At a glance: responsibilities of company boards in Turkey

Responsibilities of the board (supervisory)

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

Under Turkish law, the board structure for both listed and unlisted companies is one-tier.

What are the board’s primary legal responsibilities?

The principal duties of the board members are as follows:

• to act prudently and diligently when conducting business and performing their duties and the business of the company;
• to monitor and supervise the management and the business of the company to ensure that it is in compliance with principles of good faith, and for the interests of the company and its shareholders;
• to keep confidential the information obtained during and after the term of duty;
• to refrain from attending board meetings regarding their own interests or the interests of certain close relatives; and
• not to engage in transactions with the company unless the general assembly (GA) meeting authorises the board for a maximum period of five years regarding the repurchase of shares.

In addition to the above, the Turkish Commercial Code (TCC) sets forth the non-transferable duties of board members. The most important non-delegable and indispensable duties and powers of the board of directors are as follows (TCC, article 375):

• determining top-level management of the company and giving instructions in this regard;
• establishing the necessary system for financial planning to the extent required, and for accounting and finance audit;
• appointing and dismissing managers and persons performing the same function and authorised signatories;
• high-level supervision of whether the persons in charge of management act in accordance with the law, the articles of association (AOA), internal regulations and written instructions of the board;
• keeping the share book, resolution book of the board and the GA meeting and discussion register, preparation of the annual report and corporate governance disclosure and submission thereof to the GA, organisation of GA meetings and enforcement of GA resolutions; and
• notifying the court regarding the company’s state of excess of liabilities over assets.

None of these duties and authorities of the board of directors can be delegated to a duly authorised representative, the company management, a committee or the managers (TCC, article 367). The GA meeting cannot seize or deprive these duties and authorities of the board of directors, or transfer them to the GA meeting or the committees established under the provisions of the AOA. Similarly, the board of directors cannot waive these duties and authorities.

Whom does the board represent and to whom do directors owe legal duties?

The board is responsible for the management and representation of the company (TCC, article 365). Pursuant to article 553 of the TCC, if the board is liable owing to their own faults arising from the law and the AOA, then the board will owe legal duties to the company, to the shareholders and to the company’s creditors.

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed? Is there a business judgement rule?

According to the TCC, the company, its shareholders and its creditors are entitled to file indemnification actions against the board members to indemnify the damages that occurred owing to their faults. Shareholders may initiate actions against the directors and request the indemnification of the damages that they directly incurred or request indemnification on behalf of the company for the damages that the company has incurred (TCC, article 553).

A voluntary insurance system for the damage incurred by the company through the fault of board members while performing their duties has been introduced by the TCC.

If the damage is insured at a price exceeding 25 per cent of the company capital and the company is secured, in the case of public companies, this matter shall be announced in the bulletin of the Capital Markets Board (CMB), and if the shares are listed on a stock exchange this shall also be announced in the stock exchange bulletin, and this matter shall be taken into account in the assessment of compliance with the principles of corporate governance (TCC, article 361).

With regard to the civil and criminal liabilities of board members, unlike the previous TCC, the new TCC specifically regulates (in a separate article) civil and criminal liabilities (TCC, article 553 and 562). If the board members do not comply with the obligations set forth under the law or AOA, they will be subject to civil and criminal liability. 

Do the duties of directors include a care or prudence element?

According to the TCC, members of the board of directors and third parties in charge of management are under an obligation to act with care and in compliance with the rules of good faith (TCC, article 369).

To what extent do the duties of individual members of the board differ?

According to the TCC, it is possible for a legal person to become a member of the board of directors (TCC, article 359/2). 

The TCC requires that a chair and at least one vice-chair be appointed among the board members (TCC, article 366). The board members do not have any special duty that should be performed individually except calling for board meetings. In addition, under Turkish law, the board members do not have specific duties individually assigned to them. However, by inserting a relevant provision to the AOA or regulating an internal regulation, the board can always assign different duties to its members. Therefore, each board member can be held to be authorised and liable for different business transactions and may have different specific duties in that regard. If there is this distribution of duties, the duties and authorities of individual board members shall be disclosed in the activity report of the company (Corporate Governance Principles (CGP), article 4.2.2). If the duties are not assigned, the management is performed by all board members (TCC, article 367).

