Answer ... The Commercial Code – a primary legislative act which sets out Turkey’s company law – and the Capital Markets Law govern corporate governance practices and principles in Turkey. These are further enshrined in industry-specific statutes (eg, banking, insurance, financial leasing, factoring) and elaborated in secondary regulations issued by independent administrative watchdogs, chief among which is the Capital Markets Board (eg, its Corporate Governance Communiqué and the Corporate Governance Principles annexed thereto).

Answer ... Turkey is a civil law jurisdiction, in which statutory norms are supplemented by secondary regulations. The Turkish corporate governance framework is similarly moulded within the regulatory space (the boundaries of which are set by the Commercial Code and the Capital Markets Law), and is considered by the legislature as a public domain that leaves little room for private norm-setting and thus the use of soft law tools.

Answer ... Article 1529 of the Commercial Code designates the Capital Markets Board as the competent authority with responsibility for the adoption of corporate governance principles for public companies. Other public institutions and organisations also have a mandate to regulate in this regard – albeit in a limited context, based on their expertise, and with the prior approval of the Capital Markets Board. The Regulation on Corporate Governance Principles Concerning Banks, which was drafted and enacted by the Banking Regulation and Supervision Agency in 2006, is one example of this.

On the enforcement front, the Capital Markets Board has a panoply of tools at its disposal, from step-in rights and administrative sanctions to filing and following up criminal complaints concerning individuals.

Answer ... Public companies, banks and financial services industry players are captured by different statutes that collectively form the Turkish corporate governance framework.

Answer ... The Corporate Governance Communiqué issued by the Capital Markets Board does not apply to:

• publicly held companies whose shares are not traded on the stock market;
• listed companies or initial public offering applicants whose shares are or will be traded on markets or platforms other than the National Market, the Secondary National Market or the Corporate Products Market; and
• ‘foreign entities’ as defined under Decree 32 on the Protection of the Turkish Currency.

The communiqué makes a further distinction between three groups of companies it captures based on systemic importance (Article 5), taking into account their total market value and market cap, with ‘smaller’ companies exempted from a number of mandatory provisions (Article 6).

Answer ... Hot topics include:

• minority shareholders’ rights:
• transparency and disclosure;
• related-party transactions;
• board composition;
• independent board members’ qualifications;
• mitigation of agency problems in management; and
• executive pay.

Answer ... Turkish companies are characterised by highly concentrated and centralised ownership structures. Families, either directly or indirectly, retain majority control. Separation of ownership and control is mainly achieved through pyramidal or complex ownership structures.

Answer ... It would go too far to assert that an active and functional market for corporate control exists, given the prevalence of a controlling – even dominating – shareholder in most companies. Privileged shares are common, taking the form of golden shares in state-owned enterprises; and many companies have share classes either with the privilege of nominating board members or with multiple voting rights.

Answer ... Both joint stock companies and limited liability companies have a one-tier board structure.

Answer ... The Commercial Code requires the boards of publicly listed companies to establish an expert committee tasked with the early diagnosis and management of risks that would endanger the company’s existence, development and continuity. The committee must report on the risks and remedies to the board every two months. As regards other types of companies, although this is not mandatory, the auditor may require the board of directors to establish such a committee. The Commercial Code also allows the board of directors to create other committees and task them with:

• overseeing the business;
• preparing reports on certain subjects;
• implementing its decisions; and
• conducting internal audits.

The Corporate Governance Principles require the board to establish the following committees:

• an audit committee, whose members are selected from among the chairs of other committees and independent directors;
• a corporate governance committee, which monitors whether the Corporate Governance Principles are being observed within the organisation and advises the board accordingly, and which identifies conflicts of interest arising due to non-compliance with these principles;
• a nomination committee, tasked with developing a policy and strategy on identifying, assessing and training suitable candidates for the board of directors;
• a committee for the early identification of risks, tasked with the early diagnosis and management of risks that could endanger the company’s existence, development and continuity; and
• a compensation committee, which determines the compensation of the board members and senior-level managers based on the company’s long-term goals and sets the performance standards.

