Corporate Governance

Country Report

CSR Development Center

Delivering the Survey

▫ 24 companies with various characteristics were selected and one person from each was interviewed to answer the survey.

▫ Interviewees were CEO (11), board member (10), Chairman (3), executive director (4) and CFO (2).

▫ Our report is based on the survey results, the information we collected during interviews and our knowledge of market and CG situation supported by experts and regulators’ points of view.

Tehran Stock Exchange: Market Profile

▫ Number of companies rose from 217 in 1997 to 345 in main market and 182 in OTC market

▫ Value of the market rose from $3.2bn in 1999 to $40bn in 2005 to $65bn in 2010 to more than $100bn in 2011

▫ 2 waves of privatization: 1993-2003, 2006-2011

In 1st wave many non-strategic companies were privatized and companies in strategic industries like electricity, communications, petrochemical, oil, energy,, mining, etc. were not privatized because of a conflict with the constitution

2nd wave started with a new interpretation on the constitution to separate ownership and control: the government will keep 20% golden shares and privatize other shares: 40% through TSE and 40% through Justice Share program

▫ Legal support of this growth

Law of Foreign Investment in Exchange and OTC Markets

Law of Development of New Financial Instruments and Institutes

Tehran Stock Exchange: Structure

▫ Ownership structure is dominated and controlled by a few institutional investors, usually founders, governmental and semi-governmental companies like banks, Pension Funds, Social Security companies, Bonyads, and etc. These shareholders usually keep a close working relationship with senior managers and directors of the company.

Percentage of ownership required to invite the General Assembly

Only holders of shares above 20 percent can

Board’s system One-tier Board

Independent board members It’s not common in Iran, we have non-executive members

Board Committee It’s not common in Iran

Disclosure of information about board and managers

In listed firms, records and qualifications of board and CEO should be reported.

Compensation of the board services Board’s fees and remuneration will be exposed cumulative.

Ownership Disclosure Yes - but understanding the ownership structure and identifying ultimate owner is very difficult

Tehran Stock Exchange: Corporate

Governance▫ In 2003, Securities and Exchange Organization(SEO) was

founded to divide the regulatory of the market from execution.

▫ SEO first turned to CG in 2004 , As an attempt to develop a draft CG code, Malaysia was chosen as benchmark and the code of corporate governance was drafted in 2009.

CG code does not emphasize centralized ownership structure of the market and uses the model like UK and USA.

In 2010 the code was officially adopted by TSE but not mandatory yet.

▫ TSE drafted different facets of CG in bylaws, approved and ratified them for companies. Examples are bylaws on Investor Relations, Internal Control and Disclosure. Another bylaw, namely “Temporary De-listing”, was also ratified to fine or sanction companies upon non-compliance.

Tehran Stock Exchange: Setbacks and Limitations

▫ The capital market in Iran is quite young and rather inefficient.

▫ State ownership remains extensive, the Government directly holds 35 percent of the TSE, while securing another 40 percent through related companies.

▫ The size of the capital market is still small, relative to money market or GDP of the Iran

▫ Free float shares are as low as 15% of the market.

▫ Liquidity is low and some shares are not traded for notable periods relatively.

▫ Although Justice Shares have been ceded, they have not been paid and they are not being traded. Since 40% of 56 giant companies were in the program, these companies need special governance attention.

CG Situation in Iran

Major CG Promotional Activities

National Conference on “Capital Market, Iran’s driving force of economic development”,2004

Accounting doctoral course in “ Accounting views and thoughts development and teaching

audit”2004

Seminar on “Financial Reporting and Transitions ahead”, 2004

Seminar on “System of Corporate Governance and Internal Audit’, 2005

Publication of the Second edition of Corporate Governance Code , 2007

Workshop on CG and insurance Industry by ICC 2008

Workshops on “Corporate Governance”, 2007 by CSRIran

Forming Corporate Governance Task force 2010 by CSRIran

Seminar on Internal Audit 2010

Seminar on “Corporate Governance and Fraud Detection , 2010

2 CG Study Tours by CSRIran in Turkey and Pakistan

Round table meeting on Corporate Governance 2011 in TSE by CSRIran

The code of corporate governance has not been mandatory yet but promotional

and capacity building activities to enable the enforcement of this code has been

undergoing.

Results of the Survey

• Awareness and Commitment to Good Corporate Governance Practices

• The Board Responsibilities

• Control Environment and Processes

• Disclosure and Transparency

• Shareholders’ Rights and the Key Duties of Owners

• Stakeholder Rights

Awareness and Commitment to Good Corporate

Governance Practices

▫ How much are you familiar with Corporate Governance and its principles?

▫ Perceived importance of the implementation of Corporate Governance

Awareness and Commitment to Good

Corporate Governance Practices

Adapted to the principles of Corporate Governance? (OECD / Iranian Code)

Mechanisms on board selection criteria 13%

Nomination procedure 22%

Board committees (Internal Audit Committee, risk management,nomination and selection committee and ...)

