Technology helps firms secure fair and responsible governance
long with improving corporate governance and developing shareholder democracy, the new Turkish Commercial Code aims to guarantee fair and responsible governance.
Below you will find some renewals in the code in keeping with such a goal, which bring a technology-friendly approach to governance in a bid to serve modern needs.
The code does not require directors’ physical presence in board meetings. It allows them to participate through electronic media. Board resolutions can also be approved through electronic signatures.
The code allows the online audiovisual gathering of general assemblies and the use of online votes during these gatherings. This is important for minority representation, since the availability of the online general assemblies option is mandatory for publicly-traded companies.
Limits to voting privileges
In the new code, voting privileges are limited to 15 votes per share. The privileged votes will not be able to block the capital increase. They will also not be used in voting on resolutions regarding the amendment of the articles of the company’s incorporation, the filing of discharges, or liability cases.
More protection and control while changing company structures
The code contains important provisions for structural changes such as spin-offs, split-ups, mergers and conversions of capital companies. Those provisions, which are in compliance with European Union legislation, are mostly meant to protect the rights and credits of partners, partnership creditors and employees.
The notion of a group of companies, which describes the management of more than one capital stock company, is regulated for the first time. This important regulation covers a significant loophole in our legal system.
Under the new code, the board of directors of parent and subsidiary companies are required to report their inter-relations annually. There are also several new provisions preventing the abuse of control by the parent company.Moreover, the parent and subsidiary companies managements can now gather under the same management.
In addition to the innovations on the principles of responsibility and fairness, the new code puts special emphasis on disclosure standards and accountability. The first precondition for accountability is reliable information. Most investors, especially foreigners, complain that the financial statements of Turkish firms do not reflect their real situation. In order the cope with this problem and make company disclosures more reliable, the code has two important innovations:
1. International financial reporting standards
As borders became less of an obstacle in the global economy, the need for a unique financial reporting standard with universal characteristics has emerged in recent decades. This prompted Turkey – as a more integral part of the global business community – to reform its local financial reporting legislation and regulations in conformity with International Financial Reporting Standards (IFRS).
Starting in the financial year of 2013, Turkish firms will report their financial statements according to IFRS. Foreign investors will especially benefit from this, since they found the old accounting procedures mired in Turkey’s tax rules very difficult to understand. Moreover, comparable financial statements will make it easier to engage in merger and acquisition activities and to prepare international consolidated financial reports.
2. Independent Auditing
In the old code, there was an internal auditing system. The new code replaces this with external and independent auditing systems. Originally, the independent audit mechanism was to become compulsory for all joint stock and limited liability companies in Turkey with the new trade code. With the recent amendments to the code however, the extent of the obliged companies is limited and the coverage decision is left to the government. Small and medium sized enterprises will most probably be excluded from independent auditing, while coverage will be limited to 10 to 15,000 large companies.
(*) An economist at the Economic Policy Research Foundation of Turkey (TEPAV).
Disclosure rules, more transparency, annual reports
1. Web Site Requirement
In accordance with the principle of transparency, companies are required to launch web sites, which will be subject to independent auditing. Recent amendments limit the coverage of independent auditing. Thus, having an official website and the legal disclosure requirements is no longer universal. If a company fails to establish a web site or publish the legally required information, it runs the risk of administrative penalties and sanctions.
2. Declaration of Founder
In order to protect company’s rights and capital, the declaration of founder has been introduced to ensure transparency. If capital contribution is made in-kind, or an enterprise is taken over, the founder’s declaration must include documents clarifying the appropriateness of the share values. In addition, benefits granted to the founders, if any, are to be explained together with the underlying justification.
3. Annual board reports
Another important disclosure requirement of the new code is the annual reports of the board of directors. These reports should reflect company activities and their financial positions in detail. The board prepares the annual report together with the financial statements and its attachments within the first three months of the following year and presents them to the general assembly. The report provides information on the details of the development of the company and possible risks. Moreover, any significant events following the year-end research and development activities of the company, wages, bonuses and premiums given to the board members, expenses, other payments and significant events, have to be stated in the report.