Cover image: Dolmabahçe Palace, staircase detail.

Transcription

1 2014 Turkey Board Index

2 Cover image: Dolmabahçe Palace, staircase detail.

3 Foreword We are delighted to publish the first edition of the Spencer Stuart Turkey Board Index, a review of board composition, structure and governance practice in BIST 30 companies at August Spencer Stuart has been publishing Board Indexes in a growing number of countries around the world since the first edition of the Spencer Stuart Board Index appeared in the US in Turkey is the 18th country to have its own Board Index and this reflects an increasing interest both inside the country and abroad in how corporate governance practices are evolving. This edition of the Spencer Stuart Turkey Board Index should be seen as a starting point: its scope and content will be expanded in the years ahead. Our objective in this first edition is to highlight some basic information about the boards of the publicly-listed companies with the largest market capitalisation and daily average trade value in Turkey and to draw some interesting comparisons with governance practices across Europe and the US. The Spencer Stuart Turkey Board Index is divided into five parts: 1) Highlights of key statistics aggregated from the BIST 30 companies; 2) Commentary and analysis on company ownership, structure and board composition; 3) Our thoughts on key issues facing Turkish boards today; 4) International comparison chart; 5) Table showing key data for each company. We hope you find this inaugural edition of the Spencer Stuart Turkey Board Index an interesting read and we welcome your feedback. Kaan Okurer, Hande Gungor, Felix Hafele Spencer Stuart, Istanbul 1

4 Introduction Corporate governance plays a critical role in ensuring that companies are directed, administered and monitored in the most efficient and productive way, so as to create shareholder value and enhance investor confidence. Corporate governance has a long history; it has evolved a great deal since the days of the Industrial Revolution. Although certain key aspects of corporate governance look similar anywhere in the world, other elements, differ from one market to the next, depending on a range of local factors, from history and economics to the legal and political systems operating in any given country. One of the main concerns that corporate governance is designed to address is the increasing gap between the rights and responsibilities of owners/shareholders and the interests and activities of professional managers. This is a particularly important issue in Turkey where so many companies are dominated by founders or their families. The concept of corporate governance is relatively new in Turkey and many businesses are still getting used to the idea. However, it is widely expected that there will be steady advancements in corporate governance practices in Turkey in the coming years, predominantly due to demands made by foreign capital. In general, good corporate governance practices lead to improved performance and make it easier to gain access to lower-cost external capital. Widespread implementation of some important corporate governance principles has already started in listed companies following the enactment of the new Turkish Commercial Code in 2012, which legislates on certain governance issues that were previously subject to the principle of comply or explain. Nevertheless, the transformation of day-to-day business practices will require time, patience and a cultural shift as companies begin to recognise the benefits that come with compliance to corporate governance standards. 2

5 Our survey approach The Spencer Stuart Turkey Board Index is a survey of companies in the BIST 30 index, the group of the thirty largest companies by market capitalisation and daily average trade value listed on the Borsa Istanbul. We analysed board size, composition, committee structure and, where data were available, director compensation. We conducted our research in two ways: first, by examining publicly available sources such as annual reports and extracting data, much of which can be found at an individual company level in the data table on page 18; second, by a series of discussions with chairmen and board directors, with a focus on BIST 30 companies. We are grateful for their time and for the insights they gave us into the workings of Turkish listed company boards. The Spencer Stuart Turkey Board Index offers comparisons with indices of leading companies in a number of European countries, including UK, Germany, France, Italy, the Netherlands, the Nordics, Belgium and Spain, as well as with S&P 500 companies in the USA. A detailed table showing aggregated data from these and other countries can be found on page 16. 3