It is recommended that the same board member play a role on only one of these committees.

Answer ... The Commercial Code does not require or recommend the appointment of independent board members. However, the Corporate Governance Principles provide that:

• companies must have at least five board members; and
• one-third of the board and at least two members of the board must be independent. Independent board members must:
• • not have worked in the management of, directly or indirectly held more than 5% of the shares in, or carried out material commercial transactions with either the company, the board of directors or the controlling shareholders within the last five years;
  • not have worked in the management of, served as a board member or held at least 5% of the shares of a company that engages in the sale and purchase of goods or services with the company within the last five years;
  • possess the necessary education, knowledge and experience to fulfil the assigned duties;
  • not be employed full time by public authorities, other than serving as a faculty member;
  • be a resident of Turkey under Turkish tax law;
  • possess solid ethical standards, a professional reputation and the necessary experience to contribute to the business, remain objective in conflicts between shareholders and the company, and decide freely in consideration of stakeholders’ rights;
  • be able to dedicate the necessary time to observe the company’s activities and fulfil the duties required by the position;
  • not have served as a member of the board of directors for more than six of the last 10 years;
  • not be an independent board member of more than three companies controlled by the company or its controlling shareholders; and
  • not be registered and announced as the representative of a legal entity board member.

Answer ... There is no diversity requirement or recommendation as to board composition under the Commercial Code. The Corporate Governance Communiqué, on the other hand, requires that companies set a target of having a board that is at least 25% female by a specified date, as well as a policy through which to achieve this target. Further, the Corporate Governance Principles require that at least one board member be female.

Answer ... In principle, board members are selected and appointed exclusively by decision of the general assembly, provided that:

• the removal is included on the agenda of the general assembly; or
• there are justified grounds for the removal, even if the removal is not included on the agenda.

Unless otherwise stated under the articles of association, in order to remove a board member, the general assembly must convene with the attendance of shareholders representing at least one-quarter of the share capital and resolve by simple majority of the shareholders present at the meeting. This decision must be registered with the relevant trade registry and be announced in the Trade Registry Gazette.

As an exception to the general assembly’s exclusive authority, in joint stock companies, if a vacancy arises on the board of directors for any reason, the remaining board members can select and appoint a new member who will serve for the remaining term of service of the replaced member, provided that this appointment is approved at the first upcoming general assembly. The board resolution must be registered with the relevant trade registry and be announced in the Trade Registry Gazette.

Answer ... Board members exclusively by decision of the general assembly, provided that:

• the removal is included on the agenda of the general assembly; or
• there are justified grounds for the removal, even if the removal is not included on the agenda.

Unless otherwise stated under the articles of association, in order to remove a board member, the general assembly must convene with the attendance of shareholders representing at least one-quarter of the share capital and resolve by simple majority of the shareholders present at the meeting. This decision must be registered with the relevant trade registry and be announced in the Trade Registry Gazette.

Answer ... Board members can be appointed for a term of up to three years and, unless otherwise provided under the articles of association, the same board member can be reappointed.

Answer ... To enhance stakeholder value, it is recommended to ensure a diverse board composition, which is capable of approaching the risks and challenges faced by the company from different angles. In order to maintain checks and balances within the management, independent board members should also play a role in closed corporations, even if this is not required.

Answer ... As the governing body of a joint stock company (JSC), the board of directors is responsible for the management and representation of the JSC.

According to the Commercial Code, board members have the following non-delegable and indispensable duties and powers:

• conducting the top-level management of the company and providing instructions in this regard;
• establishing the company’s management organisation;
• establishing the necessary system for financial audits and accounting, to the extent required;
• appointing and removing managers and other persons with the same function, and authorised signatories;
• supervising management to ensure that it is acting in compliance with the law, the articles of association, internal regulations and written directives of the board of directors;
• maintaining the company books (eg, the share ledger and book of board of directors’ resolutions), preparing the annual activity report and corporate governance disclosures and submitting them for the general assembly’s approval, organising general assembly meetings and executing the resolutions of the general assembly; and
• notifying the competent court if and when the liabilities of the company exceed its assets.