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

According to the TCC, the board of directors can transfer all the management rights of the company to one or more executive members or to a third party as the manager. However, at least one of the board members must be entitled to represent the company (TCC, article 370). In such an instance, the transferee party would have the same responsibilities that the board of directors had pre-transfer.

The CGP stipulates that if there is a delegation of authority among board members, it should be specifically disclosed under the activity report of the company (CGP, article 4.2.2).

An addition has been made to article 371 of the TCC, relating to the representative authority of companies, by the Omnibus Law No. 6552 adopted on 10 September 2014. Pursuant to this addition, the board of directors may appoint non-representative members of the board of directors or persons bound to the company by a labour contract as commercial representatives with limited authority or as other commercial assistants. This act of the board of directors and the powers and duties of the appointed persons shall be explicitly reflected in the internal directive issued in accordance with article 367 of the TCC and this internal directive shall be registered and announced with the trade registry. This amendment has enabled companies to impose different kinds of limitations or categorisations for their representative authorities.

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

Non-executive and independent membership structures are regulated mainly under the CGP and in certain Capital Markets Communiqués. Pursuant to the CGP, the majority of the board members should consist of non-executive members (CGP, article 4.3.2) and some of these members should be independent board members (CGP, article 4.3.3). Because all members of the audit committee are independent board members (CGP, article 4.5.3), the audit committee comprises only non-executive members.

Additionally, the TCC also regulates the non-executive board members. Accordingly, members of the board may solely have non-executive powers provided that it is explicitly stated in the internal guidelines.

According to the CGP, the board must include the following:

• the majority of the board must consist of non-executive members;
• the total number of independent members shall not be less than one-third of the total number of members;
• in any case, the number of independent members cannot be fewer than two; and
• a person who has been acting as a board member for more than six years within the past 10 years cannot be appointed as an independent board member (CGP, article 4.3).

Pursuant to the CGP, an individual not having any administrative duties within the company is defined as a non-executive member.

As per the definition of the independent member, the CGP sets forth specific requirements to be met by independent members (CGP, article 4.3.6).

Under Turkish law, non-executive or independent directors do not have different duties from the executive directors. As a general principle, all members of the board are jointly and severally liable to the company, the shareholders and the creditors of the company for damage occurring owing to their fault and owing to the non-fulfilment of the duties stated in the law or the AOA (TCC, article 553).

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

The TCC allows the board of directors to consist of just one member (real person or legal entity) assigned by the AOA or elected by the GA, and the requirement that a member of the board of directors must be a shareholder in the joint-stock companies has been abolished. If a legal entity is elected as a member of the board of directors, a real person should be determined by the legal entity on its behalf and such a decision needs to be registered and announced with the trade registry (TCC, article 359).

Both in the TCC and the Capital Markets Law (CML), there is no ceiling stipulated for the size of the board of directors. For listed companies, it is stated that the number of members of the board of directors ­– provided that the number is not less than five in any case – shall be determined to ensure that the board members conduct productive and constructive activities, make rapid and rational decisions, and efficiently organise the formation and activities of the committees (CGP, article 4.3.1). Regarding female members on the board, the company shall determine a target percentage no less than 25 per cent and a target time, and shall establish a strategy to reach these targets (CGP, article 4.3.9).

In limited liability companies, the management and representation of the company may be left to a shareholder or non-shareholder that has been elected as the manager. However, at least one of the shareholders must possess the right to management and representation of the company in the widest manner. If there is more than one manager of the company, one of these managers must be elected as the chair of the management board by the GA.

