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Corporate Governance:
A System for Private and Public Companies



"Corporate Governance is a new system by which business corporations are directed and controlled" as defined by the Organization for Economic Co-operation and Development (OECD). In May 1999 ministers representing the 29 governments which comprise of OECD members voted unanimously to endorse the OECD Principles of Corporate Governance. These principles were negotiated over the course of a year in consultation with key players in the market. They constitute the chief response by governments to the G-7 Summit Leaders’ recognition of corporate governance as an important pillar in the architecture of the 21st century global economy. The Principles were welcomed by the G7 leaders at the Cologne summit in June 1999 and are likely to act as signposts for activity in this area by the International Monetary Fund, the World Bank, the United Nations and other international organizations. In 1991, the OECD and the World Bank signed a memorandum of understanding to broaden the global policy dialogue and co-operation on corporate governance reform and to respond to the need of individual countries to improve corporate governance.

Instead of theoretical definition, corporate governance can be stated narrowly as the relationship of a company to its shareholders or, more broadly, as its relationship to society. "Corporate governance is about promoting corporate fairness, transparency and accountability" is another definitive expression by J. Wolfensohn, president of the World Bank, as quoted by an article in Financial Times, June 21, 1999. Most writers prefer it to emphasize social impact as if it were synonymous with shareholder democracy. Even though, someone sees corporate governance as a subject, as an objective, or as a regime to be followed for the good of shareholders, employees, customers, bankers, stakeholders and indeed for the reputation, and standing of the nation and its economy as a whole.

One of the prominent OECD Principle saying that "active cooperation between corporations and stakeholders" is essential in creating wealth, employment and financially-sound enterprises over time. Good corporate governance is normally recognized as a major contributor to company performance. It is in investors’ interests that corporate governance structures ensure value creation and responsible business practices as well as the accountability of management to shareholders.

As a matter of fact, the purpose of this study is mainly to try to apply this concept for the state economic enterprises heavily involved with Turkey and to examine how efficient it works and applicable. In the wake of the worldwide trend to privatize and liberalize state economic enterprises, corporate governance has come to the forefront of discussions of institutional reform. The new international environment, throughout the developed world with a larger private sector and globally-integrated financial and product markets, makes pressures on governments and firms to reform their governance arrangements. Corporate governance has become a central policy concern as governments attempt to design legal and regulatory institutions that enable firms to raise more domestic and foreign capital.

Companies are concerned with corporate governance, because it drives their competitiveness and reduces the cost of capital. Investors care about corporate governance, because it crucially shapes security returns. For all these reasons, corporate governance occupies the time and attention of thinkers and practitioners in finance, accounting, management studies, business strategy, public policy, law, and economics.



Although, OECD Principles of Corporate Governance issued in 1999 mentioned above, the seeds of modern corporate governance idea were probably sown by the Watergate scandal in the United States. As a result of subsequent investigations, US regulatory and legislative bodies were able to highlight control failures that had allowed several major corporations to make illegal political contributions and to bribe government officials. This led to the development of the Foreign and Corrupt Practices Act of 1977 in the USA that contained specific provisions regarding the establishment, maintenance and review of systems of internal control supposed to be the signs of the corporate governance.

This was followed in 1979 by the Securities and Exchange Commission of USA’s proposals for mandatory reporting on internal financial controls. In 1985, following a series of high profile business failures in the USA, the most notable one of which being the Savings and Loan collapse, the Treadway Commission was formed. Its primary role was to identify the main causes of misrepresentation in financial reports and to recommend ways of reducing incidence thereof. The Treadway report published in 1987 highlighted the need for a proper control system, independent audit committees and an objective Internal Audit function. It called for published reports on the effectiveness of internal control. It also requested the sponsoring organizations to develop an integrated set of internal control criteria to enable companies to improve their controls.

However, the modern trend of developing corporate governance guidelines and codes of best practice began in the early 1990's in the United Kingdom, the United States and Canada in response to problems in the corporate performance of leading companies, the perceived lack of effective board oversight that contributed to those performance problems, and pressure for change from institutional investors. The first attempt to study and advocate for corporate governance in Europe came in December 1992 with the publication of the Report of the Committee on the Financial Aspect of Corporate Governance as established by the Financial Reporting Council, the London Stock Exchange and the accountancy profession of the United Kingdom, better known as the Cadbury Report. This report focused on addressing how boards of directors should carry out their crucial responsibilities to better ensure the reliability of company accounts in the face of a number of financial scandals and provide for a Code of Best Practice as an instrument for guiding corporate director's behavior. The report concluded: "The effectiveness with which boards discharge their responsibilities determines Britain's competitive position. They must have the freedom to drive their companies forward, but to exercise it within a framework of effective accountability. This is the essence of any system of good corporate governance."

