UNICREDITO ITALIANO: 2002 RESULTS

1
THE ROLE OF CORPORATE GOVERNANCE IN FOREIGN
INVESTMENT FLOW TO TURKEY Federico
Ghizzoni Executive Board Member and COO
Corporate Governance Conference Koç University,
November 7th 2003
2
AGENDA

• Foreign Direct Investment in Turkey Overview
• Turkish Corporate Government System
• Foreign Investment to Banking Sector in Turkey
• Corporate Governance in Koç Financial Services
• Conclusion

3
TURKEY EMERGING GLOBAL MARKET PLACE
GDP
GDP PER CAPITA
4
FOREIGN DIRECT INVESTMENT TO TURKEY IS RELATIVELY
LOW COMPARED TO OTHER EMERGING MARKETS
According to the latest UNCTAD Report, Turkey
is ranking 121st among 136 countries in
attracting FDI.

• Mexico 11.233
• Korea 10.340
• Chile 9.221
• Poland 7.500
• Thailand 6.078
• Czech Republic 5.108
• Malaysia 3.532
• Venezuela 2.607
• India 2.168
• Peru 2.068
• Hungary 1.944

Vietnam 1.609 Kazakhstan 1.587 Egypt
1.500 Croatia 1.382 Dominican Rep
1.353 Romania 961 Malta
811 Morocco 847 Bulgaria
770 Turkey 783
United Nations Conference on Trade and
Development
5
TURKEY PERCEPTION OF FOREIGN INVESTORS
Continuous Economic Political Instability
Lack of Good Governance

• Turkey is offering a wide spectrum of investment
  incentives, but has been unsuccessful in
  attracting investors, mainly due to political and
  economical instability
• With globalisation of financial markets,
  efficiency and transparency have become
  imperative
• One of the major problems faced by
  decision-makers is the lack of sufficient
  information
• Economic factors and stabilization efforts,
  together with the IMF Programme are positive
  developments in Turkey

6
AGENDA

• Foreign Direct Investment in Turkey Overview
• Turkish Corporate Government System
• Foreign Investment to Banking Sector in Turkey
• Corporate Governance in Koç Financial Services
• Conclusion

7
CORPORATE GOVERNANCE IN TURKEY
WHERE IS TURKEY IN CORPORATE GOVERNANCE?
Did not start to work on Corporate Governance yet
Could not succeed in implementation
Trying to adapt Global practices

• Argentina
• Mexico
• Chile
• Latin America

• Middle East Countries (Arabic Countries)
• Africa and Middle Asian Countries

• Eastern Europe
• The Balkan Countries
• Asian Countries

TURKEY
8
MAJOR DISCREPANCIES BETWEEN OECD PRINCIPLES AND
TURKISH CORPORATEGOVERNANCE SYSTEM

• NOT AVAILABLE
• YES
• INCOMPLETE
• INCOMPLETE
• INCOMPLETE
• NOT AVAILABLE
• INCOMPLETE

• Disclosure and Transparency
• Access to relevant information for Shareholders
  and Stakeholders
• Major share ownership and voting rights
• Roles and responsibilities of Board Members, key
  executives and their remuneration
• Disclosure of risk factors
• Material issues regarding employees other
  stakeholders
• Governance structures and policies
• Audit function and disclosure in accordance with
  international standards in financial reporting.

D I S C R E P A N C I E S
9
SUMMARY OF KEY PROBLEMS IN TURKEY

• No Independent Directors
• No Corporate Governance Code Yet
• No Sufficient Protection Of Shareholders Rights
• No Independent Audit Committee
• Most Companies Are Owned By Families

P R O B L E M S
10
CORPORATE GOVERNANCE IN TURKEY MOST COMPANIES
ARE OWNED BY FAMILIES

• Family Firms form the basic building block for
  businesses but can represent
• an obstacle in applying clear and transparent
  Corporate Governance rules.
• A number of major problems can be identified
• Evolution from family relationships to business
  relationships - complicated by emotions.
• Transfer of power from the founder to the board
  of directors.
• Establishment of clear lines of communication and
  responsibility.
• The family adopting the role of a shareholder and
  leaving the interface with management to the
  board of directors.
• Planning and managing changes in shareholders due
  to family succession, marriages, divorces,
  deaths, opposite interests,etc.
• As the family circle expands, the links between
  the members become weaker and the companys
  profit distributions often are called into
  question.
• Bringing in outsiders.

11
RECOMMENDED SOLUTION

• To manage the company effectively for growth,
• the Family should
• entrust its investment in the company to a
• professional board of Independent Directors
• who operate under appropriate
• Corporate Governance guidelines.

12
DEVELOPMENTS REGULATIONS TO RESOLVE PROBLEMS IN
TURKEY

• Financial Sector Restructuring
• Banking Law Banking Regulation Supervision
  Agency (BRSA)
• Central Bank Law
• Public Tender Law
• Public Borrowing Law
• Arbitration Law
• Expropriation Law
• Efforts of Private and International Institutions
  (TUSIAD, Quality Association, Istanbul Chamber of
  Commerce, OECD, World Bank, IMF etc...)

