degrees
abroad pursuant to a programme that created incentives for them to continue
working for the CMB after completing their studies. CMB experts are
frequently appointed by judges to give expert evidence with respect to
capital markets and company law issues. CMB staff have gained valuable

74 3. ASSESSMENT
insight into international best practice standards, emerging regulatory risks

and new approaches to dealing with those risks through their participation in
international organisations like IOSCO, in which the CMB plays a leading
role. The staff who met with the Secretariat had a good working knowledge
of at least one other language and were familiar with legal regimes in other
important financial centres and academic research in their field of expertise.
During the Pilot Study, CMB staff uniformly demonstrated professionalism,
motivation and a strong interest in learning about and adapting international
standards for the Turkish environment.
As in some other countries, the private and public sectors offer almost
mutually exclusive career tracks in Turkey. Most of the CMB’s professional
staff are recruited as young graduates without private sector experience.
Subsequently, some staff might exit the public sector but, if they do, they
rarely return. In such circumstances, it can be challenging for regulatory
staff to obtain extensive, hands-on experience and insight into company
operations, either directly through employment in the private sector for a
period of time or indirectly through opportunities to work side-by-side with
colleagues who have worked in the private sector. The separation of public
and private sectors can also give rise to suspicions about the motives and
qualifications of those employed in the other sector. It can also make it more
difficult to develop a common understanding of how to balance regulatory
objectives with business demands.
These difficulties are mitigated, to some extent, through CMB staff’s
active participation in conferences attended by private sector
representatives, interactive consultation processes for law reform initiatives
and monitoring programs relating to the implementation of the CMB
Principles. A number of market participants and observers commented
favourably on the increasing expertise of CMB staff who have participated
in standard-setting, consultation and monitoring initiatives in the area of
corporate governance. They stated that CMB’s staff experience in this
regard is starting to be reflected in the increasing rigour, sophistication and
focus of staff’s monitoring and supervisory activities.
3.6.2 Some risks associated with certain regulatory

approaches
In the existing environment, the “public enforcement model” for
corporate governance that operates in Turkey is, overall, a source of
strength. For example, as noted above in Subsection 3.4.2, ex ante approval
processes with respect to fundamental corporate changes give the CMB and
MTI an opportunity to detect and prevent potentially harmful conduct.
Likewise, in the absence of an extensive body of context-specific guidance

3. ASSESSMENT 75
about the application of corporate governance standards (often provided, in

some jurisdictions, through jurisprudence), the CMB has often filled the
information gap by prescribing in detail how companies should disclose
certain matters.
These regulatory approaches, however, have some limitations that could
become more significant over time. Some company representatives believe
that some of the CMB’s ex ante approval processes are time-consuming,
cause applicants to incur significant compliance costs, and, in some
circumstances duplicate other regulatory processes. For example, in the past
three years, CMB staff spent, on average, 57 days examining each proposed
compulsory offer and, on average, 101 days elapsed between the date the
compulsory offer threshold was crossed and the date the offer was launched.
On the one hand, this review and approval process protects offeree
shareholders by providing some assurance that tender offer documents
contain the prescribed disclosures and that the tender offer price has been
properly calculated. In the current environment, it is particularly important
that the CMB is in a position to detect and prevent harmful conduct, because
the formal enforcement mechanisms and civil remedies applicable to tender
offers are limited. On the other hand, delays associated with approval
processes might create uncertainty in the market and provide opportunities
for unscrupulous offerors who have acquired control through private
transactions to effect changes in the company that could adversely affect
minority shareholders’ reasonable interests even before the offer is
completed.
Detailed prescriptive requirements can be an important source of
guidance, particularly in a jurisdiction like Turkey where capital markets
and an equity culture are relatively recent phenomena. They can also
facilitate effective enforcement by providing clear standards against which
behaviour can be measured. For example, the prescribed format for
Corporate Governance Compliance Reports likely makes it easier for: (a)
listed companies to determine what constitutes the minimum, required
standard of disclosure in this area; and (b) investors and the CMB to
compare one company’s disclosure against another’s disclosure, thereby
facilitating the exercise of market discipline and/or supervisory activities.
On the other hand, detailed requirements and prescribed document formats
sometimes restrict the flexibility of corporate actors to implement standards
in an innovative but acceptable manner. For example, some company
representatives believe that the prescribed format for Corporate Governance
Compliance Reports unduly restricts a company’s flexibility to present the
required information in a user-friendly way tailored to the company’s
circumstances, notwithstanding that the prescribed format does not actually
prohibit them from disclosing any other additional information they consider

76 3. ASSESSMENT
to be important. Detailed standards could also retard the development of

judgment by corporate actors about what constitutes appropriate and
inappropriate disclosure or practices by inadvertently encouraging them to
adopt a “tick-the-box” approach to comxliance instead of focusing on
whether their activities satisfy the purpose of the standard. For example,
some company representatives, investors and analysts believe that the
CMB’s prescribed format for Corporate Governance Compliance Reports is
causing some companies to publish boilerplate disclosure instead of
describing carefully whether and how they have implemented the relevant
standards. Some company representatives and their advisers also stated that
CMB staff often make extensive drafting comments about disclosure
documents or proposed amendments to company articles and that such
comments are not always limited to material deficiencies. CMB staff
expressed the view that many people who prepare disclosure documents,
such as prospectuses and tender offer documents, often submit incomplete
documents because they know that CMB staff will review them in detail and
propose significant changes to the documents before the disclosure
document is approved. This suggests that CMB’s staff’s current practice of
providing detailed comments on companies’ draft documents is encouraging
some people to rely upon CMB staff to correct deficient disclosures instead
of developing the knowledge and judgment to provide adequate disclosure
in the first place.
Although CMB staff often invest significant resources in ex ante
approval processes, some market participants have suggested that CMB staff
do not always focus on the greatest risks to investors or market integrity
presented by the matter under approval or the surrounding circumstances.
For example, some investors and analysts believe that, although CMB staff
spend a considerable amount of time reviewing proposed disclosure
documents and transactions, they do not consistently follow up on: (a)
significant discrepancies presented in the company’s disclosure record (e.g.
inconsistencies in the information disclosed in the disclosure document
under approval and other documents such as timely disclosure reports); or
(b) rumours of selective disclosure, insider trading or abusive related party
transactions taking place in the relevant time period.
Some of the same concerns arise with respect to some of the CMB’s
monitoring processes relating to, e.g. reviews of disclosure documents. On
the one hand, some observers and market participants noted that, in recent
years, CMB staff have regularly followed up on rumours of material
developments in company affairs and required companies to issue news
releases in circumstances that would not have resulted in timely disclosure
in the past. They said that the CMB’s practices are having a disciplinary
effect and have increased their level of confidence that listed companies will

3. ASSESSMENT 77
make reasonably timely disclosure of a material development, at least if it is

the kind of development that will eventually become public through other
means. On the other hand, some company representatives, their advisers and
some analysts stated that CMB staff spend a significant amount of time
monitoring news reports and frequently contact companies asking them to
publicly confirm or deny news stories of questionable materiality. They also
expressed the view that, to date, staff do not appear to have developed an in-
depth monitoring programme to identify, analyse and challenge harder-to-
identify instances of delayed or inadequate disclosure.
It might be that this issue is primarily a problem of perception and that
such perceptions might be inaccurate. Many market participants in Turkey
would also acknowledge that the CMB’s regulatory processes are often
more efficient than those employed by a number of other Turkish
authorities. It is also possible that market participants in many other
countries would make similar comments about the capital markets
regulator’s approval and supervisory practices. Nevertheless, the fact
remains that some market participants and their advisers believe that the
CMB’s approval and monitoring processes could be improved through
greater focus upon material deficiencies and regulatory risks and that some
of the resources currently allocated to such processes could be devoted to
other priorities.
3.6.3 Some threats exist to the CMB’s ability to exercise its

powers effectively and objectively
Without stable funding, a regulator’s decision makers could find it hard
to maintain their objectivity. They might feel pressure to make decisions or
exercise their powers in a way that satisfies the interests of those who
control their funding. The lack of a stable source of funding can also
jeopardise the regulator’s ability to fulfil its responsibilities, exposing it to
censure and undermining its authority.
In Turkey, threats to the CMB’s operational independence exist,
potentially restricting its effectiveness.24 Although nominally independent,
this independence is jeopardised by a narrowly based fee structure (i.e. its
revenues are derived solely from fees paid in respect of public offerings of
securities) and a lack of control over its own budget. The MoF recently
introduced cost control measures (e.g. restrictions on the allocation of
resources to staff salaries, benefits and training, work-related travel and a
requirement to turn over a significant percentage of any quarterly surplus
over budget to the MoF) that might be affecting the CMB’s ability to fulfil
its responsibilities. As job opportunities increase due to improved economic

78 3. ASSESSMENT
conditions, resource restrictions could make it harder for the CMB to recruit
and retain top quality staff. Similar concerns exist with respect to the BRSA.
3.6.4 Transparency of the CMB’s standard-setting,

supervisory and enforcement processes
The CMB regularly publishes a significant amount of information in
Turkish and English about corporate governance standards, capital market
indicators, capital market institutions and its own operations.25 For example,
it publishes the CML, Communiqués, the CMB Principles and similar
documents on its website.26 Many of these documents are available in
English as well as Turkish. It also regularly publishes various statistics about
capital markets activities. It usually publishes draft laws or amendments for
comment on its website. Its website includes an investor-focused webpage
that, among other things, includes staff’s answers to frequently asked
questions and provides links to certain key sources of information. It also
publishes brief notices (only in Turkish) concerning any enforcement
measures taken by the Executive Board. In its Annual Report (available in
Turkish and English), the CMB provides information about capital market
activities, describes the nature of its operations, provides an update on its
standard-setting activities for the preceding year, describes the enforcement
process and provides summary statistical data on enforcement proceedings.
The CMB is to be commended for making so much information publicly
available and easily accessible.
Nevertheless, it is somewhat difficult to assess the effectiveness of the
CMB’s operations. Although it describes its responsibilities, summarises the
functions of its main operational units and provides data on their operations
during the year in its Annual Report, it does not provide much information
about the significance of its activities or how it has performed against any
objectives it has set for itself. For example, it briefly describes the
Communiqués and rule-making decisions issued in the past year but does
not explain which regulatory risks these standards are intended to address. It
does not systematically summarise the impact of standards adopted in
preceding years or describe emerging regulatory risks and its plans to
address those risks. Likewise, the Annual Report includes comparative
annual data on enforcement activities and on cases against the CMB but
does not generally analyse year-to-year trends or describe significant cases
in detail. The CMB discloses summary financial information relating to its
operations (e.g. its principal sources of income, its expenditures,
investments and debt payments on a budgeted and actual basis), but it does
not provide a more detailed breakdown on its expenditures. For example, it
does not disclose what proportion of its expenditures relate to different

3. ASSESSMENT 79
operational areas or departments and it does not analyse year-to-year trends.

Consequently, it is challenging for interested persons to assess the CMB’s
effectiveness. Performance reporting by independent regulators, however, is
a relatively new phenomenon and many such regulators have only just
started to develop and disclose performance indicators.
It is also somewhat difficult to develop a clear understanding of the
corporate governance framework in Turkey.27 As in many other countries,
corporate governance standards, enforcement mechanisms and remedies are
specified in a range of statutes, instruments and other documents. This
makes it more difficult for market participants to develop a good
understanding of the various participants’ rights, responsibilities and
options. This can make it harder for people to fulfil their obligations, reduce
the effectiveness of disciplinary mechanisms and adversely affect public
confidence in regulatory authorities. This is a particular challenge in Turkey
(and other countries that are pursuing significant reforms) because the
existing corporate governance framework is relatively new and significant
further reforms are in progress. This increases the burden on people to keep
up-to-date on the most recent developments.
3.6.5 Proposed amendments to the CML could enhance the

CMB’s accountability
Draft amendments to the CML are intended to enhance its
accountability. For example, proposed Article 25 would:
x require the Presidency of the CMB to conduct an annual, internal
performance audit;
x provide for an external audit of the CMB’s annual accounts,
revenues, expenditures and properties by the Turkish Court of
Accounts;
x require the CMB to publish an annual report that: (a) analyses the
decisions taken in the preceding year and the secondary legislation
issued, including their social and economic implications; and (b)
assesses and compares the CMB’s performance against its objectives;
x require the CMB’s annual report, financial statements and final
budget to be submitted to the Grand National Assembly; and
x require the CMB to publish on its website and in its bulletin and
annual report the external audit report, all issued regulations, all
decisions taken by the Executive Board and all “research and
investigations”.

