ABSTRACT
Subject matter of our article is the independent membership of board of directors which is within the scope of corporate governance principles regulated under the appendix of Communiqué on Corporate Governance (Series: II, No: 17.1) dated 03.01.2014 and by Capital Markets Board after the assignment under the article 1529 of Turkish Commercial Code numbered 6102, in order to determine and observe the corporate governance principles of public companies. Independent membership of board of directors is regulated in order for the corporations to carry on business at an international level and to strengthen the structure of board of members for sustaining a transparent, accountable, fair and amenable manner of administration; to protect the investor in a better way; to strengthen the sense of credibility to the capital market and the capital market instruments. In the corporate governance principles, it is stated that the majority of board of directors shall consist of non-executive members and the non-executive members qualified with independency and objectivity criteria shall be chosen as independent board members. In this article, qualifications, powers and obligations of independent board members are demonstrated within the scope of Turkish Commercial Code numbered 6102 and Capital Market Law numbered 6362.
1. INTRODUCTION
Corporate governance principles, which arose from the perception “Institutionalization and good governance of the companies as the substantial actors of the economy is not only an issue of the shareholders and managers, but also a particular concern of the whole community”,1 emerged as a system oriented to organize the allocation of powers and liabilities within its various bodies, for governing the corporations in a controlled manner.
Power of determination of corporate governance principles and supervision of the implementation of these principles in public joint stock companies is allotted to Capital Markets Board (“Board”) according to the subsequent article of Turkish Commercial Code No. 6102 (“TCC”)2 Correspondingly, under the mentioned3 article of Capital Markets Law No. 6362 (“CML”), it is set forth that the Board is entitled to determine the procedure and essentials regarding the corporate governance principles and independent membership of board of directors. Pursuant to this regulation, the Board has regulated provisions of corporate governance principles such as easing the utilization of share ownership rights and company policy of the stakeholders.
The subject matter of independent membership of board of directors, which is one of the most significant concepts of corporate governance, is not directly regulated within the scope of the TCC. In order to determine the procedure and essentials of corporate governance principles and related party transactions to be implemented by the corporations which are subject to capital market legislation, a Communiqué on Corporate Governance4 (“Communiqué”) has been published by the Board. In order for corporations to carry on business at an international level and to sustain transparent, accountable, fair and amenable manner of administration, the Communiqué has regulated the structure of the board of directors. Within the scope of these regulations, for the purpose of strengthening the sense of credibility to the capital market and the capital market instruments by protecting the investor in a better way, independent membership of board of directors has been drawn up.
Corporate Governance Principles of the Capital Markets Board (“Appendix”), found in the Communiqué’s annex, covers the corporate governance principles of the public companies admitted to the trading on the stock market and public companies admitted to the trading on the national market, second national market and market of institutional products.
However, not all provisions of the Appendix are mandatory. Mandatory provisions are adjudicated under article 5 of the Communiqué. On the other hand, other provisions are regulated for enlightening and guiding the corporate governance system. In this sense, certain regulations regarding the independent membership of board of directors, which is the subject matter of our article, are mandatory whilst some of them are only qualified as guidelines.
2. INDEPENDENT MEMBERS OF BOARD OF DIRECTORS IN TERMS OF CORPORATE GOVERNANCE PRINCIPLES
There is a distinction between the executive and nonexecutive board members of the companies which are subject to the capital market legislation. As mentioned under the article 4.3.2. of the Appendix, except being a member of the board of directors, non-executive board members do not have any administrative function; they are not in charge of an executive type of unit, and they do not get involved in company’s day-to-day workflow and ordinary activities. On the other hand, executive board members get involved in the ordinary activities of the company, day-to-day decision making process and operation systems; in fact, they act like as a worker of the company.
The principle of differentiation between the inquirer and the respondent person/authority on corporate matters lies beneath the ground of the corporate governance principles5. Despite the fact that it is not within the scope of the mandatory provisions, it is indicated under the related article of the Appendix that separating the powers of chairman of the board of directors and chief executive officer/general manager categorically and expressing this separation in the article of association in writing is substantial 6.
