Technology helps firms secure fair and responsible governance

Sarp Kalkan*

Hürriyet photo

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.

Online voting

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.

Accountability

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).