Independent Board Member

Do all companies traded on Borsa Istanbul have to obtain the approval of the Capital Markets Board for the independent board members to be elected?

Companies traded on Borsa Istanbul are divided into three groups according to their market capitalisation and market capitalisation of shares in actual circulation. Different levels of obligations have been introduced for each group in terms of compliance with corporate governance principles. The First Group consists of companies with an average market capitalisation above TL 3 billion and an average market capitalisation of shares in active circulation above TL 750 million.

Pursuant to paragraph 4 of Article 5 titled "Application of Corporate Governance Principles" of the Capital Markets Board's (Board) Communiqué Serial: IV, No: 56 "Communiqué on Determination and Implementation of Corporate Governance Principles" of the Capital Markets Board (CMB), paragraph 3 of Article 4.3.8 of the Principles will be applied only for the First Group Companies. According to the said paragraph, the board of directors is required to prepare the list of independent member candidates within the framework of the report of the Nomination Committee and send it to the CMB at least 60 days before the general assembly meeting. Within the framework of the Board's subsequent decision, this period has been reduced to 45 days for this year only. The CMB will notify the company of its negative opinion, if any, on the list within 30 days. A person on whom the Board has expressed a negative opinion cannot be presented to the general assembly as an independent member candidate.

As can be seen in the regulation, the Board's approval for independent board membership is only required for the First Group Companies. There are 23 companies in the First Group Companies and 6 of these companies are banks. As the Principles will be mandatory for banks next year, only the independent board members nominated by Group I companies below will be subject to the Board's approval.

Anadolu Efes

Arçelik

BIM Stores

Coca Cola Beverage

Emlak Konut GMYO

Enka Construction

Eregli Iron and Steel

Ford Otosan

Koç Holding

Koza Gold

Sabancı Holding

Bottle Glass

Tofas Auto. Fab.

Turkcell

Tüpraş

Turkish Airlines

Turk Telekom

In addition, the recent amendment to the Communiqué aims to clarify the scope of the review of the independent member candidate list to be conducted by the Board as stated in Article 4.3.8 of the Principles. In this framework, with the amendment, it has been stated that the review will be made within the framework of the independence criteria stated in Article 4.3.7 of the Principles.

What are "Material Transactions"? How is the concept of "materiality" defined?

For the implementation of Corporate Governance Principles, the definition of "material transactions" has been introduced and material transactions have been listed. In principle 1.3.10 of the Board's Communiqué Serial: In the principle numbered 1.3.10 of Communiqué IV, No: 56, material transactions are defined as follows; "The transfer of all or a significant part of the assets of the companies or the establishment of real rights on them or leasing them, the transfer or leasing of a significant asset, the granting of privileges or changing the scope or subject matter of existing privileges, delisting from the stock exchange are considered as material transactions in terms of the application of Corporate Governance Principles."

The Board's decision dated 16.02.2012 and numbered 5/136 clarified the significant transactions and the concept of materiality. Board;

a) In the determination of the concept of "materiality"; an assessment shall be made by the listed companies by taking into account the strategic importance of each transaction in terms of the company's activities, the following numerical criteria shall be used to assist the qualitative assessment, but the assessment shall be made by the board of directors and especially by the independent members of the board of directors, taking into account the nature of the transaction, regardless of the criteria in each case,

b) As a materiality criterion within the scope of the relevant article of the Communiqué;

20% of the total assets in the last publicly disclosed financial statements,

40% of the relevant account group in the last publicly disclosed financial statements,

25% of the shareholders' equity in the last publicly disclosed financial statements,

20% of the gross sales revenue according to the last annual financial statements disclosed to the public,

criteria as minimum ratios,

c) Transactions fulfilling any of the four criteria in question shall be considered as significant transactions,

d) In determining whether the transactions meet the materiality criterion, the transactions performed with the same party with the same nature or as part of the same plan are aggregated and evaluated as a single transaction,

e) Reminding the companies that practices such as making transactions in several instances or making changes in accounting policies in order to avoid exceeding the thresholds specified in (b) above are not acceptable and that the processes specified in the principles should be operated in these cases

has decided

Principles 1.3. 10 of the Article 10 of the Communiqué regarding the matters considered as material transactions in terms of the application of Corporate Governance Principles, the provision that such transactions cannot be executed without the approval of the majority of the independent members of the board of directors has been removed with the latest amendment to the Communiqué. In the event that the majority of the independent members do not approve the material transactions and the Company intends to execute such transactions despite the opposition of the majority of the independent members, the transaction must be submitted to the general assembly for approval. In this case, the reason for dissent of the independent board members must be immediately disclosed to the public, notified to the Board and read at the general assembly meeting to be held.

What are the amendments to be made to the articles of association in relation to the new corporate governance principles?