Answer ... Unless the articles of association provide for a higher quorum, the board of directors can convene with a majority of the members and resolve with a majority of the members present at the meeting. If none of the board members requests a physical meeting, any board member can propose a decision by circulating it among the board members; it will become enforceable if signed by a majority of the board members.

Each board member has the right to obtain information on the business of the company and request any corporate books, contracts, documents or correspondence to be brought to the attention of the board. The managers and committees entrusted with the management of the company must provide information during the board meetings and a director’s specific request in this regard cannot be rejected. Each board member can request information from the managers outside of board meetings regarding the business or specific transactions, with the consent of the chairman of the board.

Answer ... (a) Strategic planning?

According to the Corporate Governance Principles, the identification of strategic objectives is one of the main functions of the board.

(b) Risk management?

In public companies, the board must establish a committee for the early identification of risks.

(c) Major and related-party transactions?

The Capital Markets Law requires public companies to adopt a board resolution setting forth the relevant principles before engaging in any related-party transaction, which must be approved by a majority of the independent members. Otherwise, the transaction must be publicly disclosed on the public disclosure platform and presented for the approval of the general assembly.

(d) Conflicts of interest?

Unless authorised by the general assembly, board members cannot engage in a transaction or compete with the company. Board members must refrain from attending negotiations where there is a conflict of interest due to personal interests or the interests of certain relatives of the director.

Answer ... In principle, unless otherwise provided under the articles of association or where the board of directors consists of a single member, the company is represented by the joint signatures of the board members.

In practice, the board of directors often delegates its representation authority to one or more executive directors or third persons as managers, provided that:

• the articles of association allow for such delegation; and
• at least one director maintains full representation authority without any restrictions.

Answer ... Board members owe a duty of care and loyalty, which requires them to act as prudent executives and to preserve the interests of the company and shareholders in good faith in performing their duties and conducting the business of the company. Additionally, unless authorised by the general assembly, board members cannot engage in a transaction or compete with the company. Board members must refrain from attending negotiations where there is a conflict of interest due to personal interests or the interests of certain relatives of the director.

Board members owe these duties primarily to the company and then to the shareholders and finally to the creditors.

Answer ... As a general principle of civil liability, board members are personally liable for damages incurred by the company, shareholders and creditors caused by violation of their duties under the articles of association and the law.

Each board member may be found liable based on the degree of his or her negligence. Thus, while one board member may be liable based on his or her negligence against third parties, other members who acted with the necessary care may not be liable for losses.

If the management function of the board is delegated partially or completely to certain board members or third persons, as explained in question 5.4, the delegating member will not be liable for the actions of the assignee, unless it is proved that the delegating member did not take reasonable care in selecting the assignee.

Board members can also be liable for public debts of the company if those debts cannot be collected from the company.

The Commercial Code provides that members of the board of directors will be criminally liable for the following actions resulting from an act or omission:

• failure to keep company books;
• misrepresentations in or omissions from corporate documents;
• misrepresentation of share capital;
• breach of confidentiality; and
• failure to launch a website (see question 10.1).

Directors may also be criminally liable where their actions constitute a crime under the Criminal Code, such as procurement fraud, or due to breach of other laws such as the Capital Markets Law, environmental law, banking law or enforcement and bankruptcy law.

Answer ... Under the Commercial Code, shareholders’ rights can be categorised as either personal or financial rights.

Personal rights include:

• the right to attend the general assembly;
• voting rights;
• the right to information; and
• the right to request a special audit.

Financial rights include:

• the right to receive dividends;
• the right to receive liquidation profits;
• pre-emption rights and
• interest during preparatory period.

Answer ... In principle, shareholders exercise their rights through the general assembly. Each shareholder, however, is entitled to request information before and during the general assembly.

The Commercial Code requires that joint stock companies (JSCs) hold an ordinary general assembly within three months of the end of each business year. The agenda of the ordinary general assembly must include the following matters:

• appointment of bodies;
• approval of financials;
• discussion of annual activity report;
• use of profits;
• dividend distribution;
• release of board members; and
• other matters concerning the operations of the company.