Within this Cadbury Report in the U.K., the General Motors Board of Directors Guidelines in the U.S., and the Dey Report in Canada have each proved influential sources for other guideline and code efforts. Hence, those efforts extended to management level are outlined in the OECD document.


Any improvement on a subject has spill-over effect to related fields. Corporate governance was first adopted by private companies, since corporate governance principles lie on the simply applicable and easy-going form to private sectors. When we look into the corporate governance issue in the public sector, most of the public sector corporate governance models, to a greater or lesser extent, create confusion and tensions in the roles, responsibilities and decision-making powers of the board, the affiliated to Minister and the CEO each of whom is responsible and/or appointed by different way and purpose. The primary vision for these tensions is that most governance models do not provide boards with sufficient powers to match their responsibilities. The effect is that many boards have become high level, while advisory management committees leaving apart from the state enterprise rather than true governing boards, vice versa. But, generally speaking, the sole transfer of asset ownership from the state to the private sector neither creates conditions for better corporate governance, nor leads to increased effectiveness which would demonstrate convincing advantages of private ownership. Wherever we stand either on privatization process or holding state economic enterprises, we should give priority on the adapting models from private companies to public ones in terms of corporate governance.

But, we encounter problems not only the spoiled political system over public entities, but also legal system for private companies and enterprises to fit corporate governance Although political system is bound with legal procedures, the principal problem is the intricate and non-transparent legal environment in Turkey. About a dozen of legal standards, often without any mutual links (Commercial Code, Civil Code, Bankruptcy and Settlement Act, Criminal Code, Labor Code, Securities Act, Banking Act, Investment Companies Act, accounting bills and taxation law, etc.) make the management of personal risks associated with the membership in Board of Directors and Supervisory Board difficult.

Examined the content of legislation, protection of the interest of the company and criminal liability of persons authorized to act on behalf of the company in situations such as change in the company’s property structure, dissolution without and with liquidation, bankruptcy and settlement, are described, nevertheless there is a lack of willingness to adopt specific procedures, type solutions to situations from the daily practice, as well as desirable behavioral models for members of administrative bodies in such situations. Collisions between the interests of the company and the personal and collective legal security of administrative body members are taken into consideration. Howvere, within this context, the setting up of an efficient legal support to the administrative body which at the same time would be in accordance with the interests of the company has not been a priority.

More recently, besides the public agencies, the budget itself is used in the European Union imposed corporate governance principles. The Europan Council has adopted on 25 June 2002 the new financial regulation for the general budget of the European Communities applicable to the general budget of the European Communities coming into force on 1 January 2003. Commissioner Schreyer said in Brussels, "At the beginning of next year Europe will now have a completely new and modern Financial Regulation based on the principles of clarity, efficiency and transparency."

For this budgetary regulation, Neil Kinnock, Vice-President for Administrative Reform added: "The approval by Parliament and Council of the modernised Financial Regulation is a major milestone in the overall reform of the European Commission's administration started in 1999.  This change in the law was essential to our efforts to ensure more efficient and effective management and control of EU taxpayers' money and we will be implementing the improvements quickly and thoroughly. All rules and procedures for the implementation and discharge of the budget have been rationalised and modernised, and financial management will now be geared to results and performance, with clearly assigned responsibilities and closer involvement of the Community's financial managers in the whole budgetary process.” In conclusion, this approach to the budgetary system is a broaden view of corporate governance.

Corporate Governance Via Capital Markets and Turkey

The first point is that corporate governance is a necessity for all countries, both developed countries with highly sophisticated stock exchanges, and the developing countries which are anxious to attract international portfolio investment.  In developing standards of corporate governance, the Stock Exchange has been playing a leading role. Its policy is to provide broad guidelines for listed issuers in the belief that self-regulation by listed issuers is more effective and efficient than the imposition of excessive and rigid regulations. For example; there are 676 companies listed on the Stock Exchange of Hong Kong, the most developed capital market location with a total market capitalisation of HK$ 2,670 billion (US$ 340 billion). In Turkey, there are developing Capital Markets and corporate governance idea. Since Turkey is a civil law country, the legal and institutional frameworks governing Turkey’s listed companies comprise the Commercial Code 1956 (the Code), the Capital Markets Law 1981 as amended; the Decree-law No. 91 1983; the Capital Market Board (CMB); and Istanbul Stock Exchange (ISE). Specific legislation regulates the banking and insurance sectors. In a report on the observance of Standards and Codes assessing corporate governance in Turkey (http://www.worldbank.org/ifa/rosc_cg_turkey.html) prepared by the World Bank, the Code examined has been seen a framework of corporate governance in Turkey. It deals with topics such as different types of shares, shareholder assemblies and shareholder rights.