80 3. ASSESSMENT
Another proposed amendment, however, raises a question about the

CMB’s autonomy. It provides that the CMB, in its activities, shall consider
primarily the principles, strategies and policies set out in the development
plan, annual plan and government programme. On the one hand, requiring
the CMB to take into account a development plan and annual plan is a
welcome reform, since the development and use of such plans can facilitate
more systematic, comprehensive and strategic decision-making and enhance
accountability where there is a requirement to report on performance
measured against the plan’s objectives. The reference to a government
programme, however, raises a question as to whether the CMB’s authority
to develop its own regulatory strategy within the objectives set out in the
CML could be constrained by a requirement to follow a programme
developed by the Government.
3.7 Financial reporting and auditing: standard-setting, supervisory

processes and enforcement
3.7.1 Some inconsistencies in supervisory processes

There is some evidence suggesting that the BRSA sometimes focuses on
a narrower range of investor protection concerns than the CMB. For
example, some commentators have noted that the BRSA approved or
facilitated certain restructurings of financially troubled banks that resulted in
adverse consequences for the minority shareholders of such banks or the
firms acquiring them. Others suggest that BRSA staff’s reviews of publicly
held banks’ financial statements focus only on issues that raise prudential
concerns. CMB staff, however, do not review the financial statements of
publicly held banks. Consequently, a supervisory gap exists. Circumstances
like these have raised questions about the consistency of the regulatory
framework as a whole. For example, some investors have blamed the CMB,
even though it is not the principal regulator of banks, because they did not
seem to understand the division of responsibility between the CMB and
BRSA. Similar concerns about the respective roles and regulatory focus of
the banking and securities regulatory authorities have arisen in many other
countries. The issue is of particular concern in Turkey because
restructurings of troubled banks are continuing, so there is potential for
similar issues to arise in the near future.
3.7.2 Centralised standard-setting for financial reporting

Initiatives to centralise the financial reporting standard-setting process
have the potential to enhance the efficiency and quality of this process. The

3. ASSESSMENT 81
TASB has completed the translation of all of the IASB’s standards into
Turkish and published all but two of the new TAS. Its IASB-approved
translation process provided for the establishment of expert working groups,
each charged with responsibility for translating a standard on a word-for-
word basis and then reviewing some of the translations completed by other
working groups to ensure consistent translation across all of the working
groups. Once the standards were translated, they were published for public
comment. Each final TAS is being published side-by-side with the original,
English version of the relevant standard.
The TASB is well-positioned to assume responsibility for keeping TAS
up-to-date.28 Its nine-member board includes one representative from each
of the BRSA, CMB, the GDI, the MoF, the Council of Higher Education,
the Union of Commodity Exchanges and Association of Chambers of
Commerce (TOBB) and TÜRMOB, as well as a self-employed accountant.
All of the board members are part-time, non-executive members who have
expertise in financial reporting and who are continuously exposed to current
financial reporting issues in connection with their other responsibilities. The
TASB also plans to establish an advisory council consisting of experts
(including practitioners) drawn from its working groups. Until very recently,
the TASB operated with a very small staff comprising a Secretary-General
and Vice-President, since the focus of its work was translating IFRS and a
large part of that work was carried out by volunteer working groups. Now
that it has acquired its own premises and is moving into a new phase of its
operations, it has begun to hire full-time employees. It expects to devote a
significant proportion of its 2006 budget to training for its staff. An
amendment to the CML providing for the creation of the TASB specifies
that its income shall consist of 2% of TÜRMOB’s annual income, plus any
royalties the TASB receives for its publications. The Government is also
required to make up any shortfall. The TASB indicated that it expects its
existing funding arrangements to be sufficient to meet its needs, at least for
the medium term.
The TASB intends to use the same translation process going forward
and plans to start translating standards as soon as they are published by the
IASB for consultation, so that TAS will keep current with IFRS as they
evolve. It has also started to translate interpretations issued by the IASB
International Financial Reporting Interpretations Committee. A TASB
representative participates in an IASB working group that is developing
international accounting standards for SMEs. The TASB expects that
participation in this initiative will enable it to have, by the time proposed
amendments to the TCC requiring all joint stock companies to prepare
financial statements in accordance with IFRS come into force, either: (a)
Turkish versions of finalised IFRS standards for SMEs (if the TCC comes

82 3. ASSESSMENT
into force after the international standards for SMEs are finalised); or (b)
Turkish standards based on the standards being considered by the IASB (if
the proposed amendments to the TCC come into force before international
standards for SMEs are finalised).
The Secretariat was advised that the BRSA has formally indicated that it
intends to adopt TAS as replacements for its existing general purpose
financial reporting standards. It is hoped that the other authorities will make
the same decision as soon as possible, pending the enactment of the
proposed amendment to the TCC designating the TASB as the sole authority
responsible for establishing general purpose financial reporting standards
and precluding other authorities from adopting inconsistent standards.
Centralising the standard-setting function within the TASB is expected to
resolve the remaining inconsistencies in the financial reporting standards for
publicly held companies29 and prevent such inconsistencies from arising in
the future. It could also enhance the efficiency of the standard-setting
process, since the other authorities would no longer find it necessary to
allocate significant resources to the development of their own standards or
translation of international standards.
Some questions remain, however, as to whether the appropriate
information-sharing and cooperation mechanisms will be put in place to
ensure the consistent interpretation, application and enforcement of the new
financial reporting standards in Turkey.30 This is a challenging issue for
authorities in many jurisdictions since standard-setting, interpretation and
enforcement powers are often divided among different authorities. It also
will be important for authorities in different jurisdictions to interpret, apply
and enforce IFRS consistently. To facilitate consistent interpretation of the
standards, IOSCO and CESR-Fin, an operational committee of the
Committee of European Securities Regulators, are developing a database for
regulatory decisions regarding the application of IFRS. As an IOSCO
member, the CMB will have access to this database but it is unclear whether
IOSCO will permit its members to share the data with non-member
authorities in the IOSCO member’s jurisdiction. More generally, it does not
appear that any structured information-sharing or cooperation mechanisms
have been developed yet by the Turkish authorities involved in the
interpretation, application and enforcement of TAS, although the structure
of the TASB itself (which provides for representation of the CMB, BRSA,
GDI and MoF on the board) could facilitate some information-sharing.

3. ASSESSMENT 83
3.7.3 Financial reporting and audit practices – transition

issues
As is no doubt the case in many other jurisdictions, some questions exist
about the quality of financial reporting and effectiveness of external audits
as contributors to improved governance and transparency in Turkey. In part,
this is a transitional issue relating to the implementation of IFRS and ISAs.
IFRS’ principles-focused approach is very different from the detailed, rules-
based approach reflected in Turkey’s tax-oriented standards, which until
recently were the main focus of accounting and auditing practices.
Principles-oriented standards require professionals to have a high degree of
familiarity with the standards, to be able to express opinions about available
options for presenting financial information and to exercise significant
judgment in assessing whether or not a particular presentation fulfils the
standard’s purpose. Professionals in other countries that do not have a strong
tradition of principles-based accounting and auditing standards are facing
similar challenges in adapting their analytical approaches and audit practices
to the new standards. Likewise, as in other countries that are translating
IFRS from English into another language, it sometimes can be difficult to
develop an accurate and nuanced understanding of certain concepts for
which there is no precise equivalent in the other language.
The quality of financial reporting by companies that have been
voluntarily complying with IFRS for a few years is expected to improve as
they and their auditors gain more experience with IFRS. Other companies,
however, are likely to experience some “growing pains” in the short term as
they start to use IFRS. Since some companies preparing IFRS-based
statements for the first time likely are using the same audit firms as
companies that have been voluntarily using IFRS for several years, there is
likely to be some transfer of knowledge from experienced auditors to less
experienced companies. This should mitigate to some extent the non-
compliance risks that might otherwise arise. On the other hand, the limited
resources of the relatively few knowledgeable and experienced audit staff
are likely to be stretched very thin. This is an emerging risk that Turkey
shares with a number of other countries that are implementing IFRS.
Although Turkey has a strong tradition of education and training in the
fields of accounting and auditing, the novelty and complexity of the new
TAS, ISAs and other new standards are likely to present some significant
short-term challenges for the profession in terms of training and capacity-
building. With respect to pre-qualification education, some observers
expressed concern that, although a few universities have curricula that
address international accounting and auditing standards and professional
ethics, graduates of a number of other universities appear to have limited

84 3. ASSESSMENT
knowledge of such matters. Larger audit firms, however, have extensive in-
house training programmes focusing on IFRS, the new TAS and ISAs and
the CMB’s existing requirements for external auditors require audit staff to
have knowledge of the relevant standards and require audit firms to offer
training programmes to their staff. Although currently, there is no formal
requirement for auditors to pursue continuing professional development
(CPD), the CMB’s more detailed ISA-based standards include more detailed
standards regarding training, including CPD requirements. The CMB also
plans to introduce licensing examinations whose main focus will be IFRS
and ISAs. If the proposed amendment to the CML providing for the
establishment of an SRO for external auditors of capital markets entities is
enacted, that SRO would be expected to play an important role in providing
relevant education to such auditors.
A question also arises whether the CMB has sufficiently comprehensive
and systematic processes to enable its staff to identify and cause the
correction of any significant disclosure deficiencies during this transition
period. The CMB has invested significant resources to improve key staff’s
understanding of IFRS and staff have been discussing potential disclosure
weaknesses. However, a systematic review module focusing on the greatest
risks associated with the transition to IFRS has not been developed yet, even
though the CMB has been accepting financial statements voluntarily
prepared in accordance with IFRS for a few accounting periods and all listed
companies should have submitted interim financial statements prepared in
accordance with IFRS in 2005. Regulatory staff in other countries likely are
facing similar challenges. In an environment where market discipline is
weak and civil remedies are limited, however, the regulator’s review of
financial statements can take on greater significance. Thus, it is particularly
important for the CMB and other relevant authorities to have leading-edge
review systems and processes.
3.7.4 Audit standards, the standard-setting process and

auditor oversight
Effective oversight of the external audit process is critical to the
integrity of the financial reporting process and, more generally, to corporate
governance. Existing standards for external audits and systems for auditor
oversight have been undergoing review and reform in many countries as a
result of financial reporting failures, gaps discovered in standards or
systems, changes in public perceptions and for other reasons. A high-level
survey by IOSCO of the implementation of its best practice standards for
auditor oversight and auditor independence in 58 jurisdictions (including
Turkey) revealed a mixed and rapidly evolving landscape of auditor

3. ASSESSMENT 85
oversight arrangements as of 2004. IOSCO concluded that a great deal

remains to be accomplished in many member jurisdictions to establish
effective auditor oversight structures and quality assurance processes that
fully encompass IOSCO’s best practice standards.
Like their counterparts in other jurisdictions, the Turkish authorities and
the audit profession have been assessing the effectiveness of their existing
standards and systems and have introduced or are considering reforms. For
example, as noted earlier in this Report, the CMB introduced compulsory
standards to strengthen the effectiveness and integrity of the external audit
function several years ago, including high-level ISA-based standards. As
noted earlier, a new CMB Communiqué on Auditing that introduces more
detailed ISA-based standards was published in the Official Gazette in June
2006, with some provisions coming into force immediately and others set to
come into force at the end of 2006.
The introduction of detailed ISA-based audit standards is a welcome
reform, but some issues remain. First, these audit standards will not apply to
all publicly held companies, unless the BRSA and GDI adopt them. Second,
the CMB did not employ a translation process approved by the International
Federation of Accountants (IFAC). Some uncertainty exists, therefore, as to
whether the CMB’s standards are fully consistent with ISAs.
Also, while the capital markets laws include independence criteria for
auditors of CMB-regulated entities, a question arises whether existing
standards and company practices provide enough assurance that the auditors
are, in fact, independent of the board, management and controlling
shareholders. For example, existing standards do not specifically require
audit firms to be independent of the controlling shareholders of the
companies they audit (although audit firms are expected to conduct external
audits without being influenced by any relationship, benefit or other factors
that could impede their impartiality). The CMB does not impose any
documentation requirements on audit firms regarding their compliance with
the CMB’s independence criteria. Company boards are not specifically
required or encouraged to report to shareholders in advance of the
shareholder meeting on the steps the audit committee has taken to satisfy
themselves as to the proposed auditor’s independence and competence or on
the actions they subsequently take to satisfy themselves that the audit was
conducted with due care. Shareholders who attend the meeting can,
however, pose questions to the board on this topic. The CMB indicated that,
in the past five years, it has not received any complaints from the public
regarding suspected breaches of its independence criteria for auditors, nor
has it detected any such breaches during the course of its inspection
programme.

