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Best companies in CEE: Best corporate governance
Companies have continued to improve corporate governance as part of the EU convergence process. But Czech energy company CEZ retains its position as top company in the region. Chloe Hayward reports.
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Turkcell is helping to ring the changes in Turkish governance |
TURKEY HAS EMERGED as the rising star of corporate governance in the 2008 Euromoney CEE companies poll. Garanti Bank has shot up the poll from ninth position to second, and mobile phone operator Turkcell has entered the top 10 for the first time in third place. In contrast, in the 2007 poll no Turkish institutions made the top five. “Foreign direct investment has driven this change in Turkey,” says Bulent Akgul, director at Fitch Ratings in Istanbul. “In recent years there have been a lot of foreign buyers coming into this market and driving up standards of corporate governance throughout the corporate sector.” Foreign direct investment has soared from $1.1 billion in 2002 to $19.9 billion in 2006. In 2007 it reached $21.7 billion, according to Turkey’s government figures.
These inflows show clearly how well Turkey has recovered after a massive financial crisis in early 2001. The rise in FDI is largely thanks to economic reforms that have increased stability and brought business legislation in line with European Union norms.
Whatever the state of accession negotiations, the EU remains a strong driver of high standards of corporate governance as the accession process leads to new laws being adopted. Turkish boards have largely accepted reforms to company law that are required under the Acquis Communautaire, the existing body of EU law. In 2005, Turkey’s capital markets board (CMB) required all listed companies to follow IFRS-based accounting standards. Since 2005, many small and medium-sized companies have also moved to adopt international accounting standards.
Of the two top Turkish names, Sercan Soylu, research analyst at Eczacibasi Securities, says: “Garanti Bank has improved its market shares with increasing profitability. It has sold its non-core operations at attractive prices. Turkcell is the GSM giant in Turkey and return on investments and reputation is still growing.”
But it is clear that Turkcell and Garanti Bank are just two of many contenders. Soylu adds: “Akbank is very rigid in compliance and corporate governance issues. Halkbank has a good turnaround story.” David Belaunde, a research analyst at Lehman Brothers, names another company: “Coca-Cola Icecek is by far the most convincing company [in the CEE region] I think – it has a clear strategy on how to build its business in Turkey. Ownership by Coca-Cola sets higher standards in terms of quality of reporting as well as communication to the market over strategic decisions.”
‘May you live in interesting times’
As the global liquidity crunch persists, emerging market economies in the CEE region suffer. Romania’s five-year CDS spreads have doubled in the past six months, reaching a high of 175 basis points over, while in Turkey spreads widened to 283bp in the light of political unrest.
Furthermore, in March, Turkey entered a political crisis when a chief prosecutor asked the constitutional court to shut down the AKP party and ban its leaders, including Tayyip Erdogan, the Turkish prime minister, from politics for five years. The row started when Erdogan’s party was accused of Islamist activities in the secular country. The court estimates the case will take up to six months to conclude, leaving Turkey open to political instability.
However, as these political issues are played out in the courts, under the gaze of the world, the central bank governor of Turkey, Durmus Yilmaz, says the way to overcome the negative impact that politics is having on the risk perception of Turkey is to put more emphasis on structural reforms and corporate governance.
After starting a speech last month by quoting the Chinese curse, “May you live in interesting times”, in reference to the turbulent times the world is living through now, the governor went on to say: “There is a loaded reform agenda waiting for us. Macroeconomic stability, structural reforms and adherence to the principles of good governance will unlock Turkey’s economic potential and achieve its convergence with the European Union.” The governor added that the recent global financial turbulence had put the principles of good governance at the centre of public debate. However, according to Fitch, ownership issues and independent directors are both areas where Turkish companies continue to be very weak.
Despite Turkcell’s third place in the poll, and its strong performance in accounting and transparency, which marks it off from its peers, there are still controlling share issues.
The two main shareholders Cukurova Holding (CG) and Telia Sonera (TS) together hold 51% of Turkcell through the holding company, Turkcell Holding. Altimo, through its Alfa subsidiary, owns 13.2% of Turkcell’s share capital.
One dispute, over the sale of certain CG shares to TS, has now been upheld by the International Chamber of Commerce. This means that CG is obliged to fulfil the sale, despite the fact that CG sold some of the disputed shares to Altimo. In addition there has also been a dispute between the Alfa group and CG regarding CG’s outstanding liabilities to Alfa.
The board of directors at Turkcell has seven members – two from each of the three shareholding groups and one independent director. This raises another concern about board representation.
However, it is these issues that clearly highlight the strength of the management team at Turkcell, as well as the weakness of many other companies in the region in terms of corporate governance. “I think at least 33% of a board should be independent,” says Akgul. “For many in the CEE region, having one independent director is deemed impressive.” But he is quick to add: “At the same time, the fallout from the sub-prime crisis has highlighted the need for knowledgeable independent directors across the globe – the CEE companies aren’t the only ones struggling in this area.”
