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Corporate
Governance:
A System for Private and Public Companies
Muzaffer ALACAOGULLARI
Introduction
"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.
BACKGROUND
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.
SPILL-OVER
and INTER-ACTION BETWEEN PRIVATE and PUBLIC SECTOR
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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References
http://www.nigerdeltacongress.com/carticles/corporate_governance.htm
http://www.un.org.pk/rgp/Tricker-corporate%20gov.htm
http://www.indiainfoline.com/nevi/what.html
http://www.ineko.sk/english/bulletin_sprava_arp0_klirova.htm
http://www.oecd.org/EN/document/0,,EN-document-28-nodirectorate-no-15-8293-28,00.html
http://www.oecd.org/pdf/M00008000/M00008299.pdf
(OECD Principles of Corporate Governance)
http://www.combinet.net/Governance/FinalVer/finlvndx.htm
http://www.nigerdeltacongress.com/carticles/corporate_governance.htm
For
more info:
muzaffer.alacaogullari@hazine.gov.tr
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