86 3. ASSESSMENT
The CMB’s proposed establishment of an SRO for auditors of CMB-

regulated entities has the potential to deepen and strengthen the
effectiveness of the audit oversight process and enhance the profession’s
capacity to carry out high quality audits in accordance with international
standards. Some questions remain, however, as to whether this initiative
could contribute to the harmonisation of audit standards and coordination of
audit oversight practices across the financial sector.31 Also, the proposal
does not address the existing regulatory inefficiencies associated with
having each of the CMB, BRSA and GDI make separate authorisation
decisions and monitor authorised audit firms.

3. ASSESSMENT 87
Notes
1. The CML exempts banks and insurance companies from the application
of the “content” requirements in the CMB’s financial reporting standards.
The GDI, however, has issued a notice stating that listed insurance
companies should comply with the CMB’s IFRS-based standards.
2. This is relevant to the assessment of OECD Principle V.A.1, as well as
OECD Principle I.A.
3. This is relevant to the assessments of, e.g., OECD Principle I.A and
Chapter V.
4. This is relevant to the assessments of, e.g., OECD Principles II.A.3, II.A.4
and III.A.5, all of which are considered to be Fully Implemented. Among
the 123 Turkish companies that responded to the survey conducted by the
Boston Consulting Group in association with COGAT, compliance with
requirements relating to general shareholder meetings was considered to
be the most widely implemented practice in Turkey with respect to the
protection of shareholder rights.
5. This is relevant to the assessment of, e.g. OECD Principle V.A.5.
6. This is relevant to the assessment of, e.g. OECD Principle VI.E.
7. Capital markets laws require unlisted but publicly held companies with
500 or more shareholders to adopt cumulative voting procedures if any
shareholder requests that the company do so.
8. This is relevant to the assessment of, e.g., OECD Principle II.C.3.
9. This is relevant to the assessment of, e.g., the OECD Principles in Chapter
VI.
10. This is relevant to the assessment of, e.g., OECD Principles V.A.4 and
VI.E.2.
11. This is relevant to the assessment of, e.g., OECD Principle II.D.
12. See, e.g. Ararat and Ugur (2003), p. 70. This is relevant to the discussion
of, e.g. OECD Principles II.B(3), III.A.2 and V.A.5.

88 3. ASSESSMENT
13. This is relevant to the assessments of, e.g. OECD Principles I.A, V.E and
VI.D.8. The authors of Standard & Poors’ 2004 Corporate Governance
Study included in the list of the “most common and confidence-eroding
cases” taken to the public prosecutors in Turkey the following scenarios:
(1) failures to disclose merger intentions to investors to allow time for
insider trading; and (2) non-compliance with disclosure requirements in
the case of acquisitions of more than 1% of a company’s shares.
14. Similarly, the Institute of International Finance Inc. concluded in its 2005
report, Corporate Governance in Turkey: An Investor’s Perspective, that
many (although by no means all) companies have avoided
implementation of key corporate governance provisions that could
constrain family control.
15. World Bank (2003), pp. 107-08.
16. This issue is discussed in more detail in Annex I in relation to OECD
Principles I.C and IV.E.
17. This system is also sometimes referred to as the “authorised capital”
system. The Pilot Study uses the term “registered capital” system because
this is the term used in the English translations of the CML and relevant
Communiqué published by the CMB on its website.
18. IFC and Lex Mundi (2006).
19. A higher score (8/10) was assigned with respect to disclosure standards
applicable to directors’ dealings, while a score of 3/10 was assigned with
respect to the ability of shareholders to hold a self-dealing director and
persons who approved the transaction accountable. The disclosure
standards score takes into account: (a) which corporate body (e.g. CEO,
board, shareholders) provides legally sufficient approval for the
transaction and whether or not the director can participate in the decision;
(b) whether timely disclosure to shareholders of the terms of the
transaction and the director’s conflict of interest is required; (c) whether
the transaction and conflict must be disclosed in the annual report; (d)
whether the director must disclose the conflict to the board and, if so,
whether the specifics of the conflict must be disclosed; and (e) whether an
external body, such as an external auditor, must review the transaction
before it takes place. Higher scores are associated with greater disclosure.
The director liability score takes into account: (a) whether shareholders
can hold the director liable for damages to the company and in which
circumstances (e.g. whether fraud/bad faith must be proved or whether or
simply evidence of unfairness is sufficient); (b) whether the shareholders
can hold the approving body liable for damages to the company and in
which circumstances; (c) whether the plaintiff can void the transaction
and in which circumstances; (d) whether the director is liable to pay
damages for harm caused to the company; (e) whether the director is

3. ASSESSMENT 89
liable to repay profits made from the transaction; (f) whether the director
can be fined or imprisoned; and (g) whether and in which circumstances
minority shareholders can sue directly or derivatively for damages
suffered by the company. Lower scores are associated with greater
difficulty in holding directors accountable to the company for self-dealing
transactions.
20. See also the discussion of OECD Principle III.A.2, which includes a
discussion of some of the civil remedies available to minority
shareholders where a concern has arisen that their reasonable interests
have been unfairly disregarded or abused.
21. See, generally, the discussion in Annex I of OECD Principle I.B. See also
the discussion of OECD Principle III.B in Annex I relating to
enforcement mechanisms applicable to insider trading and other abusive
self-dealing.
22. See the discussion in Annex I of OECD Principle II.E.1.
23. The proposed amendments also would confer upon an offeree company’s
remaining minority shareholders the right to demand that an offeror
and/or persons acting in concert with the offeror buy their shares at the
highest price paid in the tender offer, if as a result of a tender offer the
capital or voting rights of the offeror and persons acting in concert with it
exceed a threshold specified by the CMB. Likewise, the offeror and
persons acting in concert with the offeror would have the right to request
the redemption of shares held by the minority if as a result of the offer,
the offeror and/or persons acting in concert with the offeror end up
holding a specified percentage of the capital or voting rights of the offeree
company. The proposed amendment authorises the CMB to prescribe the
principles applicable to such transactions. These amendments are also
discussed in Section 4.2.1 below.
24. See the discussion in Annex I of OECD Principle I.D.
26. See the discussion in Annex I of OECD Principles I.A.
27. See the discussion in Annex I of OECD Principle I.B.
29. See the discussion in Annex I of OECD Principle V.B.
30. See the discussion in Annex I of OECD Principle I.C.
31. See the discussion in Annex I of OECD Principle I.C.

91
Chapter 4
Policy Options
4.1 Introduction
Turkey has gone a long way to achieving many of the outcomes

advocated by the OECD Principles. In several key areas, however, more
needs to be done to ensure satisfactory outcomes. As noted earlier in this
Report, some of the existing shortcomings can be addressed only by the
private sector. Without intending to underemphasise the important role that
the private sector and private sector organisations have to play in improving
corporate governance in Turkey, the discussion of policy options in this
Chapter focuses on measures that could be implemented by the authorities to
enhance corporate governance standards, strengthen incentives to adopt
good corporate governance practices and enhance regulatory effectiveness,
efficiency and accountability. The policy options described in this Chapter
are based on Chapter I of the OECD Principles. Chapter I outlines a
framework for: (a) weighing the relative significance of the assessments of
the various OECD Principles in the context of the specific features of the
jurisdiction’s corporate governance landscape; and (b) considering various
policy options to achieve the outcomes set out in the OECD Principles.
These proposals for further reform are not intended to be prescriptive.
Instead, consistent with the emphasis in the OECD Principles and the
Methodology on functional equivalence, these proposals are intended to
stimulate policy dialogue about various options that could be adopted to
better achieve the outcomes advocated by the OECD Principles.
The policy options described below are intended to address the principal
strengths and weaknesses in Turkish corporate governance by:
x increasing the potential for market disciplinary forces to operate
more effectively;

92 4. POLICY OPTIONS
x enhancing standards that address the risks associated with the

prevailing ownership and control structures;
x implementing risk-based, coordinated approaches to supervision,
investigation and enforcement to address key corporate governance
risks, eliminate supervisory gaps and improve regulatory efficiency;
x providing more context-specific and practical guidance to market
participants, without restricting their freedom to implement
standards in innovative ways;
x strengthening the effectiveness and deterrent effect of enforcement
mechanisms and civil remedies;
x centralising the financial standard-setting process and achieving full
alignment of the standards with current IFRS;
x restructuring and deepening the audit oversight process; and
x strengthening the capacity and accountability of key regulators,
especially the CMB.
A number of the suggested policy options described in this Chapter have
already been proposed in draft legislation or are being considered by
Turkish authorities.
Some of these options mirror closely specific Essential Criteria in the
Methodology. Others are not expressly contemplated in the Methodology or
OECD Principles but represent a possible approach, tailored to Turkish
conditions, for achieving an outcome recommended in the OECD Principles.
This is consistent with OECD Principle I.A, which recommends that the
corporate governance framework be developed with a view to its impact on
overall economic performance, market integrity and the incentives it creates
for market participants and the promotion of transparent and efficient
markets.
The assessment in Chapter 3 above and the policy options outlined in
this Chapter might be seen as presenting a dilemma for the Turkish
authorities. On the one hand, the assessment and policy options suggest that
stricter regulation is needed in some areas to increase the quality and
credibility of equity markets. On the other hand, the assessment also
emphasises that overly prescriptive standards or extensive ex ante regulation
sometimes could have unintended, adverse effects. Likewise, some of the
policy options are intended to encourage companies to participate more fully
in public equity markets. Companies, however, will not participate in public
equity markets if compliance costs are too high. Stricter regulation is often
associated with increased compliance costs and the withdrawal of some

4. POLICY OPTIONS 93
marginal firms from the market. Some might ask whether it is possible to
upgrade the quality and credibility of equity markets and also encourage
companies to participate more fully in public equity markets.
These policy objectives, however, do not have to conflict with each
other and, in fact, can support each other. The strategy outlined below
combines focused regulatory reforms to address specific weaknesses with
market-based reforms to strengthen disciplinary forces and incentives. This
strategy is also intended to be dynamic, as it encourages the authorities to
adopt a lighter regulatory approach to certain matters if and when
disciplinary forces and incentives become strong enough to deal with the
perceived risk. It is hoped that this strategy will contribute to a better quality
equity market that is attractive to companies and investors, as well as an
effective and cost-efficient regulatory framework.
4.2 Increase the potential for market disciplinary forces to operate

more effectively
Unless market discipline and/or the threat of liability creates real

incentives to improve corporate governance practices, there is a significant
risk that many controlling shareholders will be unwilling to relinquish their
power to run corporate groups without regard to the potential adverse effects
on minority shareholders. Although reforms to the judicial system constitute
a priority, it will take more time to implement them. Therefore, increasing
the potential for market disciplinary forces to operate, including through the
promotion of a more sophisticated equity culture, is an important leverage
point for improving corporate governance in the short term as well as the
longer term. The outcome-oriented nature of the OECD Principles and
Methodology means that specific measures to achieve this objective are not
foreseen. The recommendations set out below, therefore, constitute options
to be considered as a means of encouraging improved implementation of
corporate governance practices and effective enforcement of standards.
4.2.1 Increase free float requirements for all listed companies

Markets for companies with low free floats are often thin and volatile. In
such circumstances, it is often necessary for significant regulatory resources
to be invested to deter, detect and stop market abuse. Also, companies with
low free floats might feel less pressure to attract and maintain investors.
Since a significant number of listed companies have relatively low free
floats, the CMB and ISE should consider enhancing the initial and
continuing free float requirements for listed companies. Currently, initial

listing requirements specify that the market capitalisation of the company’s

publicly offered shares must be at least 15 million New Turkish Lira and
that either: (a) the rate of the nominal value of these shares to paid-in or
issued capital must be at least 25%; or (b) the market capitalisation of the
publicly offered shares must be at least 30 million New Turkish Lira. ISE
Regulations also require the ISE’s Executive Council to de-list any company
that, as of December 31, 2006, does not meet the criteria noted above.
Extending initial listing requirements to already-listed companies is a
welcome reform. The effectiveness of this reform, however, will depend in
part on whether appropriate safeguards exist to protect minority
shareholders of companies that are de-listed. Furthermore, while a test that
focuses on the market value and proportion of “publicly offered shares”
might be appropriate as an initial listing requirement, it might be preferable
to use a test focusing on the size of the true “free float” as a continuing
listing requirement. This is because shares that initially were registered for
public sale could subsequently be acquired by persons (such as members of
control groups, board members, senior executives, their families, strategic
minority investors and/or institutional investors that hold shares for the long
term). The CMB could also require companies that make IPOs or secondary
offerings to have, upon conclusion of the offer, a minimum number of
shareholders holding a minimum number of shares. Over the longer term, as
the potential supply of equity capital increases, the same requirements
should be phased in for all listed companies. The ISE should also ease
restrictions on voluntary de-listing, subject to appropriate safeguards, so that
only those companies that wish to be publicly held continue to be listed.
Proposed amendments to the CML providing, at the request of an
offeror or persons acting in concert with it, for the compulsory redemption
of shares held by minority shareholders after completion of a tender offer at
the tender offer price could make it easier for publicly held companies to go
private. It will be important, however, to ensure that the subordinate
regulations applicable to such transactions provide adequate protection to
offeree shareholders (e.g. to prevent coercion of offerees in the tender offer
process). Proposed amendments to the TCC extending a number of the
CMB’s corporate governance requirements for publicly held companies to
private companies are expected to reduce concerns about the consequences
of de-listing.
4.2.2 Amend the pension and mutual fund laws