6 Highlights Depth of stock market ownership will determine the future of corporate governance in turkey The Borsa Istanbul (BIST) is the sole exchange entity in Turkey, combining the former Istanbul Stock Exchange (ISE), the Istanbul Gold Exchange and the Derivatives Exchange of Turkey under one umbrella. It was established as an incorporated company in April % The proportion of freefloating shares among all BIST companies As of August 2014, Borsa Istanbul had 423 listed companies with a total market capitalisation of TL 580 billion. The market capitalisation of the publicly traded portion amounts to TL 171 billion (29% of the total). In BIST30, the amount of free floating shares rises to around 34%. To put the Turkish picture into perspective; emerging markets as a whole account for more than 30% of world GDP, yet they only account for 12.6% of world equity capitalisation. The US, by contrast, currently accounts for 25% of world GDP and about 45% of world equity market capitalisation. In the emerging markets, the free float to total market capitalisation is 56%. In the US, the ratio is 94%. The percentage of tradable shares, or the free float ratio, has an effect on corporate governance; there is a belief in many markets that companies with higher free float ratios tend to be associated with better governance, since they are more likely to protect and be accountable to a broader register of shareholders. Broadly speaking, the current system of corporate governance in Turkey is influenced by two major forces: 1) concentrated ownership (a large portion of the Ratio of free-floating shares to market capitalisation USA 94 Emerging markets 56 Turkey 29 4

7 economy is in the hands of family-owned companies) and the related pyramidal structures; 2) banks (which are the biggest users of capital markets) and their strict regulatory compliance requirements. Despite the potential importance of the stock market as a means of raising funds and securing the longevity of corporations, in Turkey few companies have opted for equity financing on a large scale. Gender diversity: shifting from awareness to action The number of female executive directors on Turkish boards remains low. Our in-depth analysis shows that 52% of current female directors in BIST 30 companies are family members. The only reliable way of increasing the number of women on boards would be the introduction of formally enforced gender quotas. 9% The percentage of female board members in the BIST 30 companies In 2008, Norway was the first country to introduce a quota (40%) for female directors of listed companies. Since then, gender quotas for boards have been imposed in Belgium, France, Iceland, Italy, the Netherlands and Spain, although sanctions for non-compliance vary greatly between countries. The European Commission is considering imposing quotas for EU member states. Malaysia has imposed a 30% quota for new appointments to boards, and Brazil has introduced a 40% target for state-controlled firms. The governments of several other countries, including Australia, UK and Sweden, have threatened to impose quotas if firms do not appoint more female directors voluntarily. Good corporate decision-making requires that boards hear and consider different points of view which come from people with different backgrounds, experiences, and perspectives. Companies with female directors send a clear message that they value diversity of thought and experience. Gender quotas are a start, but smart companies will recognise that it will take a lot more mentoring programmes, family support policies and equal pay structures to shatter the glass ceiling. 5

8 Independence on the board: an issue for deliberation Well-qualified independent board members are able to bring a great deal of valuable knowledge and advice to board decision-making that, if accepted, can have a major positive impact on company performance and profit. Their knowledge of specific industries and foreign markets or of particular management functions can guide both strategic and tactical board decisions. 34% The percentage of independent board members in BIST 30 companies Furthermore, independent directors who manage to gain the trust of all shareholders are able to combine this trust with an objective outlook in order to unlock decision stalemates. This helps companies to resolve shareholder conflicts more quickly and to move forward swiftly with business decisions. The new Turkish Commercial Code requires that independent directors of a public company should comprise at least one-third of the board. Current data confirms that BIST 30 companies comply with the requirement within the minimum limits 34% of directors are currently classified as independent. For some Turkish listed companies, especially those that form part of a multinational joint-venture, building the right board has become a priority and goes far beyond compliance. There is a growing appreciation of the benefits that can come from a well-balanced board that brings both independence and a range of skills to the table. Independent director representation on the boards in a selection of markets France Germany Italy Netherlands Russia Spain Switzerland Turkey UK USA % Independent directors 62% 43% 50% 62% 39% 38% 85% 34% 60% 84% 6

9 Ex-employees on boards While ex-employees have had to dissolve their formal connections with the company they worked for previously in order to qualify them as independent, it is important to note that by the definitions of independence operating in many other countries, these directors would not be deemed independent. 26% The percentage of ex-employees among independent board members in BIST 30 companies Non-executive board membership A non-executive board member is defined as a member of a company s board of directors who is not part of the executive team. A non-executive director typically does not engage in the day-to-day management of the organisation, but is involved in policy making and planning exercises. 89% In the Turkish context, non-executive board members are predominantly composed of: a) shareholders and relatives in local companies, and b) regional or headquarters-based executives sitting on the Turkish board in companies with foreign ownership. 20% of non-executive directors are members of shareholding families and 13% are regional/headquarters executives sitting on the board in order to oversee the Turkish subsidiary. The percentage of non-executive board members 7

