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Transcript of THE ROLE OF CORPORATE GOVERNANCE IN FOREIGN INVESTMENT FLOW ...
THE ROLE OF CORPORATE GOVERNANCE IN FOREIGN INVESTMENT FLOW TO TURKEY
Federico Ghizzoni
Executive Board Member and COO
Corporate Governance Conference – Koç University, November 7th 2003
2
AGENDA
Foreign Direct Investment in Turkey – Overview
Turkish Corporate Government System
Foreign Investment to Banking Sector in Turkey
Corporate Governance in Koç Financial Services
Conclusion
3
TURKEY: EMERGING GLOBAL MARKET PLACEG
DP
GDP PER CAPITA
4
Mexico 11.233
Korea 10.340
Chile 9.221
Poland 7.500
Thailand 6.078
Czech Republic 5.108
Malaysia 3.532
Venezuela 2.607
India 2.168
Peru 2.068
Hungary 1.944
Vietnam 1.609
Kazakhstan 1.587
Egypt 1.500
Croatia 1.382
Dominican Rep 1.353
Romania 961
Malta 811
Morocco 847
Bulgaria 770
Turkey 783
COUNTRY FDI 2000 ($Mln.)
COUNTRY FDI 2000 ($Mln.)
FOREIGN DIRECT INVESTMENT TO TURKEY IS RELATIVELY LOW COMPARED TO OTHER EMERGING MARKETS
According to the latest UNCTAD* Report,
Turkey is ranking 121121stst among 136136 countries in attracting FDI.
* United Nations Conference on Trade and Development
5
“Turkey is offering a wide spectrum of investment incentives, but has been unsuccessful in attracting investors, mainly due to political and economical instability ”
“With globalisation of financial markets, efficiency and transparency have become imperative ”
“One of the major problems faced by decision-makers is the lack of sufficient information”
” Economic factors and stabilization efforts, together with the IMF Programme are positive developments in Turkey ”
Lack of Good Governance
ContinuousEconomic & Political
Instability
TURKEY: PERCEPTION OF FOREIGN INVESTORS
6
AGENDA
Foreign Direct Investment in Turkey – Overview
Turkish Corporate Government System
Foreign Investment to Banking Sector in Turkey
Corporate Governance in Koç Financial Services
Conclusion
7
Trying to adapt Global practices
Eastern Europe
The Balkan Countries
Asian Countries
Did not start to work on Corporate
Governance yet
Middle East Countries (Arabic Countries)
Africa and Middle Asian Countries
Could not succeed in implementation
Argentina
Mexico
Chile
Latin America
WHERE IS TURKEY IN CORPORATE GOVERNANCE?
TURKEY
CORPORATE GOVERNANCE IN TURKEY
8
Disclosure and Transparency
Access to relevant information for Shareholders and Stakeholders
Major share ownership and voting rights
Roles and responsibilities of Board Members, key executives and their remuneration
Disclosure of risk factors
Material issues regarding employees & other stakeholders
Governance structures and policies
Audit function and disclosure in accordance with international standards in financial reporting.
MAJOR DISCREPANCIES BETWEEN OECD PRINCIPLES AND TURKISH CORPORATEGOVERNANCE SYSTEM
NOT AVAILABLE
YES
INCOMPLETE
INCOMPLETE
INCOMPLETE
NOT AVAILABLE
INCOMPLETE
DISCREPANCIES
9
No Independent Directors
No Corporate Governance Code Yet
No Sufficient Protection Of Shareholders Rights
No Independent Audit Committee
Most Companies Are Owned By Families
SUMMARY OF KEY PROBLEMS IN TURKEY
P
R
O
B
L
E
M
S
10
Family Firms form the basic building block for businesses but can represent
an obstacle in applying clear and transparent Corporate Governance rules.
A number of major problems can be identified :
Evolution from family relationships to business relationships - complicated by emotions.
Transfer of power from the founder to the board of directors.
Establishment of clear lines of communication and responsibility.
The family adopting the role of a shareholder and leaving the interface with management to the board of directors.
Planning and managing changes in shareholders due to family succession, marriages, divorces, deaths, opposite interests,etc.
As the family circle expands, the links between the members become weaker and the company’s profit distributions often are called into question.
Bringing in “outsiders.”
CORPORATE GOVERNANCE IN TURKEY: MOST COMPANIES ARE OWNED BY FAMILIES
11
To manage the company effectively for growth,
the Family should:
entrust its investment in the company to a
professional board of Independent Directors
who operate under appropriate
Corporate Governance guidelines.
RECOMMENDED SOLUTION
12
R
E
G
U
L
A
T
I
O
N
S
DEVELOPMENTS & REGULATIONS TO RESOLVE PROBLEMS IN TURKEY
Financial Sector Restructuring
Banking Law: Banking Regulation & Supervision Agency (BRSA)
Central Bank Law
Public Tender Law
Public Borrowing Law
Arbitration Law
Expropriation Law
Efforts of Private and International Institutions (TUSIAD, Quality Association, Istanbul Chamber of Commerce, OECD, World Bank, IMF etc...)
13
AGENDA
Foreign Direct Investment in Turkey – Overview
Turkish Corporate Government System
Foreign Investment to Banking Sector in Turkey
Corporate Governance in Koç Financial Services
Conclusion
14
8690
95 98
61 62
88
68
56
96
7
0
20
40
60
80
100
Market Share – Foreign Owned Banks (Assets), 2002
TU
RK
EY
LACK OF INVESTMENT IN BANKING SECTOR
..... Despite; A long history of liberalization policies and practice Advance technological facilities Qualified human capital in banking sector
..... Foreign bank presence has been limited due to; Persistent macroeconomic instability (high and volatile inflation) Low volume of foreign direct investment Delays in taking necessary steps for financial sector reforms
Bu
lgar
ia
Cro
atia
Cze
ch R
ep.