Article 363 of the TCC stipulates that in the case of a vacancy on the board, the board of directors shall temporarily choose someone who satisfies the legal conditions and present it for the approval of the GA. The member chosen this way carries out their duties until the GA meeting and, if he or she is approved, he or she continues working until the end of the mandate of their predecessor.

In listed companies, if there is a vacancy on the board and it is not possible to satisfy the board meeting quorum, or it is not possible for the shareholders to convene a meeting to appoint a new board member within 30 days of the vacancy, the CMB is entitled to appoint an independent board member (CML, article 128/1(k)).

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chair and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

Under Turkish law, it is possible for the same board member to hold both the titles of chair and CEO. According to the CGP, the duties and authorities of the CEO and the chair of the board must be specifically distinguished from each other and stipulated under the AOA. In addition, if it is decided that the CEO and the chair of the board are one person instead of two separate persons, then this should be published on the Public Disclosure Platform with its reasons (CGP, articles 4.2.5 and 4.2.6).

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

According to article 25 of CMB Communiqué, serial X, No. 22 regarding the standards of independent audits in capital markets (as updated with the Communiqué serial X, No. 28, published on the Official Gazette on 28 June 2013), it is required that, within the framework of the CGP, the board appoints an audit committee constituting a minimum of two members of the board. In enterprises where it is not obligatory to establish an audit committee, the duties of the audit committee are fulfilled by the board of directors.

According to the CGP, an audit committee, a corporate governance committee, an early detection of risk committee, a nomination committee and a price committee must be formed. Regarding banks, only a corporate governance committee shall be formed. If the nomination committee and price committee cannot be formed, then the corporate governance committee will supersede the duties of these committees (CGP, article 4.5.1). Pursuant to the TCC, listed companies are under the obligation to constitute a committee that will be in charge of detecting and managing the risks in advance. If the auditor of the company deems it necessary, such a committee must also be formed by companies other than the listed ones. The committee submits an evaluation report to the board every two months and informs the board of the problems and solutions. The report shall also be sent to the auditor (TCC, article 378).

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

The frequency of board meetings is regulated under article 390 of the TCC. Accordingly, the law does not require a minimum number of board meetings per year. Therefore, in practice, the board convenes a meeting when it is deemed necessary, unless the AOA requires a minimum number of board meetings. The CGP states that the board of directors convenes the meeting on a regular basis to fulfil their duties effectively (CGP, article 4.4.1).

Is disclosure of board practices required by law, regulation or listing requirement?

The structure, members of the board, their term of office and remuneration of the members are determined in GA meetings, and the minutes of GA meetings are registered with the relevant trade registry and published in the Turkish Trade Registry Gazette.

In addition to the TCC, capital stock companies subject to auditing will be required to set up and maintain a company website within three months following the incorporation of the company, and must allocate part of the website to the announcements legally required to be made (TCC, article 1524).

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

In listed companies, the board of directors shall issue its annual report in a detailed way that should include, among other things:

• information on the duties of the members of the board of directors and executives conducted in the company and declarations on independence of the members of board of directors;
• information on the members of the committees formed within the structure of the board of directors, the meeting frequency of these committees and the evaluation of the board of directors regarding the working principles, including the conducted activities and the efficiency of the committees; and
• the number of meetings of the board of directors in a year and the attendance of the members of the board of directors to these meetings.

The annual report shall be published so that the public can access this complete and accurate information with respect to the activities of the corporation. Additionally, the nomination committee that is mandatory in listed companies regularly evaluates the structure and productivity of the board of directors and submits its advice regarding possible amendments in this respect to the board of directors.

In non-listed companies, a similar annual activity report and affiliation report (necessary for group companies) are also annually prepared by the board, including information on management, activities of the company and related important developments, financial status and risk assessment, and submitted to the GA meeting.

The shareholders discuss the activities of the board and decide on the release of the board members’ liabilities in the annual general meeting. This is one of the non-transferable duties of the general assembly (TCC, article 408).

Law stated date

Give the date on which the information above is accurate.

11 May 2020