Iran Corporate Governance Country Report

Initial Draft September 2011

Prepared By CSR Development Center (CSRIran) www.csriran.com

Alireza Omidvar Hossein Faghih

Executive Summary

CSR Development Centre has started research project with the objective of analyzing situation of Corporate Governance in the Iranian companies. The ultimate goal of this survey is to shape the roadmap of CG in Iran and how to (import) it effectively among various stakeholders. The scope of this Study entails conducted measures so far on CG, manager‘s knowledge and awareness of CG concepts, as well as benefits and challenges of implementing CG in Iran.

Corporate Governance and its importance is a relatively new subject in Iran, having come to public attention with the first attempt by the Tehran Stock Exchange to develop the first draft of a code of Corporate Governance in 2004, which was based on OECD guidelines and was mainly benchmarked with Code of Corporate Governance in Malaysian Stock Market. In 2010, the Securities and Exchange Organization (SEO)1 completed and formally adopted the Code of Corporate Governance but implementation in the companies is not compulsory yet. In this period, there have also been a number of seminars, conferences and awareness raising activities on Corporate Governance.2 Meanwhile, SEO tries to improve the governance system of the listed companies and the market through separate bylaws such as Disclosure and Transparency bylaw. The OECD Principles of Corporate Governance was translated into Farsi in 2008 but discussion of Corporate Governance has mainly remained in the academic circles while major players have started to notice this concept.

The profile of Iranian market should be noted before we go any further. The capital market is new and financial derivatives and their trade are limited; the size of the market is relatively small, compared to money market and GDB (almost 20% of GDP) and less than 20% of market is currently being free float; the institutional shareholders (pension funds, mutual funds, and insurance companies) now own more than half of the value of publicly traded stocks on the Tehran Stock Exchange though many of these are directly owned or controlled by state institutions. They and other major shareholders exercise their ownership rights by controlling management decisions directly. Board members are appointed not on the basis of their expertise and merits but because of their political connections and influence3. While we have more than 4 million people who trade or hold stocks in the market, it seems there are no embedded mechanisms or arrangements to protect the rights of minority shareholders.

1 SEO currently works as the regulator of the market. Before 2005 and formation of SEO, Tehran Stock Exchange Organization (commonly referred to as TSE) was both the regulator and executor of the market. 2 Notably the Workshop organised by CSR-DC and the Tehran Stock Exchange in December 2008, a roundtable meeting with key market players and regulators in April 2011 and the inclusion of a number of Corporate Governance courses in MBA programs at university level. 3 Mashayekhi and Bazzaz, 2008 3

The survey of companies in this research confirms that the level of awareness and compliance with the Corporate Governance code is rather low. None of the companies in the survey have developed a set of guidelines on Corporate Governance. Few of them have specialized board committees (only 17% has audit committee).Separation of CEO and chairman with 66% is the most common phenomena of CG practices in our sample of Iranian companies. Most respondents believe that starting steps such as introducing the code of conduct and whistle blower policy may boost the Corporate Governance acceptance in Iran. 47% of the respondents feel that the effectiveness of Corporate Governance should be monitored through audits done by Corporate Governance experts.

In other regional survey have done by CSR-DC, CSR Turkey, PICG, led by Iraj Hashi, A large majority (92%) do not have formal procedures and policies to protect minority shareholders‘ rights. A majority of companies (63%) do not have clear policies on shareholders‘ rights and a similar proportion (58%) do not have policies that explain the procedures for disclosing audit information and a similar proportion do not publish an annual report. The majority of companies (75%) have independent auditors as this is required by the Commercial Law and 63% of them have formalized codes of conduct and ethics.4

Iranian companies have a one-tier board structure with Board of Directors, but some of the Iranian semi-government companies have a two-tier board structure: a Trustee Board and a Management Board. We have no independent directors in Iran yet; neither is it culturally defined nor is it allowed by law. A major setback in implementing Corporate Governance in Iran arises when we see severe reluctance of companies in sharing information and lack of proper documentation and reporting in companies. However, we have noticed some good practices in private and holding companies.

In general, Iranian companies have weak Corporate Governance practices compared to those in industrialized economies. One of the main reasons for this poor state of Corporate Governance is the very basic nature of the Commercial Law in Iran, which was originally passed some 80 years ago and slightly amended some 40 years ago. Although the Law contains provisions for the establishment of joint stock companies, it is not capable of regulating all the variations in forms of ownership or formulating a suitable governance structure or even facilitating inclusion of independent directors in board. The idea of a new Commercial Law or Company Law has been on the agenda of successive governments for at least the last ten years and is the subject of discussion in a current Parliamentary Committee but there is no prospect for an early resolution of the issue. The development of a Corporate Governance culture may also contribute to the enrichment of the discussion of the new Company Law.

Regarding the concurrent needs and recent transformations and changes in capital markets, Commercial Code of Iran suffers from lack of attention to shareholder rights and also administration and control of the companies. For example, regarding collateral shares in Article No. 1145 and No. 1156 of Commercial Code of Iran, no practical and functioning assurance for

4 Privatization, Corporate Governance and Business Environment: A Comparative Study of Private Sector Development in Iran, Pakistan, Turkey and Kosovo.

5 Article 114 of the Commercial Code of Iran: The directors should possess the number of shares set forth in the articles and such shares shall not be less than the number of shares required for voting at general meetings. Such shares are placed as security against losses which may be inflicted on the company as a result of violations by the directors, whether individually or collectively. Such shares must be registered shares and non-negotiable and, as long as a director has not received discharge from the company for the period of his term of office, the said shares shall remain in the custody of the company. 4 control of managers‘ performance has been gained so that collateral shares have become a superficial issue with no effective or pragmatic application in the company; the board does not have an effective oversight on the performance of the CEO and senior managers and non- executive directors are usually lacking independence with no or very limited effective role in the board. In most Iranian companies, especially semi-governmental companies, non-executive directors are just familiar and willing toward their remuneration. . Inspection and reporting systems are neither effective nor efficient and financial reports (financial statements, loss-profit accounts, etc.) are often deficient, inaccurate or with low quality so that shareholders does not get enough information from financial status or important transactions of the company. High concentration of shares increases the agency7 costs and provides grounds for opportunitism for major shareholders and their chosen managers or directors.

6 Article 115 of the Commercial Code of Iran: If a director at the time of his election has not in his possession the required number of director's qualification shares, or on the occasion of obligatory transfer of his qualification shares, or if there is an increase in the number of qualification shares required the said director shall be required to acquire the necessary number of shares and deposit the same with the company, otherwise he will be considered to have resigned from his office. 7 In political science and economics, the principal–agent problem or agency dilemma treats the difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent, such as the problem of potential moral hazard and conflict of interest, in as much as the principal is—presumably—hiring the agent to pursue its, the principal's, interests. Various mechanisms may be used to try to align the interests of the agent in solidarity with those of the principal, such as piece rates/commissions, profit sharing, wages, performance (including financial statements), the agent posting a bond, or fear of firing. The principal–agent problem is found in most employer/employee relationships, for example, when shareholders hire top executives of corporations. (source Wikipedia) 5

Table of Contents

HIGHLIGHTS OF SURVEY ...... 7 WHAT IS CORPORATE GOVERNANCE? ...... 9 WHY IS CORPORATE GOVERNANCE IMPORTANT? ...... 10 HOW TO RECOGNIZE IF ANY GOVERNANCE PROBLEM? ...... 11 IRANIAN MARKET PROFILE ...... 13

DEVELOPMENTS AND TRENDS ...... 15 DOING BUSINESS IN IRAN ...... 16 CORPORATE GOVERNANCE SITUATION IN IRAN ...... 19

CORPORATE GOVERNANCE IN IRAN: DEVELOPMENTS AND TRENDS ...... 21 KEY OBSTACLES OF CORPORATE GOVERNANCE IN IRAN ...... 23 IRAN’S CORPORATE LAW: ...... 25 SURVEY ...... 26

OBJECTIVES OF THE STUDY: ...... 26 RESEARCH QUESTIONS:...... 26 QUESTIONNAIRE: ...... 27 SURVEY ANALYSIS ...... 28

AWARENESS OF AND COMMITMENT TO GOOD CORPORATE GOVERNANCE PRACTICES/ CREATE A PLATFORM TO ENSURE DEVELOPMENT OF EFFECTIVE CORPORATE GOVERNANCE FRAMEWORK ...... 28 THE BOARD RESPONSIBILITY ...... 32 CONTROL ENVIRONMENT AND PROCESSES...... 42 INFORMATION DISCLOSURE AND TRANSPARENCY...... 45 SHAREHOLDER AND STAKEHOLDER RIGHTS ...... 49 APPENDIX 1: OECD PRINCIPLES IMPLEMENTATION IN IRAN ...... 54 APPENDIX 2: RESPONDENTS ...... 57 APPENDIX 3: OVERVIEW OF TEHRAN STOCK EXCHANGE, CAPITAL MARKET OF IRAN ...... 59

INTRODUCTION ...... 59 HISTORICAL BACKGROUND ...... 59 STRUCTURE ...... 60 OPERATIONS & REGULATION ...... 61 PRIVATIZATION...... 61 PERFORMANCE ...... 62 FOREIGN INVESTMENT IN TSE ...... 64 OUTLOOK...... 64 TSE OPPORTUNITIES ...... 64 APPENDIX 4: CG ROUNDTABLE MEETING IN TSE: MINUTE OF DISCUSSIONS ...... 66 APPENDIX 5: IRANIAN CODE OF CORPORATE GOVERNANCE ...... 70 APPENDIX 6 - SURVEY QUESTIONNAIRE ...... 76

Highlights of Survey

Some facts regarding aspects of Corporate Governance in listed companies would help us to better understand the business environment in Iran. In most Iranian companies, ownership structure tends to be highly concentrated. The capital market (TSE) works with fairly low liquidity and Corporate Governance principals 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. There is a severe lack of informational balance between minor and major shareholders so that minor shareholders usually have few or no information on internal status, prominent financial transactions, managers‘ performance or financial documents of the company. The board usually has a weak position regarding independence of its members while it seems not only the board does not control the management but also the vice versa might be true. No effective legal tools or support for protecting rights of minor shareholders have been improvised and if there is any law or legal support mentioned by the legislators, like the right to claim or cumulative voting right and the shareholders‘ right to know8, minor shareholders would bear many practical problems in applying these rules. This is mainly because the major shareholders are the key players and there is significant imbalance of information between minor and major shareholders.

Shareholders should proactively engage in governance of the company.

Dialogue between board members and shareholders needs to be strengthened or in some case formed and there should be a regular reporting mechanism to let shareholders keep their working contacts through a possibly reporting line with the board members.

Independent or non-executive directors Independent or non-executive directors should be included in the board of directors. It is suggested that the difference between ‗non-executive‘ and ‗independent‘ needs to be clarified. There is considerable resistance to the idea that a non-executive director is not necessarily independent, nevertheless, this is an important distinction. Also non-executive board members should be capable of positively affecting executive directors or CEO to further engage in governance of the company.

Independent non-executive directors should be included in the audit committee of the board. The survey results indicate that considerable progress has been made in establishing audit committees in Iranian listed companies but this committee should include board members, non- executive managers, and also the internal auditor should be appointed by chairman and report to the chairman. Best practice, however, calls for an audit committee to be exclusively composed of independent directors; in most emerging markets, an argument can be made to aim for audit committees that are exclusively composed of non-executive directors. The inclusion of executives as members of the audit committee runs counter to good Corporate

8 Article 139 of the Commercial Code of Iran: During fifteen days preceding the convening of a general meeting, any shareholder may, at the principal office of the company, make a copy of the balance sheet, profit and loss account, the report of the operations of the directors and the report of the auditors of the company. 7

Governance practices. Thus there is a need to encourage companies to include non-executive directors as members of the audit committee.

Iran’s resources of competence in Corporate Governance should be developed. It can be concluded from the survey that there is a dearth of appropriate skills to exploit best practice in Corporate Governance. Although we need experts on Corporate Governance to expedite and facilitate adoption and expansion of Corporate Governance practices in Iran, we also need qualified directors with various set of skills to form the boards.

Establishment of a nominations committee of the board should be considered. 33% of the respondents were of the opinion that the board is responsible for succession planning, as indeed in an overall sense. One the other hand there is no job market in Iran for the director, although the SEO has made a decision to implement a bylaw to ratify the qualification of the board member of listed company and put few regulations on the composition of the board. The board can set up a nominations committee largely comprising independent directors, to come up with a policy for board succession and search for new directors. For public companies, even those with a significant or majority family shareholding, this is important as well. It is recommended that Iran should develop best practice guidance on nominations committees of the board.

Board and director evaluation should be developed Only 17% of the respondents stated that the board had conducted a formal evaluation of its performance in the previous two years. Best practices however suggest that the performance of the board, of the board committees, of individual directors and board committee members, and of the chairs of boards and their committees should all be assessed at least annually. Institutional investors should play an active role in implementation of Corporate Governance practices. Our survey noted a level of unease on the part of companies about the role of institutional investors. Successful Corporate Governance addresses the behaviour of stakeholders with respect to the companies in which they have stakes.

Research on board meetings and board behaviour should be conducted. In terms of the agenda, frequency and notice of the board meetings, compliance with the Code of Corporate Governance is common. It is recommended, however, that further research would be useful to determine whether Iranian boards are effective at determining the direction of the entity, overseeing management, and accounting effectively to their owners. These research studies should concentrate on reviewing board meeting practices and assessing the effectiveness of board meetings, the quality of discussions at these meetings and the appropriateness of their agendas.

Enforcement should begin In developing and implementing Corporate Governance, it is more reasonable to start from financial institutions. The Central Bank of Iran can pass regulations for approval of financial institutions‘ board members. For example, they can enforce that those with no professional financial management experience cannot enter the boards of these institutions. There might be some easier method of approaching such problems, like using some incentive based schemes to promote and internalize Corporate Governance in organizations. One of such schemes which are widely popular throughout the world is based on ranking organizations based on their Corporate Governance practices. We lack such a mechanism as for the moment in Iran.

Our survey emphasizes focus on the following issues to enhance the overall Corporate Governance environment in Iran:

 Legislatures, regulatory bodies, courts and self-regulating professional organisations must establish, monitor and enforce legal norms actively and even-handedly. Private associations and institutes must develop and promulgate codes of conduct, particularly with respect to corporate directors, that raise expectations for behaviour and generate formal and informal sanctions for failure to meet these expectations.

 Educational institutions should promote research on, and the teaching of, professional and managerial ethics. Institutions throughout government and society must educate and train people ranging from judges to regulators to managers to retail investors. Investment advisors and business media must constantly weigh information provided by companies and probe for additional information of interest to investors.

 To a large degree, raising awareness means convincing people that Corporate Governance is in their self-interest. Many business leaders and controlling shareholders are thus being challenged to re-think their relationships with their companies and with the minority shareholders who lay claim to partial ownership in them. Such re-orientation in thinking requires not only a strong national commitment to Corporate Governance, but one that is also broad-based.

Thus the following approaches are recommended:  The first focuses on director training, voluntary codes of conduct, expectations for professional behaviour and directors‘ resources and authority vs. management. Furthermore, another pinpoint would to make available material on functions, benefits, aspects, best practices, guidelines and case studies on Corporate Governance to provide understanding on how Corporate Governance can address some of the companies‘ issues.

 A second set of recommendations seeks to reduce or eliminate ambiguities by tightening standards for director independence, by making shadow directors liable for their actions, by increasing sanctions for violations of duties of loyalty and care and by advocating definition of a core set of related-party transactions (such as company loans to directors and officers) that should be prohibited entirely.

 Finally, empowering shareholders to seek remedy for violations of their rights and to ensure director accountability. Mechanisms to discourage excessive legal action should not prevent or discourage collective action by shareholders with meritorious claims.

What is Corporate Governance?

The concept of "Corporate Governance", though the phrase itself was initially coined in the 1970's, gained momentum in the early 1990‘s. Failures in high profile corporations‘ in developed economies brought urgency and a much higher focus on Corporate Governance (CG) practices ever since. The various codes of CG that exist around the world are a product of this endeavour.

The concept of Corporate Governance has proved difficult to define precisely, because it includes a large number of concepts and economic relationships that affect many people but to put it in a nutshell, Corporate Governance, CG refers to the structures and processes for the direction of the corporation.

The OECD has the following working definition of Corporate Governance: "Corporate Governance is the system by which business corporations are directed and controlled. The Corporate Governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance."

All in all, Corporate Governance concerns the relationships among the management, Board of Directors, controlling shareholders, minority shareholders9 and other stakeholders.

Sound governance involves a number of major issues. These include: controlling executive and director remuneration, the abuse by related company groups acting together in order to shift funds for the benefit of certain shareholders at the cost of others, self-dealing and abuse by insiders, and the overall need to improve financial market integrity, improve enforcement, and better exercise of ownership. These issues are cross-cutting being included in this report.

Anyway, Corporate Governance consists of mechanisms to ensure that financial suppliers of corporations will get a reasonable return on their investment. In financial terminology this means that Corporate Governance is intended to address what is known as ―agency problems‖ between shareholders and managers or between majority and minority shareholders. Why is Corporate Governance important?

Corporate Governance has become an essential tool for improving corporate performance. Good governance practices maintain the integrity of business transactions and in so doing, strengthen the rule of law and democratic governance.

For emerging market countries, improving Corporate Governance can serve a number of important public policy objectives. Good Corporate Governance reduces emerging market vulnerability to financial crises, reinforces property rights, reduces transaction costs and the cost of capital, and leads to capital market development. Weak Corporate Governance frameworks reduce investor confidence, and can discourage outside investment.

Furthermore, Institutional investors with significant money access and great responsibility and accountability toward their shareholders or other important stakeholders have gained more importance in markets. An important example could be Pension Funds; while they continue to invest more in equity markets, good Corporate Governance is crucial for preserving retirement savings. Moreover, it should also be clarified how these institutional investors interact with the companies and boards. In Iran, most quasi-governmental organizations like Different Bonyads, Social Security Organization, Pension Funds, etc. Have the same story while roles, responsibilities, functions, procedures, etc. must be further defined and clarified.

Studies have shown that good Corporate Governance practices have led to significant increases in economic value added (EVA) of firms, higher productivity, and lower risk of systemic financial failures for countries.

9 Corporate Governance deals primarily with ways to protect minority shareholders, as it is assumed that majority shareholders are less subject to agency problems.