10 14% Foreign directors: role models of boardroom best practice? With the globalisation of the world economy, firms can potentially benefit from the operating and governance expertise of foreign directors. The percentage of foreign directors in the BIST 30 companies Over 90% of the foreign board members in BIST 30 companies are the representatives of foreign investors assigned to oversee the management team and exert pressure when necessary. Despite their principal reason for being on the board, foreign members make a significant contribution due to the external perspective and the disciplines they bring from other markets. We also find that while some foreign board directors may have limited affinity with emerging markets, in an effort to have a positive impact on governance companies prefer to appoint directors from countries with higher levels of investor protection than Turkey. It should be noted, however, that the logistical issues for non-resident foreign directors themselves are considerable given not only travel time but also the sheer number of meetings held by many Turkish boards. 8

11 Board leadership 28 The It is increasingly common around the world for listed companies to separate the roles of the CEO and board chair. This avoids an over-concentration of power in the hands of a single individual who can pull all the levers of executive power. In the case of family companies, where the chair is typically a family member, this separation of roles would help to ensure that issues affecting the family are not the only factors taken into consideration when it comes to decision making. Even though the family as a whole may have de facto control, in this split board leadership model there is more room for dissent and alternative viewpoints and it is therefore less likely that the interests of non-family shareholders will go unheard. number of BIST 30 companies that split the roles of chairman and CEO The BIST 30 index is overwhelmingly composed of family-controlled firms. As in other countries where family businesses are dominant, owners in Turkey are often more comfortable having a family representative as chair if the CEO does not belong to the family. 57% The percentage of chairpersons who come from the principal shareholding family 9

12 Conclusion Turkey is at the very beginning of its journey towards corporate governance best practice, playing as it does in the emerging markets arena which demands exceptional agility, tolerance to volatility and a bias towards a tactical response to business issues rather than a longer-term strategic approach. The continued steps towards better corporate governance practices will enable the country and its business community to achieve sustained growth both in the Turkish market and overseas. With today s more stable current economic and political environment, the conditions are right for the next stage in the development of governance best practice in Turkey. Despite their limited free-floating shares, the family controlled public firms have played a role in this evolutionary process. They have taken a significant leap towards transparency, disclosure, integrity and ethical behaviour. The dominance of family firms has also benefited the country for a number of reasons: their ability to make prompt decisions, a tendency to consider longer investment horizons, durability in crises, and performance over the long run. However, family firms also have to be aware that preferential treatment towards kin is a risk and can come at the expense of shareholder value and the long-term interests of the business. 10

13 Added perspective Quality of boardroom discussion an indicator of board effectiveness Organisational structures, guidelines and controls help uphold but do not guarantee proper corporate governance. Governance lapses can still occur, but these tend to be due to behavioural factors rather than structural enforcement. The quality of discussion in the boardroom is an important reflection of the effectiveness of the board as well as the ability and dedication of its directors. What brings corporate governance policies to life is the presence of knowledgeable and competent individuals who have a clear understanding of their role and a strong commitment to carrying out their responsibilities as directors. 1. Short-termism Because of the volatility of the Turkish market, businesses are typically concerned with immediate issues and ensuring stability, since forecasting three- to five-year horizons is almost impossible and, as a result, business people have developed a short-term mentality. This attitude extends to the boardroom, where directors often act like an executive committee rather than focus on setting long-term strategy. An increase in independent board membership could bring a deeper, longer-term vision to boardroom discussions. Boards in Turkey frequently make decisions on issues that in other countries would be left to the executive team. This is partly a reflection of volatile market conditions, but also indicates how the board sees its mission as evidenced by the average number of board meetings held by BIST companies 17.5 per year, more than twice the average number of meetings held in markets such as the UK, Switzerland, France and the Netherlands. Average number of board meetings per year in a selection of markets France Germany Italy Netherlands Russia Spain Switzerland Turkey UK USA Board meetings