As it is emphasized under the following part of the provision, no one should be furnished with an unlimited decision-making authority in the company. In the event of a given decision for the chairman of the board and chief executive officer/general manager to be the same person, it is an imposed obligation to notify the Public Disclosure Platform (“PDP”) regarding the situation along with its reasons7.
In other words, it is compulsory to explain the reasons of assigning the same person as the chairman of both the executives carrying out operational activities as well as the day-to-day workflow in the company and the board of directors having the duty of supervision and observation of the executives; and also unification of the powers in the hands of one person, in detail. General manager and deputy general manager of financial services, who rank as senior managers of the company, can be given as an example of the executive board members. Considering the fact that senior managers of the company should report to the board of directors, when the chairman of the board of directors and the chief executive officer/general director who is the head of the directors of the company is the same person, this situation might obstruct the formation of balance of power distribution in the company and result in an inefficient supervision.
3. CONCEPT OF INDEPENDENT MEMBERSHIP OF BOARD OF DIRECTORS AND THE REQUIRED QUALIFICATIONS
For the companies subject to the capital market legislation, five board members should at least be determined in order to enable them to work in an efficient, productive and prompt way; and the majority of the board members should consist of non-executives members only.
Independent members, having the ability to maintain their independency whilst carrying on duties, should take place within non-executive board members. Number of the independent members within the board of directors should be not less than 1/3 of the total number of the board members and less than two under any circumstances.
Thereby, a distinction between the non-executive members has been made by stating that certain criteria are required for the independent members; implying all non-executive members may not be qualified as an independent member.
In order to be qualified as an independent member among the non-executive members of the board of directors, the criteria listed under the article 4.3.6 of the Appendix should be complied with. The mentioned criteria are as follows:
a) Not to have a relationship in terms of employment at an administrative level to take upon significant duty and responsibilities within the last five years, not to own more than 5% of the capital or voting rights or privileged shares either jointly or solely or not to have established a significant commercial relation between the corporation, companies on which the corporation hold control of management or significant effect and shareholders who hold control of management of the corporation or have significant effect in the corporation and legal entities on which these shareholders hold control of management and himself/herself, his/her spouse and his/her relatives by blood or marriage up to second degree,
b) Not to have been a shareholder (5% and more), an employee at an administrative level to take upon significant duty and responsibilities or member of board of directors within the last five years in companies that the corporation purchases or sells goods or service at a significant level within the framework of the contracts executed, especially on audit (including tax audit, statutory audit, internal audit), rating and consulting of the corporation, at the time period when the corporation purchases or sells services or goods.
c) To have professional education, knowledge and experience in order to duly fulfill the duties assigned for being an independent board member. d) Not to be a full time employee at public authorities and institutions after being elected as the member of board, except being an academic member at university provided that is in compliance with the relevant legislation.
e) To be residing in Turkey in accordance with the Income Tax Law (I.T.L) dated 31 December 1960 and numbered 193.
f ) To be capable to contribute positively to the operations of the corporation, to maintain his/her objectivity in conflicts of interests between the corporation and the shareholders, to have strong ethical standards, professional reputation and experience to freely take decisions by considering the rights of the stakeholders.
g) To be able to allocate time for the corporation’s business in order to follow up the activities of the corporation and duly fulfill the allocated duties.
h) Not to have conducted membership of board of directors more than a term of six years in the last ten years.
i) Same person shall not be the independent member of the board of directors in more than three of the corporations as such; in the corporation or in a company which the controlling shareholders of the corporation hold the control of management and in more than five corporations in total which are admitted to the trading on the stock market.
j) Not to be registered and announced as a board member representing a legal entity.
It must be pointed out that, at least half of the independent members are sufficient to provide the criteria regarding the settling of the independent member in Turkey. Independent members are required to remain impartial and make decisions without prejudice. Therefore, it is required for the independent members both to meet the criteria indicated above and also be independent financially. In the Appendix, there is a provision regarding the prohibition of the use of dividend, stock options or payment options relying on corporation’s performance as to remuneration of independent members of board of directors 8.