A good Corporate Governance practice should:  Provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders  Facilitate effective monitoring  Encourage effective use of recourses  Develop appropriate strategies that result in the achievement of stakeholder objectives  Managing and mitigating risk and protecting and enhancing the company‘s reputation  Create a secure and prosperous operating environment and improve operational performance  Attract, motivate and retaining talent How to Recognize If Any Governance Problem?

There are many definitions of CG. Probably the most all encompassing defines CG as endeavours focused on how companies should be directed and controlled so as to prevent fraud, misrepresentation, insufficient disclosure, selective siphoning, favouritism etc. other definitions also address efficiency, value addition, transparency, social responsibility etc. based on high ethical behaviour.

In answering to the above question, it is usually referred to lack of board committees or combination of CEO and chairman into one person; Although these could be elements that increase the risk of a firm‘s failure, these are not the main reasons why a corporation fails to pursue healthy Corporate Governance. In other words, there are companies that the Chairman of the Board and the CEO is one person, while shareholders‘ rights are fully respected and it can be said that the company has healthy governance.

Thus, these reasons are not the main failure indicators in a firm, while they could be elements that could increase the risk of failure in a firm. Recommendations of these kinds can possibly reduce the risk of a company being subject to the Corporate Governance failure. However, the main question still remains, "What are the indicators of Corporate Governance failure?‖

In response to this prominent question, major indicators of Corporate Governance failure have been divided into four categories: the board, executives, shareholders activities and financial records. Companies typically do not collapse or fall, without occurrence of these indicators. As a result, monitoring these indicators could reduce the risk of failure in Corporate Governance.

Indicators related to Board

Without having a capable board, a firm cannot be managed properly. This has led to the fact that all the guidelines related to Corporate Governance e.g. OECD principles of Corporate Governance, have specific focus on the board. Indicators related to the board which can be warning signs of Corporate Governance failures come next:

 The constant change of board members  No change of board members for a long period of time.  Difficulty in attracting the elites on the board  Lack of participation of board members in meetings (the issue which is very serious in Iran)

 Important unplanned or informal appointments related to strategic decisions (common in Iran)  Lack of honesty and transparency among the board members  Inadequate independence of board members (very common in holdings‘ subsidiaries)  Existence of different groups in board (especially in large boards)  Poor communication with investors  Inattentiveness of board members to the firm‘s activities  Unconditional support related to all management tasks;

Indicators related to company executives

The executives, especially CEO, are responsible for all operational activities and they should interact closely with board and different internal and external issues. Some indicators of Governance problem related to executives come next:

 Lack of management attention and respect to the policies of board of directors;  Lack of trust to the board (so-called no acceptance of the board) that can be because of board‘s weakness.  Conflict between the executive set;  No change in executives even if they have weak performance;

Indicators related to Shareholder Activities:

Although Shareholders do not have direct influence on activities of a company, they are in fact company‘s owners. Indicators of the Corporate Governance‘s problem related to the shareholders are as follows:

 Poor participation in the Annual General Assembly  Poor participation in voting of managers‘ election  Ineffectiveness of minority shareholders in Assemblies, decision-making and objections;

Indicators related to Financial Records:

There are many companies that do not have desirable situation of Corporate Governance while in terms of profitability and financial indicators, they have a wonderful performance. Conversely, there are companies that comply with Corporate Governance principles; however, they are on the verge of bankruptcy. Some indicators of the Corporate Governance‘s problems from the financial point of view are as follows:

 Existence of unmanaged debt (bad debt) constantly (companies may use this type of debt)  Failure to achieve the designated financial targets  Incorrect financial reporting  Continuous problems with the supervisory and legislative bodies;

Iranian Market Profile

The size and the number of listed organizations has had a steady incline in recent years and today 34510companies are listed on the TSE, up from 217 in 1997. Capital market value in the Tehran Stock Exchange (TSE) has doubled in a mere three years period while a vast portion of this growth happened in 2010 alone. Even though the total capital market had mounted to some $65bn in 2010, rising from a US$3.2bn value in March 1999, it climbed even further peaking near $100bn in March 2011. This hefty amount in fact emanates from the new wave of privatization in which several giant companies including: Telecommunication Company of Iran (TCI), Mobarakeh Steel Company and National Iranian Copper Industry Company11 has been ceded.

There have also been a number of other factors facilitating the growth of the stock exchange. Foreign investment deregulations, establishment of numerous mutual and equity funds, establishment of ‗Over-the-Counter Market‘ and also new financial tools such as future contracts, Sukuk12 and many other factors have been vastly influential to this outstanding growth in size of the market. Two of the recent major changes include the ratification of the law of ―the Development of New Financial Instruments and Institutes‖ and also the law on ―Foreign Investment in Exchange and OTC Markets‖. These laws would be briefly explored in next pages.

But let these figures not deceive us. When closely observed and monitored, one gets to know that in fact, the capital market in Iran is quite young and rather inefficient. Although the size of the market and by that the private sector has expanded dramatically, state ownership remains extensive, leading to inefficiencies and malfunctions. The Government of Iran directly holds 35 percent of the TSE13, while securing another 40 percent through pension funds and investment companies such as the Social Security Investment Company, one of the largest institutional investors on the TSE. Different Bonyads also play a leading role in TSE trading. Meanwhile, the size of the capital market is still small, relative to money market or GDP of the Iran. Estimates of GDP produced by state owned enterprises (SOEs) still range from 60 to 70 percent. Major entities such as the National Oil Company and Iran Broadcasting Organization (IRIB) are owned by government, which also has holdings in over 200 smaller JSCs. Financial derivatives and Bonds are still limited and less than 20% of shares are currently in flow.

There are a couple of advantages to Iran's capital market alongside its rapid growth and volume in comparison with other regional markets. The most important advantage is that 40 industries are directly involved. Industries such as the automotive, telecommunications, agriculture, petrochemical, mining, steel iron, copper, banking and insurance, financial mediation and other trade shares at the stock market, which makes it unique in the Middle East. The second advantage is that most of the state-owned firms are being privatized under the general policies of article 44 in the Iranian constitution14. Under the circumstances, people are allowed to buy the shares of newly-privatized firms.

10 This figure indicates the number of companies listed in floor A only while there are also 182 companies in OTC Market. 11 the total market value of these three companies is around $32bn 12 Islamic Participation Bond 13 - Omidvar. Alireza, Privatization Performance in Iran , 2010, CSRIran 14 The final boost to the privatization debate was provided by a new interpretation of Article 44 and a law on this interpretation which enabled the government and successive parliaments to embark on the transformation of state property to the private sector – a policy which has continued to date. According 13

Recent Developments in Iran’s Capital Market

After undergoing major changes (such as operation of investment banks, launch of over-the- counter markets, and issuance of Islamic bonds – Sukuk), Iran‘s capital market has recently ratified two recent legislations. Namely, i.e. the Law Developing New Financial Instruments and Institutes, and the New Law on Foreign Investment in Exchange and OTC Markets, in a move for further developments. The Law Developing New Financial Instruments and Institutes On 16 December 2009, Iran‘s Parliament approved the Law Developing New Financial Instruments and Institutes (―the Law‖) to expand the capital market tools. The Law follows three goals namely, developing new financial instruments (such as investment certificate) and institutions (such as investment funds, mutual funds, and etc.), that were previously unavailable to the capital market. Further, new tax provisions tailored for such changes have also been provided for. The Law can be summarized as follows:

1. New Financial Instruments In addition to previously introduced instruments and transaction (such as Sukuk, futures contracts, MBS, and CDs), the Law introduces another new financial instrument referred to as the Investment Certificate. Such instrument is defined by Law as ―a uniformed security issued by an investment fund in turn for investment in that fund bearing the particulars of the investor, the fund and the amount of investment‖. Such Investment Certificates is registered and the liability of the investors in investment funds is limited to the nominal value of their certificates.

2. New Financial Institutions For the first time the Law recognizes legal personality for investment funds and defines them as ―a financial institute investing financial sources acquired from issuance of Investment Certificates in approved areas‖. Having legal personality, investment funds are now able to open bank accounts in their own name, being represented, and enjoy banking services available for legal persons. Minimum capital requirement for investment funds is IRR 5 billion (roughly US $500,000). However, it may be subject to change by the High Council of Securities and Exchange considering the inflation rate changes.

3. Tax Provisions One of the obstacles of Iran‘s capital market was ambiguities and lack of sufficient legislative provisions in terms of taxation. The Law removes those ambiguities by setting certain provisions and tax exemptions as follows: - All revenues gained from securities (all new financial instruments such as MBS, futures contracts, and CDs) are exempted from income tax and VAT; - Transfer of stocks and pre-emption rights of Iranian and foreign companies in stock exchange or OTC markets are subject to a 0.5% flat rate tax; - Intermediary institutions are also exempted from transfer tax. Moreover, their revenues gained from public offering of securities and the transfer of such securities are excluded from taxation; and - Revenues gained out of sales of assets to the intermediary institute for securitization purposes as well as any transfer thereof are tax exempt; In addition to above, the Law provides for nondisclosure provision, dispute settlement procedure, and financial penalties for issuers, financial institutes, self regulatory establishments, and their managers in case of any violations to relevant laws in their practice area. to the new interpretation, the government could satisfy the constitutional requirement as long as it retained control (even through a golden share) over the main company in a sector – and privatizing the remainder of the property. This has allowed the government to convert its portfolio companies into joint stock companies and dispose the bulk of shares – in all sectors of the economy (steel, automobiles, power, petrochemicals, refineries, mines, telecommunications, banking, etc.). The licensing of private banks and insurance companies – and the privatization of some of the publicly owned banks – complemented the process. According to the new interpretation of Article 44, the aims of the ownership transformation program were: improvements in efficiency, facilitating economic growth, and the expansion of share ownership amongst a wide section of the population. 14

Presently, TSE trades mainly in securities offered by listed companies. Equities and Corporate Bonds are being traded at TSE at the moment. The plan is to introduce other financial instruments in the near future. The introduction of project-based participation certificates that bear a fixed annual return during the period of the project and the final settlement promise of the profit at the date of its completion, have diversified the market.

It should be noted that Iranian companies mainly have a very centralized ownership structure where the separation of ownership and management is hard to occur. Often there is a powerful and central shareholder like institutional investors, founder of the company, etc. As we know, this ownership structure tends to be closer to Japan or Germany models.

Law on “Foreign Investment in Exchange and OTC Markets

Currently, the share of foreign investment in the TSE is below 1%. However, it is predicted that the new by-law of investment in the stock market would raise the share to 10%. This by-law enables foreign investors to:  take their primary capital out of the country;  buy up to 20% of the shares of Iranian companies;  have concurrent activities in the TSE and OTC markets;  play a role in leading and management of the company;  decide whether or not they want to obtain the permit of Foreign Investment Company, as an optional choice;  obtain the permit of Foreign Investment Company through facilitated administrative formalities;  Be treated equally like Iranian citizens, by the Taxation Law.

Developments and Trends

Achievements in recent years

Iran‘s economy has lately been experiencing substantial economic reform and one can see the reflection of this change not only in the trend of privatization or stock market growth but also in the institutional and legal changes. One of the more important of these changes to our matter of concern is that new laws and regulations have improved legal protection of investors and the broader business environment. Meanwhile, the ranking of Iran in Global Competitiveness report and World Bank‘s Business Environment Index was gradually enhanced.

Capital Market and Privatization

In recent years, the role of the private sector has been further on the increase. Furthermore, an amendment of the Article 44 of the Iranian Constitution in 2004 has allowed 80% of state

15 assets to be privatized, 40% of which will be conducted through the "Justice Shares" scheme and the rest 40% was privatized through TSE. The government will keep the title of the remaining 20%.

In Iran, the privatization process included some 315 companies and over $72 billion worth of assets and was implemented most rapidly in the last six years. The largest single method of privatization (accounting for $34 billion of the transferred assets) was through the ‗Justice Share Program15’.The privatization programme, however, suffers from several important shortcomings. There is no mechanism to ensure that the privatized companies will improve their performance under the influence of new owners. This is because in many cases the new owners are either semi-government organizations (such as the investment companies of state owned banks or the government controlled Social Security Organization or Pension Funds), or the newly developed holding companies with roots or close connections in parts of the government. There is also every indication that the privatized companies would suffer from weak Corporate Governance. This is particularly true for companies in the ‗Justice Share Program’ and the financial intermediaries involved in this program.

Currently, governance structure in Tehran Stock Exchange is dominated and controlled by a few institutional investors. These shareholders are usually founders, governmental and semi- governmental companies like banks, Pension Funds, Social Security companies, Bonyad, and etc. in such system there would be a close relationship between the company as a legal entity and the related institutional investors. These shareholders usually keep a close working relationship with senior managers and directors of the company so that agency-theory issues caused by separation of ownership and management are minimized. This is mostly because benefits and advantages of the managers are consistent and in line with those of major shareholders. However, agency-theory problems are bulged differently in Iranian organizations through existence or occurrence of counteract or paradox of benefits between major and minor shareholders. Controlling shareholders are capable of gaining control of the company, affiliated companies or subsidiaries and this may lead to financial fraud or price manipulation in capital market.

Doing business in Iran

Iran‘s Doing Business rankings have improved substantially since 2008. Enforcement and implementation of some aspect of good governance in capital market also promises further improvements. Although from 2005 to 2008, Iran's had slipped in the rankings, recent changes especially that of the introduction of changes to article 44 have helped the economy leap frog.

The fact regarding Iran is that Iran is a complex market indeed, but all risks and issues that foreign companies would face in the Iranian market are relatively manageable risks.

Following comes a short list of facts and changes that has helped improvements in the business environment and ease of doing business:

15 the Iranian version of voucher privatization in which the minority shares of 56 very large SOEs have been transferred, through a multitude of investment companies and township cooperatives, to lowest six deciles of the population on preferential terms. People in this program would not pay for their shares and the profit from the shares, in theory, is supposed to compensate for the value of the shares. From now till then, shares in this program cannot be traded. 16

 Gradual trend towards professionalism, especially through the growth of the private sector;  Diversified of opportunities;  Gradual improvement in knowledge and understanding of concepts through internationalization;  Presence of an acceptable human resource pool in the market;  Anti-corruption campaign;

However, the weaknesses of the country‘s business environment can be summarized as follows:

 Vulnerability to legal and political fluctuations;  Lack of competitive environment;  Dominance of the public sector;  Lack of understanding for international business issues and concerns among the majority of key players;  Tendency to use ambiguous commercial agreements;  Culture of corruption in some circles;

The most important issues that foreign investors should keep a cautious eye on, otherwise they might be negatively influenced would be:

 The ―win-lose‖ mentality of the Iranian business community – this win-lose mentality is a cultural trait which could appear in business negotiations and the foreign party should be prepared for it;  Legal and political fluctuations: Being affected by legal and political fluctuations as well as by legal ambiguities;  Suffering from the lack of competitiveness;  Becoming the victim of politicized business decisions by state entities (especially in the case of worsening relations between Iran and the Client‘s country);

To mitigate the risks in doing business in Iran, foreign companies can consider the following opportunities:

 Teaming up with Iranian companies to reduce the commercial risk and to take advantage of opportunities;  Developing a pro-active stakeholder relations strategy in order to reduce the impact of political and legal fluctuations by being informed of key developments in the market;  Developing longer term relations in the market;  Training of needed resources;

As prepared by the World Bank in 2011, the tables below provide a snapshot of the business climate in Iran by identifying specific regulations and policies that encourage or discourage investment, productivity, and growth. Key indicators and benchmarks are used to help measure the ease or difficulty of operating a business.

Ease of Doing Starting a Dealing with Registering Getting Credit Business Rank Business Construction Property Permits 129 42 143 156 89

Protecting Trading Across Enforcing Closing a Investors Paying Taxes Borders Contracts Business 167 115 131 49 111

Starting a Business - The challenges of launching a business in Iran are shown below through four measures: procedures required to establish a business, the associated time and cost, and the minimum capital requirement. Entrepreneurs can expect to go through 8 steps to launch a business over 8 days on average, at a cost equal to 4% of gross national income (GNI) per capita. They must deposit at least 1.7% of GNI per capita in a bank to obtain a business registration number, compared with the regional average of 859.3% of GNI and the OECD average of 41% of GNI.

Indicator Iran, Islamic Rep. Regional Average OECD Average Number of procedures 6 8.1 5.6 Duration (days) 8 20 13.8 Cost (% GNI per capita) 4 38 5.3 Min. Capital (% GNI per capita) 0.8 104 15.3

Hiring and Firing Workers - The flexibility or rigidity of labor regulations and laws in Iran is shown below, using three indices. Conditions covered by the indices include: availability of part- time and fixed-term contracts, working time requirements, minimum wage laws, and minimum conditions of employment. Each index assigns values between 0 and 100, with higher values representing more rigid regulations. For Iran, the overall index is 49, compared with the regional average of 40.2 and OECD average of 35.8. Firing costs are calculated on the basis of the number of weeks worth of salary in severance, notification and penalties that must be paid to dismiss a worker.

Indicator Iran, Islamic Rep. Regional Average OECD Average Difficulty of Hiring Index 78 30.8 30.1 Rigidity of Hours Index 60 55 49.6 Difficulty of Firing Index 10 35 27.4 Rigidity of Employment Index 49 40.2 35.8 Hiring costs (% of salary) 23 15.9 20.7 Firing costs (weeks of wages) 90 62.4 35.1

Enforcing Contracts- The ease or difficulty of enforcing commercial contracts in Iran is measured below, using three indicators: the number of procedures counted from the moment the plaintiff files a lawsuit until actual payment, the associated time, and the cost (in court and attorney fees), expressed as a percentage of debt value. In Iran, the cost of enforcing contracts is 17.0, compared with the regional average of 23 and OECD average of 19.

Indicator Iran, Islamic Rep. Regional Average OECD Average Number of procedures 39 43 31

Time (days) 505 664 517 Cost (% of debt) 17 23 19

Getting Credit- Measures on credit information sharing and the legal rights of borrowers and lenders in Iran are shown below. One set of indicators measures the coverage, scope, quality and accessibility of credit information available through public and private registries. A second set measures how well collateral and bankruptcy laws facilitate lending. It ranges from 0 to 10, with higher scores indicating that those laws are better designed to expand access to credit. Iran has a score of 4, compared with the regional average of 3 and OECD average of 6.9. The Credit Information Index measures the scope, access and quality of credit information available through public registries or private bureaus. The index ranges from 0-6, with higher values indicating that more credit information is available from a public registry or private bureau.

