Corporate - Ethics & Governance

"The governance of the corporation is now as important in the world economy as the government of countries."
James D. Wolfensohn,
"A Battle for Corporate Honesty," The Economist: The World in 1999.

Although February 2001 economic crisis has been the most dramatic crisis in Turkey's economic history, it has been instrumental in accelerating the structural reforms and adjustments that have been long overdue. These reforms under the adjustment program were made not only to survive the crisis, but more importantly to establish a healthier and a stronger economic structure. These reforms recommended by the IMF and implemented by the governments, have raised the standards of conducting business both for the public and the private sectors. The corporations representing the production and service sectors have come to realize that they need to be transparent, accountable, ethical and consistent in their financial disclosure standards, labour standards, product/service standards and environmental standards, in order to compete in a global market where international capital flows move freely. Corporations have to protect and enhance the welfare of their stakeholders by adapting international business standards, tackle corruption, foster innovation, increase efficiency and assume more social responsibility in their respective societies.

Governance of the corporate is a concept that accommodates and communicates these principles in a systematic manner. Corporate good governance is a process, consistent with the principles and the practices of a free market and a democratic society. It assigns final authority and full responsibility to a board of directors whose decision-making responsibility is collegial and participatory where independent and outside views are valued. The board maximizes shareholder value through fairness (an ethical value), accountability and transparency. Good governance model: In its most comprehensive sense, ‘corporate governance' includes every force that has an impact on the decision-making of the firm.

In "Corporate governance: A Framework for Implementation" document of the World Bank, which is prepared to identify points for implementation of good governance in extensively differing regimes, and political, economic and social environments; the major elements of corporate good governance are defined as;

• Competitive markets
• Transparency
• Financial discipline
• Well-regulated and liquid securities markets

As a result of the ongoing reform program, the missing elements for corporate good governance are also put into utilization. The reforms, related to the banking sector, enforces the financial discipline by strengthening the links among government, banks, and corporations; restricting directed and connected lending; and restructuring banks to bring financial, managerial and technical capabilities to the real sector. As a result of the reforms, more competitive markets are in the process of being established. Despite the shrinkage in the GNP by 25% in 2001, the sharp decline in profit margins in the private sector, the expectation for transparency has increased over the following years. Given limited capital accumulation in Turkey, high level of unemployment and increasing young population, the importance of foreign direct investment flows have become a major thrust for economic stability and prosperity.

The challenge for us is to take the next steps toward good corporate governance, before in case another crisis erupts. The major initial steps already been taken, will not be fully effective without voluntary initiatives. Companies will form their own incentives and disciplines to adopt and consistently practice sound principles of good governance and ethics by adhering to best practices and rules set by global markets. The Corporate best practice example shows how good corporate governance practices adopted by the board might vary from company to company, as the issues facing the board of directors will range depending on the operations of the business.

Composition of the Board

The Board is responsible for guiding and monitoring the company on the behalf of the shareholders by whom they are elected and to whom they a re responsible. Several key issues may be considered to ensure the board is well equipped to discharge its responsibilities:

• The ratio of executive to non-executive directors
• Desired qualifications and experience of directors
• Format and timing of board meetings, agenda items including availability of discussion material to enable informed discussion by directors;
• The need to establish appropriate committees
• Procedures for dealing with ethics, conflicts of interest, dissent and resignation

Board and management power sharing

The board usually delegates the responsibility for the operation and administration of the business to management. In doing so, it is important that the Board:

• Appoints a suitably qualified Chief Executive Officer and Executive Team
• Considers the remuneration appropriate for the appointments

Shareholder and regulatory expectations, management of business risk

As the board acts on the behalf of the shareholders, directors should seek to identify expectations as well as other regulatory, ethical and social expectations. The board is responsible for identifying and significant business risks and ensuring processes are in place to adequately manage those risks. Considerations in this area might be:

• A detailed analysis of stakeholder needs and strategies to meet these needs;
• Awareness by directors of their legal and ethical duties and responsibilities
• Processes required to identify business risks as well a s potential opportunities, which may involve the establishment of committees,
• Processes required to determine shareholder expectations and other obligations.

Aligning expectations and risks with objectives of management

After determining expectations and risks, the board needs to ensure its finding are aligned with management's activities. This may involve:

• The development of a strategic plan, approved by the board;
• Production of operations plans and budgets, which align with the strategic plan;
• Establishment and maintenance of internal control systems;
• Procedures available for directors to obtain independent professional advice at the company's expense.

The Board may wish to delegate responsibility for overseeing the establishment and maintenance of a framework of internal control and ethical standards to a committee, such as an audit committee.

Monitoring of performance

An integral component of corporate governance is accountability. Issues for the Board to consider when assessing management include:

• How to monitor actual performance against plans and budgets;
• Board analysis of information provided by external and internal auditors; and
• Communication to the management team if corrective action is required, including a system to monitor effectiveness of corrective action taken. The Board should also have in place a process to review its performance in view of:
• Performance against goals;
• Directors' and management's compensation arrangements; and
• Assessing the need for changes to the board or management team, and the processes required to facilitate changes.

Communication to stakeholders

The main corporate governance of a business should be communicated to stakeholders, including a governance statement in the annual accounts and other communication to capital providers. A process to gather and gauge stakeholder feedback is an integral part of the system. Effective corporate governance encourages the use of board expertise in ways that maximize each director's contribution. An environment in which management sets the corporate strategic direction, that allows the board to monitor performance over time without impeding management of day-to-day operations, will limit the possibility of failure and satisfy stakeholders. Corporate good governance approaches are designed to assist companies to develop and implement policies, processes and systems required to address good governance and ethics requirements. Their aim to help directors identify the key issues and principal features of an effective governance process to suit the company, specifically in:

• Identification and documentation of current good governance and ethics practices;
• Comparisons to acknowledge best practices and to identify weaknesses;
• Development of actions required to establish best practice;
• Documentation of the processes and development of a plan for monitoring implementation and compliance; and
• Preparation of a good governance and ethics statement for reporting purposes.

Ensuring the Board's involvement in the strategic planning process, delineating clear Board and management power sharing arrangements, establishing processes for timely reporting, reviewing information and taking effective, responsive action towards it, are all elements of good governance. Through their consideration of the key issues, the board and management will gain a better understanding of their respective roles, leading to appropriate governance features, under which management is free to manage, while the Board is able to monitor, inquire and counsel.

As the Board President of The Ethical Values Foundation of Turkey (TEDMER), my recommendation to the corporate world would be to raise awareness, underline the benefits and explain the urgency to implement and to emphasize the importance of creating a competitive advantage through these disciplines in Turkey. Those companies, who will be pioneers in ethics and governance will be able to differentiate themselves in the local and international markets and be able to fund, operate and compete internationally with the benefits of these disciplines. A better future can start today. The decision is yours.

Ali Midillili
Board President
TEDMER