In Turkey, the Capital Markets Law (CML) governs the securities markets; establishes CMB; defines the types of securities that can be issued; sets out issuance/public offering procedures as well as initial and continuous disclosure requirements; and licenses, monitors and supervises financial intermediaries and institutional investors operating in the market. The Decree-Law No. 91 regulates the establishment and activities of stock markets.

CMB develops, regulates and supervises Turkey’s securities markets. It drafts statutory laws to be submitted to parliament for approval and issues regulations. These rules are known as "communiqués" and published in the official gazette after receiving clearance from the Ministry.CMB is located in Ankara and has ample administrative powers, capable of directly imposing administrative penalties such as warnings, fines, suspension or cancellation of licenses. It is governed by an executive board composed of seven members including a chairman. The members of the board are appointed by the Council of Ministers for a six year term. A CMB board member must have a required minimum level of education and professional experience; he/she cannot own shares of a Turkish company. Board members cannot be removed from their posts unless they disqualify themselves, violate restrictions or are condemned by a court. The Prime Minister’s approval is necessary for removal. Article 49 of the Capital Markets Law sets forth the procedures for taking violators to court. CMB’s board may request the courts to prosecute violators by submitting a written complaint to the public prosecutor's office. If the prosecutor decides not to press charges, CMB is empowered to raise an objection in compliance with the criminal procedure code. All board decisions and public disciplinary measures, including nature of charge and identity of perpetrator are published in the weekly bulletin and on CMB’s website.

Indicators and experiences show the needs of good governance in Turkey. In 1999, the majority of cases (42 out of 79 according to CMB, website: http://www.spk.gov.tr/english/) brought before the public prosecutor were cases of violation of CMB’s regulations; second in rank came 12 cases filed for carrying out intermediary operations without license; in third position came nine cases dealing with non-compliance of disclosure requirements; and finally eight cases were related to failure to provide CMB with adequate information. In addition, a relatively large number of cases could not be brought to court due to incompleteness of files or lack of expertise in the court.

ISE is a public, non-profit organisation established in its present state in 1986. It does not have a share capital, but it owns its assets and is financially independent. ISE’s members are brokerage houses and banks and it is governed by a general assembly, a board of directors, auditing and other committees, and the chairman’s office. The chairman/CEO is appointed by the government for a five year term, candidates can have any professional background, including broker or public servant. He or she can only be removed for gross misconduct. CMB closely supervises the exchange, conducts yearly audits, and has the right to reject decisions of ISE’s general assembly.

Both CMB and ISE are active in developing corporate governance standards. For this purpose, more recently the Capital Markets Law was amended and the scope of authority and duties of CMB were expanded. Additions to the law include a provision that permits CMB to attend shareholder meetings; provisions that enhance the protection of shareholders rights, and increased penalties for violations in related party transactions.

Reform on Corporate Governance

One has right to say that Turkish legislation needs more elaborate forms and statutory amendments, additions and derivative legislation. However, State Owned Enterprises (SOEs) in Turkey under either Privatization Administration portfolio or Treasury ownership, need an urgent and transitive application of corporate governance mechanisms in their managerial and economic activities. Especially, legal change on management of SOEs is on the government’s agenda towards more competitive structure and adaptable to Turkish Commercial Code and Capital Markets Law considering financial transactions, reporting, accounting and auditing. Also, public sector as a whole is another reform area for the Turkish government(s). As known, “public sector” refers to regional governments (e.g., state, provincial, teritorial), local governments like regional ones, other related governmental entities (e.g., agencies, boards, commissions and economic enterprises) as well as national governments. There is a general tendency in Turkey for those areas: whereas national governments are subject to reform in terms of restructuring, employment productivity, improvement on public relations such as extending services on electronic systems and with more computerized and faster, easier procedure, regional and local governments having a more autonomous roles and responsibilities on regional and local issues and provision of services.