Indicator Iran, Islamic Rep. Regional Average OECD Average Legal Rights Index 4 3 6.9 Credit Information Index 4 3.3 4.7 Public registry coverage (% adults) 22 5.3 8 Private Bureau Coverage (% adults) 4.5 7 61

Closing a Business - The time and cost required to resolve bankruptcies is shown below. Costs include court costs as well as fees of insolvency practitioners, lawyers, accountants, etc. The Recovery Rate measures the efficiency of foreclosure or bankruptcy procedures, expressed in terms of how many cents on the dollar claimants recover from the insolvent firm. The recovery rate in Iran is 23.1, compared with the regional average of 33 and OECD average of 69.1.

Indicator Iran, Islamic Rep. Regional Average OECD Average Time (years) 4.5 3.8 1.7 Cost (% of estate) 9 13.4 9.1 Recovery rate (cents on the dollar) 23.1 33 69.1

Protecting Investors: Iran's rank in the Protecting Investors is as low as 165th.

Iran, Islamic Indicator Regional Average OECD Average Rep. Extent of disclosure index (0-10) 5 6.3 6 Extent of director liability index (0-10) 4 4.6 5.2 Ease of shareholder suits index (0-10) 0 3.4 6.8 Strength of investor protection index 3 4.8 6 (0-10)

Corporate Governance Situation in Iran

Corporate Governance is quite a recent concept in Iran. A manifold of different institutes and organizations have approached the concept from different angles, assuming responsibility for the development, promotion and utilization of it on their own right. Key bodies, though, are the TSE, SEO and also auditors and accountant associations and societies.

Since 2003 and the inception of the Securities and Exchange Organization (SEO) of Iran, the organization has focused its regulatory efforts on fostering investor confidence16. It has been particularly keen to encourage good Corporate Governance, to ensure transparency and accountability in the corporate sector, and finally safeguard the interests of all stakeholders, especially those of minority shareholders.

As for the role of Corporate Governance in this depicted market, both on the legal landscape and also inside the market, there has been a steady but resilient approach towards utilizing such mechanisms.

The Table below shows general information on the structure of Iranian companies and their board of directors.

Percentage of ownership required to invite Only holders of shares above 20 percent the General Assembly 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 In listed firms, records and qualifications managers 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

The companies of stock market in Iran also show more acceptance and interest in governance obligations and external control mechanisms. There are yet a couple of issues that need to be addressed though. The most important of these issues though regards the role and motivations of major shareholders institutional investors‘.

Iranian market model of Corporate Governance is closer to the Inside system of Corporate Governance (like Japan or Germany), though the Iranian code of Corporate Governance has been based on the outside system of Corporate Governance and hence, some conflicts may arise in between. The main conflicts could be referred to the fact that an eccentric ownership structure tending toward institutional investors or founders of the company, with considerable power and influence on the company make it hard to separate the ownership and management of companies which is the basis for the Outside system.

In 3rd and 4th national development plans in Iran, a prominent attention and emphasize was put on privatization and the process has also been expedited in recent years. Hence, considering the lessons learned from other countries, if the goals of privatization in these plans are met and

16 Before 2003-4 TSE play the role of executive and regulatory body but after the new law of securities SEO created as a regulatory body. 20 the number and importance of shareholders and stakeholders rises as a result of ―Justice Share Program‖, the governance system would be likely to move toward an outside system.

The vast expansion of the capital market, mainly caused by the privatization of SOE‘s and the justice shares initiations, has pushed TSE to adapt new measures in order to effectively supervise and control the market. Such measures include not only endeavours to prepare the code of CG itself but also those for producing and ratifying instructions and bylaws to deal with investors, production of manuals on internal control affairs, transparency and disclosure, etc.

The Justice Share Program also brings on concerns regarding future changes in dominant ownership structure in Iran. This is mainly because more than 40 million people would hold shares of several huge companies or industrial groups and there is a need to define and formulate their participation in the companies, if any. Indeed the operation of this Program has created significant Corporate Governance problems and weakened the mechanisms through which private owners can monitor and put pressure on the management to improve a company‘ performance.

Corporate Governance in Iran: Developments and Trends

Obviously one of the major steps forward towards developing a well governed economic environment is the implementation of corporate government codes in it. It has also been empirically proved that good governance attracts more capital.

In early 1967 that the stock exchange was established, 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 did not seem to be noticed substantially. The case was addressed in the early 2000 for the first time. In that time, the managers of Tehran Stock Exchange (TSE), Islamic Parliament Research Centre, and a specialized committee in Economic and Finance Ministry, started to do some research about Corporate Governance in Iran.

The next step in that direction was in 2003 when the OECD guideline on Corporate Governance in listed companies was translated by TSE. A year later TSE‘s Research and Development Centre published the first edition of the Code of Corporate Governance in Iran.

In preparing the draft code, it was benchmarked against Malaysian Code of Corporate Governance. Meanwhile, It should be noted that although the ownership structure of Iran Capital Market tends to be Out Side (like Japan and Germany), the code structure assumed an In Side system of Corporate Governance (like UK and USA) in designing the code.

There have been notable promotional activities in Corporate Governance which was also supported and accompanied by a few legislative actions. A list of major promotional activities is provided below. Worthy to note that In August 2008, the Tehran Stock Exchange held a ground-breaking seminar on Corporate Governance where, for the first time, Iranian financial institutes, leading experts, business leaders and scholars came together to discuss Corporate Governance and its effects on the actions of corporate boards. Meanwhile, there were the ―Law on the development of new financial instruments and institutions‖ in 2009 which emphasizes on several functions of a sound Corporate Governance system.

List of 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

This code was regulated in 22 clauses and contained some necessary definitions, management board and shareholders ‗responsibilities, financial disclosures, accountability and auditing concept. According to the ownership structure, the capital market situation, and the commercial Law, this code was edited in 2005 by the new directors of SEO. The second edition of Code of Corporate Governance in Iran was regulated in 5 chapters and 37 clauses. This code has been declared via media, but it has not been implemented by many companies or announced officially by TSE. In Appendix, you can see the second edition of Code of Corporate Governance in Iran17.

The Code is the first institutional effort of its kind in Iran and has mostly been developed by accountants, although some professional and academic management experts was also on the developing committee. The primary aim of the Code is to establish a system whereby a company is directed and controlled by its directors in compliance with the best practices, so as to safeguard the interests of diversified stakeholders. It proposes the restructuring of the board of directors to introduce broad-based representation by minority shareholders and by executive and non-executive directors. The Code emphasizes openness and transparency in corporate affairs and the decision-making process and requires directors to discharge their fiduciary responsibilities in the larger interest of all stakeholders in a transparent, informed, diligent and timely manner.

Nevertheless the code of Corporate Governance in TSE has been drafted and approved but not ratified; SEO has tried to further enhance and implement the Corporate Governance system aspects, using separate bylaws on Disclosure, Internal Control and Investor Relations. These bylaws were improved through ―bylaw on Temporary De-listing‖, drafted in 2005 , which allows TSE to fine or sanction non-compliance with the other bylaws, from small fines to heavier sanctions like temporal de-listing.. These bylaws have been ratified and companies were asked to comply with them, though the level of compliance is not significant yet.

17 In 2007, a special committee was formed in Tehran Stock Exchange and after analysis of the OECD guidelines and codes of other countries the Code of Corporate Governance was drafted and was initially implemented in the TSE itself. In this code, three board committees of risk management, compensation and audit are assigned. Currently in the Corporate Governance structure of TSE, the committee meetings are held with the presence of board members and independent members. In this regard, planning for the Corporate Governance of TSE is conducted in the Risks Management Committee. 22

There have also been efforts to regulate the internal auditing function in organizations. A law passed in 2007 requires companies to establish an internal audit function inside their companies. In 2008, Regulations on Related Party Transactions (RPTs) were issued and 2008 amendments to the Civil Code introduced fiduciary duties for directors. While legislative efforts are successful and ongoing, enforcement is still lagging behind and also the fines for not complying with the laws are not sufficient to push forward.

One needs to note, that though these new laws and regulations have improved the quality of legal protection of investors and the broader business environment, substantial challenges remain which we shall address later on18.

Key Obstacles of Corporate Governance in Iran

Key obstacles of Corporate Governance in Iran can be divided into four separate categories for further illustration:

 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.

Even though the infrastructural prerequisites for a functional capital market are in place in Iran, trading and liquidity are minimal and only a few Iranian companies have turned to the stock market as a source for their financial needs. The authorities have put substantial efforts in later years to transform the capital market into a place to provide finance for the companies, though these efforts was fairly not conclusive while only 15% of the total market is being traded in the market in free float shares. Although the legal framework for Corporate Governance and investor protection has been strengthened, the majority of market and public players are lacking a thorough understanding of the concept. As a result, compliance with the new rules is low.

Another issue of concern again regards the lack of a proper Corporate Governance understanding and knowledge and therefore causes shaky and unreliable practices among the most important and influential parties.

But challenges are not limited just to the low awareness of the concept in the society and further resulting weaknesses and deficiencies are also challenging. More specific and concerning challenges may include: limited protection for small shareholders, poorly defined roles and responsibilities for boards and related bodies, a dearth of independent members in boards, and poor compliance with disclosure requirements. Many companies do not publish financial statements on a regular basis; ownership is often not disclosed; and audit quality is mixed and tends to further complicate matters; there is no functional supervisory system for internal control mechanisms, just to name of few of the problems.

18 For example Article13 of the law of ―development of new financial instruments and institutions‖ foresees and requires qualified professionalism in the management layers of listed companies, meaning that managers need to professionally be approved by the TSE. It is obvious that this article could be a two edged sword which on one side would foster CG practices but on the other would cause probable setbacks from some managers.

Some functions regarding Corporate Governance practices also require delicate and specific attention. These functions may include internal control and auditing, board and executive appraisal, succession planning, corporate secretary role, fulfilling stakeholder rights and investor relations.

Effective executive performance monitoring is minimal, meaning that boards don‘t have the means to check and monitor their executives. Meanwhile, Non-executive managers lack independence which could lead to undesirable and even illegal performance of executive managers. Cases of illegal practices of managers and auditors in a company have been reported that could have been prevented if else wise.

Other issues of concern are related to the relations and power structure of the board of directors and the executive management in an organization. Unclear division of responsibilities of executive managers, limited power of non-executive managers, and little care regarding the morality issues in the organization are issues of such nature.

Independent directors have not been permitted in law and such concept has not been popular or even known in Iran. The Commercial Law of Iran does not accept such director on the board as every board member has to be a representative to shareholders. Moreover, there is lack of legal support and flexibility to assure the independence of such directors.

Ownership structure is the next problem regarding Corporate Governance in Iran. Institutional investors and large stock owners have been pushing others‘ rights towards the benefit of themselves. Stocks have been focused in hand of special groups while the increased costs of representation have provided an atmosphere of opportunism for the majority shareholders. One can confidently state that the ownership structure -which is mainly based on concentrated ownership, has been pushing towards the interests of major shareholders.

While legislative efforts are successful and ongoing, enforcement is still lagging behind. For example, Right now, the SEO cannot penalize companies with more than a nominal fine and must spread its regulatory resources across hundreds of JSCs, not just those that issue securities but also open companies that are quoted on the TSE.

Finally cultural issues might also act as barriers when moving towards a more sound market environment, therefore a more gradual approach towards implementing Corporate Governance practices is highly advisable. Concepts like transparency, responsible business, shareholder rights and accountability are not widely appreciated and the business environment in Iran does not directly reward practicing these concepts. Generally speaking, the external environment does not appreciate or reward responsible business conduct or even fine malpractices. It is also generally accepted that working with low lights and preventing any disclosure or attention is a advantage in Iranian business.

Iran’s corporate law:

The Commercial Code of Iran, which was originally published in 1932, was updated in 1969 by the issue of a revised section dealing with joint stock companies. Iranian Commercial Law, the Securities Act of 2006, Law of "Development of New Financial Instruments and Institutions2009‖, are the main governing laws in Iranian business environment in regulating the market.

Ownership structures Iranian Commercial Law are divided into several categories where the most common Structures are Limited Liability Companies (LLC) and Joint Stock Companies (JSC).

The Joint Stock Company is defined by law as a company whose capital is divided into shares and the liability of whose shareholders is limited to the par value of their shares. The Joint Stock Company may be either a public company (Sherkat Sahami Am) or a private company (Sherkat Sahami Khass). The main difference between the two is that the public company may offer its shares and debt securities to the public while the private company may not. The members of a joint stock company must not be less than three.

Clauses 107 to 143 of commercial law describe a firm‘s board in details. According to them: Firm‘s managers are being elected through General Assembly and General Public Assembly. The highest authority in a joint stock company (whether private or public), is the general meeting of shareholders, which is of two types: (i) the ordinary general meeting which is held annually but could also be called extraordinarily; and (ii) the extraordinary general meeting. The quorum of the ordinary general meeting, in the first call, is established by the presence of those holding more than half of the shares. The joint stock company is by law required to have a board of directors elected by the general meeting. All members of the board of directors are required to be shareholders.

For election of directors the number of shares of each shareholder is multiplied by the number of directors to be elected and the result is the number of votes that the relevant shareholder may cast for election of directors, which he may give to one candidate or divide among as many as he may wish.  Iranian commercial law permits the CEO to be the chairman at the same time, conditioning to the approval of three-fourths vote of the General Assembly. Unity of CEO and chairman is the case in many private and SOEs. However, a bylaw by TSE has prohibited unity of CEO and chairman in listed companies.  Iranian Commercial law in clauses 129 till 134 has discussed financial transactions, contracting and the working relationship method between board members and the management team. This section includes limitations on board members‘ and CEO‘s transactions as well as prohibition of CEO and board members in obtaining loan or credit from firm.  Transactions pertaining to board members and CEO should be done with the notification and approval from the board. The firm inspector or auditor should also be aware of that and must notify or report to the firm shareholders at the first meeting.  Regarding non-executive directors, Iranian Commercial law expresses that their wages should be paid solely fixed and declares it as the right to attend. Non-executive directors are not allowed to be paid by firm for their managerial position except above conditions or board‘s remuneration which is approved by general assembly.  Iran‘s commercial law is silent about the composition of executive and non-executive board members. Some points regarding Iranian Commercial law are summarized below.

Iranian Commercial Law requires the General Assembly to choose a statuary and an alternate Auditor once a year. However, the election of more than one statuary and alternate inspector is optional. Generally, the function of the inspector is to serve as a watchdog over shareholders and third-parties interests and he/ she may be subject to criminal prosecution for violation of his/ her duties. About supervision associated with inter-organizational mechanisms it seems, the supervisory role of non-executive management, including creation of board committees from independent non-executive directors (including audit committees, rights and ...), internal controls, including design, formulation and establishment of appropriate internal controls (financial, legal, risk management, internal audit and ...) is very negligible and weak and there is not sufficient attention to the supervisory role of organizational ethics.

Survey

The intent of this report is to cover the how‘s and why‘s of Corporate Governance practices in Iran. Hence this report not only highlights recent improvements in Corporate Governance regulations but also tries to address measures on different aspects of Corporate Governance and dig into important reasons behind Iranian Corporate Governance situation.

CG Development Centre in Iran has started research project with the objective of analyzing situation of Corporate Governance in the Iranian companies.

The ultimate goal of this survey is to shape the roadmap of CG in Iran and to embed it effectively among various stockholders.

The design of the study is simple. It comprises of 91 questions aimed at probing the effectiveness of Corporate Boards in Iran. We selected 24 well-known companies from all sectors namely, listed companies Public Sector, Multinational Companies (MNCs) and Private Local/Family Owned companies.

These companies are combination of family firms, quasi-governmental, public stock exchange, banks, insurance and joint venture companies from different sectors. A list of surveyed companies comes in appendix 4.

Objectives of the study:

The scope of this project entails developing measures to assess situation of CG in the country, including identification of knowledge and awareness of the responding managers and board members on concepts related to CG, as well as their opinion on benefits and challenges of implementing CG in Iran.

Conducting this survey will enable us to:  Identify challenges and needs of several business sectors of the country  Develop and implement concepts of CG in selected companies.  Develop tools and guidelines for promotion and facilitating implementation of CG in different business sectors of the Iranian Economy.  Facilitate development of related regulations on Corporate Governance in Iran.  Identify practices that are fundamental to improving level of Corporate Governance in Iranian companies.

Research Questions:

 What aspects of Corporate Governance leads to improved business environment in Iran?  Which aspects of Corporate Governance help enterprise managers to better run their company in the Iranian context?  What are the stakeholder‘s expectations from mechanisms of Corporate Governance?  What dare the challenges of the market regulatory bodies to develop proper regulations in regards to Corporate Governance?

 What are the main challenges and difficulties in implementing Corporate Governance mechanisms in different business sectors of the Iranian Economy(FOB, Listed, Government Owned, Quasi Government)?

Questionnaire:

The questionnaire is divided into 6 sections:

• 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 • The Role of Stakeholders in Governance of the Firm

We analyse our survey with the most important points of the survey and also other important points which was noticed and explained during our interviews with board members and experts. Following this part which is separated in a green box, a thorough explanation and analyze of each section would come. Again alongside sharing the results of the survey, we have taken the liberty to offer more explanation based on our analysis during the interviews and meetings with board members and experts.

Survey Analysis Awareness of and commitment to good Corporate Governance practices/ Create a platform to ensure development of effective Corporate Governance framework

In many countries, ratification and enacting codes of Corporate Governance in the capital markets are the main drivers for implementation of the concept of Corporate Governance practices in the business arena; However, in Iran the code has not been implemented yet. Our survey reveals that:  18 % of the respondents are familiar or knowledgeable with the concept of Corporate Governance and its principles  82% of the respondents accept that the main benefit of implementing Corporate Governance practices is compliance with the legal and regulatory requirements.  None of the respondents have developed their own code or guideline for Corporate Governance.  A significant barrier in implementing good Corporate Governance was the unavailability of qualified staff and a lack of information/know-how as well as Lack of effective rules and regulations about Corporate Governance principles and practices.

As mentioned in the last sections, initial discussions on implementation of Corporate Governance in Iran began in 2005. Currently after 6 years, while the Iranian Code of Corporate Governance has not been implemented yet, most of the FOB and listed company directors do not have much information or awareness on principles of Corporate Governance. The concept is mainly known to the accountants, students, exchange organization administrators and university professors rather than the business community. Economic reform policies in Iran require strengthening the role of SEO and introduction of the Iranian Code of Corporate Governance. These should be supported by board-based efforts to raise awareness among directors and investors.