Independent member should not depend on the income gained from the board of directors. Otherwise, independent member’s approval of all kinds of matter may come into question and in this case, it will not be possible to achieve the goals indicated in the Communiqué.
4. POWERS OF THE INDEPENDENT MEMBERS OF BOARD OF DIRECTORS
In the board of directors, which is authorized to make decisions on any matter within the scope of the company’s administration and representation and apart from general assembly’s authority, independent members are qualified with important powers compared to other members of the board of directors 9.
4.1 Preventing the Execution of Board of Directors’ Resolution on Operations Effecting Company’s Financial Position
As stated under the related provision of the Appendix, on various transactions of the companies, approval of the majority of the independent board members shall be required in order to execute the board of directors’ resolution in relation to such transaction. In relation to this, first of the indicated cases is that in transactions i.e. asset and service purchase and sale and obligation transfer transactions, the rate of the transaction amount comparing to the total asset amount as per the latest financial statements disclosed to public or to the revenue amount as per the latest annual financial statements disclosed to public or to the value of the corporation to be calculated on the basis of the arithmetic average of the daily corrected weighted average prices of the six-month term prior to the board of directors’ resolution date, exceeds 10%. Second case indicated in the Appendix is the cessation of any activity of the companies 10. In addition to this, following the related article, it is stated that in case that the majority of the independent board members do not approve the transaction, this situation shall be disclosed at PDP and such transaction shall be submitted to the approval of the general assembly.
4.2 Preventing the Execution of Transactions
Under article 9 of the Communiqué, it is stated that independent board members shall be required to take part in the resolution of board of directors, regarding transactions in the following situation: if the rate of the transaction values more than 10% approved by the majority of the independent board members and is more than the combined value of the companies as calculated above. In case the majority of the independent board members do not approve such transaction, this situation shall be disclosed at PDP in a manner including a satisfactory explanation and the transaction shall be submitted for the approval to the general assembly.
4.3 Common and Continuous Transactions
In the event the situation indicated under Communiqué’s related article occurs, a comparison report shall be prepared and disclosed at PDP in addition to board of directors’ resolution 11. This situation is where it has been foreseen that the rate of the amount of common and continuous transactions between the corporations and subsidiaries thereof with their related parties within an account period, compared to i) for purchases, the cost of sales in the latest annual financial statements disclosed to public, ii) for sales, the revenues in the latest annual financial statements disclosed to public, exceeds 10%. It is indicated that in case the majority of the independent board members do not approve such transactions, the ground for opposition shall be disclosed at the PDP. It must be pointed out that, in case the independent members do not approve such transaction, it shall not prevent the execution of the transaction.
4.4 Granting Collateral, Pledge, Mortgage and Surety
Approval of the majority of the independent board members is required in the resolutions of board of directors as to granting collateral, pledge, mortgage and surety in favor of third parties for the purpose of conducting corporations’ ordinary commercial activities 12. In the event that the majority of the independent board members do not approve such transactions, obligation to disclose the ground for opposition at the PDP has been imposed.
4.5 Committee Membership
It is obligatory to form “Audit Committee”, “Early Detection of Risk Committee”, “Corporate Governance Committee”, “Nomination Committee” and “Remuneration Committee” within the scope of the board of directors. It is indicated under the related article of the Appendix that, committees shall be composed of at least two members, in case it compromises both two members and in case there are more than two members, the majority of them shall be comprised of non-executive members of the board of directors 13. In any case, the chairman of each committee shall be elected from among the independent members of the board of directors. It is indicated that all members of the audit committee must be comprised of the independent members of board of directors.
5. THE LIABILITY OF INDEPENDENT MEMBERS OF BOARD OF DIRECTORS
In TCC, there is no distinction in terms of liability of the board members with regards to their qualifications, areas of expertise or being an executive member 15. There is no specific provision in CML or Communiqué with regard to the liability of independent board members.
