Turkey increases the public disclosure burden on small enterprises while the U.S. does the opposite.

The lower the cost of adjustment to a law is, the more smoothly that law can be implemented. As the adjustment cost rises, so does the resistance to the law. I have been reading about the recent debates on the Turkish Commercial Code (TCC) from a cost-benefit perspective. Yes, the TCC is good, but how do its benefits compare with its cost? Which types of companies are to bear heavier burdens? Is the current climate conducive to adjustment?

Let me give the facts and figures first: It is estimated that the annual cost of adjustment to the new TCC will go beyond 6 billion liras. An assessment of this subject is available on TEPAV’s website. The new TCC will put an additional burden of 6 billion liras (6 quadrillion liras, if six digits had not been omitted). Why? So that they can disclose their activities to the public and become fully institutionalized. Let me tell you what I think with five points.

Here is the first one: Under normal conditions, you expect the banking sector to undertake the corporate sector reform. A company that seeks to grow gradually institutionalizes its management structure as its relations with financial markets deepen. The large companies at the center of the system became what they are today through their relations with the financial system. In Turkey, however, the system has not worked in this direction so far. During the 1990s, Turkish banks focused on the Treasury’s operations and preferred to lend to the Treasury instead of the corporate sector. Therefore, they were not able to get to know Turkey’s corporate sector. The new TCC chose to accelerate the institutionalization within the corporate sector through fines and penalties instead of leaving the process to time. From this perspective, the new TCC is harmonious with the French-style statist tradition of Turkey. It is a tradition of Turkey’s to punish companies for not taking a certain step instead of incentivizing them to take the step.

Second, not each company will be affected by the TCC equally. Small companies will have to shoulder a greater burden during the institutionalization process. At the core of the adjustment cost of 6 billion liras lay obligations involving independent audits, process audits, website design and a series of obligations regarding public disclosure. Out of 1.4 million companies in Turkey, 1.2 million have fewer than 10 employees. In all, 30 percent of the formal labor force – 3.3 million people – work in enterprises that have fewer than 10 employees. The cost of adjustment will be high for such enterprises.

The third point is about timing. Official estimates suggest that in 2012, Turkey’s economy will slow down by at least 50 percent compared to 2011. Once again, small companies will be the ones affected by the slowdown to the highest extent. As always, it will be small companies that will perish the most. If you add adjustment costs on top, even more of them will be perish.

What does the US do while Turkey increases the burden on the shoulders of small enterprises? The US reduces the public disclosure burden on small enterprises, more specifically, small enterprises that want to enter the capital markets. This is what the new U.S.  Jobs Act means in essence. In the meantime, Turkey increases the public disclosure burden on small enterprises that do not even plan to enter the capital markets. Why? It just does.

Here comes the fifth point: Why did Turkey introduce a new TCC though it was possible to regulate the transition process more smoothly via an administrative decision? Because the Public Surveillance, Accounting and Audit Standards Agency (PSA), established by Decree No. 660, is somehow not fully operational yet. The authorities of the Capital Markets Board, Bank Regulation and Supervision Agency and the Treasury regarding the obligation of public disclosure were handed over to the PSA. But as the Agency is not fully operational, the essential administrative regulations regarding the exceptions and exemptions about the TCC have not been able to be made.

This is what the issue is all about. It is not life, but the PSA that is putting a spoke in the TCC’s wheel.

This commentary was published in Radikal daily on 29.05.2012