Understanding Corporate Governance and its Main Goals:

As we see in the below graph, only 9% of respondents indicated that they knew Corporate Governance principles, specifically the OECD Principles of Corporate Governance. This was followed by 45% of the respondents not knowing much on the concept.

The respondents were asked on various definitions of Corporate Governance. Some of the respondents identified Corporate Governance as a company‘s internal structure that allows it to comply with domestic laws and regulations. They perceived Corporate Governance to be a legislative and regulatory burden that has been imposed on them by regulatory body; some of the respondents believed that Corporate Governance is the same as corporate social responsibility or sustainable economic development. This group also thought that Corporate Governance is about ethics and a company is ethical if it fulfils its corporate social responsibility.

The overall response is not surprising but most of the respondents believed that Corporate Governance is a system by which companies are directed and controlled. This is in line with the OECD definition of Corporate Governance, which uses the same definition. However, based

28 on our observations on the level of knowledge of the respondents on CG, we believe that the number of respondents who actually understood Corporate Governance was much lower than their self-assessment indicated.

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

Familiar 18% 27% somewhat

45% Not Least 9% very Much

Corporate Governance Improvements

In addition to gauging awareness of good Corporate Governance practices, the survey sought respondents' views on the level of compliance with Corporate Governance best practices in their own companies.

Although still the principles/codes of Corporate Governance in the country have not been enforced, some companies- relying on managers‘ personal experiences, are taking advantage of management consultants in organizational longevity of organization and have implemented some of the aspects or principles of Corporate Governance in their companies. These activities are mainly in:  Separation of CEO and managing director;  Formation of audit and risk committees;  Reporting of the financial director to the board.

Although in the above mentioned companies, audit or risk management committees existed, these committees are not affiliated with the board and are mostly formed by the executive management and can be considered as CEO‘s advisory arm.

Companies had adopted such Corporate Governance improvements as required by best practices; for example, while 9% had established board committees, 68% of the respondents have Separation of chairman and CEO , 73% of the respondents have not introduced independent non-executive directors to the board of directors, 86% have not established Board Evaluation Instructions, 60% have not established conflict of interest and related-party transactions administration procedures and 69% have not Implemented a formal remuneration system for executives.

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, 9% nomination and selection committee and ...) Developing compensation and remuneration mechanisms for board 31% of directors and executives Board Evaluation Instructions 13%

Separation of chairman from CEO 68% Independent and non-executive board members 27% Developing procedures governing deals with related parties and 40% preventing conflicts of interest Instructions for protecting shareholder and stakeholder rights 4%

Barriers to improve Corporate Governance practices:

4% of the respondents did not identify any barrier to improving Corporate Governance in the company as they believed every barrier has to be overcome and resistance is futile.

Of the 96% of respondents who identified barriers, 77% mentioned unavailability of qualified staff to help with implementation of Corporate Governance practices and 68% stated lack of countrywide effective rules and regulations relating to Corporate Governance principles and practices as the barrier to improving Corporate Governance practices in the company.

The other main obstacle identified by 18% of the respondents was that Corporate Governance identifies or discloses commercially sensitive information that cannot be shared with competitors. 9% asserted that the main obstacle to improvement of Corporate Governance practices was that they did not see any benefit in adopting such practices.

Barriers to improve cg practices Lack of effective rules and regulations 68% Due to information disclosure and transparency as a part of 18% Corporate Governance, we prefer to keep our financial information away from competitors and rival stakeholders We don‘t find any use in it regarding the Iranian legal and 9% business structure / We simply don‘t see any value engaging with it. Lack of professional experts and consultants 54% Lack of knowledge and expertise available to the company 77% I do not see obstacle 4%

Benefits of adopting Corporate Governance practices:

For an overwhelming majority (77%) of the respondents, the most important benefit of adoption of Corporate Governance practices was improved strategic decision-making process. Meanwhile, we can see that the perceived benefits of Corporate Governance are closely followed by improved risk management system and improved brand and credibility, each 72% and 68% respectively.

It should be noted that the bottom three perceived benefits are also indicative. Defending shareholder‘s rights and information disclosure and transparency as important goals of Corporate Governance are fully underestimated and a major benefit pertaining to better access to capital is unrealized the most.

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 40% internationalization

Importance of Implementing Corporate Governance Practices:

The concept of Corporate Governance will become popular only if the business community and the financial sector consider it as important.

In our survey 22% of the respondents considered Corporate Governance to be very important, 68% considered it important and only 9% considered it to be of average importance. Even though the questionnaire offered the option of ‗not important at all‘ or ‗irrelevant‘, none of the respondents considered Corporate Governance to be irrelevant or not important at all.

Importance of the implementation of Corporate Governance

0% not important

9% somewhat important 68% important 22% Very important

The Board Responsibility

 Bylaws or statements in which the board functions is described in details was not identified in studied companies and mainly board‘s duties and responsibilities is in the framework of commercial law and company‘s statutes. Only in one of the quasi government companies (%4), there existed board duties booklet, which was handed in to them upon selection.  Even though the boards of directors are performing a number of functions required by the Code of Corporate Governance, such as approving budgets and remuneration of executives, issues such as succession planning and exploring business opportunities are not considered important matters that need to be overseen by the board. Only in one of the companies we observed that to manage succession planning, a group of managers were elected and the shadow board was formed.  Approving budget plan and ensuring executive management performance are the main responsibilities of the board of directors in the Iranian companies.  There is no transparent and accepted division of roles and responsibilities between board member and shareholders and they are often mis-concepted.no reporting line between board member and shareholder.  No self-assessment system exists for board members or CEO. Board members and CEO are resistant towards these kinds of assessments. Although in some large governmental and quasi-governmental companies, board members are evaluated by the organization but no efficacy was observed.  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.  Respondents generally struggled to define the word ‗independent‘. This term is generally considered synonymous with non-executive board members. 96% of the respondents did not have a single independent non-executive director on their board of directors.  Some board committees such as risk management and audit committees in studied companies did exist but the interesting thing was the composition of these committees which was mostly composed of executive managers and the committee would report to the CEO. Although in 17% of the analyzed companies audit committee existed, members of the audit committee were selected by the CEO and reported to him.  The board of directors met on average ten to twelve times a year in 45% of the surveyed sample.  About rewards compensation system and board services, companies often approve a number in General Assembly and divide it equally between board members. If the CEO is also a board member, then he will receive more than other members.  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.  SEO obliged all listed companies through a bylaw that the CEO and chairman of the board have to be separated.  Some holding companies have by-laws or guidelines for the evaluation of board of their own subsidiary/member companies. The holding or parent company does this assessment for all subsidiary/member companies‘ board members while the parent company, itself, does not go through any assessment or evaluation. Generally speaking, board evaluation is in its infancy phase in Iranian companies.

Traditionally and also based on the Iranian commercial law, the board is responsible for executive and strategic duties (but in practice mainly administrative/executive tasks). However, the power structure in Iranian companies is very centralized, with little delegation of authority to lower management levels. Both in private and government-owned companies, the managing director's approval is needed for nearly all decisions with legal or financial liability on the company.

Iranian companies have a one-tier board structure with Board of Directors, but some of the Iranian semi- government companies have a two-tier board structure: a Trustee Board and a Management Board. In the one tier board companies, election of board members is made by the General Assembly and in semi-governmental companies; selection of the management board members is done by the Trustee Board. In semi government companies, the Trustee board is supposed to oversee the work of the management board, while the management board carries out the day-to-day operations of the company. Practice however varies greatly across companies, with Trustee boards playing little role in operation of some companies, while working full time in others and engaging in day to day management. However, the Trustee boards in many JSCs do not supervise key functions, including corporate strategy, financial reporting and risk management and policy.

Due to the Commercial Code of Iran, all board members shall represent a shareholder or a group of shareholders. This means selections of independent board members are not permitted by law. Board members are divided into two categories of executive and non-executive. However, in reality, CEO is the most powerful person in the company and often offers or selects the board member. This could severely damage the governance system in such companies.

According to the fiduciary duties of the board members, directors and key company officers must act reasonably and in good faith toward the company. Directors can be held liable for losses caused to the company for wrongful behaviour. For JSCs, there are few specific rules on conflicts of interest, through a new SEO regulation on related party transactions applies for board members as well.

Based on the Corporate Governance guidelines, board‘s duty should be strategy formulation, ensuring achievement of the financial objectives, proper utilization of manpower resources and performance evaluation of managers/directors and risk control. Therefore, chairman of the board‘s duty must ensure achievement of the above tasks and effective communication with shareholders, while the CEO takes responsibility for the executive tasks.

The separation of strategic and executive duties in companies requires development of proper organizational culture and also existence of legal obligations. Existence of internal approvals and bylaws are the most important and essential supports to make this separation practical.

Board composition:

The composition of the board is a crucial factor in preventing conflict of interest and balancing competing demands for company resources. In all of the surveyed companies, people affiliated with major shareholders were members of the board. Minority shareholders were represented on the boards of 8% companies surveyed.

The Chairman of one company said: ―Because the company‘s shareholders composition is 50- 50, mainly during the first four years of our activities, many of the differences due to

33 shareholders and the board composition, remains unresolved but in the past two years it was agreed that a board member be added to the members independently so we could solve many problems and decision-making has become much easier and faster.‖

Number of board members:

Good Corporate Governance practices require that boards be large enough to encompass individuals with a range of specific skills on finance, legal and commercial affairs. On the other hand, a board exceeding a dozen members can be unwieldy. Meanwhile, the corporate law in Iran requires a minimum of two board members.

In our survey board of 3 and 4 members had 6% of the total each. The highest number of members recorded was five, found in thirteen of the surveyed companies and 18% had a board of 7 people.

Seven members 18% Six members

Four members

60% Five members

Three members

0% 10% 20% 30% 40% 50% 60% 70%

Companies mostly don‘t pay attention to board‘s composition in order to provide the diversity of skills, talents or expertise. The composition of board usually comes from composition of shareholders and their respective shares in the company. In none of the surveyed companies have we noticed existence of any bylaw for board composition. However, in one of the companies, it was emphasized that the board should contain a financial expert.

Number of executive and independent non-executive directors:

Even though the definition of independent director was given in the questionnaire and explained during the process of interview, a majority of respondents did not understand the definition. For them, a non-executive director who did not work full time for a company was an independent director. A majority of the respondents expressed that it is difficult to find any non-executive directors and impossible to find independent non-executive directors. There is general resistance to the idea of having independent non-executive directors on the board.

Respondents were satisfied with having non-executive directors, whom they defined as those directors who do not work full time in the company and can be distant relatives or friends, but these respondents generally opposed the idea of having an independent non-executive director, mainly because they could not identify the value of having such independent outsider directors.

Board meetings:

The Companies Ordinance requires that the directors of a public company meet at least once every year, and 100% of the responding sample stated that they complied with this. On the other hand, the Code of Corporate Governance recommends having a meeting every month.

The board of directors met on average 10 to 14 times a year, in 46% of the surveyed sample, and followed by around 6 times a year (25%). Meanwhile 91% stated that the directors are furnished with background material one week before the meeting, as required by law. In a considerable part of companies, 17%, it is not clear whether board meetings are not held or they do not document the meetings.

In private and family companies mainly, board meeting are not held formally and many decisions are taken in a friendly or family gatherings. In these companies and mainly due to high levels of confidence towards the CEO, the formal meetings are not needed and that is enough if the CEO participate the members only during the phases of making and implementing the decisions. In small and medium companies, family owned businesses and companies in which amount of mutual trust between board is high, basically, the board meetings are not officially formed and doesn‘t have any specific discipline.

Many businesses create a board of directors in order to comply with legal requirements. Known as a ―paper board‖, its purpose is usually limited to approving the company‘s financials, dividends, and other procedures that require board approval by law. These boards usually meet about once or twice a year and their sessions last for a very short period of time. Even in state- owned and quasi-governmental companies, because some board members participate in more than 10- 20 companies, board meetings are rarely formed and it was observed that some fundamental decisions for the company will have up to six months delay due to not reaching a quorum of board members.

Board members should be able to allocate adequate time to their responsibilities, which include attending periodic meetings. There should be some limitations on the number of board seats one person can occupy. We did not observe such rules or limitations in any of the surveyed companies. Data gathered on the frequency and duration of meetings showed the following:

(i) On average the Boards meet 6 times a year and the average duration of a meeting is 4 hours. This means that, on average, boards are formally in session for 24 hours in a year to attend to the company's business and to fulfil the obligation of directors. (ii) Public Sector Boards meet much more frequently (Average 10+ times/year) and for longer duration (average 6 hours). therefore all other boards in this survey meet fewer than 6 times per year and for much shorter durations (<3 hours). Some Boards indicated that they meet for as little as 8 hours per year i.e. 4 meetings of 2 hours each.

Following the above notes, a question rises about the optimum hours per year that the board should be working on company matters, in a formal meeting. Is 24 hours per year enough to perform all the functions expected from a board looking from law perspective as well as from stakeholders‘ points of view? Is this time enough for approval of accounts 4 times in a year, setting strategy and business targets, approving new investments, etc.? Another point should also be considered that although Code of Corporate Governance recommends board meetings each in a monthly order, some experts noted that this might not be necessary and may transform the nature of board meetings to executive meetings.

Clearly, there is no unique answer. Each Board has to determine the length of time it should be meeting to fulfil its obligations. Board of the companies that are under threat or in rapid expansion would need to spend more time than those operating in a steady/static mode.

Frequency of meetings Annually Quartley 0% 12%

Other 17%

Bi-monthly 25%

Monthly 46%

Board Assessment

The culture of board evaluation still has a long way for improvement in Iran. As only 17% of the respondents stated that the board had conducted a formal evaluation of its performance in the last two years. Only in one company was it noticed that Key Performance Indicators were established to assess the performance of the board.

The objective of Board assessment would be to improve the effectiveness of the Board. Various methodologies could be considered to undertake this Exercise. For example, the Board could appoint one of its own directors or an independent consultant to periodically assess the collective dynamics of the board by talking to the directors and provide periodical feedbacks to all board members individually and to the board as a group.

In none of the surveyed companies, there was no board self evaluation systems in place. Only in 8 percent of the companies were there a system of 360 degree evaluation for managers and employees. Some respondents indicated that they had an informal process of assessment. Meanwhile, we noticed a growing interest in instituting processes that would allow this to happen.

Some holding companies have by-laws or guidelines for the evaluation of board of their own subsidiary/member companies. The holding or parent company does this assessment for all subsidiary/member companies‘ board members while the parent company, itself, does not go through any assessment or evaluation. Generally speaking, board evaluation is in its infancy phase in Iranian companies.

In some quasi-governmental companies, assessment guidelines are prepared by parent companies or by the related ministry, in which managers/directors are evaluating, is mostly based on personal and organizational performance. These kinds of evaluations are mostly performed as one of the administrative bureaucracy processes while their results do not have a meaningful effect on the feedback or appraisal system for the board members.

The Role of the Board

There are no published guidelines or booklets explaining the roles, responsibilities, operation, qualifications or structure of boards in Iran19. In practice, boards have not assumed an independent oversight function for themselves, and are considered to play a relatively minor role in providing strategic guidance for companies.

Looking from a professional management point of view, the board is mainly responsible for setting corporate strategy, setting ethical standards, monitoring managerial performance and achieving an adequate return for shareholders, while preventing conflicts of interest and balancing competing demands on the how the company is run and how the rewards are distributed. Boards need to exercise objective and independent judgments. It is the board‘s responsibility to oversee systems designed to ensure that the company obeys applicable laws, including tax, competition, labor, environmental, equal opportunity, health and safety laws. The board is not only accountable to the company and its shareholders but also has a duty to act in their best interests.

Most of the boards are empowered to set the CEO's compensation. Compared to the Public Sector and MNCs, boards of Family Owned Businesses generally have higher authority to define CEO remuneration indicated by Family Owned Boards is generally more than what Public Sector and MNC Boards indicated. In our survey, however, it is worth noting that relative to the power to hire/fire or undertake performance assessment of CEOs, many of Boards felt they were empowered to set compensation.

100% of the surveyed sample stated that the board was responsible for electing, appointing and dismissing the chief executive. The board of directors is responsible for setting the remuneration of the CEO. A majority 88% of the sample thus expressed that the board was responsible for approving the remuneration of the CEO. 33% of the respondents did not reply to the question relating to approval of the succession plan, while 33% stated that the board was responsible for the succession plan.

19 - As of June 2011

Succession Planning

Replacement

Performance appraisal

Compensation and remuneration

Recruitment and selection 0 5 10 15 20 25

OECD Code of Corporate Governance clearly prescribes that directors must determine compensation, but as indicated by the survey, not all boards are fulfilling this responsibility and they end up simply rubber stamping decisions taken elsewhere.

Regarding a separate accessibility of the board members to the CFO, in no case we observed that a board member might be able to access CFO without the consent of the CEO while this accessibility should be ensured regardlessly.

Board Responsibilities

Between Reviewing strategic plans and macro operational plans, Business Plans , Organizational Performance Assessment and Monitoring , Fiscal Budgeting and monitoring costs as a board responsibility, An overwhelming majority (83% of the companies) stated that the board was responsible for setting the corporate strategy. A vast majority of respondents said that their Boards did involve themselves in setting the Vision/Mission/Value statements of the company. The few who said that their board was not involved in this process indicated that they were either asked to rubber stamp what was given to them by the controlling shareholder or that their boards merely completed a formality without truly engaging the directors. Among the surveyed companies, the major duties of the boards are budget approvals, and performance assessment of the executive managers in regard to the approved budget. The annual budget of a listed company is classified as a significant issue that shall be passed to the board for information, consideration and decision making. The approved budget for listed companies and the associated operational plan must be handed in to the SEO for information.

Also the annual reports, including the financial statements, are to be approved by the directors of the company. 83% of the surveyed sample claimed that the board of directors did approve these documents.

Board Responsibilities

Fiscal Budgeting Performance Assessment Business Plans Reviewing strategic plans

Verifying of balance sheet, income/profit & loss statement and report of board‘s activity, profit payout to shareholders within maximum 8 months, use of formal accounting services and providing financial audited statements, right time formation of annual general public assembly and possibility of shareholders‘ presence in assembly, redress to the company which is due to changes in managers/directors and responsibility against company and third parties toward violation of legal regulations, statutes and legislation of the general assembly as a single or joint, are the most important responsibilities of managers/directors according to the Commercial Law of Iran.