The regulatory framework for pension funds and mutual funds,
including the TCC as well as the relevant capital markets laws and pension
laws, should be amended to provide clearly that such funds (or individuals
acting on behalf of and in the interests of the funds’ investors) have the

power to exercise all of the rights (including voting rights) attaching to

shares held by the funds. Consistent with OECD Principle II.F, the relevant
CMB Communiqués should also be amended to specify clearly that persons
acting on behalf of pension funds or mutual funds should consider whether
and under what conditions they should exercise the voting rights attaching to
the shares they hold on behalf of investors in such funds. They should also
be required or encouraged to develop and disclose on a regular basis their
overall corporate governance and voting policies and their policies for
managing material conflicts of interest that could affect their exercise of key
ownership rights regarding their investments. The provisions in the
Communiqués prohibiting funds from participating actively in the
management of companies in which they invest should also be clarified in
this respect. Similar amendments should be made to the laws governing the
conduct of other institutional investors acting in a fiduciary capacity, such as
company-sponsored pension plans. The CMB should also eliminate the
existing portfolio restrictions that apply to CMB-regulated mutual funds and
pension funds and replace them with a more general and sophisticated
“prudent investor” principle. Such a change should mitigate the adverse
effect that the current restrictions have on funds’ economic incentives to
participate in corporate governance and pro-actively exercise their rights as
shareholders.
Consistent with the annotations to OECD Principle IV.C, the relevant
authorities should take steps to ensure that participatory pension funds
established by publicly held companies are required or encouraged to be
overseen by trustees capable of exercising objective judgment. Those
trustees should be charged with responsibility for managing the fund for the
benefit of all beneficiaries. As a first step, since the CMB currently does not
have regulatory responsibility for such funds but does have authority with
respect to publicly held companies, it could encourage or require publicly
held companies to publicly disclose information about such funds (e.g. in
companies’ annual reports or in listed companies’ Corporate Governance
Compliance Reports). For example, companies could be required or
encouraged to disclose on a regular basis:
x the identity of people making decisions about the fund’s investments
and the exercise of rights attaching to shares held by the funds
(including information about any relationship between such persons
and the company, board members, executives, significant
shareholders or related parties);
x the number and proportion of shares and voting rights held by the
pension fund in the company’s shares and the shares of any related

companies, as well as the percentage of the fund’s assets invested in

such shares; and
x the fund’s voting policy, if any, and its policy, if any, for dealing
with material conflicts of interest that might affect the exercise of its
ownership rights.
Such information would help the CMB and other relevant authorities assess
the magnitude of any regulatory risks (including corporate governance
concerns and prudential concerns regarding the funds), so that an
appropriate and cost-effective regulatory solution could be adopted, if
needed. It also would equip fund participants with useful information about
the fund’s operations and equip investors and potential investors in the
company’s shares with useful information about the company’s governance.
4.2.3 Expand investor education initiatives

To improve understanding of the overall corporate governance system
and provide information to investors to help them exercise their rights, the
CMB should expand its existing investor-focused webpage. The existing
content of the webpage could be supplemented with easy-to-read electronic
pamphlets designed to help investors understand how the various elements
of the corporate governance framework fit together. For example, the
pamphlets could describe:
x various corporate actors’ responsibilities and rights (e.g. the role of
the board, the role of auditors and the role of shareholders);
x the roles and responsibilities of the CMB, MTI, ISE, TASB, BRSA,
GDI and GDF, emphasising as well the division of responsibilities
among them and the limits of the CMB’s responsibilities vis-à-vis
investors (i.e. that the CMB is not responsible for preventing all
harm to investors);
x the reasons why shareholders might want to exercise their
participation rights and how to do so;
x the kinds of information companies can provide, the kinds of people
investors can contact to obtain information, the kinds of questions
they might want to pose to company representatives about missing
or inadequate information or questionable practices and the kinds of
information that company representatives can and cannot provide;
and
x the legal remedies available to shareholders and how these remedies
can be pursued.

This webpage should also include links to key sources of corporate

governance standards, the Public Disclosure System, the ISE Daily Bulletin
webpage, CMB surveys on companies’ corporate governance disclosures
and reports on enforcement activities.
In the longer term, to enhance investors’ awareness of potential
corporate governance problems and increase incentives for companies to
adopt better corporate governance standards, the CMB should consider the
potential advantages and disadvantages of publishing “Name and Shame”
lists, disclosing the names of companies that have not implemented certain
key corporate governance standards and/or not complied with key disclosure
obligations. Although this “Name and Shame” proposal might be
controversial and is used only in a few jurisdictions, it nevertheless deserves
consideration in a jurisdiction with small and illiquid capital markets
exhibiting weak market disciplinary forces. Since the CMB Principles are
relatively new and other significant corporate governance standards have
been introduced only in the past few years, the use of “Name and Shame”
lists might be introduced at a later date, after companies have had sufficient
time to implement new standards and after the CMB has taken other steps
(such as publishing annual surveys of corporate governance compliance
practices and warning companies of its intention to publish Name and
Shame lists) to encourage companies to improve their practices.
It might be hard to change the investment habits and attitudes of older
Turkish residents, who have experienced repeated financial crises and likely
prefer to invest their savings overseas and/or in bank deposits, government
securities or informal savings products. Many Turkish children and young
adults, however, probably will face more promising economic prospects and
have more disposable income to save and invest. It is also likely that they
will have to save substantial sums for retirement due to uncertainty about the
expected payout from public sector pension plans. If efforts are made to
make them financially literate, aware of the benefits of investing for the
future and aware of their rights and responsibilities to be pro-active
investors, they could, in the longer term, significantly contribute to the
development of a stronger equity culture. Therefore, investor education
initiatives to improve the financial literacy of middle school, high school
and university students should be encouraged.
4.2.4 Fully implement the IOSCO Principles for Sell-Side

Analysts
Sell-side analysts, which serve as conduits of advice and analysis to
capital markets, can facilitate and strengthen market discipline, provided
that they operate with integrity and free from conflicts of interest. To

strengthen the existing regulatory regime, the CMB is encouraged to assess

the extent to which structural conflicts might be impairing the ability of sell-
side analysts to act with integrity. Such studies have been conducted in a
number of other jurisdictions and have assisted regulatory authorities in
determining whether problems exist, the potential impact of such problems
and how best to develop a cost-effective strategy for dealing with such
problems. Once such a study has been conducted, the CMB is encouraged to
work with industry, including the Association of Capital Markets
Intermediary Institutions of Turkey (TSPAKB), to ensure that all of the core
measures specified in the IOSCO Principles for Sell-Side Analysts are
adopted, either through compulsory standards, codes of conduct or
otherwise.
4.3 Enhance standards addressing risks associated with prevailing

ownership and control structures
4.3.1 Additional compulsory standards could be necessary in

some areas
The OECD Principles and Methodology often leave the choice open: (a)
between compulsory and non-binding standards to achieve particular
objectives; and (b) as to the optimum combination of laws,
recommendations and incentives to achieve the recommended outcomes. If,
however, an assessment reveals that voluntary standards currently are not
sufficiently effective or efficient tools to address a particular issue in given
jurisdiction, it may be appropriate to recommend compulsory standards to
achieve the recommended outcomes, so long as the regulatory costs are
acceptable and understood. The rationale for using compulsory standards in
particular areas should be re-considered periodically, since developments
(e.g. improved economic incentives to voluntarily adopt good governance
practices or evolving company practices) could eliminate the need for such
an approach.
The assessment indicated that, in Turkey, additional compulsory
standards (complemented by mechanisms to enhance market discipline) are
needed to address patterns of abuse of minority shareholders by some
controlling shareholders. The detailed assessment of disclosure practices
reveals that non-binding recommendations have not been effective tools to
achieve the outcomes associated with several OECD Principles. As
explained in more detail below, these recommended, additional compulsory
standards (in the form of disclosure and shareholder approval requirements)

are also intended to strengthen market disciplinary forces and deepen the
equity culture.
4.3.2 Enhance disclosure standards relating to ownership and

control
The Essential Criteria for OECD Principle II.D state that the corporate
governance framework should require or encourage disclosure of: (a) all
capital structures enabling certain shareholders to exercise a degree of
control disproportionate to their ownership interests or cash flow rights; (b)
the entire company group’s ownership structure; (c) intra-group relations;
and (d) formal or informal voting agreements affecting more than a
specified (relatively low) percentage of shares. Such disclosure should be
published either periodically (e.g. in an annual report) or made available
continuously (e.g. on a website belonging to the company, stock exchange
or regulatory authority). The information should be updated on a timely
basis if there is any change. The Essential Criteria also emphasise that
companies should disclose this information at least annually in a
comprehensive, easy-to-access and easy-to-use format so that interested
persons can obtain a clear picture of the relevant capital structures and other
arrangements without having to consult and/or cross-check more than a few
documents. The Essential Criteria for OECD Principle III.B state that there
should be timely reporting by insiders (including board members, senior
officers and significant shareholders) of transactions in listed companies’
securities. OECD Principle V.A.3 and associated Essential Criteria in the
Methodology also call for disclosure about major share ownership and
voting rights, including disclosure about company group structures,
significant cross-shareholdings and intra-group ownership and control
structures.
The wider implementation of IFRS by all listed companies
(commencing in 2005) and closely held companies (if proposed
amendments to the TCC are enacted) is expected to improve disclosures to
some extent in this area. In some respects, however, the OECD Principles
call for more extensive disclosure about capital structures, voting rights,
intra-group relations and voting agreements than is called for under IFRS.
Proposed amendments to the TCC requiring companies to report on relations
between controlled and controlling companies are also expected to enhance
transparency in this area. The implementation of the joint ISE/CMB Public
Disclosure System is also expected to make it easier for investors to obtain
some of the key disclosure documents. Even with these reforms, however,
some gaps in disclosure practices are likely to remain and it could still

remain difficult for interested persons to easily and quickly acquire an

understanding of the structure of ownership and control of a company.
Ensuring that there is widespread, consistent and comprehensive public
disclosure in a user-friendly format of the relevant information is a
challenge for regulators in many countries. Given the concentration of
control and complex ownership structures that prevail in many Turkish
companies, however, disclosure standards and practices in this area are a
key issue for Turkey. It is important for Turkey to have state-of-the-art
standards in this area. Accordingly, it is recommended that the CMB
expand, as necessary, its existing disclosure standards to cover all of the
topics mentioned in the preceding paragraph and convert recommended
disclosure practices into compulsory standards. It also should require
companies to publish at least annually (and preferably update on a timely
basis) a consolidated, comprehensive disclosure statement covering all of
these disclosure items. The disclosure statement should provide information
about the proportion of the voting rights, as well as the proportion of equity,
of each class of securities held by the relevant persons or entities about
whom information is required to be disclosed. The disclosure statement
should also include:
x a description of the current holdings (including total voting power)
of each board member, senior executive and significant shareholder
(including holdings of, and the potential voting power associated
with, securities convertible into equity or voting shares and rights to
acquire equity or voting shares and including securities held by
close family members of such individuals where the insiders have
an economic interest);
x the cumulative change in each relevant person’s holdings; and
x each transaction by the relevant person during the past year.
The disclosure standards should be broad enough and clear enough to
capture direct or indirect ownership, control and/or direction over securities.
4.3.3 Require shareholder approval for most significant

related party transactions
Proposed amendments to the TCC are expected to increase transparency
regarding intra-group relations and transactions, thereby assisting investors
and regulators in monitoring such transactions. The requirement for
controlled companies’ boards to prepare an annual report regarding intra-
group transactions and the prohibition on abuse of control are also expected
to deter some conduct that adversely affects minority shareholders in

corporate groups. Nevertheless, additional measures are recommended.