JSCs can convene an extraordinary general assembly as and when necessary.

The board of directors is authorised to convene the general assembly. However, if the board of directors cannot convene or a quorum cannot be achieved, any shareholder can convene the general assembly with the approval of the competent court.

Minority shareholders representing at least 10% of the share capital for non-public companies or at least 5% of the share capital for public companies can request the board of directors to convene the general assembly or add new items to the agenda for the general assembly. If the board of directors rejects this request or does not provide a positive answer within seven days, the same minority shareholders can seek a court order to convene the general assembly.

Answer ... The appointment of the board of directors is among the non-delegable authorities of the general assembly.

Any shareholder can file suit against the board members claiming damages incurred by the company due to violation of their duties arising from the law and the articles of association. Shareholders can also request that the court restrict or terminate the management rights of any manager for just cause. The Commercial Code provides that managers’ violation of their duty of care and loyalty or any other obligation arising from other laws and the articles of associations will constitute just cause.

Answer ... As general principle, for both JSCs and LLCs, the shareholders are not responsible for the transactions of the company and their liability is limited to the subscribed capital contribution.

Answer ... As general principle, for both JSCs and limited liability companies (LLCs), the shareholders are not responsible for company transactions and their liability is limited to the subscribed capital contribution. The shareholders of an LLC, however, are liable for public debts of the LLC with their personal assets and pro rata to their shareholding ratio within the total share capital.

Answer ... Each shareholder has a pre-emption right, allowing it to acquire newly issued shares in the event of a capital increase, in proportion to their current shareholding. In JSCs, pre-emption right can be restricted with affirmative votes of at least 60% of the share capital, provided that there are just grounds to do so. Although the Commercial Code does not define ‘just grounds’, it has been held that public offerings, the acquisition of businesses or subsidiaries and employee participation in the company are all considered just grounds.

Answer ... According to the Commercial Code, share transfers in a JSC are not subject to registration with the trade registry. However, if the company’s entire share capital is acquired by a sole shareholder, the board of directors must be notified of the relevant transaction within seven days. The board must then register the sole shareholder within seven days with the relevant trade registry and announce it in the Trade Registry Gazette. For LLCs, any share transfer must be registered before the relevant trade registry and be announced in the Trade Registry Gazette.

Under the Capital Markets Law, according to the Communiqué on Material Events Disclosure (II-15.1), the trading shareholders in a public company must disclose their direct or indirect, joint or standalone shareholding if this reaches or falls below 5%, 10%, 15%, 20%, 25%, 33%, 50%, 67% or 95% of the total share capital or voting rights. If the shareholder directly holds such shares, the disclosure is made by the Central Registration Agency on behalf of the shareholder.

Answer ... Studies have shown that the costs of collecting information and private enforcement are high for institutional investors and other activist shareholders; hence, they usually choose to exit where they fail to exert an influence on company policies. Minority shareholders, including institutional investors, are reluctant to bear these costs and the loss of liquidity by blocking their shares before casting their votes in the presence of highly concentrated ownership structures and voting privileges. Even where investors choose not to exit, given the absence of specialised dispute resolution mechanisms, public supervision and enforcement through the Capital Markets Board appears to be by far the most effective tool for implementing corporate governance principles – albeit at the cost of ‘moral hazard’ on the part of the minority shareholders, which have little or no incentive to take an active stance.

Answer ... There is no legislation or code of practice that particularly applies to institutional shareholders (eg, stewardship). However, certain institutional investors (eg, collective investment institutions, portfolio management companies) are subject to standalone disclosure requirements on their activities under the supervision of the Capital Markets Board.

Answer ... The annual general assembly is regarded as the appropriate forum for activist individual shareholders to make their voices heard. Institutional investors and shareholder collectives (a combination of individuals building up a sizeable shareholding), however, may establish a more direct and reciprocal bond with management, considering the leverage they enjoy.