On the other hand according to law of securities/stock exchange market, permit/license obtaining the public release from the organization in order to postulate writing and publish/release securities, announcing the results of the distribution and sale of securities to the organization maximum 15 days after the public supply/distribution, information providing at the time of application acceptance, complying with requirements of information disclosure of registered publishers with the organization, respecting of disciplinary regulations and information regarding securities transactions which is not based on secret information, publishing comprehensive information on company activities based on accounting and financial audit standards and preparing of financial statements in accordance with legal regulations are other duties of directors.

Succession Planning

Boards must have the required authority and power to compensate the CEO consistent with their view of performance. Boards that are unable to actively influence CEO compensation often express their negative opinion on the CEO performance in giving approvals to the CEO plans during the board meetings.. The CEO is the principal person through whom the Board implements its policies or achieves its targeted objectives. For this reason, the board must have controlling tools like CEO compensation in hand, to better govern CEO activities and develop positive behavioural changes in CEO in line with the best interest of the stakeholders.

Less than half of the respondents, 38%, said that their boards engaged themselves in succession planning. 8% said they were considering instituting a process. One of the respondent, 4% , said that they establish Future Director Group to prepare their board in future. A chairman of one company said: ―In the past 10 years we had a very rapid growth in our business and we have established nearly 30 companies. Hence, in order to overcome the problem of effective board we tried to create the shadow board during the past years.‖ In no other case, we saw succession planning to be a practice, especially for the board of directors. They may just use this method for executive management‖.

Planning and developing future leadership is crucial for long term and sustained success of a company. For a fair and reliable system, it is important for the board or a board committee to oversee this activity and demand an annual review. In certain instances this activity could also be performed by the controlling shareholder. However, in such cases the board should be taken into confidence and their buy-in secured. Well-established systems for succession planning can be motivational for high performance/high potential employees who aspire for progression based on merit and a known criterion. Tools like Development Centre or Assessment Centre might be used for this purpose and usage of these tools were also observed in 3 companies.

Executive Board Assessment

The basic idea to have the appraisal of CEO by the board or a board Committee is to:  To give the directors a good sense of how the top team of the company is performing  To ensure objectivity and fairness by reviewing the integrity of the process being followed by the CEO  To bring in an element of multiple assessment.

More than half of the respondents (54%) said that their boards do not involve themselves with the performance appraisal of the senior management of the company. In one of the FOBs in our survey, the parent holding company evaluated the performance of the SBUs by demanding weekly, monthly and annual management reports. Also for 30 percent of the surveyed companies, the holding company has defined key performance indicators for evaluating the performance of the board members, and executive managers of the subsidiary companies.

Engagement in Performance Appraisal

No 54%

Yes 46%

Board committees

Board committees play an important role in Corporate Governance best practices, and respondents were asked whether they had established or planned to establish the committees, generally considered necessary for adequate Corporate Governance. Although the Commercial law does not require specific supervisory board committees, a number of companies reported that they had established some committees.

The most prevalent existing committee was the performance appraisal committee (29.0%), followed by the risk management committee (%20), Audit committee (16.0%), (16.0%) . however, an important point is that these committees were mainly established by CEO and usually board members are not members of these committee.

Only in one company was it noticed that the risk management committee was formed in presence of board members.

Prevalency of Board Committees

Others 16% Performance Appraisal 29% Internal Audit 16%

Nomination 0%

Compensation and 0% Remuneration 20% Risk Management

Committees of boards may not have high effectiveness

In Iranian companies, mostly we have no formal board committees such as Audit Committee, Remuneration Committee, Risk Management Committee, etc. Yet there is a need for establishing a framework on the functioning of committees of boards so that their effectiveness is demonstrated

Non executive directors often hold middle-level positions in other companies and this, coupled with a packed board meeting calendar, may leave them with very little time to devote to the affairs of their boards. Additionally, independent directors may not get adequate information before a board meeting.

Although best practices recommend20 that no more than 75% of the elected directors should be executive directors, including the chief executive, 70% of the respondents stated that more than 30% of the elected directors were non executive directors.

20 - McKinsey report 2009

CONTROL ENVIRONMENT AND PROCESSES

In survey by TSE, where 132 of 330 responded regarding their audit committees, 52 did not have an audit committee and of the 80 companies with audit committees, only 4 confirmed that the committee reports to the board.4 of the companies in our survey had internal auditors. In 3 of them, internal auditors reported to the CEO while only in one company did the internal auditor report to the chairman. Also 4 of the companies in our survey had audit committees where all of them reported to the CEO.

The idea of auditor rotation or rotation of audit partners was not very popular among the respondents, mainly because quality auditors are not available in abundance: 30% of the surveyed had not changed their external auditor in the previous five years. Nevertheless, Tehran Stock Exchange requires all listed companies to change their auditor every 3 years.

46% of the respondents stated that their audit committees were responsible for overseeing internal controls and risk management procedures and only 18% stated that the audit committees were responsible for overseeing whistle-blowing policies.

The TSE Code of Corporate Governance recommends that every listed company shall have an internal audit function that shall, among other things, be responsible for recommending the appointment of external auditors to the board of directors and shall consider any questions of resignation or removal of external auditors, audit fees and provision by external auditors of any service to the listed companies, in addition to audit of its financial statements.

Nevertheless, Internal Auditing is not welcome to the market and only holdings, banks and listed companies use it. It is a pre-requisite for listed companies while holdings usually use auditors as a major control and strategic leadership mechanism within their companies. Nonetheless, most of small and medium companies neither have auditors nor go through auditing regularly.

TSE requested 330 listed companies to report their status of internal audit system and their superior officer. 132 companies had answered to this request at the point where we investigated last year. It became clear that, 80 companies have internal audit systems in place while 52 companies do not. It was also found that superior officer of this committee in 60 companies is the CEO, in 4 companies is the board, in 3 companies is the financial manager or deputy of Economics and Finance, in 1 company is managed with audit committee and 1 company used outsourcing method while others did not provide any specific answer.

In our survey we found that 4 of the companies used internal auditors inside their organizations while four of them have formed an audit committee. Consistent with the results from TSE survey, we also found that in 3 of the 4 companies, the auditors were appointed by the CEO and also reported to the CEO while in one Iranian-Swiss joint venture did the auditor appoint and report to the board. Another important point about internal auditors in these companies is that internal auditors are considered as employees of the company and therefore, shall not be considered as an independent person.

Moreover, 17% of the companies had audit committees and all these 4 committees were appointed and supervised by the CEO. They also reported to the CEO. In none of these

42 companies, audit committee chose the external auditor of the company but they could suggest the external auditor to the board or CEO.

Prevalency of Audit Committee and Internal Auditor (%)

companies with no internal 67% auditor or audit committee Companies with audit committee 17%

Companies with Internal Auditor 17%

We can see from the figure below that the internal auditor of the responding companies performs a number of functions where the most common are to perform regular and extraordinary inspections of the company‘s operations, to ensure compliance of the board of directors and executive bodies with legal requirements, charters and by-laws, and to develop policies and procedures for internal control and risk management.

Internal Auditor Functions Investigates cases of the uses of insider information

Oversees the periodic financial reporting process implemented by management

Ensures that the board and the executive bodes act in compliance with the legal requirements, the charter and by-laws Develops procedures and policies for internal control and risk management

Reviews the accuracy of accounting entries and checks the accuracy and timeliness of document flows Carries out periodic and unscheduled inspections and inventories of assets and liabilities Implements internal control activities on a daily basis

The main question here is that if internal auditors are supervised by the board, given that the board currently is a strong representative to majority shareholders, is the independence of internal auditors, as its most important feature ensured?

The aim of internal control is to secure a logical assurance on reaching effective objectives, operational efficiency, reliability of financial statements and adherence to rules of practice and current regulations. While management is responsible for ensuring that fraud and insiders

43 dealing do not take place, the audit committee, supported by the internal and external auditors, should ensure that the necessary controls are robust and defensible.

Our findings about internal control mechanisms and processes in both financial services industry and capital market reveals the structural weaknesses in this domain although the financial and capital market regulators have noticed and emphasized the importance of internal control systems. The most prominent and notable point is that Iranian businesses reduced the concept of internal control environment to just internal auditing and they usually, deliberately or not, commit such misconception.

Another checkpoint for TSE can be according to ―Instructions of Acceptance of Securities in Tehran Stock Exchange". The admission request, hence, needs an independent auditor to evaluate and approve the adequacy of internal control system and submit the relevant reports and documents to TSE and this also need to be approved and confirmed through a meeting between TSE and the applicant securities organization. This approval should indicate the point that company's internal control system involves maintaining and respecting the rights and interests of shareholders equally.21

21 All State-owned companies and organizations go through a formal audit each year; though all State-owned banks are excluded from this process due to a technical legal point. However, Central Bank of Iran, as the regulator of the financial market, has guided Iranian banks to draft and approve internal control procedures, bylaws and checklists in their board of directors in order to comply with applicable international rules and guidelines like Basel II and to put them into implementation. In TSE on the other hand, although the internal control guideline has been drafted, it has not been ratified or mandatory yet.

INFORMATION DISCLOSURE AND TRANSPARENCY

 Listed Respondents are generally fulfilling the requirements of the Disclosure Bylaw regarding information disclosure and transparency. There is, however, reluctance to provide voluntary information related to articles of associations and related-party transactions, remuneration of the board members, market share, sales and marketing data, environment and social responsibility, and stock options policy, or to add a ‗Management discussion and analysis‘ section in the annual report, mainly because the respondents were of the opinion that there was no legal requirement to disclose such information in annual reports.  33% of the respondents did not make their annual reports available on their websites.  Non-public companies mainly tended to work with low lights and to disclose as little information as possible. The respondents mainly considered transparency regarding external stakeholders while they failed to relate transparency in internal processes to risk management purposes.  Currently, some holding companies have remarkably large subsidiary/member companies while they often have prominent exchanges between themselves. It is necessary to create a mechanism to obtain financial statements of all subsidiary/member companies separately and also jointly as a group and have them audited, approved and sent to TSE

Effective disclosure, which includes financial disclosure and transparency, is fundamental to good Corporate Governance and essential for building investor confidence. Information transparency is also necessary for capital market efficiency. Since business entities only assume information disclosure costs, disclosed information is usually less than satisfactory. More disclosure results in less uncertainty but for this purpose, a cost-benefit limit should also be considered.

The 2006 Securities Act provides for regulation of listed companies that fail to properly disseminate information to the TSE, which has the authority to temporarily de-list a company until it meets certain requirements. The main goal of the TSE is to improve the market integrity and efficiency through more timely disclosure of information. TSE website notes the Securities Act protects investors' rights, and is aimed at "preservation and development of a transparent, fair and effective market." However, there is insufficient publicly available information that comprehensively addresses Iran's compliance with this principle.

Banks and companies which are considered Public Interest Entities use National Accounting Standards (NAS22). Larger banks and some other companies, usually with foreign investment or

22 The National Accounting Standards (NASs) issued by the Islamic Republic of Iran Audit Organization (IRIAO) are based on International Financial Reporting Standards (IFRSs), formerly known as International Accounting Standards (IASs), issued by the International Accounting Standards Board. IFRSs are being constantly reviewed and revised to keep up with changes in global financial practices and trends. Consequently, to remain in compliance, the IRIAO has been introducing new projects for incorporating revisions into NASs. According to IRIAO website, as of February 2009, amendments of NASs aimed at harmonization with international standards were in process. On its website, the IRIAO accounted for 9 NASs which made "minor departures" from the revised IASs, and 10 IFRSs that had not been adopted as of February 2009. In a May 2007 self-assessment report prepared for the International Federation of Accountants, the Iranian Institute of Certified Accountants noted that the 45 control, have made progress in implementing IFRS, but other companies have not. Many companies still do not comply with NAS and use tax accounting for their reports.

All listed companies are required to publish audited financial statements that include a balance sheet and income statement. A cash flow statement and information on controlling or beneficial owners are not required for JSCs.

Disclosure Methods According to the Information Disclosure Bylaw in TSE, Issues subject to disclosure should be made available to public at least 10 days before the General Assembly and at most 4 month after the end of financial year. Also the listed companies are obliged to establish an informational portal and provide all their previous financial and non-financial statements, managerial reports and the latest news on transaction of the company shares on the portal, but many companies do not satisfy these rules and even may not have updated websites.

All listed companies are also required to put their annual reports in Codal23 system from 2005 so that all shareholders can have access to information like annual and mid-term reports, financial statements, reports of Annual General Assembly and events affecting the activities, new or severe financial conditions and publisher‘s results of operation). Companies are required to announce the information on transactions according to the terms in the relevant bylaw and disclose them to the public. In this regard, regulatory and monitoring agencies like SEO or TSE, have put sanctions on those not providing transparent information disclosures.

Compliance In our survey we saw that only listed companies published their financial statements and annual performance reports and none of the other surveyed companies tended to publish their annual or financial reports.

Shareholders and investors continue to report problems in accessing companies‘ information. TSE posts some information, including prospectuses and a small number of annual reports, and the Registrar in the Ministry of Taxes also has basic information for companies. Some banks and a few companies also have websites with information for the public; but normally the publicly disclosed information usually does not have required sophistication or details providing useful information.

Factors Preventing Disclosure The main reason for non-disclosure of the voluntary information outlined above, provided by 83% of the respondents, was the absence of any legal requirement to do so.

IRIAO had established convergence of national auditing standards with International Auditing and Assurance Board pronouncements as a formal objective. To keep up with the revisions in ISAs, the IRIAO, according to the Iran Daily 2005 article, prepared seven new standards and was in the process of revising existing standards. 23 www.codal.ir 46

Reasons for non-inclusion of information in annual reports

Other

There have been no penalties for this

There is no legal requirements on this

No one asked

Disclosure of Material and Related-Party Transactions In OECD countries, regulators require disclosure of transactions involving company directors and their associates because of the fiduciary nature of the director's role. Also in Iran, related party transactions are considered and subject to mandatory disclosure.

Currently, some holding companies have remarkably large subsidiary/member companies while they often have prominent exchanges between themselves. It is necessary to create a mechanism to obtain financial statements of all subsidiary/member companies separately and also jointly as a group and have them audited, approved and sent to TSE.

A particular characteristic of the Iranian corporate landscape, however, is a tendency for such individuals to establish large interlocking networks of subsidiaries and sister companies that include partially-owned, publicly-listed companies. On the one hand, the use of such subsidiaries and sister companies permits investors not only to place their money with the management team of their choice, but to direct this money to the markets and industries in which particular subsidiaries specialise and which investors believe hold the greatest potential for profits. On the other hand, such pyramidal structures can lead to severely inequitable treatment of shareholders. By conducting operations through a complex network of subsidiaries, controlling shareholders acquire control of operations and/or cash flows disproportionate to their equity stake in individual companies.

Disclosure of related party transactions is minimal owing to lack of legislated requirements and lack of compliance with good Corporate Governance practices. Just one of the surveyed companies (4.0%) disclosed related party transactions and one (4.0%) disclosed significant transactions. only 4 companies (19.0%) disclosed both. Seventy-three (73.0%) disclosed neither.

The extent of this disproportionate control is frequently unclear to outsiders and undisclosed by insiders. A particular challenge for corporate-governance reform in Iran is, therefore, to encourage the dynamism and growth of family businesses while channelling their energies and operations into structures that are more transparent and, consequently, more clearly equitable for non-family investors.

Disclosure of Conflicts of Interest and Related-Party Transactions It is the responsibility of the board to monitor and manage potential conflicts of interest between management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions.

Disclosure of related-party transactions and conflicts of interest help to protect minority shareholders‘ rights as well as to provide information to the market that the company is being run with due regard to the interests of all its investors. It is thus essential to fully disclose

47 material related-party transactions to the market, including whether these transactions have been executed consistent with arm‘s length principle24 or on normal market terms. Related parties shall include entities that are controlled by, or are under common control of the company, significant shareholders, including members of their families, or key management personnel.

The Commercial Law has also laid down certain requirements related to disclosure of conflict of interest and related-party transactions. The chief executive cannot engage, directly or indirectly, in a business competing with the company‘s business. Directors and officers must disclose ―direct or indirect interests in any contract or arrangement entered into or to be entered into by or on behalf of the company‖. Directors who have an interest in a certain transaction are not allowed to discuss or vote on the matter in board meetings.

Disclosure of remuneration Payments to the board members of companies are unclear and hidden in many cases. It seems TSE must induce accepted/listed companies and even display the payments to board members and auditors separately in each case and reveal all payments made to company board, on either wages, benefits, overtime, bonus or loan basis.

Moreover, the rights and benefits of executive members and the remuneration of non-executive members and their performance reward is officially announced in assembly meeting and prevent its transfer in charge of major shareholders.

Financial Transparency, Financial reporting and information disclosure has been mentioned in Law of Securities and in this regard, companies should send the required information on a certain schedule to TSE. However, some companies do not comply with these rules, either with putting delay in the process or with not sending any information.

The quality of audits has also been questioned by some market participants; Auditors cannot be directly connected to the company and are required to comply with a professional code of ethics. Otherwise, provisions on auditor accountability to shareholders were actually removed from the law and have not been replaced.

There were no requirements for rotation of audit firms or partners and other independence requirements are minimal; However, TSE has put forth rules to oblige the companies to change their external auditors every three years. Auditors often do other non-audit work for their clients. In some cases they may, effectively, both prepare and audit the financial statements and accounts.

24 The arm's length principle (ALP) is the condition or the fact that the parties to a transaction are independent and on an equal footing. Such a transaction is known as an "arm's-length transaction". It is used specifically in contract law to arrange an equitable agreement that will stand up to legal scrutiny, even though the parties may have shared interests (e.g., employer-employee) or are too closely related to be seen as completely independent (e.g., the parties have familial ties). From Wikipedia 48

Shareholder and Stakeholder Rights

 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.  In order to help foster shareholder activism, shareholder institutions are beginning to play a crucial role in providing a platform to initiate collective shareholder activism. Re-activation of Individual Shareholder Association is one of the key initiatives recently  The response showed that just one company has a Board-approved CSR policy whereas many public sector entities do not

Although the number of shareholders and value of the market has risen dramatically lately, administration and control of the company remain within certain groups of shareholders. This is mainly because the basis and conditions to have independent directors in board have not been facilitated yet and minority shareholders have little influence in determining board members and overseeing their work and performance. Hence, certain groups of powerful shareholders are practically controlling the company and they play a major role in choosing the majority of board, choosing the independent or external auditor and determining the approach and strategy of the company. However, this can cause damages to minority shareholders’ rights and benefits while they have little or no participation in effective control or oversight of the company and choosing or affecting directors or auditors of the company. A sound Corporate Governance system can help in solving these malfunctions and maltreatments and improve the respect to rights of shareholders and the performance of the companies.

