Nicholas Birch in Istanbul -

The OECD says Turkey has seen the light and finally woken up to the importance of corporate governance. There's still a way to go, though.

Turkey needs to strengthen its market regulators, defend minority shareholders' interests and give institutional investors more of a say in companies' affairs, a report by the Organisation for Economic Cooperation and Development (OECD) said on October 20.

"You've captured the imagination of investors," OECD Secretary-General Angel Gurria told an Istanbul press conference. "But will there be enough paper to feed the growing appetite? That depends on winning trust."

Given the circumstances, levels of confidence are already pretty high. Just five years ago, a PricewaterhouseCoopers report ranked Turkey as the world's fourth least transparent country. Now, the country's markets watchdog promotes state-of-the-art corporate governance standards, foreign direct investment has soared, and the foreign-owned share of free-float on the Istanbul Stock Exchange is 65% and rising.

Further steps

The speed with which Turkey has adapted itself bodes well for the future, the OECD report says, noting that "serious corporate governance problems surfaced" in other rapidly growing countries. But the specificities of Turkey's corporate landscape leave it with a fair few knotty problems to solve.

"Coming here felt like going home", the Mexican-born Gurria quipped, referring to the on-going dominance of family-owned holdings characterised by a high degree of cross-ownership. "There is a potential for abuse for example where controlling shareholders will impose commercial conditions that go against the interests of the company as a whole and against the interests of minority shareholders."

To combat such eventualities, the report advises improved disclosure on ownership and control, related parties and board decision-making processes.

Expected to come into force early next year, Turkey's new Commercial Code (TCC) looks set to tackle many of these issues.

Among a raft of improvements are articles prohibiting parent companies from abusing their power to control subsidiaries and making compulsory companies' publication of investor-related information. The new TCC is also expected to take steps to improve incentives for pension and mutual funds, whose total equity in Turkey today is less than $1bn.

"That's a nonsense figure", says Gurman Tevfik, president of the Turkish Institutional Investors' Association, blaming it largely on current legal ambiguities over whether such funds have the right to participate in the management of the companies they invest in. "If you want to get somewhere fast, you don't walk, you use a car, right? If you want quick improvements to your investment culture, you need the help of institutional investors."

Better bean counting

In a country where taxes on income and companies are high and few people pay them, the OECD report also understandably draws attention to the importance of reform of accounting, financial reporting and audit practices.

At the moment, says Unal Tekinalp, chairman of the commission on the new Commercial Code, 360,000 companies in Turkey are as good as lost. "Too many people are handing out accounting standards and nobody is using them," he says.

If Tekinalp gets his way, by next year all companies will have to publish financial statements according to centralised regulations fully compatible with international financial reporting standards.

Auditing, meanwhile, falls under the remit of the Capital Markets Board (CMB), Turkey's market regulator. While the OECD approves of its plans to set up a self-regulatory organisation for auditors, it questions whether proposed regulations will be enough to ensure auditors' independence from company boards.

The OECD also calls for greater independence for the CMB, whose supervisory powers it says have compensated for weak market discipline and limited civil remedies. It says the regulator should have more power to punish rule-breakers and remove board members when necessary, and be given more financial independence and a greater control over its budget. Rather than its current dependence solely on fees derived from offerings, one way to do that would be to take annual dues from all publicly held companies.

Corporate governance expert and board member of the media giant Dogan Yayin Holding, Murat Dogu, agrees that the influx of international interest into Turkey has begun to transform Turkish corporate practice.

"The world is changing fast, Turkey is changing faster, and it's no longer possible to manage your company with a management style that's 20 years out of date", he says. "How many companies are aware of that? Not many, I fear."

Changing more minds probably ultimately depends on Turkey's bigger picture. Without a continuation of the past four years' political stability and economic growth in an increasingly international market, legal changes alone may not serve very much purpose.

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