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

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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

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TURKEY: EMERGING GLOBAL MARKET PLACEG

DP

GDP PER CAPITA

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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

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“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

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AGENDA





Conclusion

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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

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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

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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

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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

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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

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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...)

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AGENDA





Conclusion

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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

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ania

Po

lan

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Ro

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Slo

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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.

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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

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AGENDA





Conclusion

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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.

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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

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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

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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

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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

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AGENDA





Conclusion

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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

Documents

THE ROLE OF CORPORATE GOVERNANCE IN FOREIGN INVESTMENT FLOW