Authority and Functions of Annual General Meeting

"Shareholders of a joint stock company participate in the ownership, profit, losses and liquidation of a company in direct proportion to their share holding‖. Due to the Iranian Commercial Code, the liability of each shareholder is limited to the par value of his/her shares and in absence of fraud there is no alternative to shareholders. As such, a joint stock company under Iranian law holds a separate juridical personality and can sue or be sued on its own. At the Annual General Assembly, majority is 50+1 percent of the meeting participants while at an Extraordinary Meeting a majority is considered two-thirds of present voting. A shareholder with 20 percent or more of a company has the authority to call a shareholders' meeting or go to court.

Shareholders have a general right to attend General Assemblies, trade and transfer their shares, receive basic information from the company, elect board members, and approve major transactions. Approval by two third majority of attending shareholders at the General Assembly is required for changes in the company charter, collecting new capital, and initiating restructuring or liquidation. Shareholders can dispute a General Assembly‘s decision in court and new fiduciary duties mean shareholders can, in theory, sue directors and company officers for damages. General Assemblies are not always held, and when they are held, shareholders may not approve major transactions or receive all required information. Shareholders do not have an explicit right to ask questions during the General Assembly. The decision to collect new capital can be delegated to the board, and minority shareholders do not have pre-emptive rights when collecting new capital. Accessing corporate information is difficult. Outdated securities market infrastructure and norms and limited liquidity also effectively limit shareholder rights by making it more difficult to trade shares.

The rights of these shareholders comprise two main categories. The first category makes up the bundle of rights that constitute ―ownership‖. Generally speaking, this bundle includes: the right to information on basic company performance; the right to enjoy distribution of dividends proportionally; the right to enjoy distribution of company property upon liquidation proportionally; the right to participate in decision-making by the shareholder meeting in proportion with shareholders of the same class. The second category of shareholders‘ rights differentiates the separation between ownership and management. While no longer having the responsibility, or the right, to oversee day-to-day operations of the company, shareholders must have some means of reconciling their differing interests, goals and investment horizons into basic strategic decisions. Here, shareholders‘ rights treat with the essentials of shareholder participation in decision-making (procedures for shareholder meetings, election of directors, approval of fundamental corporate changes, etc.) and limit mechanisms (and their consequences) that hinder or undermine shareholder decision-making, such as undisclosed control arrangements, non-transparent corporate-control transactions and management entrenchment.

Currently there is no takeover law or regulation, and no requirement for investors seeking to take control of a company to make a tender offer to other shareholders. In practice, there have been few changes in control.

According to the definition of shareholder rights, property rights are divided in two kinds of financial rights and non-financial rights. Examples of financial rights of a shareholder are the right to share in profit, the priority right in company‘s new shares and the right to share in the company assets. And examples of non-financial rights of a shareholder are also voting rights, franchise and right to be informed/right to know. Shareholders can take action to use their

50 voting rights to elect board members, to engage in important decision makings like increasing capital, change in company compendium, etc.

Under the laws of the stock market, shareholders also have the right to have access to company financial statements 15 days before the assembly being held.

Procedures for Annual General Meeting: Attendance, Notice It was observed that listed companies were generally following the provisions of the TSE regulation in respect to the AGM. In the company surveyed, more than 90% of total respondent didn‘t specify any statistical data on their attendance in the latest AGM.

According to commercial law for public joint stock companies the notice of AGM must be sent to the shareholders at least 15 days before the date of the meeting. In the case of a listed company, such notices must also be published in at least one issue of both daily a daily newspaper.

Investor protection index

In the 2005 International Monetary Fund (IMF) concluded that investor protection in Iran is weak, measured by an index including different aspects of Corporate Governance. Countering this perception, Tehran Stock Exchange (TSE) website states that the new Securities Act of 2006 supports investor's rights, protects against insider trading, and strengthens disclosure and information Disclosure regulations, with the aim to achieve a transparent, fair and effective market. According to World Bank, Iran‘s ranking in terms of protecting investors, is 165th in 20101. Iran‘s worst indicator regarding the protection of small shareholders has been recorded 165 which has fallen one rank compared to the year before. Then in the property registration index fell six steps and is reached rank of 153. According to World Bank report on Iran's business climate, investors‘ protection index is 30 percent (3 of 10). This includes three criteria: disclosure rates (50 percent), level of responsibility of managers (40 percent) and ease of claims by shareholders (zero).

Voting mechanisms at AGM The Commercial law has specific provisions related to voting and proxies. 67% of the surveyed sample stated that voting at AGMs took place by means of a show of hands while 37% stated that a proxy voting mechanism was also available to shareholders with writing on a piece of paper. An electronic voting mechanism was not used by any of the respondents..

Special Minority Shareholder Protection Mechanisms 55% of the surveyed sample claimed that they had a clause relating to equal treatment with respect to voting rights and subscription rights in their articles of association, while only 19% had cumulative voting as a special minority protection mechanism.

Divined According to Commercial Law of Iran, companies are required to divide profits among shareholders up to eight months after the Annual General Assembly's decision about how to divide profit.

Fortunately, in the new law of capital market, the results of the mistakes and abuses by the stock companies‘ managers will cause problems for managers rather than to involve shareholders. In

51 case managers commit three violations, their name will be blacklisted and no longer can perform as managers‘ of listed companies.

It is worth mentioning that companies that are late in paying interest are considered delinquent because the legal obligations have not been respected. However, looking from a legal point of view, serious tools to punish and prevent from this matter are not available. In many cases shareholders receive their dividends with considerable time delays. In some cases, company managers, deposit company profits to projects or bank accounts with their own personal benefit and pay the profits with long time delays to the shareholders

Related-party and Material Transactions The directors of listed companies are now required to formulate a transfer-pricing policy for each related-party transaction. In addition, listed companies are required to maintain a statement, recording the methods employed by them for determining transfer pricing in various types of related-party transactions and to maintain a record of all related-party transactions. All companies are required to reveal to the board of directors all transactions with any related parties for review and approval.

It can be concluded that there is evidence of substantial related-party transactions and at the time of the survey, the number of related-party transactions was increasing among the surveyed responding companies and financial sector institutions. In the surveyed companies, the authority to approve related party transactions seemed to be shared among governing bodies. With respondents allowed multiple responses, approval authority largely rested with management (71.0%), followed by the AGM (33.0%) and the supervisory board (29.0%).

However, due to deficiency of cash flow in Iranian Stock Market, some companies especially holding companies tend to perform trade of shares of member/subsidiary companies in order to increase transactions in market and mitigate profit deficiency. These transactions usually take place through internal contracts which enables the companies to offer and divide unrealistic and unrealized dividend. On the other hand, sometimes companies provide all or some of their profit through non-operational profits. For example, some companies were able to acquire substantial loans from the financial system and use it for share trade in capital market. This, however, shows that some listed or holding companies have got into share speculation largely and this may drive them away from their core business

Conflicts of interest Good Corporate Governance practices require that board members and management disclose conflicts of interest and abstain from voting on resolutions when a conflict exists. Management must disclose conflicts of interest to the board and obtain its prior approval before engaging in a transaction that presents conflicts of interest. Only 29.0% of the surveyed companies reportedly complied with this requirement.

Some respondents among the surveyed companies reported that their companies had policies and procedures in place to cover conflicts of interest issues, including mandatory disclosure of conflicts of interest for management and members of the supervisory board and mandatory recusal where a conflict exists .Notably, however, only two respondents did indicate that a member of management board had abstained from voting owing to conflicts of interest in a case in 2004.

Many of the respondents said they had not experienced a situation of conflict of interest between a major shareholder and the company. Others said that such issues are debated at the Board and resolved through discussion. Yet others said that in such situations the majority shareholder gets his way. It is indeed good to note majority of respondents saying that they do not encounter such issues on their Boards.

Insider Trading Insiders are defined in the law, and insiders cannot trade on inside information or disclose it to third parties. Insiders should file with the SEO their trades within one day. The SEO and TSE are also supposed to monitor trading to detect abuse, but heavy sanctions are not allowed and civil sanction amounts are low. In practice, enforcement in this area has been minimal.

Stakeholders rights There is no provision in the law requiring that board members treat all stakeholders fairly. The current framework does not provide a code or law on ethical standards for JSCs, or on protection of the interest of stakeholders. However, some companies started some initiatives on the protection of stakeholders‘ interest. Examples could be defining code of conduct or code of ethics, preparing consumer-rights guideline, putting helpdesks where necessary, considering anti-bribery or anti-corruption guidelines, etc. Meanwhile, there is no requirement for labour to be represented on the board or in management.

Table below summarizes the 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%

Investors Relations Although TSE has drafted an investor relations guideline to officially establish investor relations functions through investor relations office in listed companies, this guideline has not been ratified or made mandatory yet.

CSR policy The response showed that just one company has a Board-approved CSR policy whereas many public sector entities do not. It is encouraging to note the trend whereby increasingly Boards are realizing the value of a CSR policy to encourage greater and more proper involvement of their companies in business and society. Today, stakeholders and society at large who are also stakeholders expect companies to be not only socially responsible but also concerned corporate citizens. Compliance with law, payment of due taxes, respect for the environment etc. are all minimum expectations. Companies who exhibit meaningful CSR behaviour instill a sense of pride in their employees and their families which in turn helps with employee motivation and retention.

Appendix 1: OECD Principles Implementation in Iran Principle FI PI NI SE CO NL I. Ensuring the Basis for an Effective Corporate Governance Framework Overall Corporate Governance framework X X Legal framework enforceable /transparent X X X Clear division of regulatory responsibilities X X Regulatory authority, integrity, resources X X II. The Rights of Shareholders and Key Ownership Functions Basic shareholder rights X X X Secure methods of ownership registration X X X Convey or transfer shares X X Obtain relevant and material company information X X Participate and vote in general shareholder meetings X X X Elect and remove board members of the board X X X Share in profits of the corporation X X Rights to part in fundamental decisions Amendments to statutes, or articles of incorporation Authorization of additional shares Extraordinary transactions, including sales of major corporate

assets Shareholders GMS rights Sufficient and timely information at the general meeting Opportunity to ask the board questions at the general meeting Effective shareholder participation in key governance decisions Availability to vote both in person or in absentia Disproportionate control disclosure Control arrangements allowed to function Transparent and fair rules governing acquisition of corporate

control Anti-take-over devices Exercise of ownership rights facilitated Disclosure of Corporate Governance and voting policies by inst.

investors Disclosure of management of material conflicts of interest by inst.

investors Shareholders allowed to consult each other III. Equitable Treatment of Shareholders All shareholders should be treated equally Equality, fairness and disclosure of rights within and between

Principle FI PI NI SE CO NL share classes Minority protection from controlling shareholder abuse; minority

redress Custodian voting by instruction from beneficial owners Obstacles to cross border voting should be eliminated Equitable treatment of all shareholders at GMs Prohibit insider trading Board/Mgrs. disclose interests IV. Role of Stakeholders in Corporate Governance Legal rights of stakeholders respected Redress for violation of rights Performance-enhancing mechanisms Access to information ―Whistleblower‖ protection Creditor rights law and enforcement V. Disclosure and Transparency Disclosure standards Financial and operating results of the company Company objectives Major share ownership and voting rights Remuneration policy for board and key executives Related party transactions Foreseeable risk factors Issues regarding employees and other stakeholders Governance structures and policies Standards of accounting & audit Independent audit annually External auditors should be accountable Fair & timely dissemination Research conflicts of interests VI. Responsibilities of the board Acts with due diligence, care Treat all shareholders fairly Apply high ethical standards The board should fulfill certain key functions Board oversight of general corporate strategy and major decisions Monitoring effectiveness of company governance practices

Principle FI PI NI SE CO NL Selecting/compensating/monitoring/replacing key executives Aligning executive and board pay Transparent board nomination/election process Oversight of insider conflicts of interest Oversight of accounting and financial reporting systems Overseeing disclosure and communications processes Exercise objective judgment Independent judgment Clear and transparent rules on board committees Board commitment to responsibilities Access to information FI Fully Implemented PI Partially Implemented NI Not Implemented SE Existing in SEO rules and regulations and Commercial Code of Iran CO Existing in Code of Corporate Governance NE Needs New Legislation and Regulation

Appendix 2: Respondents

Respondent’s Position

CFO 2

Executive Director 4

CEO 11

Board Member 10

Chairman 3

Companies Surveyed, by Year Established

More Than Twenty Years 8

Eleven to Twenty Years 9

Six to Ten Years 1

Up to Five Years 6

Type of Companies

Other 8

Listed 5

Financial Services 3

Family-Owned Business 12

List of participation in the survey

Name Type/ Sector Field of Activities Number of Employee Mahan investment FOB/ Service Airline 5000 Group Atieh Group FOB/ Service Business Consulting 50 AryaMachine FOB/ Service Heavy Machinery 80 Pasargad Listed/ Financial Services Finance and Banking 2530 Bank Rail Niru Private/ Service Transportation 50 Behpakhsh Private/Service Distributer 2017 Mashad Carpet FOB/ Manufacturing Textile industry / 400 Carpet Ezam Holding FOB/ Manufacturing Spare part 135 Tak Makaron FOB/ Manufacturing Food Producer 460 Fouman Chimi FOB/ Manufacturing Chemical producer 1400 Pasargad trading Private/ Service Trade and investment 12 Parak software FOB/ Service Software Developer 12 SEMEGA Semi Government/ Tourism Tourism investment 340 Khazar Shipping Listed/ Service Transportation 50 Line Rahshahr FOB/ Construction Construction / 1400 Contractor Sanat Madan Listed/ Financial Services Trade and investment Investment SITCO/Espandar Private/ Manufacturing Cement Hamkaran System Listed/ IT IT Dadeh Pardazi Iran Listed/ IT IT Torbo Compresor Semi Government/ Turbine Naft Manufacturing Aria Pishro Gharn FOB/ Oil Oil Engineering Dana Energy FOB/ Oil Oil exploration Saderat Bank Semi Government/ Financial Bank Services Samexon FOB/ Construction Construction / EPC Contractor

Appendix 3: Overview of Tehran Stock Exchange, Capital Market of Iran

Introduction

Capital market value in the Tehran Stock Exchange (TSE) has grown up to $60 bn i.e. two-fold its size comparing to three years ago. The regulatory body has attempted to play a more liberal facilitator role through introducing initiatives such as removing the limitations regarding foreign investment, establishment of several mutual funds, equity funds, establishment of ‗Over the Counter Stock Company‘ etc. as well as new tools including future contracts, SAKUK25 and so on. Given the TSE outstanding performance over the last three years, illuminates the potential opportunities arising from it.

Table: TSE Quick Stats( Should be explained for 2011) Number of Listed Companies: 350 Total Market Value: $60 billion Floating Percentage: 15% Number of Brokerage Firms: 90 Weighted Average PE Ratio: 5.8 Weighted Average Dividend Yield: 16% Growth Value compare to previous year 45.1% Capital Market per GDP 5% limitation on daily fluctuations Max 5% 26 legal entities share of trading share $2.6 bn Real legal entities share of trading $350 mn Transaction Value $17 bn Transaction Value Growth 70%

Historical Background

The Tehran Stock Exchange, the only formal capital market in Iran, was established in 1966 as one of the first stock exchanges in the MENA27 region. On the eve of the Islamic Revolution, in 1978/1979, trade slowed down. Only three new members were added in 1979, and in the following two years many companies were either confiscated or nationalized, which reduced the number of listed firms to only 55. Because all banks and insurance companies were nationalized in 1979 they stopped being traded on the stock market. Bond trading ended in 1983. It is notable, however, that despite being portrayed in the early days of the Revolution as a capital profiteering tool, the TSE was never closed down.

25 - Islamic Participation Bond

26 As far as real and legal entities are concerned, the legal entities accounted for more than $10 bn of investment, while the share of real entities was merely $350 mn. However, it should be noted that the high amount of investment made by legal entities does not mean that they have actually made such an investment in the stock market. In reality, the legal buyers have invested about $2.6 bn in the market. Some $7.8 bn of the figure is related to the 50% plus one share of the block share of Iran Telecommunication Company. 27 Middle East and North Africa

Finally after a decade of reduced activities the stock market peaked up again in 1990 and today 35028 companies are listed on the TSE, up from 217 in 1997. Total market capitalization in 2010 amounted to $65 bn, up from US$ 3.2 bn in March 1999. This hefty amount in fact emanates from the new wave of privatization in which several giant companies including Telecommunication Company of Iran (TCI) have been ceded.

Structure

The TSE operates subject to the influence and control of several government agencies. The TSE is under the formal management of the Tehran Stock Exchange Brokers‘ Organization whose board appoints the Secretary General and his management team. The new law ratified in 2007 separates the supervision and trading operation. That gave rise to the creation of The Securities and Exchange Organization (SEO) as the supervisory body to the TSE.

The TSE is basically working under the direct supervision of the following bodies:

The Securities & Exchange Council is the highest authority and is responsible for all related policies, market strategies, and supervision of the market. The Chairman of the Council will be the Minister of Economics; other members are: Minister of Trades, Governor of the Central Bank of Iran, head of the Chamber of Commerce, Attorney General, Chairman of the Securities and Exchange Organization, representatives of the active market associations, three financial experts requested by the Economics Minister and approved by the Council of Ministers, and one representative for each commodity exchange. The Securities and Exchange Organization (SEO) is responsible for administration and supervisory duties, governed by the Board of Directors. The SEO‘s Board of Directors is elected by the Securities and Exchange Council. In 2006, the TSE introduced more stringent reporting and disclosure requirements for listed companies and enforcement measures for non-compliance. There are several auditing firms approved by the exchange regulator and the Iran Audit Organization, including representative offices of KPMG and PWC that are active in Iran. The exchange publishes all financial statements and company news and releases on its website. Number of Listed Companies & Annual Trade Volume

500 12000 450

400 10000

350 8000 300 250 6000 200 4000

Listed Companies Listed 150 100 2000 50

0 0 Rials) billion (x 10 Trade of Volume Annual

Listed Companies Annual Trade Volume

28 NB: this figure indicates the number of companies listed in floor A only.

Operations & Regulation

The range of price movements is typically restricted to five per cent daily. This can be changed in specific situation by the General Secretary of the TSE in case of unusual price movements resulting in an extremely high or low P/E ratio. Short selling is not permitted. All purchase and sale orders are executed exclusively by authorized brokers on the floor of the TSE. In addition, each stock has to meet a daily trade volume threshold, directly proportional to its market capitalization, in order to fully observe the price change on that day. If trade volume is below the threshold, price change will be proportional to the trade volume as a percentage of the threshold.