Accordingly, independent members are subject to the same legal and criminal liability as other board members. The provisions regulating the liability of the board members are also applicable for the independent board members. There are general provisions in TCC whilst there are special provisions in CML regulating the legal and criminal liability of the board members. Since the independent members do not have executive
powers, source of their liability shall not be the operational activities of the company. Nonetheless, only the non-fulfillment of management and observance duties, in an unlawful manner which are regulated under TCC
and related legislation. In the event that the independent board members cause damage to the company, particularly with regard to the transactions affecting the financial status of the company, related party transactions and third party beneficiary transactions; their liability may
come into question. Protection of investors of the public companies admitted to the trading on the stock market is the main purpose of this. Before the vote, the independent board members should use their right of examination and their right to inquire information regarding the relevant issues, because of their impartiality. Independent board members, who have voted without using the aforementioned rights and depending on deficient information/documents, can be held liable in the event the company suffers from loss due to implementation of the related transaction. Also, the independent member who is restrained from using his/her right of examination and right to demand information, has also an obligation to demand information and documents by applying to the related court. Additionally, in the event the independent board members oppose the related transaction, they should record their reasoning in the meeting minutes. Furthermore, if the independent member as the committee member causes misinforming of the board of directors regarding the area of expertise, he/she can be held liable in terms of the breach of duty of care.
a) Legal Liability
The board members are liable for the damages they have caused to the company, to the shareholders and to creditors of the company in case they have breached their obligations which arise from the regulations and articles of association, defectively 16. As a matter of fact, compensation is the sanction for breaching duties 17. Given the fact that the liability of the board members is liability based on negligence, the board members can be held liable provided that their negligence is proven 18. In order for the board members to be held liable, there must be an illegal act, damage and casual link along with the fault 19. The board member can discharge from liability by proving he/she exercised due care on transactions or acts causing damage. According to the duty of care and commitment, board members and third parties having administrative duties are obliged to fulfill their duties with due care, namely that of a prudent manager, and pay regard to the interests of the company in good faith 20. Therefore, duty of care expresses the deliberation of the board members, and it also constitutes a measure in designating as to whether the board members are negligent. An objective duty of care has been set forth for the managers under TCC, by setting the “prudent manager’s care” as a measure 21. Prudent manager represents the ideal standard of a person 22. The term objectivity shall be interpreted as being qualified to fulfill the duty, to evaluate the related information, to be competent in terms of ability and education to follow up and supervise the practice and development 23. The board member shall be capable of making decisions in accordance with the requirements of the work and corporate governance principles 24. Board members, who are capable of making decisions as a businessman, have the ability to act towards the interest of the company within the scope of the articles of association, and also to make decisions in accordance with the requirements of the business life by evaluating the results of their experiences logically. Under the subsequent regulation laid down in the TCC regarding the duty of commitment 25, it is indicated that the board members should avoid transactions which constitute a conflict of interest between themselves and the company 26. Also it is stated that the board membershave the e “obligation to value the interest of the company above others’ interest and to consider it with good faith”. The confidentiality obligation is also evaluated in respect to commitment obligation. Commitment obligation of the board members is concretized under two provisions; article 395/1 and 396 of TCC 27. According to the prohibition of making a transaction with the company28. the board members should receive permission from the general assembly to make transactions with the company, in order to carry out a transaction with the company on its behalf or on behalf of someone else. In case of violation of this provision, the company may allege that the related transactions are void. With regard to the prohibition of competition, the board members cannot make a business transaction, which falls the scope of the field of operation of the company, on its behalf or on behalf of someone else and which cannot become a partner of a company, having the same field of operation, with unlimited liability 29. It must be pointed out that, the above mentioned provision is not mandatory. This prohibition can be restricted or extended through regularization in articles of association or permission given by the resolution of general assembly, depending upon the conditions and the period 30. In addition to these, board members can be held liable due to a breach of duty, following the ratio of the fault, and consists of the following acts: in the event that a board member makes transactions in this manner by protecting its own interest or someone else’s interests and causes damage to the company; and the other board members that are informed of the situation but have not taken any precaution or have given approval to the transaction. According to a provision of TCC regarding the liability