Pursuant to the Provisional Article 1 of the Communiqué, the amendments to the articles of association and the restructuring of the board of directors required to be made in order to comply with the Communiqué must be completed by the first general assembly meeting to be held no later than 30.06.2012. However, it is stated in the Board's statement that the approval of the amendments to the articles of association in a second general assembly meeting to be held until 30.06.2012 may be possible only in the presence of exceptional reasons upon application to the Board. Within this framework, by all Exchange companies;

Amendment of the articles of association in relation to the principles numbered 1.3.10 and 4.4.4.7, which are required to be included in the articles of association,

Regarding the principles numbered 1.3.1, 1.3.7, 4.3.1, 4.3.2, 4.3.3, 4.3.3, 4.3.4, 4.3.5, 4.3.7, 4.3.8, 4.3.9, 4.5.1, 4.5.2, 4.5.3, 4.5.4, 4.6.2 and 4.6.4 of the principles numbered 4.6.2, 4.5.2, 4.5.3, 4.5.3, 4.5.3, 4.5.4, 4.5.4, 4.6.2 and 4.6.4,

required.

As a separate article titled "Compliance with Corporate Governance Principles" in the Company's articles of association or as a separate paragraph within the existing articles on the subject;

"The Corporate Governance Principles required by the Capital Markets Board shall be complied with. Transactions and decisions of the board of directors taken without complying with the mandatory principles are invalid and deemed to be contrary to the articles of association",

"The regulations of the Capital Markets Board on corporate governance shall be complied with in transactions deemed to be material in terms of the application of Corporate Governance Principles and in all related party transactions of the company and in transactions regarding the provision of guarantees, pledges and mortgages in favour of third parties",

"The number and qualifications of the independent members of the Board of Directors shall be determined in accordance with the regulations of the Capital Markets Board on corporate governance."

The Board announced to the public that it would be appropriate to include the following statements.

As of the latest situation, what are the independence criteria for an independent board member?

Within the framework of the latest Communiqué regulations made by the Board (Article 4.3.7 of the Principles) and the principles announced by the Board to the public, the independent criteria of the independent member are as follows.

a) The independent member must not have established any direct or indirect employment, capital or significant commercial relationship in the last five years between the company, one of the related parties of the company or legal entities related to the company in terms of management or capital of the shareholders who directly or indirectly hold 5% or more shares in the company's capital, and himself/herself, his/her spouse and his/her relatives by blood or marriage up to third degree. In determining whether a party is related to an entity, the provisions of TAS/IAS 24 "Related Party Disclosures" will be utilised. It is sufficient that the significant commercial relationship is important for the independent member candidate or any of the company. In determining the capital relationship, a 10% criterion will be taken as basis.

b) Within the last five years, the independent member must not have worked or served as a member of the board of directors in companies that carry out all or a certain part of the activities and organisation of the company within the framework of the agreements made, primarily in companies that audit, rate and consultancy of the company. The fact that the independent board member candidate is a certified public accountant who has prepared a full attestation report of the company within the last five years will be considered as a situation that impairs his/her independence since he/she performs the tax audit of the company. The fact that the independent member fee is currently invoiced as a consultancy fee will prevent the person from fulfilling the criteria specified in this paragraph. 

c) The independent member must not have been a partner, employee or a member of the board of directors in any of the companies that provide significant services and products to the company within the last five years.

d) If the independent member is a shareholder due to his/her board of directors duty, the ratio of the shares he/she holds in the capital should not be more than 1% and these shares should not be privileged.

e) He/she must have the professional training, knowledge and experience to duly fulfil the duties to be undertaken by virtue of being an independent member of the Board of Directors.

f)       Provided that it complies with the legislation to which they are affiliated, the independent member must not be employed full-time in public institutions and organisations, except for university faculty members, as of the date of nomination and during his/her term of office if elected.

g)      It is deemed sufficient for at least half of the independent board members to fulfil the criterion of "being deemed to be resident in Turkey according to the Income Tax Law", which is among the criteria that independent board members must fulfil.

h) The independent member should have strong ethical standards, professional reputation and experience to contribute positively to the activities of the company, to maintain his/her impartiality in conflicts of interest between the shareholders of the company, and to decide freely by taking into account the rights of stakeholders.

i) The independent member should be able to allocate time for the company affairs to the extent that he/she can follow the functioning of the company activities and fully fulfil the requirements of the duties undertaken.

In addition, it is possible for the same person to be an independent board member in companies under the umbrella of the holding company, without any limit on the number of companies. However, pursuant to the principle numbered 4.3.6, an independent board member must have served as an independent member within the group for a maximum of 6 years within the last 10 years.

In order to prevent potential conflicts of interest, statutory auditors of parent companies are not allowed to become independent board members of their subsidiaries during their employment. However, if the statutory auditor resigns from his/her position, there is no obstacle for him/her to become an independent member in the holding companies.

A person nominated as an independent member by any privileged share group may become an independent member provided that he/she fulfils the independent criteria specified in the principles.