Answer ... The key focuses of individual and collective shareholder activism include:

• the appointment of independent board members;
• dividend distributions (a rarity among Turkish listed companies); and
• transparency in related-party transactions through monitoring, reporting and audits.

Answer ... A shareholder dispute (deadlock) over board composition – more precisely, on the appointment of independent board members – in Turkey’s largest mobile phone operator triggered a protracted and contentious debate on policy instruments and conditions for, and the extent of, ‘state intervention’, which involved practitioners, academics, shareholders and, most importantly, the Capital Markets Board. This ultimately led to the board’s empowerment, under exceptional circumstances, to appoint independent board members ex officio.

Answer ... There is a trade-off between the Capital Markets Board’s broad authority to police the market with the aim of safeguarding minority shareholders’ interests and the ultimate goal of enhancing shareholder awareness and promoting an activist, enlightened shareholder class. The board’s proactivity ensures compliance to a great extent; yet deficiencies in governance may be disguised by ‘tick-box’ compliance rates. Shareholder activism would increase if some hybrid forms of regulation, enacted with input from both public and private actors and striking a balance between hard law and soft law, were put in place, underpinned by specialised and practical dispute resolution mechanisms, which would collectively lead to an effective and dynamic framework.

Answer ... Chapter 3 of the Corporate Governance Communiqué generally bears soft law characteristics. Among other things, it:

• promotes the establishment of company policies with regard to stakeholders and employees;
• encourages their participation in decision making; and
• vaguely prescribes how relations with customers and suppliers should be conducted.

In a jurisdiction where ‘state actors’ almost exclusively configure and own the regulatory space, the emergence of private initiatives in the form of norm production by stakeholders is rare. That said, some ground-breaking advances have been introduced to the Commercial Code, most notably on:

• the responsibilities of ‘controlling shareholders’ and their managers towards creditors (Article 206);
• the accountability of ‘groups of companies’ towards society and consumers (Article 209); and
• the liability of board members and those holding management powers for damages suffered by creditors (Article 553)

These should help to increase awareness in this regard going forward.

Answer ... According to the Commercial Code, the general assembly or the articles of association can provide for attendance fees, wage bonuses, premiums and profit shares to be paid to board members. The annual activity report of the board of directors must indicate the premiums, bonuses, allowances, travel and accommodation expenses and other types of benefits granted to board members and managers.

However, the Corporate Governance Principles require that companies establish written principles for executive compensation and present these principles to the shareholders to obtain their opinion. The policy prepared in this respect must also be published on the company’s website. Stock options or payment schedules contingent on the company’s performance cannot be used to compensate independent board members. The remuneration foreseen for independent directors must be sufficient to ensure their independence.

Answer ... Please see question 9.1.

Answer ... The Corporate Governance Principles require that companies publicly disclose the compensation and other benefits granted to board members and managers in the annual activity report.

Answer ... No.

Answer ... The annual activity report of the board must include an assessment on whether the company has achieved its operational and financial objectives, and if not, indicate the reasons. The board of directors must make a self-assessment and conduct a performance review of the board, the individual members and executive members. Based on this evaluation, the members may be rewarded or discharged from their duties.

Answer ... In order to incentivise executives while also creating value for the company and other stakeholders, compensation packages may consist of fixed and variable components. Companies should consider emphasising performance-based payments when structuring these compensation packages. It is vital that performance standards are defined accurately and prioritise the long-term good standing and sustainability of the company.

Answer ... Companies that are subject to independent audits (see question 11) must launch a website within three months of their incorporation, on which they must publish certain information regarding the company as required by law and matters which are subject to registration and announcement with the relevant trade registry.

Company information such as the following must always be available on the website:

• subscribed and paid-up share capital;
• the company address; and
• the identity of board members and managers.

Additionally, the Regulation on Websites of Companies provides a detailed list of matters that must be published on the website for at least six months, such as:

• information and documents regarding mergers and spin-offs;
• disclosure requirements of group companies;
• details of certain lawsuits against the company;
• information on pre-emption rights; and
• details of capital decreases.