due to the delegation of authority, can be held liable for the acts and decisions of the assigned ones 31, in case the board members, do not exercise due care in a reasonable manner whilst selecting the people to take over the mentioned duties and power. The related provision of TCC regulates that the board members cannot be held liable if they are in breach with the law or articles of association, which lies outside the control of the board members. The purpose of this provision is to exclude board members from liability based on abstract duty of due care, in the event of absence of casual relation or fault 32. At the same time, the related provision “determines the boundaries of the duty of care and the concrete content of the burden of proof to be performed by the board members (which is needed for confuting the proofs indicated by the plaintiff, showing that the member has fault)” 33. Through the provisions regarding liability, TCC has increased the sources of the liabilities as well as the people who can be held liable. In addition, the liability shall be imposed on people who have acted negligently in causing such damage, in proportion to their rate of fault. In other words, the liability shall be determined regarding the aggravation of fault. In the event of joint liability plaintiffs were given the right to sue the liable ones together for the whole damage, with regard to succession, if they want to be compensated for the same damage. As it has been laid down in the subsequent provision of the TCC: “each individual shall be held severally liable for the related damage, in accordance with their own fault and the specific conditions of the situation, to the extent that they can be personally held liable for the damages” 34. The judge shall decide the upper limit of liability by taking the fault of the related individuals and features of the concrete case into consideration. The board member who has paid compensation with regard to the whole damage or the amount of upper limit determined upon the rate of his/her fault, can appeal to the other liable people. The judge shall determine in which proportion the board member can appeal to the others by taking the features of the concrete case into consideration. It is regulated in the TCC that the corporation will be held liable for the tortious acts of the board members during performance of their duties, which are entitled to represent and manage the corporation 35. Nevertheless, the corporation that paid compensation to the injured parties, reserves the right to recourse to the board members that committed tortious acts. It must be noted that, the person claiming the existence of a tortious act, should prove the terms of such tortious act. In addition to general liability regulated under TCC, the rights of the investors are protected under CML by the specific liability principles that are applied to the board members of corporations subject to the capital market legislation. To illustrate such a protected right, we can enumerate the following events: Acting in contrast to prohibition of transfer of hidden income; providing false, deceptive, deficit information on registration statement; violating obligation of financial reporting; providing false, deceptive, deficit information on public disclosure documents can be given as examples to the mentioned regulations.
However it should be noted that, the board members shall not be held liable for the damages caused in case board of directors’ resolution is related to the fulfillment of duties. For instance, article 15 of CML regulates the obligation to disclose various issues to the public. Board members shall not be liable for the damages of the shareholders due to the fulfillment of this obligation in a corporation which the value of the shares has decreased.
b) Criminal Liability
The criminal liability of board members may arise from misdemeanors or crimes. In the event of a misdemeanor act, administrative authorities impose administrative fines or administrative measures whilst courts impose prison sentence or judicial fines for the criminal acts. Acts that falls within the concept of misdemeanors according to TCC consists for example of, abstaining from registering to the trade registry in an unjustified manner, to make false statements for the registration and recording, not to use and register a trade name, and lastly not mentioning essential elements in the trade name.. Regarding the criminal acts stated under TCC, comprises for example issues such as, unfair competitive acts, absence of the commercial books or having no records under the commercial books, storing the commercial books in contrast with TCC, lending out to the shareholders on behalf of the corporation in contrast to the conditions stipulated under the law and disclosure of the business secrets can be given as examples.
6. CONCLUSION
The economic future of the public corporations admitted to the trading on the stock market and the companies which are economy’s grand complementary, is not a concern of just the company owners, but also concern of all the employees, suppliers and even customers of the company. Therefore, creating the company’s long term success, peace and trust environment is significant. This explains why TCC had assigned the Board, the compliance with CML, Communiqué and the Appendix. Furthermore, in order to maintain transparency and objectivity, the obligation of assignment of the independent board members within the non-executive board members has been regulated. Qualifications, duty term, assignment and concept of independence of the independent members are arranged within the scope of the Appendix. Additionally, since there is no specific provision regarding the liability of independent board members under TCC or CML, the provisions regarding the liability of the board members are also applicable for the independent board members.