In 2002, the TSE authorities have split the TSE into two floors (A, B) and introduced a B1 and B2 board on the second floor. Different listing and delisting criteria apply on the various floors and boards. This has helped the TSE to improve the supervision of listed companies and to manage and to enforce punitive actions in case of violation of listing criteria.

In addition, the TSE authorities have introduced new listing and delisting criteria. Based on each floor‘s prerequisite, applicants can apply for either floor A or B. However, none of the applicant companies can immediately be listed on floor A. Initially, they have to pass a certain period of time performing well on the B1 or B2 board of floor B. If companies, for any reason are not able to meet the requirements of their board or floor, they are degraded to a lower level.

The TSE introduced more stringent reporting and disclosure requirements for listed companies and enforcement measures, including private and public warning and removal from the main exchange, for non-compliance. All listed companies are now required to report their audited annual financial statements, prepared in accordance with the National Accounting Standards (NAS) of Iran, to the exchange. In addition, companies are required to report their earnings on a quarterly basis and every time that there is a material change to their earnings forecast. The exchange publishes all financial statements and company news and releases on its website.

The specialized Religious Jurisprudence Committee of the Securities and Exchange Organization tries to introduce new financial tools, in accordance with Islamic principles. The committee has so far studied and introduced nine new financial tools, which include: Islamic securities, lease and pull 0production, future contracts of goods and services, mortgage partnership papers, selling shares through loans, forward purchase, implicit sale empowerment papers, and shares trading empowerment contract.

The listed companies currently enjoy 2.5% of tax exemption, regarding their income tax. In the event that the free float shares of these companies reach 20%, the tax exemption will be doubled (5%).

Privatization

When the general policies of Article 44 of the Constitution was communicated in the year 1385 (March 2006- March 2007), the stock market could gain a decisive role in the privatization move, since the shares of governmental companies were offered through this market. In fact, the privatized companies account for more than 50% of the total value of stock market, and the first seven listed companies constitute close to 40% of the total value of stock market in terms of the shares value. Furthermore, the ―justice shares‖ have been ceded to 40 million people and the government plans to list the companies, whose shares have been offered as justice shares.

Privatization policies that were projected in Iran‘s Fourth Five-Year Development Plan (2005- 2010) will be a good indicator for future growth and dynamism in the Tehran Exchange. Another sign of the growth potential in the market is the rise in various indices. The TSE has several indices, of which the All-Share Price Index (TEPIX), introduced in 1990, is the most widely followed. The TEPIX is a market value of all share prices appearing on the TSE price board. Other indices include top 50, financial, industrial, and the secondary market. All the mentioned indices have been experiencing solid annual increases in the last few years.

Performance

The total value of stock market in February 2010 was equal to $63 bn. The value of initial public offering of 15 governmental companies was $28.7 bn on the same date. This makes the value of stock market minus the value of these 15 companies equal to $34 bn. interestingly, the total value of stock market in February 2007 was $37 bn, namely $3.2 bn higher than that of three years later. In fact, the significant growth in the total value of stock market has been due to the giant governmental companies, whose shares were sold at the stock market.

Currently, there are 26 investment funds active in the capital market, with total value of $220 mn. The growth and development of these funds is expected in the near future, given that these funds enjoy tax exemption.

Establishment of Farabourse Company (Over the Counter Stock Company) may be mentioned as the most important event in the country‘s capital market in the Iranian year 1388 (March 2009- March 2010). Moreover, offering the block shares of Iran Telecommunication Company may be considered as the next achievement of the capital market in the same year. Unlike the commodities and stock market, Farabourse does not occupy an actual building for its trading, but the trading takes place on a virtual basis and through the brokerage firms. The trading figures and other information are published in its official website.

Summary of the performance of the TSE over the past 5 years is as follows:

2005-2006: In December, 2005, 419 companies with a market capitalization of IRR 32,741.7 million were listed in TSE. The TSE has had an exceptional performance over the past 5 years. In general, the stock market in 2005/06 shed value as it is manifested by the decline of its major stock price indices. The TSE price index (TSPIX) at the end of 2005/06, declined by 21.9%, while the Financial Sector Index, and the Industrial Index, declined by, 38.8%, 19.4% respectively, and the Dividend Index gained 11.8%, mostly due to a reported 100 billion USD capital flight from the country because of the international dispute surrounding the Iranian nuclear program. 2007: The market bottomed in June 2007 mainly because of the renewed privatization drive in the Iranian economy. 2008: The TSE was not directly affected by the international financial turmoil in 2008, but following the global reduction in prices of copper and steel, the bourse index dropped by 12.5 percent, as most of the companies listed on the exchange are producers of such commodities. 2009: The TSE sank about 40% in value between August 2008 and March 2009, influenced by falling oil prices and declining markets in other parts of the world. As of August 1, 2009 it has recovered by more than 10%. 2010:

Figure: The overall annual performance of the Tehran Stock Exchange since 2000.

TSE Overall Return

160 140 120 100 80 60 40 20 0

-20

% -40 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Table: Top- ten listed companies in TSE Company Name Sector Market Capital % of Total Market

(billion$) 1 Iran Telecom Co. Telecom 7.5 12.5 2 National Iranian Copper Copper Mining 4.2 7.0 (NICIC) 3 Mobarakeh Steel Co. Steel 2.6 4.3 4 Isfahan Refinery Petroleum 2.2 3.7 5 I.R.I Shipping Lines Logistic 2.0 3.3 6 Saderat Bank Banking 1.8 3.0 7 MAPNA Engineering 1.7 2.8 Services 8 Parsian Bank Banking 1.6 2.7 9 Mellat Bank Banking 1.6 2.7 10 Omid Investment Co. Holding 1.4 2.3

Table: Share of the market value Sectors Share of the market P/E Ratio value Industrial contractor group 0.5% 251% Production TV and radio 0.1% 146% Technical and engineering 3.2% 129.7% service Financial 0.7% 129.1% Metal 16.3% 105% Banking 14.2% -- Automotive sector 7.02% - telecom 13.1% - Mining 6.6% -

The five most popular stock groups, with highest number of shareholders are:

 Investment group, with 13 companies and 562,375 shareholders  Automotive group, with 31 companies and 431,142 shareholders  Real estate and construction group, with 12 companies and 273,411 shareholders  Cement group, with 30 companies and 237,000 shareholders  Metal ores mining group, with 8 companies and 221,000 shareholders

Though Tehran Stock Exchange has not been able to have a good position in the world in terms of market value, the TSE managed to gain the second position after Colombo for its total value of share trading. In February 2010, the total value of share trading of TSE was 300% higher than the year before.

Foreign investment in TSE

Currently, the share of foreign investment in the TSE is below 1%. However, it is predicted that the new by-law of investment in the stock market would raise the share to 10%. This Foreign Investment By-law enables foreign investors to:  take their primary capital out of the country;  buy up to 20% of the shares of Iranian companies;  have concurrent activities in the TSE and OTC markets;  play a role in leading and management of the company;  decide whether or not they want to obtain the permit of Foreign Investment Company, as an optional choice;  obtain the permit of Foreign Investment Company through facilitated administrative formalities;  Be treated equally like Iranian citizens, by the Taxation Law.

Outlook

The TSE has been widely publicized by the government since the start of 2008. With the slowdown in parallel investment markets such as the real-estate, and the attractive returns of the TSE, a displacement of funds from other sectors and into the equity market is taking place. This trend is expected to continue, going forward.

Regulations are complex, but improving each year. The TSE is a full member of the World Federation of Exchanges and a founding member of the Federation of Euro-Asia Stock Exchanges (FEAS). Recently, the TSE signed a Memorandum of Understanding (MoU) with the Malaysian and Bahraini exchanges for co-operations and opportunities for dual listing. The Securities and Exchange Organization is in the process of devising regulations for exchange traded funds (ETF's), derivatives and other financial products. The stock exchange is implementing a new electronic trading system, with capabilities far greater than the existing system.

The combination of the factors mentioned above, the strong economic outlook, and the privatization process makes the Iran capital market a unique investment opportunity.

TSE Opportunities

 Significantly undervalued

 One of the only markets uncorrelated to the global stock exchanges: providing great hedging and diversification opportunities  Chosen vehicle for Iran‘s vast privatization plans with lucrative IPOs in the pipeline  New improved electronic trading system recently introduced: no failed trades, faster trades, real-time data and online trading  Considerable appetite to attract foreign investment and cooperate with other global markets  New products, such as financial and commodity derivatives (gold coin, gold bullion and copper) have been introduced and more to come

Appendix 4: CG Roundtable Meeting In TSE: Minute of Discussions

This roundtable meeting was held on April 2011 in Tehran Stock Exchange and the idea and organization of the meeting was provided by CSR-DC. Members of Regulators of the market, Corporate Governance task force, TSE and representatives from other stakeholders were present at the meeting and explained their perspectives and views on Corporate Governance in Iran.

Mr. Alireza Omidvar- President of CSR-DC Welcome to all of the participations. He then noted CSR-DC‘s past activities and collaborations regarding CG and appreciated previous efforts for promotion of Corporate Governance in Iran.

Dr Ghalibaf – CEO of TSE After mentioning the benefits of Corporate Governance in the Capital Markets, he emphasized on the role of CG implementation in listed companies in improving their accountability towards their stakeholders, implementing mechanisms for conducting their corporate responsibilities and attracting finance. He then emphasized on the importance of transparency and healthiness of the markets, and importance of CG in the capital markets. This was followed by a brief history of implementation of Corporate Governance in the Tehran Stock Exchange as follows: In 2003 Brokerage Company was established and the OECD guidelines on Corporate Governance in listed companies were translated by TSE. In 2007, a special committee was formed in Tehran Stock Exchange and after analysis of the OECD guidelines and CG codes of other countries; the Code of Corporate Governance was drafted and initially implemented in the TSE itself. In this code, three board committees of risk management, compensation and audit are assigned. Currently in the Corporate Governance structure of TSE, the committee meetings are held with the presence of board members and independent members. He then pinpointed some important issues in regard to the implementation of CCG in the listing criteria in TSE as follows:  The companies feel that following the Code guidelines will end in value added for them;  Considering the fact that currently, the mechanisms for presenting TSE as a source of financing for companies has not been fully developed. Though companies enter TSE mainly not because of providing finance and imposing CCG guidelines on IPOs is a double-edged sword. If only TSE follows CG guidelines, and other markets do not have mechanisms for ensuring transparency, companies loose their incentive to enter TSE. On the other hand tax reduction mechanisms in the non-transparent atmosphere outside TSE are more attractive for companies;  To increase the effectiveness of the activities in development of Corporate Governance in Iran, alongside with efforts to implement CCG in TSE listed companies, other assurance, regulatory and civil society organizations must increase their presence in this field. This will increase the pressures for accountability on companies and directors. Presence of these kinds of institutions will make companies‘ directors and managers think more on their social responsibilities;  Development of the professional managers clubs or associations to increase accountability of directors on a personal level and need for establishment of an independent directors‘ society;  The important role of education in development and promotion of the concept of Corporate Governance between company managers;

Dr Ghalibaf also mentioned that Article 13 form ―law of development of new financial instruments and institutions‖ that requires directors of TSE listed company to be qualified and approved of professionalism is one of the capacities that helps us in implementing Iranian CCG in TSE.

Dr. Rostami – TSE vice president of listed companies After beginning with the goals of this meeting, he mentioned that:  Article 107 of the Iranian Commercial Code has conflicts with Corporate Governance practices;  Article 127 of the Iranian Commercial Code states that the board members are appointed by the shareholders. With this remarks, he presented some questions to guide discussions towards:  Who are the most important players in enforcement of CCG?  What kind of role does the Chartered Accountants Society take for itself in the process of implementation of the code?  What are the expectations and comments on the CCG implementation?

Dr Raei – as the representative from listed companies All stakeholders (regarding implementation of the code) need a clear and shared overview from the concept of Corporate Governance and the code. We have to show to all stakeholders on the effects of CG implementation on their affairs and how their interests are protected during and after implementation of the code. Implementation of CG must be followed in the financial markets as well as the capital markets. If these attempts do not follow on time, solo obligation by TSE will end in movement of capital from this market to other markets. In this regard, enforcement of transparency in the capital market will make other markets more attractive for investors. He emphasized on establishment of professional managers association, just like Medical Council as a regulatory body for medical treatments in the country. We need to follow the process of CG implementation step by step. If we address all kind of institutions and companies at once, there will be huge pressure from their side that we cannot resist; For example I would suggest starting from financial institutions. The Central Bank of Iran can pass regulations for approval of financial institutions‘ board members; another example could be that they can enforce that those with no professional financial management experience cannot enter the boards of these institutions. Dr Ghalibaf – CEO of TSE: Follow-up of the Central Bank to implement CG guidelines in the financial institutions is more important than following this in the capital markets in this stage. It is more appropriate to start implementation of CG in financial institutions, prior to enforcing it in TSE.

Alavi – Representative from Chartered Accountants Society Corporate Governance is an opportunity for the accounting profession but we see ourselves the last part of the puzzle. There is a possibility to put forth the CG guidelines in the auditing reports.

Dr Fakharian – CEO of Tadvin Co Instutute (Representative of Ernst & Young in Iran) and member of high council of the society of chartered accountants of Iran Emphasizing on the role of internal auditor in helping implementation of Corporate Governance and improving supervision and risk management, we expect that implementing Corporate Governance will improve taking responsibility between the companies‘ directors and managers.

Assuring the implementation of the codes is the internal auditor‘s role; therefore, there must be a revision on the role of the internal auditors in the companies.

Dr Rostami – vice president of Listed companies of TSE I don‘t think we have unified standards in Iran regarding internal controls, isn‘t it right? Mr Fakharian in his response said that in Iran, there are no standards for internal controls, but there are many international standards in this regard.

Mrs Kasraei – vice president of Risk Management of Parsian Bank and member of the Task Force In Iran, there is no proper understanding on the concept of risk management; Risk management is translated as a concept like internal control! She pinpointed on the important role of the Central Bank of Iran on development of the concept of CG in the country. She also said that currently in Iranian banks, internal control is neglected. After mentioning that in Iran there is no business culture supporting information disclosure, she posed a question on the level of belief between Iranian banks on the importance of transparency. She suggested forming more focused meetings with specific goals to discuss on CG implementation in the future.

Dr Hoshi – Task Force Champion He emphasized on the importance of role of the auditors in implementing Corporate Governance in companies. He also stressed that a top down pressure on companies would be the best strategy to implement CG in a company. On the lack of internal control standards in Iran, he said that development of these standards is a simple task of translation and revision, considering the legal and business environment of Iran. He also mentioned that currently internal control flaw of the companies are formulated and reported under the title of ―Letter to the Management‖ in the companies.

Mr Jamshidi Fard – TF member He said that every time the discussion on the implementation of Corporate Governance is on the table, the Iranian Commercial Code is oppressed! Meanwhile, article 118 of the commercial code helps us in implementation of the code in Iran. He noted that the implementers, both directors and managers, are resistant to implement the code. After mentioning that the CG Codes are complementary to the commercial codes, he stated that there are many rooms for flexibility in development of the code even with the current commercial code, but we need to conduct comparative researches with other countries. He also commented that implementation of the CCG will reduce the supervisory costs of the Securities and Exchange Organization.

Dr Mohammadi – Secretary General of Brokerage He emphasized on making the proper management practices more tangible and also stressed on the importance of developing frameworks for identification of professionalism in management, and increasing the number and frequency of monitoring. He also mentioned that the professional and legal frameworks must be publicly promoted and the managers must know that they are monitored.

Dr Maddahi- Manager of the Audit Division, SEO She noted that the most important ambiguity in implementing the CG code in TSE is the issue of independent board member. We may be able to solve the challenge of professional

68 characteristics of independent board members, but the most important issue is how to ensure effectiveness of the independent board members in board meetings. Independent board member is the key issue regarding the concept of Corporate Governance. If we clarify this issue, we can easily implement the code in TSE. She also mentioned that the standard of reporting on internal controls is developed in the standards committee of the SEO and will be publicly issued in the near future.

Farshid Farahnakian – Member of the TF and Lawyer In the Iranian Commercial Code, the issue of the independent manager is totally rejected and item 88 totally and clearly declares it. He mentioned that audit institutions of public companies can be of great help in implementing CG in these companies. He also said that under the Commercial Code, the board must report to the auditors every 6 months.

Dr Raei: He stated the following issues:  Challenges on the transparency and extracting reliable information from the companies  Emphasis on the education and increasing awareness in stakeholders on the notion of CG  Establishment of the Professional Managers Society  Communicating through benefits of CG implementation not its limitations  Requirement to pass laws in the Cabinet on enforcing CG.

Dr Hoshi – TF Champion He mentioned about the analysis and disclosure of the board compensation. He defined independent manager as a person independent from the major shareholders, and proposed that purchasing few numbers of share for independent board members can potentially solve the conflict with Commercial Code of Iran and enable us to have independent board members.

