TURKEY IS READYING itself to take a leap into the world of good corporate governance. The leap will have to be pretty huge because the record up to now has been so poor.
A leading Turkish economist says that only Koc and Sabanci, Turkey's two largest private conglomerates, and "to a certain degree" Is Bank, Turkey's largest private bank, have adhered to the principles of good corporate governance.
"Outside these," he says, "my opinion is: be careful, don't give them the benefit of the doubt."
Celik Kurdoglu, a professor of economics who owns Good Company, a consultancy that specializes in teaching good governance practices to business people, concurs. "We are at a rather primitive stage," he says.
The web test
Examining the quality of information available on the websites of Istanbul Stock Exchange for the 50 companies in the IMKB 50 index, Kurdoglu found that two of them don't even have websites. Fewer than half that did published their annual reports on their websites. Only 4% disclosed risks associated with their partnerships and affiliates. About a third did not disclose their partnership structure. None of the companies disclosed the remuneration of its board members or its articles of association. Information concerning transactions between parent companies and their affiliates was seriously under-reported, the survey indicated.
A study that compared Dogan Yayin
Holding, the biggest media company in emerging Europe, and its international peers according to the amount of information disclosed discovered a big gap. Dogan rated 17% compared with Disney's 83%, News Corporation's 74%, and Bertelsmann's 67%.
To be fair, the situation elsewhere in the world is not that rosy either. Consultancy McKinsey, which recently surveyed 150 corporate directors and 44 institutional investors with over $3 trillion in assets under management, discovered that they are dissatisfied with the pace and extent of corporate governance reform in most parts of the world.
In Turkey, multiple bank failures, a poor foreign investment track record and sensational violations of foreign companies' minority rights have served as a wake-up call to the government.
Official guidelines
As a result, in June last year, the Capital Markets Board published Turkey's first official corporate governance guideline. As is the international norm, compliance was optional. But companies that decided to ignore CMB's governance guidelines were obliged to explain their rationale for non-compliance in their annual reports. They were also required to disclose conflicts of interest, and make known whether they intended to change their management policies in the future in line with the CMB's principles.
In March, CMB went further and announced that these regulations would apply to all public and private companies, whether they were listed on the stock exchange or not.
The board also announced that, like its peers in Italy and Brazil, it would start a corporate governance index in the Istanbul Stock Exchange.
A study shows that Istanbul Stock
Exchange-100 companies that are perceived by the market to be practitioners of good corporate governance have outperformed the stock market index by 68% in the past three years. They outperformed peers deemed to be not good practitioners by 90%.
"Companies that enter the index are likely to see a 25% to 30% increase in their share price," says Kurdoglu. "This will act as a spur. When one company takes a step, the others will follow. De facto, the market will make it compulsory for companies to join."
Kurdoglu says it is difficult to guess when the index might be set up. "If all goes well it can happen in three months," he says.
For this to happen rating companies will have to start becoming active in Turkey. Companies that score seven out of 10 on the Capital Markets Board guidelines will gain admittance. Deminor Rating, a Belgian corporate governance rating company, has applied to the board to open an office in Turkey.
So far the only company that has submitted itself for examination is Tansas, the retail company owned by the Dogus group, which also controls Garanti, a leading private bank. Tansas was rated by Fitch Ratings.
"The rating process itself took two months but it took us two years to prepare ourselves for it," says Aclan Acar, chairman of Tansas. Acar is also chairman of Turkey's Corporate Governance Association, which has about 100 members.
"When at least 10 to15 companies are ready, CMB will establish the index," Acar says. "But I cannot say that there is a great appetite for it. Very few companies know what it entails. Like in everything else you need pioneers."
Kurdoglu says that "for a long time companies were cool towards the idea of improving their corporate governance standards. They treated it as a fashion, a cosmetic measure."
Kurdoglu's first client for corporate governance advice was Efes Bira, Turkey's largest brewer, which is building a significant presence in former Soviet-bloc countries. The company is generally considered to be have the least governance risk of any company in the country.
Sabanci, one the largest private conglomerates, has made corporate governance one of its top two priorities for 2004.
Turkcell, the country's leading mobile telecom provider, has hired consultancy Ray & Berndtson to improve its governance position.
Responding to growing awareness, securities firm HC Istanbul recently published a list of the companies that it considers show the most dedication to the best governance practices. The basis of the list was a questionnaire filled out by analysts and is thus based on perception rather than realities.
Brewer Anadolu Efes; Akbank, Turkey's most profitable bank; iron and steel venture Erdemir; media firm Dogan Yayin Holding; and Koc Holding, the biggest private conglomerate, topped the list.
Ayse Botan Berker, Turkey manager of Fitch Ratings, says that the main concern is whether Turkey's blue-chip companies will elect to go on the corporate governance index. "If they don't the index might not have much value," she says. "Big companies must pioneer so that others may follow them."
Most of the trading companies are family owned and the average free float on the stock exchange, around 25%, is tiny by West European standards.