14 Added perspective 2. Over-emphasised financial/regulatory compliance focus In highly regulated sectors, the need for compliance and its associated liabilities has dominated boardroom discussions. This has to be set against the backdrop of the 2001 financial crisis in Turkey as well as the worst global financial crisis in recent times. Hence it is not surprising that boardroom discussion in sectors such as banking mainly revolves around financial and regulatory matters. Equally, when the financials are transparent and the business is doing well, there is limited time and interest among boards to look more deeply into proper processes covering nomination, remuneration, succession, culture and organisational health, et cetera. In other words, focusing predominantly on regulatory compliance, policy making and financial performance comes at the expense of neglecting two of the most critical topics concerning boards in more mature markets, namely: strategy and people. This is one of the ways in which board committees can help; it is noticeable that every BIST 30 company has an audit committee, and yet none has a dedicated nomination committee. Creating enough space on the board agenda for a proper discussion of strategy is a common challenge facing boards throughout Europe and beyond. In recent years, the burden of government regulation and compliance has reduced the amount of time available to boards for discussion of strategy and boards throughout the region have had to make a conscious effort to correct this. As a result, strategy has become a higher priority for many boards, although in highly regulated industries it is easy for other concerns to get in the way. 3. The power of the controlling shareholder In Turkey, most of the listed companies are controlled by families, groups or the state. This has the potential to be a positive force, since the presence of board members who are heavily invested can help to preserve the business. However, if a dominant shareholder limits the voices of other board members, this will inevitably restrict and hinder the quality of boardroom discussion. Therefore, the further development of independent representation on boards will play a critical role in improving boardroom best practice. Admittedly, in a relatively smaller market, it is not always easy to find qualified independent members, but this should not be an excuse for not trying. 12

15 In order to mitigate the perceived risk of having formal boards composed of totally independent, strong board members, some listed companies also establish unofficial advisory boards to which they recruit influential and internationally recognised names. Advisory boards can provide a safe platform from which boards can seek advice without ceding control. Independent board member compensation In the Turkish context, there is no uniform method of compensating independent board members. We have only been able to collect compensation information on one-third of the BIST 30 companies as there is no requirement for these companies to publish their compensation data. There are, however, several different models in place: 1. Monthly payments 2. Annual payments 3. Payment per meeting 4. Lump sum payments or a combination There is a broad spectrum in the nominal fees paid to independent board members. In a few companies, fees are so high that they could be said to jeopardise the independence of the directors; yet in most companies the fees are almost negligible. BIST 30 companies have not yet arrived at an appropriate and consistent level of compensation for independent directors. 13

16 Comparison tables In this first edition of the Turkey Board Index we provide two sets of tables. In addition to the detailed company data for the BIST 30 (beginning on page 18), we are publishing a chart comparing aggregated data from 16 countries (pages 16 17). All data is taken from individual country Board Indexes published by Spencer Stuart in Constituent companies of Spencer Stuart EMEA & US Board Indexes BELGIUM BeL20 + BelMid FRANCE CAC40 GERMANY DAX30, Mdax, Sdax, Tecdax ITALY 38 (FTSE MIB) + 62 (Mid Cap, Small Cap, Other) NETHERLANDS AEX and AMX Denmark OMX Copenhagen NORDICS Finland OMX Helsinki Norway Oslo Stock Exchange Sweden OMX Stockholm RUSSIA Top 50 companies from Expert 400 SOUTH AFRICA JSE Top 40 + top companies by market cap + select SOEs SPAIN IBEX-35 + top companies by market cap SWITZERLAND SMI TURKEY BIST 30 UK FTSE 150 USA S&P 500 comprising NYSE and NASDAQ-listed companies 14