Seemingly, there is no dramatic distinction to analyze corporate governance context between public and private sector. “The Report of the Committee on the Financial Aspects of Corporate Governance” (the Cadbury report, by Cadbury Committe, UK, on December 1992) defined corporate governance as “the system by which organizations are directed and controlled”. It identified the three fundamental principles of corporate governance as openness, integrity and accountability. Surely, these principles are relevant to public sector entities as they are to private sector. They apply equally to all public sector entities, irrespective of whether governing bodies are elected or appointed, whether or not they comprise a group of people or an individual, whether aiming at profit for maximize shareholders’ or stakeholders’ benefit, society satisfaction.

Aspects of governance in the public sector which have different set of external constraints and influences, social and political and economical as well have been addressed by the Committee on Standards in Public Life (the Nolan Committee, U.K.), the first report to study on the corporate governance in the public sector, published in May 1995. The Nolan report identified and defined seven general principles derived from the three fundamental principles of corporate governance as openness, integrity and accountability, but including four more forms as selflessnes, objectivity, honesty and leadership. Each of these principles is defined in terms of responsibilities of “holders of public office”. However, in the context of the private sector, definitions of these principles need to be adapted to reflect social and political forms which distinguish them from the private sector. In particular, as emphasised earlier, public sector entities regardless of governmental offices or state economic enterprises have to satisfy a more complex range of political, social and economic objectives in one hand. These objectives are subject to forms of accountability to various stakeholders which are different to those that a company in a private sector owes to its shareholders.

Essentially, corporate governance is related to complete legislative systems. As the OECD has commented "Corporate governance is of direct relevance to policy makers because laws, institutions and regulations, on which policy makers exert influence, have a direct bearing for corporate governance structures. Such policy levers include: company law, taxation, banking and securities regulation, prudential regulation of pension and insurance sectors, stock market regulation, and bankruptcy legislation. Gaining insight into other countries' experiences in these areas is very useful to policy makers in evaluating and possibly re-shaping their own institutional and regulatory structures, particularly in conditions of rapid change that may increase pressures to adapt the existing framework for corporate governance." Hence it should be viewed as a package of corporate governance systems at various levels, within a given country, involving state legislation and state regulatory infrastructure, stock market regulation (including codes of best governance practice), shareholder powers, audit, and self-regulation by companies and boards.

Conslusion and Recommendations

Good corporate governance is gradually becoming fundamental to raising capital, satisfying investors and running successful businesses in increasingly global markets, theoretically called “good governance” in the private sector to shareholders, to all other stakeholders in the public firm - employees, suppliers, customers, and bankers as well as to the local and national society for the provision of employment, the creation of wealth and the building of a modern competitive state. There are primary distinctions between the models of corporate governance, modern and on-going traditional practices adopted by companies that vary more considerably than between public and private companies. Therefore, governance system should form a package of overall corporate control in each company within the complete law jurisdiction applied and supervised by public entity. Also, it is vital to see the package as a whole. There has to be an integrated harmony between state legislation and regulatory infrastructure, stock market regulation and corporate self-regulation. Moreover, the overall corporate governance package has to be consistent with the way that business is done and the reality of relationships in that culture, this should require slow adaptation or transitive process.

Inventories on the standards of management, organizational structures and processes a company faces and control mechanisms are the starting point to reform the present system. For example, highly sophisticated stock exchanges, even aiming at attracting international portfolio investment should not be the first step at the beginning. From the point of view of public entities’ position in Turkey, the privatization process in the public sector and restructuring of other SOEs are the basic and important steps the governments consider. Moreover, by putting into practice codes of good practice establishing standards of behaviour in the private and more importantly public sector it would be secured greater transparency and to reduce corruption which Turkish public suffers the most. Since Capital Market Law and Turkish Commercial Code have a core role in a good governance particularly restructuring and privatization of SOEs, arangements in legislation will help bring solutions problems not only in the private sector for good governance concerns, but also in the public sector especially for social, political concerns as well as economic enterprises. In conclusion, I believe that the adoption of these attributes of corporate governance in our public and private sectors, will send a powerful signal to the local and external markets, which should lead to increased inflow into Turkish economy of national and international investment funds, thereby producing more employment and greater national prosperity.

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http://www.oecd.org/pdf/M00008000/M00008299.pdf (OECD Principles of Corporate Governance)


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