R E G U L A T I O N S
13
AGENDA

• Foreign Direct Investment in Turkey Overview
• Turkish Corporate Government System
• Foreign Investment to Banking Sector in Turkey
• Corporate Governance in Koç Financial Services
• Conclusion

14
LACK OF INVESTMENT IN BANKING SECTOR

• ..... Despite
• A long history of liberalization policies and
  practice
• Advance technological facilities
• Qualified human capital in banking sector
• ..... Foreign bank presence has been limited due
  to
• Persistent macroeconomic instability (high and
  volatile inflation)
• Low volume of foreign direct investment
• Delays in taking necessary steps for financial
  sector reforms

Market Share Foreign Owned Banks (Assets), 2002

• Foreign ownership has been basis for
  restructuring and transformation of the
  competitive environment. Still some market
  restructuring expected as privatization ends
  given further consolidation.
• In Turkey, HSBC and UCI entered the market in
  2002, being among the first large FDIs in the
  local banking sector.

TURKEY
Romania
Estonia
Lithuania
Poland
Slovakia
Czech Rep.
Hungary
Latvia
Bulgaria
Croatia
15
NUMBER OF OUTSTANDING PROBLEMS CAUSE LACK OF
INVESTMENT IN BANKING SECTOR

• Banks
• Liquidity problems
• State Banks with overnight liabilities of 14
  Billion
• Large open positions of the Private Banks
• Significant share of holdings of Government debt
• Low asset quality
• Inadequate risk assessment and management systems
• Lack of good Corporate Governance
• Operating Environments
• Major macroeconomic instability
• High public sector deficit
• Systemic distortions created by State and SDIF
  Banks

Outstanding problems make it hard for Foreign
Investors to invest in a Bank in Turkey and be
involved in privatization and acquisitions due to
the lack of transparency. Foreign Investors
need to clearly understand the relationship
between Shareholder and Management
16
AGENDA

• Foreign Direct Investment in Turkey Overview
• Turkish Corporate Government System
• Foreign Investment to Banking Sector in Turkey
• Corporate Governance in Koç Financial Services
• Conclusion

17
UCI ACQUIRED A 50 STAKE IN AN INTEGRATED AND
WELL CAPITALIZED FINANCIAL SERVICE
The restructuring has lead to the creation of a
group involved in corporate and retail banking,
as well as in brokerage, asset management,
leasing and factoring
KFS
KOÇ GROUP 50
UCI 50
Total UCI Investment USD 259.5 Million
99.07
99.92
99
100
99.94
80
Koçbank
Koç Yatirim (Brokerage)
Koç Asset Mgmt.
Koç Lease
Koç Factoring
Koç NV (Dutch Subsidiary)
Koç Azerbaijan
99.97

• WHY UCI INVESTED IN KFS...
• We found the right partner to accept
  international standards (exGroup Exposure Both
  parties accepted to be treated as regular
  customers)
• Our partner was ready to give up control and
  discuss in detail Corporate Governance issues.
• SHA signed by both Shareholders and Corporate
  Governance approved by BoD.

18
KFS CORPORATE GOVERNANCE PRINCIPLES ARE
DETERMINED IN LINE WITH INTERNATIONAL STANDARTS
COMPLIANCE WITH 4 KEY PRINCIPALS OF CORPORATE
GOVERNANCE
Rules has been codified in the Shareholders
Agreement and Corporate Governance Document
Relevant financial and operational information as
well as internal processes of management.
Effective and timely communication.
Transparency
Roles and responsibilities are clearly defined.
Related parties are fully accountable with their
area of responsibility.
Accountability
Related parties responsible for generating value
in a sustainable way for shareholders, employees,
customers and community.In line with laws and
regulations.
Responsibility
Equal treatment to all Shareholders and other
parties . 50-50 representation in all Governing
Bodies.
Fairness
19
KFS CORPORATE GOVERNANCE KEY HIGHLIGHTS

• Shareholders do not interfere directly in the
  company.
• Shareholders provide capital to the company and
  elect Directors to represent their interests.
• Directors Govern the Company
• Management Manages the Company
• BoD and Management are clearly separated.

20
KFS CORPORATE GOVERNANCE ROLES AND
RESPONSIBILITIES OF HOLDING AND SUBSIDIARIES,
CEO AND OTHER EXECUTIVES
Is accountable to the Shareholders for
performance results (Value Creation)
Selects the CEO and oversees Management
Board of Directors
Shareholders
Management
Is accountable to the Board
Provide Capital and elect Directors
The CEO takes his direction solely from the Board.
21
KFS INTERNAL GOVERNANCE In addition to
compliance to 4 key principles of Corporate
Governance, KFS also have clear principals
defined in other aspects of Corporate Governce

• Independent Audit Committee
• KFS independent audit committee is set as an
  essential part of Corporate Reporting process.
• Reports directly to the Board and oversees on
  behalf of the Board the integrity of the
  financial reporting controls and procedures
  implemented by Management to protect the interest
  of Shareholders.
• Roles and Responsibilities of CEO and Executives
• Business functions report to the CEO.
• Risk and monitoring functions report to COO .
• Seperation Between Business and Risk management
• Internal transparency assured by monitoring
  functions
• Financial Monitoring Cycle
• Commercial Monitoring Cycle
• Steering Committee

22
AGENDA

• Foreign Direct Investment in Turkey Overview
• Turkish Corporate Government System
• Foreign Investment to Banking Sector in Turkey
• Corporate Governance in Koç Financial Services
• Conclusion

23
CONCULISION TURKISH CORPORATE PRACTICES CAN
CHANGE WITH THE RIGHT APPROACH

• Governance Practices can be applied successfully
  in Turkey if the following are done
• New set of laws and regulations to be introduced
• New Board structure to ensure the protection of
  all Stakeholder rights
• Appointment of Independent Directors
• Clear seperation between Directors and Management
• Very strict transparency and reporting rules
• For Banks
• Regulations on Group Exposure
• Separation of Risk Management and Business
  functions
• Independent Audit function
• Compliance with IAS and Basel II