The Capital Markets Law, on the other hand, require that companies publicly disclose their financial statements, audit reports and activity reports, as well as any information, events or developments that may affect the value of the capital market instruments and investment decisions of the investors on a public disclosure platform.

Answer ... The board of directors is responsible for carrying out the reporting obligations on behalf of the company.

Answer ... According to the Commercial Code, based on the results of the independent audit as per Turkish Accounting Standards, the auditor will:

• issue:
• • a positive opinion;
  • a limited positive opinion; or
  • an adverse opinion letter; or
• refrain from issuing an opinion letter.

Under a positive opinion letter, the independent auditor confirms that there are no violations as per Turkish Accounting Standards and other requirements, and that the financials accurately reflect the actual position of the company.

Answer ... Particularly for publicly traded companies, the timely disclosure of information is essential to ensure transparency and thus gain the confidence of investors. Addressing the information asymmetry between management and other stakeholders, in both public and closed companies, is essential to create shareholder value in the long run. Independent board members should play a significant role in monitoring the company’s compliance with the disclosure requirements. Therefore, companies should internally increase awareness of the importance of transparency, and should work closely with legal and financial advisers to ensure compliance with the reporting and disclosure requirements.

Answer ... Companies that satisfy two of the following conditions (separately or together with their subsidiaries or affiliates) are subject to an independent audit (based on the figures for 2020):

• active assets valued at TRY 35 million or more;
• annual revenues of at least TRY 70 million or more; and
• at least 175 employees.

These conditions must be satisfied for two consecutive fiscal years. Additionally, regardless of these conditions, companies that are active in certain sectors as listed under the relevant decree – such as banks, financial institutions and companies operating under licence in other regulated markets, such as media and energy – are subject to an independent audit.

The general assembly appoints an auditor each year. The identity of the auditor must be registered before the trade registry and announced in the Trade Registry Gazette. The auditor can be replaced during its term of service only by court order requested by the board or by the minority shareholders if there are just grounds for replacement.

Answer ... The Commercial Code prohibits the appointed auditor from providing any other services or advice other than tax consultancy and inspection to the same company.

Answer ... Please see question 11.2.

Answer ... The current legislative and regulatory framework empowers the Capital Markets Board to exercise exclusive standard-setting and extensive policing powers. However, private initiatives led by the likes of the Turkish Industry and Business Association and the Corporate Governance Association of Turkey are helping to champion progressive views, largely drawing on the work and support of quasi-academic platforms (eg, the Sabancı University Corporate Governance Forum) or transnational actors (eg, the International Finance Corporation and the European Bank for Reconstruction and Development). This form of multilateral collaboration is best exemplified by the formation and further evolution of the IWD (independent women directors) project, which aims to create a talent pool of female professionals who are sufficiently qualified to serve as independent directors in listed companies boards. Today, thanks to these combined and organised efforts which have paved the way for future advances, gender diversity is a prevailing theme in contemporary discussions around corporate governance in Turkey.

Answer ... Current economic, social and micro-organisational developments call for a fundamental rethink in three key policy areas:

• The COVID-19 pandemic makes a compelling case for the overriding need to step up efforts in corporate governance digitalisation;
• Environmental, social and corporate governance and impact investing are likely to dominate the legislature’s agenda now that export markets are demanding imminent change; and
• The role of institutional investors as a key driver of shareholder activism will be reframed in the context of stewardship, in line with transnational best practices.

Answer ... Voluntary, informal, non-binding instruments that afford flexibility can better accommodate the configuration of costs, contingencies and complementarities at an organisational level; while soft law should be adequately incorporated into the policy mix. Input from an extended set of ‘norm entrepreneurs’ in rulemaking and the exploitation of learning opportunities in the search for more efficient rules should be encouraged. Private supervision and enforcement practices should be bolstered. The quality of disclosure and corporate governance reporting should increase. Finally, the use of new technologies that might increase shareholder activism should be incentivised, as recently seen in the introduction of mandatory electronic general assembly meetings.