CORPORATE GOVERNANCE PRINCIPLES AND INDEPENDENT BOARD MEMBERSHIP
Under Turkish Law, independent members of the board of directors (‘IGC’) stand out as an important element of the corporate governance approach. These members aim to provide a check and balance mechanism in company management in line with the principles of impartiality and objectivity. Membership of the Board of Directors is regulated under the Turkish Commercial Code No. 6102 (‘TCC’) and then detailed in the Communiqué on Corporate Governance (‘Communiqué’), Communiqué on Determination and Implementation of Corporate Governance Principles (‘CGP Communiqué’) and Capital Markets Law (‘CMB’). Pursuant to Article 1529 of the TCC, it is an obligation for publicly traded companies to have independent members. The CMB clearly emphasises that independent members should act impartially and not assume executive duties while fulfilling their duties.
The main purpose of the members of the BoD is to establish an effective audit mechanism for the protection of minority rights and prevention of conflicts of interest by considering the long-term interests of the company. A BYK member is a person who is not connected in any way with the voting shareholders or other units of the company other than the duties of the board of directors. Since the relationship that may be established in this process may jeopardise the independence or objectivity of the independent director, the relationship between the independent director and the company management is only an economic relationship. Nowadays, the scope of the relationship of the independent management has been expanded as the company and its subsidiaries (group companies).
Companies that are obliged to have independent board members
It is obligatory for public joint stock companies to have a BYK member. Although it is not mandatory for non-public companies to have a BYK member, there is no obstacle to the presence of BYK members in these companies. Article 1 of the Communiqué specifies the companies that are not within the scope of the Communiqué. Article 1 of the CGP Communiqué reads as follows: ‘The purpose of this Communiqué is to regulate the Corporate Governance Principles to be adopted by the listed companies.’
Determination of Independent Board Members
The first and most important characteristic that should be present in the BYK members is that these members should not be affiliated with the companies in any way. This is because these members serve not for their personal interests but to protect the rights and interests of minority shareholders. When the CGIF Communiqué published by the Capital Markets Board (‘Board’) is analysed, it is seen that the Board has determined the qualifications required for the members of the BoD in detail. These criteria are set out in Article 4.3.6 of the CGIF Communiqué:
- No employment relationship in a managerial position to undertake important duties and responsibilities, no joint or individual ownership of more than 5% of the capital or voting rights or privileged shares, or no significant commercial relationship has been established between the company, partnerships in which the company has management control or significant influence, shareholders who control the management of the company or have significant influence in the company and legal entities controlled by these shareholders, and the company itself, its spouse and blood relatives and relatives by marriage up to second degree within the last five years.
- Not being a shareholder (5% or more), an employee in a managerial position with significant duties and responsibilities or a member of the board of directors in companies from which the company has purchased or sold services or products to a significant extent within the last five years, primarily in the audit (including tax audit, statutory audit, internal audit), rating and consultancy of the company, within the framework of the agreements made, during the periods when services or products were purchased or sold.
- Having the professional education, knowledge and experience to fulfil the duties to be undertaken due to being a BYK member.
- Not working full-time in public institutions and organisations after being elected as a member, except for university faculty membership, provided that it is in accordance with the legislation to which they are affiliated.
- To be deemed to be resident in Turkey.
- To have strong ethical standards, professional reputation and experience to make positive contributions to the Company’s activities, to maintain his/her impartiality in conflicts of interest between the Company and shareholders, and to decide freely by taking into account the rights of stakeholders.
- To be able to allocate time for company affairs to the extent that he/she can follow the functioning of the company’s activities and fully fulfil the requirements of the duties he/she undertakes.
- Has not served as a member of the board of directors of the company for more than six years within the last ten years.
- The same person is not serving as an independent member of the board of directors in more than three of the companies controlled by the company or the shareholders controlling the management of the company, and in more than five of the companies listed on the stock exchange in total.
- Not being registered and announced on behalf of the legal entity elected as a member of the board of directors.
The above-mentioned criteria are generally divided into two in the doctrine and are considered as objective criteria and subjective criteria.
Independent member candidates are determined by the boards of directors of the companies and the Board has no intervention in this process. The Board audits the independent members only in terms of independence and compliance with the determined criteria[1]. It can be said that this audit is carried out on the basis of objective criteria.
As it is known, the term of office of the board members is 3 years and this term is also applicable for the members of the BoD. Pursuant to principle 4.3.5. of the CG Code Communiqué, it is possible for an independent member to serve for more than one term.
Election of Independent Board Members
A report is prepared and submitted to the company’s board of directors to ensure that the BYK member meets certain qualifications and is independent. The list of candidates is presented first to the Board and then to the general assembly. The Board assesses the independence of the member, especially according to objective criteria. If the Board gives a negative opinion, this person cannot be presented to the general assembly (Corporate Governance Principles 4.3.7.). If approved by the Board, the independent member is presented to the general assembly and the general assembly takes the final decision (This system is applied for Group 1 listed companies, Board approval is not required for Group 2 and 3 companies)[2] [ 3].