Appendix 5: Iranian Code of Corporate Governance

Chapter one: definitions

Words and phrases defined in the first article of ―the securities market law of Islamic republic of Iran‖, if used, shall have the same meaning in this instruction. Other words and phrases are defined as following: 1. Independent director: a real person who is the member of the board and is not: a. elected by or representative of main shareholder or shareholders b. elected by or representative of shareholders who comprise more than 50 percent of attendances in the general assembly of shareholders c. partner of the company or associated companies and main shareholders d. having any business deals with company or associated companies and main shareholders e. a member of the board of director of the company or associated companies for more than three consecutive periods f. holding any executive responsibility or employment relationship with company or associated companies 2. Non-executive director: a director who holds no executive responsibility or employment relationship with company 3. Main shareholder: a person who directly, or alongside affiliated individuals, has considerable influence on and control over company 4. Minority shareholder: that who is not a main shareholder 5. Control: steering ability of financial and operational policies of a business unit, in order to attain economic benefits from its activities 6. Company: a business unit with one or more associated business units 7. Associated company: a business unit which is under control and influence of the company 8. Affiliated entities: that who is: a. Directly or indirectly, and through one or more intermediaries: i. Is in control or is controlled by the business unit (including the main business unit, associated business units) ii. considerably influential on business unit b. An affiliated business unit of the unit c. In special partnership with the business unit d. Key executive of business unit e. Connected with either of the aforementioned (cases a to d) on the basis of family relationship f. is directly or jointly controlled or highly influenced by those mentioned in d and e, or a big share of the voting share is directly or indirectly in their possession g. controlling the business units‘ special pension plans for the dependant, independent employer and under controlled sub units 9. Disclosure: sending information to SEO and timely dissemination of information as in criteria and guidelines of companies registered

Chapter two: Board of Directors

The number of directors on board should be such, to facilitate productive discussions, rational decision-making and sufficient monitoring of the corporations affairs. The majority of the members of the board should be non-executive members and independent members should comprise of not least than 20 percent of all board members. Article 1: non-executive to become executive members, alongside the observance of this article, is only possible after the resolution of the board and the beneficiary director has no voting rights. Article 2: the board should have at least one independent financial member. The independent financial member should have financial credentials (accounting, financial management, economics, or other related managerial certifications with financial orientation) with related experience. Article 3: chairman of the board shall be elected from among the non-executive board members Article 4: Board members shall not hold the managing directors position or executive board member position in any other company. Real executive or non-executive board members, originally, or as a representative of a legal person, can on utmost four other organizations serve as board members. Article 5: the board should have a board secretary office responsible of arranging and documenting board sessions, collecting required information, providing expertise and ensuring adherence to legal obligations by the board. Note: the documents and information‘s related to this article should immediately and without any restraint be provided to the corporate secretary. Article 6: the corporate secretary is in charge of the corporate secretary office. The secretary is proposed by the chairman and elected and appointed by the board and is directly responsible to the chairman. Individuals who are not board members can also be appointed as the corporate secretary. Note: the role of corporate secretary is not considered executive responsibility or employment relationship Article 7: corporate secretary should be present at all board meetings. Preparing the minutes, documenting resolutions of board, follow up of the resolutions and reporting on the implementation of the resolutions are the corporate secretary‘s responsibility. The corporate secretary is obliged to document all board resolutions and a brief of discussions as of number and date in a registry book. Note: administrative procedures of the corporate secretary office should be suggested by the corporate secretary and approved by the board and implemented. Article 8: the board should at least have monthly sessions. The quorum of the meetings and the ways by which resolutions are reached should be stated in the statute of the organization. The board shall report on the number of board meetings and the attendance rate of each director in the annual report of the general assembly of the shareholders. Article 9: board meeting agenda is selected and based upon director‘s suggestions. Prioritizing issues suggested is on the chairman. If the majority of board members have a different opinion regarding the prioritization of issues, prioritization should be based on the majorities‘ opinion.

Article 10: The board is obliged to, by adhering to laws and regulations, protect the shareholders rights including: 1. the right to attend and vote at the general assembly 2. the right of regular, complete and timely access to the organizations information 3. the right of possession and ownership of the shares 4. the right of shared profits 5. the right of timely receive of profits

Article 11: the board should employ methods to ensure that persons with companies‘ secret information cannot use this information to trade securities of the main company or affiliated companies. According to this, the company should engage proper methods of control and oversight to prevent these kinds of trade. Upon discovering a case of trade based on these information, it should be communicated to shareholders properly.

Article 12: The fiduciary duties of board of directors include the following: 1. Selection of CEO, Deputy CEO and board members of member/subsidiary companies and oversight of their work 2. Determining remuneration, rewards and compensation of CEO and Deputy CEO 3. Approving strategic plans, executive plans, bylaws and internal rules of the company 4. Identifying the major risks of the company and making sure of having proper systems to manage such risks 5. Approving material transactions with related-parties while the related director cannot vote regarding this decision. Transactions bylaw approved by board of directors determines the limitations on material transactions. 6. Approving of material transactions of intangible and tangible fixed assets and major investments according to Transactions bylaw and Borrowing bylaw 7. Approving the policies on pricing, sales condition, mortgages and collateral sharing for loans, and deciding on company‘s rights 8. Verifying the information presented to legal and regulatory authorities including TSE and SEO

Article 13: the board should form board specialized committees in presence of non-executive and independent board members and external consultants to handle significant issues like accounting, financial reporting and auditing, appointing, remuneration and rewards compensation, material transactions and investments. Formation of audit committee based on instructions in this code is mandatory and formation of other committees is due to board‘s opinion. On relevant discussions and topics, after analysis in committees and stating the committee‘s opinion or comments, final decision would be made on the board. List of fiduciary duties and responsibilities of each committee should be drafted and approved by board of directors.

Article 14: The board should appoint an auditing committee comprising of at least five members, the majority of whom should be independent or non-executive directors. The head of the audit committee should be the independent financial member of board. At least one other member of the board should have financial literacy and experience. Article 15: board resolutions on responsibilities of the audit committee should include the following:

1. assure timely report of annual and interim reports and other important information of the company 2. assure compliance to accounting standards and other legal obligations 3. supervise selection and modifications of accounting procedures according to accounting standards 4. supervise main estimates and important adjusting in annual and interim reports 5. propose selection, continuation or change of external auditor 6. supervise independent director‘s contract and implementation of its content 7. Negotiate with the external auditor and legal inspector on auditing procedures and, if required, assure conformity of company‘s audit report with associating companies auditing reports and conformity of all auditing reports provided by all auditing firms if more than one auditing firm is engaged. 8. Ensure reasonable assurance regarding the independency of auditor and effectiveness of audit process in the framework of professional behavior performance 9. Ensure reasonable assurance on professional services provided by external auditors, based on external auditors code of ethics 10. Review the independent audit report and following the management performance in response to it 11. Ensure reasonable assurance on the establishment of, and supervision on, a beneficial internal control system 12. Supervise internal auditors and ensure reasonable assurance regarding the effectiveness of internal audit processes 13. Propose to the board the appointment, extending or dismissal of the internal audit manager 14. Propose to the board the auditing fee and all compensations and bonuses of all the internal audit unit staff members or internal audit contracts 15. Ensure reasonable assurance of the availability of a company‘s code of ethics, and the executive management‘s commitment to it 16. Control deals with people related to company or associated companies 17. Ensure reasonable assurance, the availability and access of all information and resources required, to both internal and external auditors 18. Investigate other issues outlined by the board Article 16: The audit committee should have explicit authority to investigate any matter within its terms of reference, the resources to do so and full access to information. The committee should be able to obtain external professional advice and to invite outsiders with relevant experience to attend, if necessary. Article 17: The audit committee should meet regularly, with due notice of issues to be discussed, and should record its conclusions in discharging its duties and responsibilities. The board should, in their report to the general assembly, disclose in an informative way, details of activities of the audit committee, number of audit meetings held in a year, details of attendance of each member of the audit committee in respect of meetings . Article 18: the audit committee can invite other board members, head of internal audit and the representative of external auditor to the audit committee meetings. However, the committee should meet with the external auditors without executive board members present at least twice a year.

Article 19: the board can appoint a nomination committee with at least 3 members the majority of whom should be selected from independent or non-executive board members. The head of this committee should be a independent board member. Article 20: regulations approved by the board on the duties and responsibilities of the nomination committee should include the following: 1. Recommend to the board, directors to fill the seats in board committees 2. Recommend to the board candidates for directorships 3. Recommend appointing or dismissal of chief executive officer and top managers of the company and the board of associated companies 4. Recommend education programs to each new board member, chief executive officer and top manager for orientation purposes. Article 21: the board should implement a process, to be carried out by the nominating committee annually, for assessing the effectiveness of the board as a whole, the committees of the board, each individual director as well as the chief executive officer. All assessments and evaluations carried out by the nominating committee in the discharge of all its functions should be properly documented. Article 22: the board should establish an internal audit function and identify a head of internal audit who reports directly to the audit committee. The head of internal audit will be responsible for the regular review and/or appraisal of the effectiveness of financial and operational affairs, risk management, internal control and governance processes within the company. Article 23: the internal audit should be performed according to international auditing standards and remain independent of activities they audits. The board should determine the remit of the internal audit function based on the audit committee recommendation. Article 24: the board should establish a sound internal control system in order to safeguard assets, carryout reporting, and also adhere to rules and regulations. The board should, at least once a year, review the internal control system and report to shareholders. The external auditor should deliver his notes on this report in the general assembly.

Chapter three: General Assembly of Shareholders

Article 25: at least one of the board members should be elected in the general assembly by minority shareholders Article 26: the board should prior to the general assembly meeting, establish a function to review and approve the ownership or representation of participants in the meeting Article 27: the annual financial report, activities report and general situation and the reports of the legal investor and external auditor should be uploaded on the company‘s website ten days prior to the general assembly meeting. The financial reports approved in the general assembly should also be uploaded to the website and disseminated through one of the major newspapers ten days after the general assembly. Article 28: majority of board members should be present at the general assembly meeting from the start. Those absent should provide their reasons of absence to the board of the assembly in written as for the board to inform shareholders the reasons at the beginning of the meeting Article 29: when decision makings in the general assembly, shareholders should have the right to exercise their vote whether present or absent (through formal representation or security trusty)

Article 30: non-executive directors‘ right to attend and bonuses of each of the directors should be determined in the general assembly Article 31: sufficient and reasonable time should be allocated to questions and answers of shareholders and boards in the general assembly

Chapter four: Accountability and Disclosure

Article 32: the board should establish a function in order to ensure full conformity with requirements of Islamic Republic of Iran‘s securities market act and other related rules and regulations on information disclosure Article 33: after providing the information relevant to this chapter to the securities and exchange organization, the board should publicize this information through the company‘s website Article 34: the full name and profile of the board directors and executive director, their being dependent or independent, executive or non-executive, amount of their stock ownership in the company, other directorships and also all their receivables from company or associated companies including compensations and bonuses-if provided- shall be disclosed in the general assembly of shareholders, to the shareholders and in a separate note. Article 35: the board should provide shareholders with a separate note on the company‘s observance to Corporate Governance principles covered in this guideline, in their report in the general assembly

Appendix 6 - Survey Questionnaire

Objectives of the study  The scope of this project entails conducted measures so far on CG, manager‘s knowledge and awareness of CG concepts, as well as benefits and challenges of implementing CG in Iran.

This will enable us to:  Identify needs of the businesses and managers in regards to CG.  Develop and implement CG practices.  Develop tools and guidelines for CG.

Research Questions:  What aspects of Corporate Governance leads to improved business environment?  What aspects of Corporate Governance help enterprise managers to run the company?  What are the stakeholder‘s expectations from a Corporate Governance mechanism?  What are the needs of enterprise managers and market regulatory bodies in the area of Corporate Governance?  What are the main challenges and difficulties in implementing Corporate Governance mechanisms in Iran?

Questionnaire

The questionnaire is divided into seven sections to be presented to the interviewee:  Create a platform to ensure development of effective Corporate Governance framework  Board responsibility  Maintaining shareholder rights and the key responsibilities of owners  The role of stakeholders in governance of the firm  Internal Control and Internal Auditing  Disclosure and transparency

Questionnaire of Iran Corporate Governance Country Assessment

Email: Fax Telephone: Organization Name

Established

Type Private Governmental Semi-government Family Owned Business Publicly Listed Company

Staff

International activities

Number of affiliated companies

Total shareholders

Over 20 percent of the number of

major shareholders Type of Corporate Governance

structure Number of board members

Number of non-executive members

1- Ensuring efficient and effective Corporate Governance mechanisms and disclosure

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

Very much not least Somewhat Familiar

2- Has your company developed any Corporate Governance procedures? Find any mechanism or process to monitor implementation of these procedures.

3- Which of the following is included in your Corporate Governance structure?

- Adapted to the principles of Corporate Governance? (OECD / Iranian Draft Code) - Mechanisms on board selection criteria - Board committees (Internal Audit Committee, risk management, nomination and selection committee and ...) - Separation of chairman from CEO - Independent and non-executive board members - Developing procedures governing deals with related parties and preventing conflicts of interest - Developing compensation and remuneration mechanisms for board of directors and executives - Instructions for protecting shareholder and stakeholder rights - Board Evaluation Instructions

4- What are the most important obstacles to implement Corporate Governance mechanisms in your company?

- Lack of effective rules and regulations - Lack of professional experts and consultants - Lack of knowledge and expertise available to the company - 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 - 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.

- I do not see obstacles

5- Have you ever received consultancy on Corporate Governance? Yes (Please elaborate) No

6- Have you ever held any training courses for you managers on this topic? Yes No

7- What are the most important benefits of establishments of a Corporate Governance system (Please Rank)

- Increasing information and disclosure - Improved brand and credibility - Improved risk management system - Compliance with legal and judicial requirements - Defending Shareholders Rights - Improved strategic decision-making process - Better access to capital and foreign partners and move towards internationalization

8- How important are considering and implementing Corporate Governance systems in working environment? Very important important somewhat important not important

2- Board Responsibilities Does the company set goals for its

board members? How long does board membership term last Number of board meetings in the last year Participation ratio of the board members in board meetings How do the company/shareholders

ensure board effectiveness, alignment of their activities with long term goals of the company and shareholders? Is there clear division of responsibilities

between the board and shareholders on making critical decisions? Is effectiveness and efficiency of board

structure under continuous assessment and revision? What are the procedures to ensure

transparency on the board recruitment and selection criteria? (Assessing prior performance) Are there any self assessment systems

for board performance and efficiency in place?

Are there any independent board members in charge? Are there any bylaws for structure, composition, and roles of independent members in place? What are the mechanisms for board compensation? Does it have any relation with their long-term performance? How does the board ensure managerial oversight? Does the board assess executive board‘s performance on a regular basis? Do the executive managers participate in board meetings or is there any executive board member? Are there any written policies on board and CEO succession planning and selection criteria? Which of the following are among Reviewing strategic plans and macro operational plans board responsibilities? Business Plans Organizational Performance Assessment and Monitoring Please point to any bylaws if available. Fiscal Budgeting and monitoring costs

What are the roles and responsibilities of board regarding corporate executives in the following items? Recruitment and selection Compensation and remuneration Performance appraisal Replacement Succession Planning

Please point to any bylaws if available Do board members provide independent judgment on major shareholder‘s point of view? Maximum number of job positions that board members are allowed to hold? Are they allowed to take several positions? Does the board have direct and independent access or reporting relation with legal and financial managers? Are executive compensation and remunerations dependent on organizational overall performance or to their personal performance? Only if there is professional committees in place

Risk Management Committee

Compensation and Remuneration Committee Nomination Committee Internal Audit Committee Performance Appraisal Committee Other Are the majority of board members

independent? Is the committee chair independent?

Do the committees have clear roles and

responsibilities? Does the committee attend all board

meetings? Is the functionality of the committees,

their budget, and access to external and internal consultants clear? Does the committee assess time

allocation of board members? Do the committee‘s suggestions reach

all board members?

3- Protecting shareholder rights Corporate Website

Media Email Post Telephone

How much share ownership is required for Absolute Majority raising an issue? Relative Majority Less than 25 percent

Who are informed on shareholder modifications Internal stakeholders and replacements? Stock Exchange Official Registrar, and Official Newspaper

Who can add an item to the agenda? Majority Shareholders Minority Shareholders Number or total accumulated shares for annual

meetings Total Accumulated shares required for selecting

managers Voting mechanism in general assembly

What mechanisms are available for shareholder Shareholder complaints against other compensation? shareholders Complaint against the Company Shareholders Complaints against decisions of shareholders meetings Assembly

Shareholder complaints against board members Shareholder requests for inspections or audits What legal actions shareholders can pursue if Financial losses Legal procedures do not perform The legal ruling against the company for forcing If the limit is violated voting them to obey the rules or regulations Early voting results are not declared Stop the illegal transfer of contracts or Do minority shareholders have the right to documents litigation against the board? Stop paying dividends What legal conditions for the absent shareholders

and shareholders opposed to the void shareholders meetings to make decisions there. Whether the legal protection for shareholders against and there is absent? The legal reference to address violations of Decision shareholder rights is what? Arbitration Council Whether major shareholders or directors can

vote for the spending increase minority shareholders? Observe the principle of equality of equity The vote Useful information Distribution and dividend

5- Internal Control and Internal Auditing Does the company have internal auditing

committee? What is the role of internal auditing committee? What processes does the audit committee utilize

to oversee the internal auditors‘ activities? Is the Corporate Accountant selected by the

auditing committee? Does the board integrate internal control

mechanisms in devising new strategies? Does the board revise bylaws and internal control

policies? Independence of internal auditing Accessing to the corporate management Independence from what it does Independence of actions and independent votes.

What is the selection mechanism for auditing

committee members? Are the members of auditing committee, staff of Only the committee chair is independent the company? There is at least one financial expert in the committee

Majority of the committee members are financial experts.

How often do you change your auditor?

Which board members or executives receive the

internal auditing reports? Does the head of internal audit committee attend

the board meetings?

6- Role of Stakeholders in Corporate Governance System Does the board care for legitimate rights of

different stakeholder groups in its decision makings? How? Are there any bylaws or procedures in place for this issue? Has there any codes developed for voluntary Example: Codes of Ethics, Bribery and Fraud, practices or relations with stakeholder groups or Relations with Staff, Society and Consumer NGO‘s? Rights Which mechanisms are in place for stakeholders

to ensure responding to their legitimate rights? Is there any envoy from staff in the board?

How does the board interact with the staff? How aware is the company on issues of corporate High moderate Low Nothing. social responsibility?

7- Transparency Do you disclose your financial, operational, Financial managerial, or auditing reports? Operational Managerial Auditing What kind of information do you disclose? Due to the Stock Exchange regulations. None Only the company profile and track record Obligation to report to : Stock Exchange Organization Senior Management Board Members Majority Shareholders High ranked family members Affiliated companies

Why don‘t you disclose your information? No one asked There is no legal requirements on this There have been no penalties for this Other

Do you have any department/person responsible for developing/ revising and endorsing regular reports (seasonal, biannual, or annual)? What is the procedure for information

disclosure in your company? Has your company ever been subject to

sanctions or interpellations for lack of proper general information disclosure?

What is your corporate policy on responding

to individual journalists, investors, and market activists and who is responsible for that? Do you disclose identity of controlling

shareholders? Do you assess relations between controlling

shareholders? Do you report your transactions with related

parties? Is there any clear explanation on definition

of related parties? Who is responsible for evaluation and

endorsement of related party transactions? Is dealing with related parties have an upper

limit that requires board endorsement? Is there any procedures for defining,

regulating, dealing related parties and conflicts of interest? Does the company disclose incidents of

conflicts of interests that affect its performance? Is obligation on disclosure similar for all General Assembly shareholders? Board

Who or what department is responsible for

dispute resolution? Is the board‘s compensation and reward

system disclosed in detail? Do you report work experience and

competencies of your board members? 8- Would you like to receive a Corporate Governance assessment for your company?