Est
on
ia
Hu
ng
ary
Lat
via
Lit
hu
ania
Po
lan
d
Ro
man
ia
Slo
vaki
a
% Foreign ownership has been
basis for restructuring and transformation of the competitive environment. Still some market restructuring expected as privatization ends given further consolidation.
In Turkey, HSBC and UCI entered the market in 2002, being among the first large FDIs in the local banking sector.
15
Banks;
Liquidity problems
State Banks with overnight liabilities of $14 Billion
Large open positions of the Private Banks
Significant share of holdings of Government debt
Low asset quality
Inadequate risk assessment and management
systems
Lack of good Corporate Governance
Operating Environments;
Major macroeconomic instability
High public sector deficit
Systemic distortions created by State and SDIF
Banks
NUMBER OF OUTSTANDING PROBLEMS CAUSE LACK OF INVESTMENT IN BANKING SECTOR
Outstanding problems make it hard for Foreign Investors to invest in a Bank in Turkey and be involved in privatization and acquisitions due to
the lack of transparency.
Foreign Investors need to clearly understand the relationship between
Shareholder and Management
16
AGENDA
Foreign Direct Investment in Turkey – Overview
Turkish Corporate Government System
Foreign Investment to Banking Sector in Turkey
Corporate Governance in Koç Financial Services
Conclusion
17
UCI ACQUIRED A 50% STAKE IN AN INTEGRATED AND WELL CAPITALIZED FINANCIAL SERVICE
KFSKFS
KoKoçbankçbank KoKoç Yatç Yatıırrıım m (Brokerage)(Brokerage)
KoKoç ç Asset Asset Mgmt.Mgmt.
KoKoç ç LeaseLease
KoKoç ç FactoringFactoring
KoKoç NV ç NV (Dutch (Dutch
Subsidiary)Subsidiary)
KoKoç ç AzerbaijanAzerbaijan
99.97%
99.07% 99.92% 99% 100%99.94% 80%
The restructuring has lead to the creation of a group involved in corporate and retailbanking, as well as in brokerage, asset management, leasing and factoring
Total UCI Investment USD 259.5 Million
UCI %50 KOÇ GROUP %50
WHY UCI INVESTED IN KFS... We found the right partner to accept international standards (ex:Group Exposure: Both parties
accepted to be treated as regular customers) Our partner was ready to give up control and discuss in detail Corporate Governance issues. SHA signed by both Shareholders and Corporate Governance approved by BoD.
18
Transparency
Accountability
Responsibility
Fairness
Relevant financial and operational information as well as internal processes of management. Effective and timely communication.
Roles and responsibilities are clearly defined. Related parties are fully accountable with their area of responsibility.
Related parties responsible for generating value in a sustainable way for shareholders, employees, customers and community.In line with laws and regulations.
Equal treatment to all Shareholders and other parties . 50-50 representation in all Governing Bodies.
KFS CORPORATE GOVERNANCE PRINCIPLES ARE DETERMINED IN LINE WITH INTERNATIONAL STANDARTS: COMPLIANCE WITH 4 KEY PRINCIPALS OF CORPORATE GOVERNANCE
Rules has been codified in the Shareholders Agreement and Corporate Governance Document
19
Shareholders do not interfere directly in the company.
Shareholders provide capital to the company and elect Directors to represent their interests.
Directors Govern the Company
Management Manages the Company
BoD and Management are clearly separated.
KFS CORPORATE GOVERNANCE: KEY HIGHLIGHTS
20
Board of Directors
Management
Provide Capital and elect Directors
Is accountable to the Board
Is accountable to the Shareholders for performance results (Value Creation)
Shareholders
Selects the CEO andoversees Management
The CEO takes his direction solely from the Board.
KFS CORPORATE GOVERNANCE : ROLES AND RESPONSIBILITIES OF HOLDING AND SUBSIDIARIES, CEO AND OTHER EXECUTIVES
21
Independent Audit Committee:
KFS independent audit committee is set as an essential part of Corporate Reporting process.
Reports directly to the Board and oversees on behalf of the Board the integrity of the financial reporting controls and procedures implemented by Management to protect the interest of Shareholders.
Roles and Responsibilities of CEO and Executives: Business functions report to the CEO. Risk and monitoring functions report to COO .
Seperation Between Business and Risk management
Internal transparency assured by monitoring functions: Financial Monitoring Cycle Commercial Monitoring Cycle Steering Committee
Adoption of Common Values Ethical Code Internal Communication
KFS INTERNAL GOVERNANCE: In addition to compliance to 4 key principles of Corporate Governance, KFS also have clear principals defined in other aspects of Corporate Governce
22
AGENDA
Foreign Direct Investment in Turkey – Overview
Turkish Corporate Government System
Foreign Investment to Banking Sector in Turkey
Corporate Governance in Koç Financial Services
Conclusion
23
CONCULISION :TURKISH CORPORATE PRACTICES CAN CHANGE WITH THE RIGHT APPROACH
Governance Practices can be applied successfully in Turkey if the following are done …
New set of laws and regulations to be introduced
New Board structure to ensure the protection of all Stakeholder rights
Appointment of Independent Directors
Clear seperation between Directors and Management
Very strict transparency and reporting rules
For Banks;
Regulations on Group Exposure
Separation of Risk Management and Business functions
Independent Audit function
Compliance with IAS and Basel II