17 Data tables 15

18 International comparison table BELGIUM FRANCE GERMANY ITALY N LANDS GENERAL INFORMATION BOARD AGE FOREIGN GENDER NEW MEM- BERS OTHER BOARDS LIMITS REMUNERATION EXCOM Size of sample Supervisory board/unitary board of directors 07/49 5/35 66/0 4/96 41/9 Average number of board meetings per year Percentage of companies who conducted an external board evaluation - 35% 15% 27% 20% Combined chairman and CEO 5% 68% 0 22% 4% 8 Percentage of boards with senior independent director (SID) 1 N/A 70% N/A 44% 12% 9 Average board size (total) Average board size (excluding employee representatives) Average number of independent board members Percentage of independent board members 41% 62% 43% 4 50% 62% Average age: all directors Average age: non-executive directors Average age: executive directors N/A Percentage of foreign board members (all) 29% 31% - 7% 43% Percentage of foreign non-executive directors - 28% 24% 8% 45% Percentage of foreign executive directors - 1% N/A 5% 36% Average number of nationalities represented on the board Percentage of female board directors (all) 17.9% 31% % 16.9% Percentage of female non-executive directors % 23.8% 20.1% 21.4% Percentage of female executive directors - 3.8% N/A 6% 6.8% Percentage of companies with at least one woman on the board 82.2% 100% 94% 87% 70% Percentage of new board members 13.3% 7% 7.4% 17% 13.5% Percentage of women among new board members 35% 41% 38.2% 39% 23.4% Percentage of non-nationals among new board members % 11.8% 7.2% 48.4% Average number of boards per director (total) Average number of foreign boards per director Percentage of executive directors with an outside board - 86% N/A 18% 0.6% 10 Percentage of boards with tenure limits N/A N/A N/A N/A 100% Average length of tenure limits N/A 12 3 N/A N/A 12 Percentage of companies with a mandatory retirement age N/A 3% 75% 5% - Average mandatory retirement age N/A Average retainer for non-executive directors - 27,281 55,000 39,900 77, Average fee for audit committee membership - 12,394 18,000 54,800 9,100 Average fee for remuneration committee membership - 11,800 N/A 36,000 6,400 Average compensation for nomination committee membership - 11,500-30,300 6,700 Average board size of ExCo Percentage of foreigners on the ExCo 25.6% 26% 22.5% 1.3% 33.3% Percentage of women on ExCo 10.9% 10% 7.3% 6.4% 7.6% 16 Remuneration figures are stated in Euros. Figures for non-euro currencies are based on conversion rates at 31 March Or lead director or equivalent Finland EUR/meeting France 3 While there is no formal tenure limit in France, directors lose their independence after 12 years on the board Germany 4 According to goals expressed in compliance statement 5 Shareholder representatives only 6 Chairmen only Netherlands 7 Based on boards meeting less than 20 times annually. One-tier boards meet on average 7.4 times. Two-tier boards meet on average 8.8 times. 8 This relates to one-tier boards only as a combined CEO and chairman is not permissible on two-tier boards. 9 67% of all one-tier boards in the Netherlands Board Index have a Senior Director or Vice Chairman.

19 NORDICS Denmark Finland Norway Sweden RUSSIA SOUTH AFRICA SPAIN SW LAND TURKEY UK USA /8 20/5 4/21 5/45 0/41 1/71 0/92 12/08 0/30 0/150 0/ % 47% 88% 0% - 40% 98% 0% 0% 4% 2% 0% 1% 65% 5% 7% 0% 53% N/A N/A N/A N/A 9.8% 52.8% 21% 15% N/A 100% 90% % 80% 59% 53% 39% 57% 38% 85% 34% 60% 84% % 26% 15% 18% 24% 26% 11% 59% 15% 33% 8% 16 25% 13% 15% 18% 29% 26% 89% 55% 15% 26% - 0% 0% 0% 1% 1% 29% 11% 73% 0 7% N/A % 29.6% 39.6% 30.2% 8% 20.8% 13% 15.6% 8.7% 20.6% 18.6% 11.9% 26.6% 28% 21.5% 7.8% 25% 15% 16.5% % - 0% 0% 0% 0.3% 9% 6.4% 4% 0% - 6.6% - 96% 100% 100% 100% 39% 94.4% 68% 85% 56.7% 97.3% 95.2% 17.6% 16.1% 10.1% 8.7% 29.8% 6.8% 8.9% 8.5% % 7% 25.6% 21.9% 38.1% 53.5% 10% 18.3% 17% 38.9% % 30% % 30% 18% 61.1% % % 6.3% 0% 5.7% 20.5% 24.8% 12.9% 27.3% - 27% - N/A N/A N/A N/A 2.4% 28.6% 25% 30% N/A N/A 3% N/A N/A N/A N/A N/A % 4% 8% 4% 0% 46.2% 28% 55% N/A N/A 73% N/A N/A 73 46,971 49,600 35,720 51,718 84, ,806 64, ,167 40, ,937 78,075 20,029 21, ,305 12,824 16,211 9,421 74,937 78,075-14,522 8,698 14,493 See note 2 5,423 N/A N/A 6,283 23,058 49,913-13,312 8,175 15,625 6, ,039 8,602 N/A 4,228 14,522 8,698-8,471 See note % 28.6% 13.3% 59.2% % 20.3% 15.8% 4.3% % - 10 Positions on boards of foreign and domestic listed and nonlisted companies not in the Netherlands Board Index have not been included in the analysis. As a result, the average number of directorships may be greater than what is reported in the Board Index. Chair positions are not counted double years. This relates to non-executive directors. 12 Includes per-meeting fees or fees for committee membership. Based on 184 nonexecutive directors who were on the board of a company included in the Board Index for the entire year of Excludes retainers for non-executive chairmen. Russia 13 Data available for 10 of 41 companies. turkey 14 Average remuneration for independent directors only UK 15 While there is no formal tenure limit in the UK, directors lose their independence after 9 years on the board USA 16 Top 200 companies only 17 $8.411 (average all committees) 17