There are several options the CMB could pursue. OECD Principle III.A.2
specifies that there should be mechanisms enabling minority shareholders to
sanction controlling shareholders for abusive conduct, as well as effective
remedies. In light of the existing weaknesses in incentives, market
discipline, enforcement mechanisms and available remedies and given that
many market participants and informed observers suggested that abuse of
minority shareholders is not uncommon, the adoption of a shareholder
approval requirement and enhanced, timely disclosure standards for
significant related party transactions are recommended. This approach,
rather than a regulatory approval requirement, is proposed to facilitate
market discipline and strengthen the equity culture.
An alternative or complementary approach used in some countries
would be to require oversight of significant related party transactions by an
independent board committee. This regulatory approach has worked in some
countries where: (a) companies generally have been able to recruit
sufficient, knowledgeable, experienced and influential independent board
members; (b) such individuals have the resources and incentives to pro-
actively exercise such an oversight function; and (c) there are effective
mechanisms for holding boards accountable for inadequate performance of
this function.
4.3.4 Enhance disclosure requirements about related parties

In line with the OECD Principle V.A.5, the CMB should formalise its
practice of asking companies to provide more detailed disclosure about
related party transactions by amending the capital markets laws to
specifically call for more detailed disclosure. In particular, enhanced
disclosure should be required about related parties and benefits flowing to
related parties in disclosure documents for public offerings, tender offers,
mergers, going-private transactions and other fundamental changes provided
to shareholders in connection with events requiring shareholder approval or
acceptance or rejection of an offer. Such disclosure should be provided
regardless of whether the related party is treated differently from other
shareholders. Enhanced disclosure requirements should address:
x the decision-making process leading to the transaction;
x related parties, their interests in the relevant companies, their
involvement in the transaction, their involvement in the decision-
making process for the transaction, and special benefits flowing to
them as a result of the transaction; and

x transaction values (preferably determined by an independent valuer

or adviser under the oversight of independent board members).
A summary of this disclosure should be included in notices or news releases
published in connection with such transactions. Similar disclosure should be
required in connection with any timely disclosures required to be made
under the Communiqué on Disclosure of Material Events. If the transaction
is a related party transaction exempt from shareholder approval
requirements or enhanced disclosure requirements, the nature and grounds
for the exemption should be disclosed. These proposed enhancements to
disclosure requirements should complement the recent move to IFRS, which
provides for enhanced periodic disclosure about related parties and related
party transactions, and the proposed amendments to the TCC regarding
annual disclosure of intra-group transactions and activities.
4.3.5 Require more detailed disclosure about actual board

and management practices
Recommendations in the CMB Principles should be converted into
requirements and expanded to require companies to provide more detailed,
material information, at least on a yearly basis, about: (a) actual board and
management structures and responsibilities; and (b) standing committees’
mandates, annual objectives and performance against objectives. Companies
should also be required to provide a description of actual decision-making
arrangements and processes involving senior management and the board.
The required level of detail should be sufficient to give investors a
meaningful insight into how decisions generally are actually made at the
highest levels in the company without imposing an undue disclosure burden
on companies or restricting their flexibility to adapt aspects of their
decision-making structures and processes to deal with emerging issues.
Companies should also be required to disclose any discrepancies between
the responsibilities that the board or a committee has actually assumed and
those recommended under the CMB Principles, together with detailed
reasons why these responsibilities have not been assumed. In connection
with any significant events requiring timely disclosure, companies should
also be required to disclose information about the background to the event or
proposal, the steps taken by board committees and the full board to ensure
that they fulfilled their duties of care and loyalty to the company, any
committee’s recommendations to the full board and the full board’s
recommendation or reasons in support of or against the proposal.
The enhanced disclosures described in the preceding two paragraphs
should facilitate market discipline by equipping investors and potential
investors with useful information about the company’s governance. The

existence of such disclosure requirements, if consistently monitored and

enforced, can help motivated board members and senior management effect
change within the company. They can point to the disclosure requirements
and explain that governance practices need to be improved and certain
inappropriate conduct needs to be avoided so that the company can “tell a
good story” in its disclosures. These recommendations are consistent with
OECD Principles V.A.8, VI.E.2 and VI.E.3. Compulsory standards are
recommended here because non-binding standards do not appear to have
been effective yet in changing the actual practices of many boards. As noted
above, the need for compulsory standards should be re-considered
periodically as markets and company practices evolve.
4.4 Amend the tender offer laws
Although many jurisdictions have a follow-up offer requirement, the

CMB is encouraged to consider whether alternative regulatory approaches
would offer more comprehensive and cost-effective protection than the
existing requirements. One option would be for the CML to prohibit, subject
to certain exemptions, any acquisition of outstanding shares that resulted in
a person (or group acting jointly or in concert) holding more than a specified
percentage of the shares or votes (e.g. in the range of 20-30%), unless that
person (or group) acquires such shares pursuant to an identical offer made to
all offerees at the same time. Since offerors are often willing to pay
premiums for share blocks even where the acquisition of such a block will
give them effective, but less than legal, control, it is recommended that the
tender offer obligation be triggered by a transaction that would result in the
offeror holding more than a specified percentage of the company’s shares or
voting rights, rather than a test based on acquiring control.
It is also recommended that the capital markets laws be amended to:
x require the offeror to disclose all material information of which the
offeror is aware that would be relevant to a decision to acquire or
dispose of the company’s shares;
x require the offeror to disclose the background to the tender offer
including the nature and extent of its negotiations and discussions
with company representatives and significant shareholders;
x require the offeree board to prepare and publish a response to the
tender offer and disclose, among other things, any other material
information not previously disclosed by the offeror and that would be
relevant to a decision to acquire or dispose of the company’s shares;

x permit offerors to improve the offer price during the tender offer
period, provided that all offerees who previously accepted the offer
receive the improved offer price; and
x prohibit offerors from providing any offeree shareholders with any
collateral benefit, unless an exemption is obtained.
It is also recommended that the CMB publish non-binding guidance
regarding the offeree board’s role and responsibilities in the context of
tender offers. At a later date and provided that market disciplinary forces
have become stronger, the CMB should evaluate the potential advantages
and risks of eliminating the requirement for offerors to obtain the CMB’s
approval before launching tender offers. If effective disciplinary and
protective mechanisms exist (including, for example, ensuring that the CMB
could swiftly intervene to halt or require the extension or amendment of a
tender offer), eliminating this approval requirement likely would reduce
compliance costs and delays in launching and completing offers while
contributing to a more efficient market for corporate control.
4.5 Introduce a risk-based approach to supervision, investigation

and enforcement
4.5.1 The CMB should develop a comprehensive, risk-based

strategic plan
In small, thinly traded capital markets, it is particularly important for
regulators like the CMB to operate effectively (to compensate for weak
market discipline) and efficiently (to avoid imposing undue regulatory costs
on market participants). Currently, CMB departments engage in some
assessment and planning exercises to identify areas where further reform is
needed or where operations can be improved. It does not appear, however,
that they systematically and comprehensively assess emerging regulatory
risks, consistently exchange information with other departments about
emerging risks that could affect other operational areas or systematically
evaluate the impact and cost-effectiveness of their standard-setting and
operational initiatives.
Proposed amendments to the CML requiring the CMB to report on its
performance against stated objectives, assess and disclose the implications
of its standard-setting and decision-making and carry out its activities in
accordance with a development plan and annual plan are welcome reforms.
While the CMB already carries out some of these activities without being
obliged to do so, statutory requirements in this area often encourage

institutions to develop deeper, more systematic and more comprehensive

assessment and planning processes. The CMB’s plan to develop a regulatory
impact assessment system as part of the twinning project with German
authorities is a welcome initiative, which could enhance its capacity to
exercise its standard-setting activities in an efficient and cost-effective way.
Consistent with these proposed amendments and to enhance its
effectiveness and efficiency, it is also recommended that the CMB:
x conduct, with input from staff most closely involved in day-to-day
supervisory, enforcement and law reform matters, a comprehensive
assessment to identify the most significant risks to the achievement
of its regulatory objectives;
x develop a draft 3-5 year strategic plan to address those risks; and
x publish an overview of the plan for public consultation before
finalising it.
The detailed plan and overview should include an assessment of the costs
and benefits associated with alternative approaches (including non-
regulatory approaches) to address these risks. The plan should provide for a
risk-based approach to approval and supervisory approaches and, to the
extent permitted within the Turkish legal system, a risk-based approach to
formal investigations and enforcement. Developing this plan and these
operational processes could be coordinated with the CMB’s plan to develop
new operational manuals as part of the twinning project. As already
contemplated in the draft CML, the CMB should also update its strategic
plan on an annual basis and report on its past year’s performance against the
plan’s objectives
While neither the OECD Principles nor the Methodology specifically
call for authorities to employ risk-based regulatory strategies, OECD
Principle I.A and the associated essential criteria in the Methodology
emphasise the importance of having an efficient, as well as an effective,
regulatory framework. Risk-focused regulatory approaches are one method
for improving the regulatory system’s efficiency and effectiveness. They are
intended to concentrate regulatory resources where the greatest risks to the
achievement of objectives lie, reduce regulatory and compliance costs for
firms where there are lower risks and enhance the consistency and depth of
supervisory practices.

4.5.2 The authorities should work together to develop

coordinated risk-based approaches
In developing its strategic, risk-based plan, the CMB should identify
functions where its responsibilities overlap with other authorities and
evaluate:
x areas in which there is potential for coordinated approaches that
would reduce duplicative effort (e.g. shareholder meetings, approval
processes for amendments to company articles);
x areas where there may be gaps in supervisory practices; and
x areas where there is a need for structured information-sharing and/or
coordinated supervision or investigations.
To the extent feasible, the authorities should work together to develop
coordinated risk-based regulatory approaches to reduce duplication and
close gaps. The BRSA’s recent proposal to establish a Financial Sector
Commission (FSC) that brings together representatives from the BRSA,
CMB, GDI, the exchanges and other organisations on a periodic basis to
discuss issues of common concern could provide a forum in which to
develop coordinated risk-based approaches, address regulatory gaps, discuss
common concerns, share experiences and, where appropriate, develop cross-
sectoral regulatory approaches. Greater benefit could be derived from such a
forum if managers and experts with direct responsibility for standard-setting
and supervision participate in cross-sectoral working groups established
under the FSC or a similar organisation. Two priorities that should be
addressed are monitoring of publicly held banks’ financial statements and
bank restructurings. The BRSA and CMB are encouraged to discuss their
regulatory approaches to these matters to ensure that investor protection
concerns are adequately addressed.
To ensure a consistent approach to the application of TAS and assist the
CMB, BRSA and GDI in identifying the greatest risks associated with the
transition to IFRS, the TASB should help these other authorities to develop:
(a) systematic, risk-focused processes and programmes for reviewing
financial statements prepared in accordance with IFRS; and (b) appropriate
mechanisms to facilitate information-sharing with respect to the authorities’
application and enforcement of TAS. If the TASB’s advisory council (drawn
from its expert working groups) participated in some of the authorities’
discussions about the risks and challenges relating to the implementation of
TAS, such a dialogue could deepen the authorities’ and the audit
profession’s understanding of these risks and challenges.

4.5.3 Amend the CMB’s fee structure to strengthen incentives

to improve corporate governance
The authorities should consider amending the CML to authorise the
CMB to develop a new fee structure. This new fee structure could be
designed to provide incentives for companies that implement significant,
easy-to-verify structural governance measures. The rationale for offering fee
discounts is that market disciplinary forces are likely to be stronger in such
companies and the risk of abuse of minority shareholders is likely to be
lower. Accordingly, supervision of such companies is likely to impose lower
demand on regulatory resources.
Instead of being an exclusively transactionally-based model relying
solely on fees derived from offerings, the new fee model could involve: (a)
collecting an annual fee from all regulated market participants; and (b) a
limited number of additional fees for significant transactions or activities.
This arrangement could be considered fairer, since it spreads the fee burden
among many of the market participants whose activities result in the
expenditure of regulatory resources. It also reflects the reality that market
participants’ ongoing activities (and not just public offerings) result in the
expenditure of regulatory resources. It also would make the CMB’s
revenues less volatile, which should improve its regulatory capacity and
contribute to greater operational independence. (Additional
recommendations addressing the need for a regulator to have sufficient
resources to fulfil its responsibilities and operate with integrity are set out in
Subsection 4.10 below.)
Annual dues for publicly held companies could be based on their market
capitalisation, subject to meaningful, cumulative discounts for companies
that implement certain corporate governance measures. These measures
could include, among other options:
x maintaining a free float or broad shareholder base that substantially
exceeds minimum requirements;
x having a capital structure where the average number of votes per
share does not exceed a low threshold that is substantially below
that specified in the proposed amendments to the TCC;
x providing in the company’s articles for higher shareholder approval
requirements for fundamental changes that have a differential
impact on related parties; and/or
x providing in the company’s articles for arbitration, at the option of a
minority shareholder, of complaints about certain matters (e.g.
claims of misconduct in relation to company meetings, claims

arising from the conduct of board members or senior management,

or claims with respect to dissent rights).
The incentive effects of this fee structure could be reinforced by disclosing or
requiring companies to disclose the fee discounts to which they are entitled.
Neither the OECD Principles nor the Methodology specifically call for the
implementation of these measures. They are merely examples of possible
alternative practices that could enhance the effectiveness of disciplinary forces
and/or reduce the potential for abuse of minority shareholders.
4.5.4 Incorporate corporate governance factors into

