Principles and Codes of Practice Within the Scope of the Guideline on Principles for Responsible Management in Portfolio Management

ABSTRACT

Within the scope of the decision of the Capital Markets Board’s (“Board”) Decision Body dated 16.02.2024 and numbered 11/255[1] (“Board Decision”), the Principles for Responsible Management (“Principles”) for mutual funds established by portfolio management company (“PMC”) have been regulated. The Principles, which consist of five main principles, encourage collective investment schemes and PMCs to determine policies to ensure the long-term sustainability of investee companies, taking into account environmental, social and governance factors. Within the scope of the decision of the Board Decision Body dated 21.11.2024 and numbered 60/1696[2], the reporting standard to be taken as a basis for reporting the practices regarding principles for responsible management by portfolio management companies has been determined and the “Guideline on Principles for Responsible Management” (“Guideline”) has been prepared in order to include all relevant regulations, including the reporting standard, in a separate guideline. In this study, the Principles included within the scope of the Guidelines, implementation recommendations and codes of practice related to the Principles are analyzed.

Keywords: Principles for Responsible Management, Guideline on Principles for Responsible Management, Principles for Responsible Management Policy, Portfolio Management Company, Environmental-Social and Corporate Management

I. INTRODUCTION

After the 2008 economic crisis, in many countries around the world, detailed regulations were introduced under the name of “stewardship codes”, which can be defined as oversight principles for the companies in which institutional shareholders invest, in order for them to play a more active role in company management. In our country, regulations have been made in this context with the Board Decision published by the Board. In this regard, the Board has also published the Principles prepared based on the provisions of Articles 1, 54 and 128/2 of the Capital Markets Law No. 6362 (“Law”) and the Guideline containing the codes of practice of these Principles. The Guideline provides details on the Principles, recommendations on their implementation and codes of practice, aiming to achieve sustainable benefits.

II. PRINCIPLES FOR RESPONSIBLE MANAGEMENT AND IMPLEMENTATION RECOMMENDATIONS

In the portfolio management industry, responsible management is defined as the effective management of institutional investors' relationships with publicly traded joint stock companies in order to create long-term value for their clients[3]. On the other hand, the Principles refer to the set of principles determined on the basis of the “Comply or Explain” principle for the responsible investment, management and supervision of the assets of the mutual funds established by the PMCs for the purposes of long-term value creation for all relevant shareholders and sustainable benefits for the economy, environment and society[4].

With the Board Decision, regulations have been introduced in order to adopt policies to ensure the sustainability of companies in our country and the Principles have been announced. The Principles are divided into five topics and regulate the following issues. In addition, the Guideline published by the Board exemplify the approaches and methods that can be used in the implementation of the Principles for each principle.[5]

1. Monitoring Activities for Investee Companies

In order to accurately assess the performance of the investee companies and their long-term investment value, it is recommended that companies invested by PMCs should be regularly monitored. A system for monitoring activities can be established by taking into account factors such as the size of the investment and the nature of portfolio management.

2. Interaction Activities with Investee Companies

Within the scope of this principle, the determination of the strategy of the PMCs regarding the execution of interaction activities for the investee companies is addressed. In determining the relevant strategy, factors such as the investment strategy of the funds under management, the nature and size of the investment are taken into consideration. It is foreseen that it will be beneficial to increase communication activities with the investee company through methods such as communicating evaluations and suggestions directly to the officials of the investee company and using the general assembly meeting rights.

3. Cooperation Activities with All Relevant Shareholders

It is recommended that PMCs should be open to cooperating with other investors to increase their influence on the investee company and with all relevant shareholders to protect investor rights and interests.

4. Exercise of Voting Rights of Portfolio Assets Under Management

It is recommended that PMCs exercise their voting rights with respect to partnership shares and debt instruments in the portfolios under management and that due care and diligence is exercised in the exercise of voting rights. It is considered that the Principles for Responsible Management Policy (“Policy”) to be prepared by the PMC may also include measures to be implemented to prevent or manage conflicts of interest that may arise in the exercise of voting rights, appointment of proxies in the exercise of voting rights, the conditions under which partnership shares/debt instruments in the managed portfolios may be borrowed or lent, the situations in which the lent securities will be called for voting, and the principles on how lending may affect the voting activity.

5. Incorporation of Environmental, Social, Governance Factors into Policy

In order to promote the long-term performance and sustainable value creation of the investee companies, PMCs are expected to include in the Policy its strategy on key environmental, social and governance (“ESG”) factors, including climate change. In this context, it is recommended that PMCs consider the long-term performance and sustainable value creation of the investee companies, regularly monitor the business model and strategy of the investee companies and the impact of ESG factors on the long-term performance of the investee companies, analyze, monitor and evaluate ESG-related risks and opportunities, and consider ways to integrate these risks/opportunities into their investment processes.