20 BIST 30: Board data Ownership Board meetings Board directors Family members Women directors Women directors from family? Chairman Chairman also CEO? Akbank Family Family No Arçelik Family Family No Aselsan State owned Non-family No Asya Katılım Bankası Family Non-family No BIM Family Family Yes Emlak Konut GYO State owned NA Non-family No ENKA Family Family No Erdemir State owned Non-family No Garanti Bank Joint venture Family No Halk Bank State owned Non-family No İş Bankası State owned Non-family No Kardemir Family Family No Koç Holding Family Family No KOZA Altın Family NA Family No Koza Anadolu Metal Family NA Family No Migros Joint venture Non-family No Pegasus Family Family No Petkim Joint venture Foreigner No Sabancı Holding Family Family No Şişecam State owned Non-family No TAV Joint venture Family No Tekfen Family Family No THY State owned Non-family No Tofaş Joint venture Family No Turk Telekom Joint venture Non-family No Turkcell Joint venture Non-family No Tüpraş Family Family No Ülker Gıda Family NA Family Yes Vakıflar Bankası State owned Non-family No Yapı Kredi Bankası Joint venture Family No 18 Committee names AC Audit Committee AFC Anti Fraud Committee APC Active-Passive Committee CC Credit Committee CG Corporate Governance Committee CRC CSR DC EC ISC Credit Revision Committee Corporate Social Responsibility Committee Discipline Committee Environmental Committee Information Security Strategy Committee

21 Non-executive directors Independent directors Former employees as independent directors Foreign directors Nationalities of foreign directors Committees Names of committees Independent director compensation USA 4 CG, RA, AC, CC NA None 4 CG, RA, AC, EC NA None 3 CG, RA, AC NA None 7 CG, AC, CC, RC, PFC, ITC, DC UK 3 CG, RA, AC NA None 3 CG, RA, AC NA None 3 CG, RA, AC NA None 3 CG, RA, AC TL 5,000 net x Spain 9 CG, APC, RC, CG, AC, RC, CC, LRC, AFC None 6 AC, CG, ORC, CC, APC, RC NA None 8 AC, ISC, CC, CRC, CSR, RC, RC, CG None 3 CG, RA, AC NA China, USA, Germany, Ireland NA TL 2,500 net x 12 NA 4 RC, AC, CG, NC NA None 3 CG, RA, AC TL 2,000 net x None 3 CG, RA, AC NA Greece, Italy, USA, NL 3 CG, RA, AC TL 16,000 gross per meeting Ireland, UK 3 CG, RA, AC NA Azerbaijan, Georgia 3 CG, RA, AC NA None 3 CG, RA, AC NA None 3 CG, RA, AC NA France 4 CG, RA, AC, NC USD 50,000 gross p.a None 3 CG, RA, AC TL 7,500 gross x None 4 CG, RA, AC, EC NA Italy 3 CG, RA, AC NA Lebanon 3 CG, RA, AC TL 8,000 net x Germany, Sweden 5 CG, RA, AC, RC, NC NA None 4 CG, RA, AC, EC TL 11,000 gross x None 3 CG, RA, AC NA None 4 AC, CC, CG, RC NA Austria, Italy 4 CC, AC, CG, RC NA ITC LRC NC ORC Information Technology Management Committee Liquidity Risk Management Committee Nomination Committee Operational Risk Committee PFC RA RC Project Financing Credit Committee Early Detection of Risk Committee Risk Committee 19

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