supervisory risk assessment criteria
The CMB should incorporate into its risk-based screening criteria
readily verifiable good corporate governance factors, especially those
indicating that market disciplinary forces likely can operate reasonably
effectively with respect to the matter under consideration. Factors that could
be considered might include: (a) free float data; (b) low vote-to-share ratios;
(c) establishment of an independent board committee to review and provide
recommendations about the proposed transaction, with sufficiently detailed,
material information about the background to the transaction, committee
deliberations and recommendations; (d) a good disclosure record in the past
few years and the company’s and significant individuals’ compliance
records in the past few years; (e) where appropriate, the use of higher
quorums, approval thresholds and possibly majority-of-minority approval
thresholds; (f) commitments to provide longer time periods for shareholders
to consider the proposal; and (g) the provision of private, low cost remedies
to shareholders in circumstances where there is non-compliance with
applicable standards.
To implement the programme, senior experts would screen files against
the risk-based criteria and assign the file to one of three categories: basic
(i.e. limited) review, issue-oriented review or full review. Employing such a
process would enhance the consistency of review process, facilitate the
efficient allocation of resources and provide incentives to companies to
implement good governance practices, since companies that met good
governance standards likely would have their files processed significantly
faster under basic review or issue-oriented review procedures. If possible,
filing fees for transactions could be based on the level of review, providing a
further incentive for voluntary adoption of good governance practices. The
basic principles underlying the risk-based approach should be published to
promote transparency and encourage companies to implement specific
governance practices, although the detailed screening criteria and screening
scores should remain confidential. Another advantage of this system is that

it could encourage the CMB to adopt a lighter regulatory touch as market

disciplinary forces strengthen and corporate governance practices improve.
4.5.5 Focused monitoring of disclosure quality in key

corporate governance risk areas
To be able to consider disclosure records as a factor in a risk-based
programme and to ensure thorough and consistent monitoring of company
disclosures, the CMB should implement a comprehensive continuous
disclosure review programme. The review programme should prioritise
assessment of disclosure quality relating to key corporate governance risk
areas in Turkey, such as disclosure about ownership and control structures,
board and management decision-making processes, related party
transactions and changes in insiders’ ownership or control over the
company’s securities. To enhance transparency and provide more guidance
to companies and investors about the expected standards for disclosure, the
CMB should publish periodic reports on the results of its review
programme.
4.5.6 Prioritise enforcement in key corporate governance risk

areas
If practicable under Turkish law, the CMB’s Enforcement Department
should increase the proportion of resources devoted to issues relating to: (a)
materially deficient disclosures by or in respect of publicly held companies,
e.g. in core disclosure documents such as prospectuses, annual financial
statements and annual reports; (b) persistent non-compliance with timely
disclosure requirements, especially in respect of changes in insiders’
ownership or control of securities and/or related party transactions; (c)
selective disclosure; and (d) other instances of suspected non-compliance
with capital markets laws that raise significant concerns about the
inadequate performance of responsibilities by principal participants such as
board members, senior executives, external auditors, underwriters, dealers
and/or analysts. Detailed written reasons for the Executive Board’s decisions
in respect of such cases should be published to provide more context-
specific guidance about how the standards apply.
4.6 Provide more context-specific and general guidance to market

participants
As noted above, the complexity of the corporate governance framework

and its continuing evolution create some challenges for various market

participants who wish to understand their respective rights, obligations and

options. Accordingly, this Report recommends various measures, such as the
enhancement of the CMB’s investor-focused webpage, to make the relevant
information easier to find and use. Several additional recommendations are
set out below. These recommendations are consistent with OECD Principle
I.B, which emphasises, among other things, that the legal and regulatory
requirements affecting corporate governance practices should be transparent
and enforceable.
To reduce uncertainty regarding the status of the CMB Principles, the
document should be restated to specify which standards contained in the
CMB Principles are compulsory (e.g. because they are restatements of
requirements in the capital markets laws or the TCC), which are non-
binding, the source of each standard and the potential consequences of not
implementing the standard.1
The CMB should work with other relevant authorities, the ISE and
interested private sector institutions to produce a comprehensive, high-level
summary of the corporate governance framework for publication on the
authorities’ websites. The summary should, among other things: (a) identify
the principal sources of standards and their status; (b) identify and describe
the rights and responsibilities of various participants in the corporate
governance process; (c) outline the potential consequences of non-adherence
to various categories of standards; and (d) identify the principal sources of
information about the standards and publicly traded companies. The
summary should be made available in Turkish and English since it likely
will be of interest to existing and potential foreign investors.
Although the CMB Principles provide useful guidance to companies
about structures and practices that should be adopted to improve corporate
governance, they do not (and should not) explain how compulsory and
recommended standards apply in particular situations. Such practical
guidance about the application of the standards is needed, however, in some
form. In some countries, such guidance is available in jurisprudence, reports
by Public Commissions of Inquiry, regulatory authorities’ detailed reasons
for enforcement action, policy statements, reports on supervisory review
programmes and speeches. A few authorities provide specific oral or written
guidance upon request in some circumstances. The CMB should explore the
feasibility of producing various types of non-binding guidance documents to
assist market participants in applying corporate governance standards in
particular situations. The CMB’s publication in 2004 of a survey on the
implementation of the CMB Principles is a good start. The challenge is to
provide guidance in a way that it is sufficiently specific to be helpful
without being prescriptive.

Also, where the objective is to implement an international standard, such

as IFRS, the authorities should avoid creating texts that compete with
documents published by those standard setters. Instead, they should focus
their efforts on maintaining precise, comprehensive and up-to-date Turkish
translations of the relevant documents and/or should incorporate by
reference the complete English versions. They should also use translation
processes approved by the relevant international standard setters, wherever
those standard setters provide for such approval. The TASB’s decision to
follow an IASB-approved translation process, and publish TAS side-by-side
with the English text of IFRS, sets a good example.
In addition to the options previously mentioned, it also could be useful
for the CMB to work with affected market participants to develop non-
binding guidance about the interpretation and application of corporate
governance standards, especially new requirements. One area where
guidance is likely to be particularly useful relates to the circumstances in
which decisions made by board should, and should not, be protected as a
legitimate exercise of business judgment and not second-guessed by
investors, regulatory authorities or courts. It will be important for CMB staff
and private sector representatives to approach any such dialogue as a
learning exercise for both groups and not a supervisory, accusatory or
lobbying exercise. These discussions can also help regulatory staff to
develop a deeper understanding of the practical challenges, business realities
and complex issues arising from the implementation of corporate
governance standards. They can also help private sector representatives
develop an improved understanding of how the CMB tries to balance
regulatory objectives with legitimate business needs.
4.7 Enhance remedies, enforcement mechanisms and adjudicative

procedures
4.7.1 Provide for more affordable and accessible remedies

To be effective, market discipline needs to be backed up by a credible
threat that shareholders and/or other interested parties, such as board
members, could successfully and swiftly pursue remedies. Since ongoing
reforms to the judicial system likely will take some time to improve the
efficiency and reliability of judicial processes, a phased-in approach
involving multiple options to enhance remedial options should be
considered. First, the CMB should consider encouraging or in some
situations requiring companies to provide rights of action to investors that
can be pursued through courts or private, binding arbitration at the investor’s

option. Such rights could be provided in respect of significant transactions

(e.g. where there was a breach of a duty or failure to comply with the law),
instances of materially misleading disclosure (including failures to make
required disclosures) and/or failures by management or board members to
fulfil their responsibilities. It would be essential that the rights of action and
applicable procedures provide for a swift resolution of issues and impose
minimal costs on potential complainants (while at the same time
discouraging frivolous lawsuits). If companies are encouraged (instead of
required) to provide private rights of action, the CMB could offer incentives
(e.g. reductions in fees) to companies that do so.
Proposals to amend the TCC and CML to give shareholders the right to
demand that their shares be purchased at fair value in certain circumstances
(e.g. if they vote against a proposed fundamental change or if the company’s
free float drops below a minimum percentage) are expected to strengthen
incentives for companies to consider the interests of minority shareholders.
The challenge will be to ensure that the remedies actually operate swiftly to
provide minority shareholders with a fair price for their shares without
imposing significant costs on those seeking remedies. Enabling shareholders
to pursue such remedies through binding arbitration or in the courts, at their
option, could help to achieve these objectives.
As noted in Subsection 3.4.1 above, proposed amendments to the CML
would, if enacted, create a statutory civil remedy where there has been
incorrect or misleading disclosure in a prospectus. The issuer, board
members, responsible market intermediaries, auditors and selling
shareholders could be sued for damages. Another proposed amendment to
the CML would create a statutory civil remedy against audit firms and
signatories to audit reports where there has been non-compliance with the
CMB’s auditing principles and standards during independent audits or
where the financial statements or audit opinions are incorrect, incomplete
and/or misleading. Rating agencies, appraisal firms and the individual
signatories to reports issued by such entities could also be held liable for
damage resulting from incorrect, incomplete or misleading information and
opinions in such reports. The draft amendments provide that the persons
sued under these provisions have the burden of proof.
Statutory civil remedies for investors and prospective investors who
have suffered harm either because they relied on materially misleading,
incomplete or incorrect information and/or relied upon the opinion of a
professional who voluntarily assumed some responsibility for providing an
opinion about the integrity of company disclosures are mechanisms used in
a number of countries to provide greater protection to investors and/or
strengthen market discipline. Such statutory remedies can make it somewhat
easier for investors to establish a claim, e.g. by clearly defining the basis for

liability (e.g. specifying that materially misleading or incomplete disclosure

gives rise to liability), eliminating or shifting to the defendants one or more
aspects of the burden of proof and/or specifying the measure of
compensation. For example, a statutory remedy might provide that, in
respect of misleading or inadequate disclosure in a prospectus: (a) investors
who purchased securities during a relevant period are presumed to have
relied upon the misleading disclosure; (b) the loss suffered by the investor is
presumed to be equal to the difference in value between the purchase price
of the securities and the (lower) trading price of the securities on the day
after the disclosure was publicly corrected; and (c) defendants have the
burden of overturning the statutory presumptions, e.g. by proving that the
investor had full knowledge of the relevant information and/or that the drop
in the trading price of the securities was wholly or partly attributable to
other factors. When authorities propose to introduce statutory civil remedies
in a corporate governance context, it is very important for them to carefully
assess, with input from market participants and investors and in light of
relevant research regarding similar provisions introduced in other countries:
(a) the limitations of existing civil remedies; (b) the effect of such
limitations on market disciplinary forces and other incentives that affect
corporate governance; and (c) the potential consequences (including
unintended consequences) in terms of incentives and economic effects on
market participants and investors of introducing the proposed remedies. It is
equally important to craft statutory civil remedies that provide the
appropriate level of investor protection and the right mix of incentives for
investors, companies and responsible persons to facilitate market discipline
and encourage better corporate governance, on the one hand, without, on the
other hand, discouraging careful and well-intentioned companies and
responsible persons from participating in capital markets.
The proposed amendments to the CML providing for statutory civil
remedies are at a relatively early stage of development. The CMB has been
discussing these and other proposals with companies, their advisers, other
market participants and investor representatives. Such discussions no doubt
will generate useful information that can be used to assess the consequences
of introducing these remedies. Given the proposals’ early stage of
development, it would be premature to express an opinion in this Report
about the proposals. The following suggestions are offered, however, based
on the existing draft. First, it is unclear from the draft legislation exactly
which elements of a case must be established by the claimant and which
must be proved/disproved by the defendants. For example, the prospectus
liability provision simply states that the parties claiming they are not liable
have the burden of proof. It is unclear whether this means that a defendant
would have the burden of disproving that: (a) the prospectus was incorrect
or misleading; (b) the claimant relied upon the prospectus because he