Independent Board Membership: Duties and Limitations
The members of the BoD are a mechanism established to realise the principles of transparency, accountability, fairness and responsibility in company management. These members are members of the Board of Directors who are not connected to the management or shareholders of the company through economic, family or other close relations, and who contribute to the strategic decision-making processes of the company by adhering to the principles of impartiality and independence. In line with these criteria, the duties of independent members are as follows
- Audit and Oversight: Independent members are responsible for ensuring transparency and impartiality of the board decisions. In this context, they are responsible for taking measures to prevent conflicts of interest, especially on a transaction basis[4].
- Public Disclosure and Protection of Investor Rights: Independent members have important responsibilities for public disclosure and protection of investors’ rights in public joint stock companies. In this context, independent members are responsible for protecting the rights of investors, not the interests of company owners and major shareholders.
The above-mentioned duties are the general principles that all independent members must comply with while fulfilling their duties. In addition, they also fulfil the ordinary duties of board members. Board of Directors membership is quite different from ordinary board membership. These differences are not limited to those mentioned above. In addition to the above-mentioned duties, certain limitations have been introduced to ensure independence.
Bonus or incentive payments based on the financial performance of the company cannot be made to the members of the Board of Directors. This regulation aims to prevent the decisions of independent members from being affected by conflicts of interest. Independent members are not interested in the short-term favourable performance of the company, but in the long-term sustainability of the company’s activities. For this reason, independent members are paid only the remuneration arising from their membership in the board of directors and no extra remuneration, premium, etc. is paid due to the performance of the company.
Adaptations of Independent Board Membership for Non-Publicly Traded Companies
As it is known, corporate law is not specific only to publicly traded companies due to its nature. All legal entities, especially joint stock or limited liability companies, which are not publicly traded and which are subject to the rules and principles within the scope of the TCC, duly established and continue their commercial activities actively, may appoint independent board members to their boards, which are the representation and binding body. In this process, the regulator Board and the CMB are naturally out of contact, but it can be said that the philosophy and logic of the existence of independent board members continue to exist.
Although the selection or acceptance criteria of the members in these organisations are much freer, attention should be paid to the powers of the member, whether he/she will have some ‘procedural’ signature or voting rights even if he/she is not under the umbrella of the board, and to what extent he/she will influence the decision-making mechanism; preventive measures to be taken in order to prevent possible conflicts of interest and authority that may arise from the lack of regulation and regulator umbrella should be implemented, especially in family companies. These preventive measures may include precise job descriptions, clear authorisation schemes, and appropriate mapping of processes and task flows.
Conclusion
As one of the cornerstones of corporate governance, the members of the BoD play a critical role in the realisation of the principles of transparency, accountability and impartiality. The BRI Communiqué aims to create a structure in compliance with the principle of impartiality by regulating the independence criteria of the members of the BoD in detail. The Communiqué provides an effective check and balance mechanism in company management by determining the independence criteria, selection processes and the scope of duties of the members of the BoD. The function of the BOD members in terms of protecting investor rights and preventing conflicts of interest is discussed in detail in this study.
The importance of the BRI Communiqué stems from the fact that it creates an environment of trust in capital markets by raising the corporate governance standards of companies. The fact that the Communiqué clearly defines the independence criteria and introduces regulations for the selection process of the members of the BoD contributes to the long-term growth of companies.
BoD members are a critical element for ensuring independence and impartiality in company management. The BRI Communiqué provides an important framework to ensure this independence. Strengthening the internal audit mechanism and reinforcing the corporate governance approach by the members of the BoD is of great value for the sustainability of companies and capital markets.
Finally, it should not be forgotten that adaptive independent board membership is possible in non-publicly traded companies and corporate sustainability can be increased by the participation of independent members in a controllable, monitorable and measurable corporate organisational structure.
[1] Bilgili, A. (2024). Independent board membership within the framework of corporate governance principles (Publication No: 869875) [Master’s Degree, Çukurova University]. Council of Higher Education.
[2] Emin Avcı Yalova Journal of Social Sciences, Volume 12, Issue 2, 112-124
[3] Pursuant to the CML Communiqué published by the Board in 2012, listed companies are categorised into three groups as Star Market (Group 1), Main Market (Group 2) and Sub-Market ( Group 3 ) based on their market capitalisation and the market capitalisation of the shares in actual circulation. In line with these criteria, the Board determines the markets in which companies are included every year, and the last announcement was published in 2024.
[4] Hatice Kübra Kandemir, ‘Independent Board Membership as a Corporate Governance Tool: Is Full Independence Possible?’ YBHD 2020/2, pp. 435-472.
