Despite Turkey rapidly gaining ‘tiger economy’ status among emerging market economies – supported by declining inflation and interest rates, and strong economic growth – the country’s perceived low standards of corporate governance relative to EU countries remain a deterrent to foreign investment.

However, a survey conducted by Standard & Poor’s (S&P) in June predicted a rise in transparency and disclosure practices among publicly listed Turkish companies this year. This trend has been gathering pace in the past few years, with the influence of the IMF and the country’s EU candidacy providing external anchors.


Good governance looks set to become an essential business prerequisite if Turkish companies are to remain competitive. Assessing sources of information that are most readily available to international investors, S&P’s Transparency and Disclosure survey found that Turkey had made considerable strides in improving the quality of its investment environment during recent years.

“Changes to the legal and regulatory environment together with increased investor interest are likely to enhance the value and quality of disclosed data,” says Amra Balic, governance analyst at S&P. “Corporate transparency is viewed as an important factor affecting a company’s attractiveness to investors.”

Corporate governance has become a pressing issue in emerging markets, where demand for growth capital is a driving force. Turkey is no exception. Spurred by the IMF-backed economic reform programme, an important milestone was the Capital Markets Board’s (CMB) issuance of the Corporate Governance Guide in July 2003, modelled on International Financial Reporting Standards (IFRS). Although compliance with its provisions is not yet mandatory for publicly held companies, the CMB requires listed firms to ‘comply or explain’ with respect to its guidelines.

An additional incentive for compliance will soon be provided by the Istanbul Stock Exchange (ISE), which in February announced plans to issue the ISE Corporate Governance Index, a league table charting Turkey’s best governance practitioners.

Strategic importance

Rising standards of corporate governance are removing the few remaining barriers to investment in what is otherwise a highly attractive prospect. Geographically, Turkey is perfectly positioned to tap the markets of Europe, north Africa, the Middle East and central Asia. It boasts a population of 63 million with increasing consumer purchasing power, low-cost skilled labour and state-of-the-art telecommunications networks.

The privatisation of major state-owned enterprises, as part of the IMF scheme, looks set to generate greater dynamism in the market.

“Turkey has much to offer but enhanced corporate governance is critical if the powerful Turkish private sector is to become internationally competitive,” says Coskun Ulusoy, president and CEO of OYAK, Turkey’s largest private pension fund and a major industrial holdings company.

Spirit of openness

As a privately held entity that is under no obligation to comply (or explain its non-compliance) with stock exchange listing disclosure regulations, OYAK is an example of a corporation voluntarily raising transparency standards. It attributes its recent financial success to these considerations, which have been the focus of five years’ work.

“Basic principles of transparency and accountability provide legitimacy to a corporation and broaden access to capital,” explains Mr Ulusoy. “For instance, our investments were leveraged by a $115m loan in January last year, which marked OYAK’s debut on the international capital markets – in this case the syndicated loan market.

“A core purpose of the loan was to broaden our exposure to the market – possibly thanks to our principles of transparency and strong corporate governance.”

Foreign investors are becoming ever more committed to ensuring high governance standards – both their own and those of the companies and countries in which they invest. Although it is no secret that transparent companies with enhanced levels of disclosure have a better profile in the capital markets, this remains news for many companies in Turkey.

Something to prove

“What we wanted to prove at OYAK is that greater transparency and prudent management can enhance profitability and add value to a company in the long run,” says Mr Ulusoy. “And our performance has proved the point.

“In May, OYAK posted record results and became Turkey’s most profitable conglomerate. This, if anything, should prove a strong incentive for other Turkish corporates to renew their focus on voluntary corporate governance.”

As enterprises gradually improve governance standards, the government is heavily incentivising foreign investment. The legal and regulatory procedures relating to foreign investment into Turkey are streamlined, transparent and among the most liberal of the Organisation for Economic Co-operation and Development countries.

A law enacted in 2003 removed the need for investment permission from the government. Minimum capital requirements for foreign investments have been abolished. Turkey harmonised its export incentives regime with the EU’s in 1995 and significant strides have since been made in improving import procedure efficiency.

In 2004, specific incentives were introduced to encourage investment in 36 Turkish provinces where per capita income is less than $1500. These include tax and labour insurance premium advantages, free land allocation and energy price support.

Such reforms have led the UK government’s Export Forum to list Turkey among the 12 international markets that offer significant investment opportunities for British firms. Investors can be certain of continuity of policy because improving the investment environment is a specific objective of the reforms being conducted under the auspices of the IMF.