already had knowledge of the relevant information; (c) the defendant was
responsible for ensuring that the information in the prospectus was correct;
and/or (d) the claimant suffered a loss or the claimant’s loss due to the
inadequate disclosure in the prospectus. With respect to the liability
provision applicable to audits, rating opinions and appraisals, the draft
legislation specifies that the burden of proving “completeness” lies with the
defendants. It is unclear whether this means that all other aspects of the
burden of proof (e.g. proving that auditors failed to comply with CMB
auditing principles or standards, proving that opinions or reports were
incorrect or misleading and/or proving damages resulting from the breach of
standards) lie with the claimant. Secondly, questions arise whether it is
appropriate to provide remedies where prospectuses, opinions or appraisals
are inaccurate or incomplete in any way, or whether remedies should be
available only if disclosures are “significantly” or “materially” inaccurate or
incomplete. A question also arises as to whether it is appropriate to impose
civil liability on rating agencies or appraisal firms for inaccurate, incomplete
or misleading opinions or reports, absent proof of negligence or of a
material conflict of interest. A question also arises whether statutory civil
remedies should also be introduced in respect of inaccurate, incomplete or
misleading disclosures in other core documents issued by companies, such
as audited annual financial statements, tender offer documents, merger
disclosure documents and/or information circulars for shareholder meetings.
With respect to the prospectus liability question, it might be appropriate to
provide for a remedy in addition to damages, such as a right to rescind a
contract to purchase securities and recover the purchase price. Finally, in
light of the facts that some of the difficulties that investors experience in
pursuing civil remedies appear to relate to other aspects of the civil litigation
system (e.g. possibly evidence rules, discovery rules or pleading rules), as
well as challenges relating to the capacity and efficiency of the judicial
system, it is recommended that the CMB work with other relevant
authorities and private sector experts to identify and explore options for
reforming other aspects of the civil litigation system (e.g. rules governing
pleading or discovery of documents) that currently might be discouraging
investors from pursuing civil remedies in appropriate circumstances or
preventing them from swiftly obtaining remedies.
Consideration should also be given to granting interested persons the
right to apply to the Executive Board of the CMB for a “hearing” to consider
their concerns about suspected breaches of certain capital markets laws,
such as those relating to, e.g. the issuance of shares and public offers, tender
offers, mergers and/or related party transactions. The Executive Board
would have the discretion to determine the type of hearing (e.g. an oral,
public hearing or a hearing through written representations). This would add
some flexibility to the system. Written reasons for the Executive Board’s

decision or a public oral decision should be delivered absent special

circumstances justifying confidentiality. Appropriate precautions (e.g. a
requirement to pay a relatively low application fee, costs orders imposed on
persons who applied for a hearing frivolously or maliciously) should be
taken to prevent misuse of such a right.
4.7.2 Increase penal and administrative penalties and

enhance the CMB’s enforcement powers
Proposed amendments to the CML establishing administrative penalties
(as an alternative to the existing penal sanctions) for crimes such as insider
dealing, the creation of false or misleading impressions, market
manipulation and disguised profit transfers are welcome and should be
enacted as soon as possible. Likewise, proposed amendments providing for
higher administrative penalties for failures to comply with subordinate
legislation such as Communiqués should be enacted as soon as possible, but
consideration should also be given to substantially increasing the proposed
fixed penalties. This is because the variable penalties, which are calculated
as a multiple of the benefits received as a result of the breach of law, might
not have a sufficient deterrent effect if the benefit received is small or hard
to prove. The CML should also be amended to clearly specify that
materially insufficient or misleading disclosure (including a failure to
provide disclosure pursuant to a “comply or explain” requirement)
contravenes disclosure requirements and is, therefore, subject to the same
sanctions as an outright failure to disclose.
Proposed amendments to the CML would authorise the CMB to apply to
the court to have board members removed and/or new members appointed.
Given the judicial system’s current shortcomings, it is recommended that the
CMB be empowered to make such an order itself, at least on an interim
basis until a court renders a final decision. The power should extend so that
it applies to senior executives and any individual who appears to be
exercising any of the functions of a board member or senior executive.
Proposed amendments to the CML would also provide for the settlement
of potential criminal proceedings before the prosecution has commenced in
some circumstances. Such a settlement could occur after the Executive
Board found that a criminal offence was committed but before the case was
referred to the Public Prosecutor. Defendants could avoid having the matter
referred the Prosecutor’s Office if, within a month after the CMB’s finding
was published, they deposited a sum into the Investor Protection Fund equal
to the greater of three times the benefit obtained by committing the offence
and the maximum penalty. Where the offence also involves a breach of the
applicable corporate law or the company’s articles or results in a decrease or

loss of shareholders’ equity, the CMB could elect not to apply to the Public
Prosecutor, provided that amount equal to 1.5 times the loss incurred or the
benefit of which the company was deprived is paid to the relevant company.
Providing for the settlement of criminal proceedings is a welcome reform
since, among other things, it provides an incentive for those who have
engaged in misconduct to accept on a timely basis the Executive Board’s
finding. Under the proposed law, defendants could avoid the risk of having
to pay a penalty that could significantly exceed three times the benefit
received if they promptly paid the specified penalty, as well as avoiding the
stigma of a criminal prosecution and the costs associated with defending
themselves in such a prosecution. The incentives for individual defendants
might be stronger, since they could face imprisonment if a prosecution was
successful. If defendants facing strong cases settle proceedings instead of
vigorously defending themselves in prosecutions and appeals, the CMB and
the Public Prosecutor’s Office would be able to use their enforcement
resources more efficiently. Swiftly resolving criminal cases could also
contribute to greater investor confidence in the integrity of the capital
markets, provided that investors believe that the terms of settlement are
appropriate in the circumstances.
Some questions arise, however, about whether the proposed settlement
provision will have the intended effect. Although the incentives in some
circumstances for some defendants (particularly individuals, who could face
imprisonment) might be strong enough to encourage them to settle, it is
possible that others will conclude that the price of settling is too high, e.g. if
they believe it is unlikely that a court will impose a more severe sanction
upon them or that the sanction will be upheld on appeal. A question also
arises whether settlements should also be permitted in respect of alleged
breaches of capital markets laws that give rise only to administrative
penalties. Also, a question arises as to whether the proposed terms of
settlement are flexible enough to remedy the harm flowing from the breach
or provide some assurance that the same problem will not arise in the future.
For example, some regulators in other jurisdictions have exercised their
settlement powers to, among other things, ensure that defendants: (a)
corrected or cured the harm caused by their misconduct; (b) compensated
persons harmed by their misconduct; (c) modified or adopted new processes
intended to prevent similar misconduct or harm from occurring in the future;
(d) committed not to engage in the same misconduct in the future; and/or (e)
removed from positions of authority persons who had engaged in
wrongdoing. In addition, the current draft of the CML seems to provide that,
if the defendant pays the required sum by the deadline, no one has the
authority to reject the settlement. This could adversely affect investor
confidence in the integrity of the capital markets if, for example, a person
who deliberately committed a very serious offence avoided penal sanctions

(including a prison sentence) by paying a fine to settle the case. By contrast,

in some other jurisdictions that provide for settlements, the regulatory
authority retains the discretion to decide whether or not to enter into a
settlement agreement with a person accused of violating the law.
Accordingly, it is recommended that the authorities consider amending
the CML to provide that:
x settlements can be entered into with respect to the alleged
contravention of any provision in the capital markets laws (i.e. the
CML, any Communiqué or any CMB decision);
x the potential terms of settlement are unrestricted and can include,
among other things, the giving of enforceable undertakings (e.g.
such as undertakings not to engage in certain activities, to provide
compensation to certain persons or to implement changes in
processes);
x settlements can be entered into before or after the Executive Board
has made any findings; and
x settlements can be entered into regardless of whether there has been
a finding by the Executive Board that there has been non-
compliance with capital markets law.
To address concerns that might arise from increasing the flexibility of
the settlement provisions, the CML could be amended to provide for
settlements to be submitted to an appropriate adjudicative body for approval.
For example, in some jurisdictions, staff of the regulatory authority (e.g.
represented by the Head of Enforcement or Chief Operating Officer)
negotiate the proposed terms of settlement with defendants and then submit
the proposed settlement to the regulator’s board of directors or an
administrative tribunal for approval. This approval process provides
assurance that the proposed settlement terms are proportionate, fair,
dissuasive and result in consistent treatment of similar cases.
Consideration should also be given to granting the CMB additional
enforcement powers. Some options include the powers to: (a) publicly
reprimand any person who has contravened the capital markets laws; (b)
require any publicly held company, capital markets institution or licensed firm
to submit (at its own expense) to an independent review of its practices and
procedures and make such changes as may be ordered by the CMB; and (c)
intervene as a party or “friend of the court” in any proceedings involving the
capital markets laws, as well as any proceedings under the TCC, Bankruptcy
Code, Banks Act or Insurance Act and involving a publicly traded company.
Consideration should also be given to expanding the scope of the CMB’s

existing power enabling it to order capital markets institutions to cease

engaging in conduct that the Executive Board has found to contravene capital
markets laws so that such a power can be exercised in respect of any person or
entity who has been found to contravene capital markets laws, at least on an
interim basis pending completion of a court case.
The OECD Principles and Methodology do not specifically recommend
that regulatory authorities possess the powers described in this Subsection.
They do, however, recommend that compulsory standards be enforceable
through effective mechanisms. These recommendations are potential options
intended to improve the effectiveness of enforcement mechanisms in Turkey
and the authorities are encouraged to consider the feasibility of introducing
some or all of these mechanisms.
4.7.3 Continue enhancing the judiciary’s capacity to deal with

complex company law issues
Existing programmes to enhance the judicial system’s effectiveness and
efficiency are a priority and need to continue. In the longer term, more
attention should be paid to enhancing its capacity to deal with complex,
commercial cases on a timely basis through, e.g.: (a) more extensive,
specialised training for candidates and practising judges and prosecutors;
and/or (b) establishing a Commercial List (e.g. a protocol for allocating
complex, particularly time-sensitive cases involving business law to a sub-
division within the existing court system) as a mandatory or optional mode
for pursuing such cases. Cases set down for the Commercial List would
have to meet certain criteria, be heard by specialist judges and be subject to
special procedures to expedite the litigation process.2
4.8 Complete the centralisation of the financial standard-setting

process
The proposed amendment to the TCC designating TAS as the sole

source of general purpose financial reporting standards and authorising other
authorities only to adopt supplementary standards that do not conflict with
TAS should be enacted as soon as possible. Going forward, it will be
important to ensure that any supplementary financial reporting standards
developed by other authorities for special purposes relating to their mandate
are truly supplementary and do not conflict with TAS.

4.9 Adopt ISAs in full; restructure and deepen the audit oversight
process
The CMB’s proposal to establish an SRO that would assume certain

standard-setting, disciplinary and capacity-building responsibilities in
relation to authorised auditors of CMB-regulated entities is a welcome
initiative. To obtain the full benefits of this proposal, however, certain
additional reforms should be considered. The CMB’s proposal could be
broadened by: (a) expanding the SRO’s membership to include auditors of
BRSA-regulated and GDI-regulated firms; (b) requiring such firms to
become members of the SRO; and (c) delegating to it certain standard-
setting and disciplinary powers with respect to all authorised audit firms and
authorised auditors of companies subject to the oversight of the financial
sector regulators. The authorities should also explore the benefits of
delegating to this SRO: (a) the power to conduct practice reviews of its
members; (b) the power to monitor continued compliance with authorisation
and licensing criteria; and (c) either the power to authorise such audit firms
or, at a minimum, the power to screen applicants for authorisation on behalf
of the regulators. This should reduce duplication of regulatory effort and
promote a consistent approach to oversight.
To take advantage of the expertise and resources that exist in the
profession, this SRO should be permitted to hire staff with significant
experience involving either the preparation of financial statements in
accordance with IFRS and/or the external audit of such financial statements
in accordance with ISAs. The SRO should also be encouraged to hire an
appropriate combination of experienced staff with regulatory experience, as
well as staff with private sector experience. Either the SRO’s governing
body (e.g. its board) or a non-voting advisory board should include some
members with significant, current private sector experience. However, to
address the potential conflicts of interest that can arise in a self-regulatory
model, the authorities should retain an oversight function with respect to the
new entity (e.g. by providing for an oversight board, a majority of whose
members are nominated by public sector entities with an interest in the
conduct of external audits). The SRO should be subject to appropriate
accountability mechanisms and employ processes for its public interest
activities that are transparent and provide for public consultation with
respect to the development of its standards and principal operational
policies. These recommendations are consistent with the Essential Criteria
for OECD Principle V.C and OECD Principle I.C.
Many countries, including Turkey, are introducing significant reforms to
strengthen and deepen audit oversight process. Data on these reforms is
being collected, e.g. by IFAC, and some authorities and commentators are