9%

Developing compensation and remuneration mechanisms forboard of directors and executives

31%

Board Evaluation Instructions 13%

Separation of chairman from CEO 68%

Independent and non-executive board members 27%

Developing procedures governing deals with related parties andpreventing conflicts of interest

40%

Instructions for protecting shareholder and stakeholder rights 4%

Awareness and Commitment to Good Corporate

Governance PracticesBarriers to improve Corporate Governance practices

Lack of effective rules and regulations 68%

Due to information disclosure and transparency as a part of Corporate Governance, we

prefer to keep our financial information away from competitors and rival stakeholders

18%

We don’t find any use in it regarding the Iranian legal and business structure / We simply

don’t see any value engaging with it.

9%

Lack of professional experts and consultants 54%

Lack of knowledge and expertise available to the company 77%

I do not see obstacle 4%

Awareness and Commitment to Good Corporate

Governance Practices

Benefits of adopting Corporate Governance practices:

Increasing information disclosure 50%

Improved brand and credibility 68%

Improved risk management system 72%

Compliance with legal and judicial requirements 59%

Defending Shareholders Rights 50%

Improved strategic decision-making process 77%

Better access to capital and foreign partners and move towards internationalization 40%

The Board Responsibilities

• The board of directors met on average ten to

twelve times a year in 45% of the surveyed sample.

• The Role of the Board

The Board Responsibilities

• Internal bylaws or statements for board functioning was not identified in studied companies. Only in one quasi government companies, a board duties booklet was handed upon selection.

• Only in one of the companies we observed to manage succession planning, a group of managers were elected and the shadow board was formed.

• No self-assessment system exists for board members or CEO.

The Board Responsibilities

• No formal evaluation of the board performance had been conducted in the previous two years by 90% of the respondents. Board’s evaluation exists for subsidiary/member companies.

• Only in one of the respondent companies, a Swiss-Iranian joint venture, we observed that there exists an internal code that one of the board members must specifically be expert in finance. Board composition is ignored.

• SEO obliged all listed companies through a bylaw that the CEO and chairman of the board have to be separated.

Control Environment and Processes

• In survey by TSE, 132 of 330 responded regarding their audit committees,

▫ 52 did not have an audit committee

▫ 80 did have audit committees

4 confirmed that the committee reports to the board

4 had internal auditors. 3 of them reported to the CEO while only one reported to chairman

60 audit committees reported to CEO

• Although auditor rotation each 3 years is mandatory, 30% had not changed their external auditor in the past five years

Control Environment and Processes

• Internal Auditor Functions in companies with audit committee

Disclosure and Transparency

• Disclosure Method▫ Companies website▫ TSE information portal

• Disclosure Items▫ annual and mid-term reports, financial statements, reports of Annual General Assembly,

events affecting the activities, new or severe financial conditions, publisher’s results of operation

• Compliance▫ Items: listed companies published only financial statements and annual performance reports▫ Method: 33% of the respondents did not make their annual reports available on their websites▫ Shareholders and investors continue to report problems in accessing companies’ information

• Factors Preventing Disclosure of voluntary information▫ 83% responded to absence of legal requirements

Disclosure and Transparency

• Disclosure of Material and Related-Party Transactions

▫ Problem: some holding companies have large subsidiary/member companies while they have prominent exchanges in between. It may both affect disclosure requirements and shareholder rights.

▫ 4.0% disclosed related party transactions, 4.0% disclosed significant transactions, 19.0% disclosed both., Seventy-three (73.0%) disclosed neither.

• severe reluctance was noticed to provide voluntary information related to articles of associations, related-party transactions, remuneration of the board members, market share, sales and marketing data, environment and social responsibility, and stock options policy.

• Currently, some holding companies have remarkably large subsidiary/member companies while they increasingly have prominent ambiguous exchanges between themselves

▫ This can severely harm transparency, quality of disclosure and shareholder rights

Shareholders’ Rights and the Key Duties of Owners

• 46% of the respondents stated that more than 50% of all shareholders attended the last AGM.

• Electronic voting mechanisms are not used by any of the respondents;

• With respect to treatment of shareholders when changes of control occur, 91% did not have clear policies and none had block-voting mechanisms. Only in one company use of Silent Voting mechanism have been noticed.

• Evidence was found of an increasing number of related-party transactions among responding companies, with 80% of the respondents stating that under a governing document or law it was mandatory to disclose related-party transactions. In addition, 67% stated that the related-party transactions should be verified by the external auditors

• According to by law of behaviour in TSE accepted upon entering the market, companies are to treat all shareholders’ rights equally. This by law also requires the companies to ensure availability and presence of all shareholders in the General Assembly, to ensure presence of CEO, board members and auditor in the General Assembly meeting, to allocate enough time for shareholders’ questions and to disclose the dividend in the meeting.

• Regarding the dividend, listed companies on the average divided and distributed 80% of their annual profit between shareholders, but generally there are no way for a minority shareholder to affect the amount and distribution method of the profit to be divided.

Stakeholder Rights

availability and prevalence of different codes and guidelines

Code of Conduct 8%

Code of Ethics 13%

Consumer-rights Guideline 13%

Anti-Bribery 0%

Employees Representative on Board 4%

• There is no provision in the law requiring that board members treat all stakeholders fairly; However, some companies started some initiatives on the protection of stakeholders’ interest.

• Just one company has a board-approved CSR policy.

Key Obstacles of CG in Iran

• Capital market structure and situation

• Low awareness on Corporate Governance functions and benefits in various stakeholders

• Non-conducive business environment in Iran

• Lack of institutional laws to fully support responsible business, property right and stakeholder rights