Ümit Hergüner, Managing Partner, Hergüner Bilgen Özeke, on the new Turkish Commercial Code (TCC) and the liability of board members and management in Turkish corporate governance

In corporate management, as in other aspects of life, the simplest way to promote responsible behaviour is to ensure accountability. The new TCC, in its overhaul of the commercial landscape, will initiate serious changes towards facilitating good corporate governance. It will introduce a legal regime that will require clarity in the assignment of duties among corporate management teams and align liability as exactly as possible with responsibility. This will be accomplished through two major but related steps. First, the new TCC will explicitly allow a company’s board of directors to delegate its duties, both to smaller groups within the board and to the management team. Second, the new TCC will move corporate law from a regime of strict joint and several liability to a regime of differentiated and several liability for the board of directors.

On the delegation front, the new TCC will allow corporate boards to delegate management authority to a subgroup of the board of directors, an individual director, or to the management team, but only when the company’s articles of association explicitly authorise it. Moreover, the law will require delegation to take place pursuant to a set of bylaws that the company enacts. These bylaws must state in detail the processes to be followed in exercising management discretion as well as the lines of reporting to be followed, and exactly with whom the delegated responsibilities and duties will be placed. Such an explicit allocation of duties and responsibilities will increase individual accountability. The company will not have to publish or register these bylaws, but it will have to disclose them to any shareholders or creditors who can demonstrate a protectable interest in the company. After July 1, 2013 this disclosure will also have to be made online.

The new TCC will also rework the liability scheme that governs corporate decision-making. It will bring about a two-part shift: initially, the board of directors will no longer be held jointly and severally liable for the results of board decisions, but rather liability will be assigned severally among board members. Next, with regard to the outcomes of delegated duties, board members will be shielded from liability for the decisions of their delegates unless they are shown to have failed to exercise due care in selecting the parties to whom they have delegated managerial authority.

These steps will assign responsibility within corporate boards more accurately than the current system, and will get the most out of existing corporate directors. The new liability scheme will also make it easier for companies to recruit independent professionals as board members. Under the new TCC, independent directors will not be subject to individual liability solely by reason of holding the title of director. As long as they have not taken on any responsibilities under the company’s bylaws, which would be stated clearly for all interested parties to see, and as long as they have exercised due care in selecting the people to whom they have delegated managerial duties, independent directors will not face liability for outcomes of corporate decisions that end up hurting the company’s interests. This will encourage independent businesspeople to take part in corporate boards more often, and share their expertise with industry participants from a position of greater familiarity with corporate affairs.

The idea of individual liability is a must for responsible governance. The overhaul of the TCC will constitute a massive step towards achieving this goal in the Turkish corporate world. The changes outlined above will require private enterprises to undertake a huge amount of expense to bring their practices in line with the requirements of the new law, but this price is well worth paying to achieve the increases in efficiency they will usher in. If anything, the parliament should double its efforts to bring about further changes to encourage transparency and anti-corruption in corporate governance. Only when Turkey realises good governance in its public and private sectors will it realise its true potential. I wholeheartedly applaud the bold initial step that has been ushered in by the new TCC, and hope that more changes in this direction will soon be in the works.