Corporate Governance in Iran
Corporate governance (CG) is the system of rules, practices and processes by which a company is directed and controlled.
Corporate governance essentially involves balancing the interests of the many stakeholders in a company –these include its shareholders, management, customers, suppliers, financiers, government and the community.
Since corporate governance also provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.
Four Pillars of Corporate Governance:
- Accountability; management stands accountable to the board members and board members to the shareholders.
- Fairness; protection of shareholder’s rights, particularly those of minor ones and effective compensations for likely violations
- Transparency; timely and accurate disclosures on all material matters, including financial situation, performance, ownership and corporate governance
- Independence: predefined procedures and structures in place so as to minimize or avoid completely conflicts of interests and presence of independent directors or advisors who free from influence of others.
When Tehran Stock Exchange (TSE) was established in early 1967, the process of establishing and controlling companies was slightly mentioned in commercial Law and especially in its amendment in April 1968, but the Corporate Governance issue with its modern conception was not noticed substantially at the time.
CG was addressed in the early 2000 for the first time. In that time, the managers of TSE, Islamic Parliament Research Centre, and a specialized committee under Economic and Finance Ministry, started to do some preliminary studies about Corporate Governance in Iran.
Next steps in this respect were taken in 2003 when the Organization for Economic Co-operation and Development (OECD) guideline on Corporate Governance on listed companies was translated by TSE. A year later TSE‘s Research and Development Centre published the first edition of Corporate Governance Code in Iran.
Eventually, TSE introduced a corporate governance code in 2007 that reformed corporate board members’ compensation polices, improved internal and external audits, ownership concentration and risk management.
However, the code limits the directors’ independence from major shareholders due to restrictions exerted by Commercial Law of Iran—S&P 500 companies have 12 board members of which 11 are independent–and unluckily provides no guidance on external control, shareholder rights protection, and the role of stakeholder rights.
A 2011 study by Corporate Social Responsibility Development Center (CSR-DC) found that most Iranian companies are not in an appropriate situation regarding accounting standards and that managers in most companies conceal their real performance, implying little transparency and trustworthiness regarding operational information published by them. Examination of 110 companies’ performance by this center found that companies with better corporate governance had virtually better performance.
According to the findings by CSR-DC, ownership structure in Iran is dominated and controlled by a few institutional investors, usually founders, governmental and semi-governmental companies such as banks, Pension Funds, Social Security companies, Bonyads (Persian for Foundations), and etc. These shareholders usually keep a close working relationship with senior managers and directors of a designated company in Iran.
As mentioned earlier, corporate governance, as a new concept, entered Iran’s economy less than a decade ago in late 2007, but it does not cover all aspects of CG.
Furthermore, the Securities Exchange Organization (SEO) made an effort in 2013 to calculate Corporate Governance Index in order to rate sectors in the exchange market. This study was conducted by TSE Issuers Affairs Management and the scores were specified relatively in percentages from 0-100 percent.
The benchmarks employed for the rating of the companies were based on the following factors:
- Commercial Law of Iran
- Securities Market Act
- TSE Admission Board’s Instructions
- International Experience on CG
- Draft Instructions On Corporate Governance by SEO
After designing the checklist and preparing the necessary questionnaire and asking the experts’ comments on the allocation of probable weights to different impacting variants in questions—considering comments given by prominent international figures as well. They were classified broadly into 5 different groups, namely shareholders’ rights, board members commitment to CG, auditing, financial data disclosures, and transparency.
What comes down in the table is the result in percentage form.
Source: Bourse Monthly, 2013
As it is evident from the table, we can easily infer from the data found by the study that the CG Index in the capital market of Iran is dramatically below the standard. This denotes that real efforts should be made to enhance the gauge’s level to climb up and reach to that of the international standards.
Key Obstacles of Corporate Governance in Iran
Key obstacles of Corporate Governance in Iran can be divided into four separate categories for further illustration:
- Non-conducive business environment in Iran
- Low awareness of Corporate Governance functions and benefits by various stakeholders
- Capital market structure and situation
- Lack of institutional laws to fully support responsible business, property right and stakeholder rights
Whereas CG and its changes have obtained a great deal of significance and ample studies have been carried out regarding CG practice in foreign countries, studies on CG in Iran are few. Since Iranian capital market authorities are making attempts to attract more and more investors, including both domestic and foreign, to the capital market, perhaps one of the best viable alternatives to achieve this goal is to strengthen and expand CG because CG leads to increased transparency of listed companies’ performance in equities market.
It also makes it possible for investors to distinguish between financially strong or weak performing firms, and consequently, enhances trust among market practitioners in and with the capital.
Hence, it is strongly recommended that capital market authorities set out to establish a Corporate Governance Committee and use technical assistance of international organizations such as World Bank, Asian Development Bank (ADB), OECD, and IFC.
According to the research findings by CSR-DC, Iran‘s capital market works with fairly low liquidity and Corporate Governance principles are often interpreted, illustrated, applied and implemented by the dominant shareholders.
Meanwhile, there is no clear division or difference of roles and responsibilities between shareholders and board of directors as board members directly represent shareholders.
Minor shareholders do not have an effective or prominent role in Corporate Governance system or decision-making in General Assemblies. What needs to be done in terms of Corporate Governance in Iran – but not limited to Iran, as the other MENA countries face similar challenges—are:
- Proactive involvement of shareholders in governance of the company
- Establishment of independent or non-executive directors
- Re-activation of Individual Shareholder Association as one of the key initiatives
- Engagement of independent non-executive directors in the audit committee of the board
- Development of Iran‘s resources of competence in Corporate Governance
- Consideration of developed establishment of a nominations committee of the board
- Development of board members and director evaluation
- Research on effectiveness and quality of discussions of board meetings
In final analysis, having a well-defined corporate governance and full implementation of its instructions are prerequisites without which it would be a moot point to speak of development of capital market of Iran since perfect participation of investors whether domestic or abroad cannot be realized when there is not enough confidence with the disclosed information or with the individuals who are running those economic entities.
DISCLAIMER: This report has been prepared and issued by Agah Brokerage Firm on the basis of publicly available information, internally developed data and other sources believed to be reliable. The information contained herein is not guaranteed, does not purport to be comprehensive and is strictly for information purposes only. Agah does not assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. Any expressions of opinions are subject to change without notice.
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