BIBLIOGRAPHY
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Kendigelen, Abuzer. Türk Ticaret Kanunu, Değişiklikler, Yenilikler ve İlk Tespitler. İstanbul: Oniki Levha, 2011.
Odman Boztosun, Ayşe. Hukuksal Açıdan Bağımsız Yönetim Kurulu Üyeliği. Ankara: Seçkin, 2013
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Şener, Oruç Hami. Teorik ve Uygulamalı Ortaklıklar Hukuku. Ankara: Seçkin, 2012.
Tekinalp, Ünal. Sermaye Ortaklıklarının Yeni Hukuku. İstanbul: Vedat Kitapçılık, 2015.
Turkish Commercial Code numbered 6102 and published in the Official Gazette numbered 27846, dated 14.02.2011.
Capital Markets Law numbered 6362 and published in the Official Gazette numbered 28513, dated 30.12.2012.
Communiqué on Corporate Governance (Series: II, No:17.1) published in the Official Gazette dated 03.01.2014 and numbered 28871.
FOOTNOTE
1 Ayşe Odman Boztosun, Hukuksal Açıdan Bağımsız Yönetim Kurulu Üyeliği, (Ankara: Seçkin, 2013), 29.
2 TCC, article 1529.
3 CML, article 17.
4 Communiqué on Corporate Governance (Series: II, No:17.1) published in the Official Gazette dated 03.01.2014 and numbered 28871.
5 Odman Boztosun, Hukuksal Açıdan Bağımsız Yönetim Kurulu Üyeliği, 46.
6 Appendix, article 4.2.5.
7 Appendix, article 4.2.6.
8 Appendix, article 4.6.3.
9 TCC, article 374.
10 Appendix, article 1.3.9.
11 Communiqué, article 10/2.
12 Communiqué, article 12/3.
13 Appendix, article 4.5.1.
14 Appendix, article 4.5.3.
15 Odman Boztosun, Hukuksal Açıdan Bağımsız Yönetim Kurulu Üyeliği, 159.
16 TCC, article 553.
17 Reha Poroy, Ünal Tekinalp ve Ersin Çamoğlu, Ortaklıklar Hukuku 1, (İstanbul: Vedat Kitapçılık 2014), 388.
18 Poroy, Tekinalp ve Çamoğlu, Ortaklıklar Hukuku 1, 388.
19 Oruç Hami Şener, Teorik ve Uygulamalı Ortaklıklar Hukuku, (Ankara: Seçkin, 2012), 404.
20 TCC, article 369.
21 Abuzer Kendigelen, Türk Ticaret Kanunu, Değişiklikler, Yenilikler ve İlk Tespitler, (İstanbul: Oniki Levha, 2011), 221.
22 Ünal Tekinalp, Sermaye Ortaklıklarının Yeni Hukuku, (İstanbul: Vedat Kitapçılık, 2015), 279.
23 TCC, article 369 justification.
24 Tekinalp, Sermaye Ortaklıklarının Yeni Hukuku, 280.
25 TCC art. 369
26 Kendigelen, Türk Ticaret Kanunu, Değişiklikler, Yenilikler ve İlk Tespitler, 222.
27 Tekinalp, Sermaye Ortaklıklarının Yeni Hukuku, 281.
28 TCC, article 395/1.
29 TCC, article 396.
30 Tekinalp, Sermaye Ortaklıklarının Yeni Hukuku, 282.
31 TCC, article 553/2.
32 TCC, article 553/3.
33 Poroy, Tekinalp ve Çamoğlu, Ortaklıklar Hukuku 1, 390.
34 TCC, article 557.
35 TCC, article 371/5.