publishing reports and other analyses of these initiatives. The CMB and
other authorities are encouraged to evaluate the suitability, costs and
benefits of leading-edge reforms being implemented in other countries with
a view to adopting state-of-the-art processes and standards. Given the
existing weaknesses in market disciplinary forces and certain investor
protection mechanisms, it is particularly important for auditor oversight
mechanisms to be robust. At the same time, it is essential that reformed
processes are cost-effective and are developed with the support of
professionals involved in conducting independent audits. To enhance
regulatory accountability, promote investor confidence in auditor oversight
mechanisms and provide guidance to the audit profession, the authorities are
encouraged to publish regular reports about their auditor oversight
programmes.
The CMB’s adoption of a new Communiqué requiring audits of CMB-
regulated entities to be carried out in accordance with the CMB’s detailed,
ISA-based standards is a welcome reform. It is recommended that the BRSA
and GDI adopt the CMB’s standards as the core standards for audits of the
firms they regulate, although they might find it necessary to introduce
supplementary standards that do not conflict with the core standards to
address unique features of audits of the firms they regulate. Going forward,
however, it is recommended that the authorities either: (a) assign to the SRO
described above the responsibility for translating new ISAs into Turkish; or
(b) at a minimum, coordinate their resources to translate new ISAs into
Turkish and adopt such translated standards as a common set of standards
applicable in respect of all entities regulated by such firms. In either case,
the translations should be carried out in accordance with a translation
process approved by IFAC and the CMB’s existing ISA-based standards
should be assessed for conformity with ISAs.
4.10 Preserve the CMB’s operational independence; enhance its

capacity and accountability
4.10.1 Preserve the CMB’s operational independence

The MoF’s decision requiring the CMB (and other authorities such as
the BRSA) to turn over on a quarterly basis a significant proportion of any
surplus over budget should be reconsidered. On the one hand, it is important
for the Government to continue pursuing reforms designed to tighten its
fiscal controls, reduce government debt and ensure that independent
regulators are subject to appropriate controls with respect to their
expenditures. The pursuit of these important objectives, however, should not

be permitted to adversely affect the independent regulators’ ability to fulfil

their responsibilities where there is an unanticipated demand for resources
(e.g. in connection with a major investigation). Consideration should also be
given to amending the relevant legislation to provide that neither the
revenues the CMB receives nor its investments would initially constitute a
part of the Consolidated Revenue Fund, except that the CMB could be
required to turn over any surplus to the Consolidated Revenue Fund, no
more frequently than once a year. The surplus should be determined jointly
by the MoF and Executive Board of the CMB after allowing sufficient
reserves to address the CMB’s reasonably foreseeable future needs and
commitments. The CML should also be amended to authorise the CMB to
determine its own budgetary needs, possibly subject to an obligation to
consult the MoF without having to obtain its approval.
4.10.2 Enhance the CMB’s capacity to recruit, retain and train

top-quality staff
The CMB’s effectiveness and efficiency depend upon its continued
capacity to recruit, retain and train top-quality staff. Accordingly, relevant
legislation and rules should be amended, as needed, to provide the CMB
with the flexibility to:
x provide remuneration packages that compete with those offered in
the private sector to similarly qualified individuals;
x recruit staff, either on a temporary basis or permanent basis, outside
the procedures and timelines applicable to the recruitment of civil
servants;
x occasionally employ staff on secondment from other domestic or
foreign authorities or domestic or foreign enterprises (including
professional services firms), subject to appropriate precautions to
address confidentiality and conflict of interest concerns;
x second some of its own staff to other domestic or foreign authorities
or firms; and
x provide sufficient training opportunities, in Turkey or abroad, to its
staff.
As well as addressing any legal or structural limitations that could
restrict the CMB’s flexibility to employ staff outside the civil service, the
cultural issues associated with employing individuals recruited from the
private sector, or briefly seconding staff from the public sector to the private
sector, might have to be addressed. As noted above in Chapter 3, the

separation of public and private sectors can sometimes give rise to

suspicions about the motives and qualifications of those employed in the
other sector. Employing private and public sector staff side-by-side creates
opportunities to modify these attitudes, but the early stages of such
programmes sometimes generate tensions that would need to be addressed.
4.10.3 Strengthen accountability mechanisms

Accountability mechanisms enable the Government and public to
scrutinise the regulators’ exercise of their powers. One form of
accountability mechanism is budget control. Since the recommendations
above would give the CMB more power to control its own budget, other
accountability mechanisms might be necessary. An increase in the
regulator’s powers also makes a re-consideration of accountability
mechanisms appropriate.
Proposed amendments to the CML, described in Subsection 3.6.5 above,
are expected to enhance the CMB’s accountability. The Steering Group
supports the proposed amendments, with one exception. While the proposal
to have the CMB take into account a development plan and annual plan in
exercising its powers is appropriate, it is recommended that the reference in
this Article of the draft CML to a “government programme” be deleted.
There is a concern that requiring the CMB to consider government
programmes in deciding how to exercise its powers and fulfil its
responsibilities could compromise, or appear to compromise, its status as an
independent regulator.
Building on these existing proposals, it is also recommended that the
CMB prepare an annual statement of priorities. The draft statement should
be published for public comment, together with an expanded annual report
that, among other things, summarises the CMB’s performance against its
previously stated objectives and includes independently audited financial
statements and the Executive Board’s discussion and analysis of results of
operations and assessment of foreseeable risks to the achievement of its
objectives. These initiatives should enhance the CMB’s accountability,
thereby supporting its independent status and any grant of additional powers
to it. This practice also should enable the CMB to set a good example in
terms of the transparency of its operations, thereby enhancing the CMB’s
legitimacy as a standard setter, supervisor and enforcement authority.

4.10.4 Enhance the transparency and rigour of the CMB’s

consultation processes
Consistent, transparent consultation processes also contribute to
accountability by enabling interested persons to assess the reasons and
estimated costs and benefits of the regulator’s proposed use of its powers.3
The CMB’s informal consultation practices should be codified in a law or
statement of practices and supplemented as follows. It should: (a) publish a
notice of every proposed subordinate legislative instrument or decision of
general application and provide a reasonable opportunity for interested
persons to make written representations; (b) include in the notice, among
other things, a discussion of the alternatives considered by the CMB, the
reasons for not proposing the alternatives and a description of the
anticipated costs and benefits of the proposed instrument or decision; and (c)
publish with the final instrument or decision a summary of the comments
received and how the CMB dealt with the comments. The Steering Group
supports the CMB’s plan to develop a regulatory impact assessment system.
This system should help the CMB systematically assess the anticipated costs
and benefits of proposed initiatives and, at a later date, evaluate such
initiatives’ effectiveness and the associated costs.
The CMB should also consider publishing, at least annually, a calendar
of proposed initiatives and consultations, to help interested persons plan for
and allocate resources to the review of proposed initiatives. Enhancing the
rigour, transparency and predictability of the CMB’s standard-setting
activities should enhance its legitimacy as a standard setter and improve the
quality of its standards. These recommendations are consistent with OECD
Principle I.B and the associated annotations, which emphasise that legal and
regulatory requirements that affect corporate governance in a jurisdiction
should be transparent and policy measures should be designed with a view
to their overall costs and benefits.
4.11 Other independent authorities
The TASB advised the Secretariat that, as part of its current work
programme, it intends to consider international best practice standards
regarding accountability mechanisms for independent authorities and
formalise or enhance, as needed, its existing arrangements. Among other
things, it intends to publish its regulatory philosophy. It also intends to
prepare its own financial statements in accordance with TAS to the extent
such standards are appropriate for a public authority, have its financial
statements audited by an independent auditor and then make the statements
publicly available.

Consistent with some of the recommendations outlined above in relation

to the CMB, it is recommended that TASB also should:
x having regard to the relevant CMB Principles relating to the
responsibilities of the board and senior management and relating to
transparency and adapting them as appropriate to its status as a
public entity, publish a statement summarising the TASB’s
governance structure and practices;
x prepare and publish for consultation an annual statement of
priorities;
x publish an annual report that includes, among other things, a
summary of the past year’s performance against stated objectives
and the board’s discussion and analysis of results of operations and
an assessment of foreseeable risks to the achievement of its
objectives;
x codify its consultation practices in a published statement that
provides for, among other things: (a) a description of the role of its
working groups; and (b) a summary of comments received on
proposed TAS and a brief explanation of how the TASB addressed
the principal comments; and
x publish an annual calendar of proposed standard-setting initiatives
and consultations.
Like the CMB, the TASB’s effectiveness and efficiency will depend
upon its capacity to recruit, train and retain top-quality staff, including staff
with substantial experiencing in preparing or auditing financial statements
prepared in accordance with IFRS as well as staff with significant regulatory
experience and exposure to international standard-setting processes. The
existing framework within which it operates appears to provide it with
sufficient flexibility to achieve these objectives. It will be important,
however, for this flexibility to be preserved. In particular, it would be
beneficial if the TASB could: (a) provide remuneration packages that
compete with those offered in the private sector to similarly qualified
individuals; (b) employ staff on secondment from other domestic or foreign
authorities or domestic or foreign audit firms, subject to appropriate
precautions to address confidentiality and conflict of interest concerns; (c)
second its own staff to foreign authorities; (d) provide sufficient training
opportunities, in Turkey or abroad, to its staff; and (e) have sufficient funds
to enable its staff to participate in working groups of international standard
setters, such as the IASB.

Similar reforms to strengthen the BRSA’s operational independence and

accountability, as needed, should also be considered.
Notes
1. See the discussion in Annex I of OECD Principle I.B.

2. Some jurisdictions establish Commercial Lists where there is no
“Commercial Court”, as such. Others use a “Commercial List”, even
where there is a Commercial Court, in order to further sub-divide cases,
e.g. to provide for expedited hearing of time-sensitive, complex
commercial cases where the parties agree (or are required to comply)
expedited litigation procedures.
3. See OECD Principle I.A and the related Essential Criteria in the
Methodology.

126
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OECD PUBLICATIONS, 2, rue André-Pascal, 75775 PARIS CEDEX 16
PRINTED IN FRANCE
(26 2006 03 1 P) ISBN 92-64-02863-3 – No. 55345 2006
A PILOT STUDY
Corporate
It is widely expected that there will be rapid growth in Turkey in the coming decade. This
will fuel companies’ demand for external finance to expand their businesses or establish
new ones. To attract such finance on competitive terms, domestic equity markets need
Governance
to expand and foreign investment needs to increase. This will happen only if corporate
governance standards are high, meaning both a well-established and cost-effective
legal and regulatory framework and company practices that favour transparency and the
in Turkey
protection of minority shareholders.
This report evaluates the extent to which the OECD Principles of Corporate Governance
have been implemented in Turkey, looking at both the legal and regulatory framework as
well as company practices. It makes use of a newly developed assessment methodology A PILOT STUDY
and, accordingly, is an experimental, pilot study. The report finds that significant reforms
to the corporate governance framework have already been introduced, with regulatory
authorities playing a leading role in setting and enforcing corporate governance standards
as well as fostering market integrity. The report supports additional legislative reforms
that are already in progress. Looking ahead, the report argues that it is time to move
into the next important phase in policy reform. This will involve systematically monitoring
implementation of the new standards, evaluating their impact, focusing enforcement efforts
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http://www.sourceoecd.org/9264028633
SourceOECD is the OECD’s online library of books, periodicals and statistical databases. For more
A PILOT STUDY
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ISBN 92-64-02863-3 T U RK E C E TURKE
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Corporate Governance in Turkey

Corporate Governance in Turkey

Y COR Y COR RPORA Y COR KEY

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

This work is published on the responsibility of the OECD Steering Group on

Also available in French under the title:

In 2004, the OECD’s Steering Group on Corporate Governance decided

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

List of Abbreviations and Terms.................................................................................... 9

Summary of Assessment and Policy Options .............................................................. 15

Chapter 2. Overview of the Corporate Governance Landscape................................ 37

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

3.2.5 Corporate governance practices in some important areas

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

Chapter 4. Policy Options ............................................................................................. 91

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

4.10.2 Enhance the CMB’s capacity to recruit, retain

Annexes I & II................................................... see www.oecd.org/daf/corporate-affairs

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

List of Abbreviations and Terms

BRSA Banking Regulation and Supervision Authority

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

ISE Istanbul Stock Exchange

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

This study is an evaluation, based upon a draft assessment methodology

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

integrity. In recent years, it has adopted a state-of-the-art corporate

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

The Report outlines a number of policy options intended to strengthen

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

Summary of Assessment and Policy Options

This summary assessment of the extent to which the OECD Principles

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

Basic shareholder rights: Many of the OECD Principles included in

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

and other stakeholders. It is too early to definitively assess the quality of

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

and arrangements enabling some shareholders to obtain a degree of control

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

request by shareholders at a meeting, on the actions they have taken to ensure

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

The OECD Principles recognise that there often are a number of

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

Enhance standards addressing corporate governance risks

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

authorities should work together to develop coordinated risk-based

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

independent review of practices and make changes as ordered by the CMB;

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

Preserve the CMB’s operational independence: It is important for the

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

Significant reforms to the corporate governance framework have been

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006

Box 1. Summary Assessment of Implementation of OECD Principles

x II.A(3) – Shareholders able to obtain relevant and timely information on

x II.A(2) – (Criterion 1) – Shareholders have the right to convey or transfer

CORPORATE GOVERNANCE IN TURKEY: A PILOT STUDY – ISBN-92-64-02863-3 © OECD 2006