On the other hand, as the climate crisis has emerged as a serious threat and the perspective of organizations and consumer demands have started to change, ESG has gained significant popularity in recent years. Profitability alone is not sufficient in terms of consumers' expectations from companies, and there has been a demand for environmental and social issues to be given importance as well, and this issue has been in great demand by investors. Due to the changing environmental and social conditions around the world, the intensification of regulations and interventions in this area has forced organizations to include ESG in their business.

ESG, which plays an important role in the effort to increase the focus on sustainable and responsible investments together with environmental, social and governance criteria, is of great importance for investors who care about recycling resources, minimizing waste and protecting nature. As a result, investors invest in companies that commit to these practices, contributing both to the profitability of companies that adopt ESG and to the environment.

III. LEGAL ASSESSMENT AND CODES OF PRACTICE OF THE PRINCIPLES

Principles for responsible management, for which regulatory efforts were made to strengthen corporate management after the 2007-2008 global financial crisis, first emerged in the United Kingdom in 2010[6]. The Principles have been developed by capital market regulators, industry representatives and/or international organizations to ensure that assets managed by asset managers are managed to protect client interests. The Principles include rights such as participation in the management of the investee company, exercise of voting rights and close monitoring of its activities[7].

As explained above, the Principles aim to enable investors to exercise their rights arising from shareholding effectively, and to increase their oversight and voice over the companies in which they invest. In addition to the classical legal rights arising from shareholding, such as the right to vote, monitoring the company's objectives, transactions, investments and financial situation is also encouraged. For example, the Guideline provides investors with more comprehensive powers than conventional legal rights, with suggestions such as exercising the right to file an annulment action against general assembly resolutions, adding an item to the general assembly agenda, and preparing an annual report on the risks in the investee sector.

On the other hand, the regulation on the Principles is based on the “Comply or Explain” principle for the responsible investment, management and oversight of the assets of securities investment funds for the purposes of long-term value creation for all relevant shareholders and sustainable benefits for the economy, environment and society. In addition, it has stated that it is not mandatory for PMCs to create a Policy regarding the Principles organized within the framework of the "Comply or Explain" principle.

Codes of practice are regulated in detail under the fourth heading of the Guideline. According to this:

(i) In the event that the board of directors of a PMC decides to set a policy for all of the Principles in the management of the mutual funds established by the PMC, the decision and the Policy must be disclosed to the public on the Public Disclosure Platform (“PDP”) page of the PMC and all investment funds established by the PMC. In this context, the established Policy or the board of directors' decision not to determine a Policy must be disclosed to the public no later than 31.12.2024. Within the framework of the “Comply or Explain” principle, if the board of directors of the PMC decides not to set a Policy, the reasons for the decision should also be disclosed to the public.

(ii) If the manager of the investment fund is a different PMC, the principles regarding the reporting to be made by the manager company to the founder company regarding compliance with the responsible management principles policy should be included in the portfolio management agreement.

(iii) The codes of practice set out in the Policy must be disclosed to the public on the PDP page of the PMC and the funds it is the founder of, with an annual report prepared in accordance with the reporting standard in the Annex of the Guideline and approved by the board of directors of the PMC within 60 days following each accounting period. In addition, the information and explanations included in the report should be examined by the inspection unit of the PMC and the statement of the inspection unit regarding their consistency, whether they honestly reflect the truth, whether they contain errors and/or omissions should be included in the annual report.

(iv) How the voting rights arising from the assets in the managed fund portfolios are exercised should be disclosed to the public once a year collectively on the PDP page and the official website of the PMC.

(v) The first reporting on the principles determined to be implemented within the scope of the Policy established by the PMCs must be disclosed to the public by 02.03.2026 at the latest, including the practices in 2025, and the reporting for the following periods must be made within the 60-day period specified in subparagraph (iii) above.

(vi) If the PMCs that decided not to set a policy decide to set a policy in the following periods, the Policy should be disclosed to the public by the end of the relevant accounting period at the latest and the reporting for the following periods should be made within the 60-day period specified in subparagraph (iii) above.

 IV. CONCLUSION

The Principles emerged especially in the aftermath of the global economic crisis in 2008, bringing to the agenda the impact of institutional investors on the corporate governance practices of the companies in which they invest, and the tendency to strengthen corporate governance has been effective. The Principles encourage investors to exercise rights beyond their classical legal rights arising from share ownership and aim to increase their oversight and voice over the companies in which they invest. The Principles, which focus on five areas, describe the activities that can be carried out on the investee company and aim to create value for all shareholders in the long term and provide sustainable benefits for the economy, environment and society.

It is foreseen that if PMCs adopt the implementation of the Principles and investors actively exercise their rights in this context, maximum sustainable benefits for the economy, environment and society can be achieved.

REFERENCES

1.         16.02.2024 dated and 11/255 numbered decision of the Capital Markets Board’s Decision Body

2.         21.11.2024 dated and 60/1696 numbered decision of the Capital Markets Board’s Decision Body

3.         Deniz KAHRAMAN, Institutional Investor Magazine, Volume 60, 2023

4.         Capital Markets Board, Guideline on Principles for Responsible Management