EU incentive

Turkey’s EU candidacy has significantly strengthened the country’s will to reform. Membership will involve compliance with the incoming Solvency II directive, which aims to standardise risk management among insurers. This will be a critical step in giving foreign investors confidence in their hedging strategies for country risk.

“The prospect of EU integration will be an important catalyst for change, pushing Turkey’s corporate governance practices towards rapid improvement,” says Mr Ulusoy. “This is a necessary evolution in anticipation of Turkey’s accession to the EU in 2015.”

Although regulatory and governmental pressure will play its part in encouraging Turkish companies to harmonise their systems with global governance imperatives, the market itself will be the strongest force for positive change. Companies will discover, as OYAK has, that with good governance comes freer access to growth capital at lower cost, while foreign investors can enjoy higher equity valuations.

In common with many emerging markets, family-owned companies have tended to prevail in the Turkish market and they are not reputed for their willingness to reform along more transparent lines. OYAK has, however, enjoyed a head start in this respect because it is a mutual association of member stakeholders who have participated in the fund’s operations since 1961. It was this characteristic that allowed US-educated Mr Ulusoy to apply, with relative ease, the governance reforms that have contributed to OYAK’s success.

“In the years since its founding in 1961, OYAK’s public image had tended to be that of an introverted institution, closed to the outside world,” he explains. “This perception derived from the fund being financially and administratively autonomous, subject to the provisions of its own law. The fund published no annual reports, commissioned no outside agency to audit its books, and did not adhere to international accounting standards.”

New principles

However, on joining the group in 2000, Mr Ulusoy made it his priority to undertake extensive and progressive management restructuring. OYAK’s governance principles are in line with the recommendations of a Code of Best Practice issued by the Turkish Businessmen and Industrialists Association in 2002.

At OYAK, the roles of CEO and chairman of the board are separate. Even among Turkey’s listed companies, this practice is still scarce. A survey last year revealed that only 12.8% of listed companies separate the two roles.

The publication of OYAK’s first annual report intended for general release followed in 2001. All OYAK’s financial statements have since been prepared and audited according to IFRS. One of the most important insights of S&P’s survey was the importance of consistent, consolidated reporting.

“While transparency is not possible without disclosure, simple disclosure of information does not always clarify,” says Mr Ulusoy. “It is possible to baffle the observer with too much information, scattered throughout various statutory documents peculiar to a specific company or emerging market country. The first step in getting Turkey on the investment map will involve Turkish companies adhering closely to internationally recognised standards.”

Common ownership

Mr Ulusoy is mindful that grandiose declarations of best practice on an international level amount to little if OYAK’s 222,000 geographically dispersed members cannot easily access those that manage their fund.

Since 2000, OYAK has installed alternative delivery channels to serve its members better. It has also organised events to acquaint members, staff and the public with OYAK’s operations better. This year alone the management aims to address more than 8000 OYAK members at a series of conferences.

Higher levels of disclosure have helped OYAK to attract major European investors with which it has forged strong partnerships. “Transparent companies offer investors seeking new markets a formidable opportunity, and our French and German partners have recognised this,” he says.

OYAK’s current joint ventures include automotive, insurance and industrial partnerships with Renault, Axa and the German power company STEAG. Now in its 35th year of operation, OYAK Renault’s production is mainly for sale to world markets, leveraging Turkey’s position as a gateway to Europe and the Middle East. The country’s location has become a vital component of Renault’s international growth strategy, which aims to achieve half of all sales outside Europe by 2010.

OYAK’s joint venture with one of the world’s top 10 listed insurers, Axa, is another case in point. Ten years since its inception, Axa-OYAK now has the highest market share in the Turkish insurance sector, gained by tapping demand for financial protection products among Turkey’s growing middle class.

“Misconceptions about levels of governance across the emerging markets remain an obstacle to establishing potentially successful insurance start-ups,” says Cemal Ererdi, general manager at Axa-OYAK. “But increasingly, official bodies are being set up to supervise local companies and steer them towards international best practice. Axa identified a market opportunity specific to Turkey and – with OYAK vigorously pursuing high standards of best practice – the result has been an indigenous brand, a household name and a transparent corporate entity.”

The pay-off

A moral crusade may look good on paper but the critical driver for the emerging markets remains the fact that good governance lowers the cost of capital for the companies in which funds are invested. When tapping the global capital markets, companies will continue to pay a much higher price if they fail to align their priorities with those of international investors.

Numerous high-profile cases of corporate governance failures have focused the minds of governments, regulators, companies and investors on the threat posed to the integrity of financial markets by weak governance. But by harmonising processes with broader governance imperatives, corporations will increasingly enjoy a competitive advantage. This should ensure that the momentum for improved accountability remains strong.