Abstract. Corporate governance in family companies often does not rest on written rules. This article examines five governance gaps commonly found in family companies and how these gaps can be filled through the Turkish Commercial Code (TCC) and contractual instruments. Although Turkish legislation contains no regime specific to family companies, family companies can secure their future by using the instruments the law offers to joint-stock and limited liability companies together with a family constitution, shareholders’ agreements, articles of association and internal directives.
A. Introduction
The vast majority of businesses in Türkiye are family companies. Of the more than 2 million businesses in Türkiye, 96% are family companies. Family companies are estimated to account for more than 70% of global GDP.
Despite the weight these companies carry, there is very strong evidence that governance in them is rather weak. Of the companies that took part in a survey conducted in 2017, approximately 60% have no “family constitution,” and only 22% have written rules on the participation of family members in management. Again, in a study conducted in 2023, 71% of the 34 family companies examined have this type of governance policy.
The Turkish Commercial Code (TCC) does not provide for a regime specific to family companies. This article addresses the main governance gaps in joint-stock and limited liability companies subject to the TCC and the legal instruments that serve to close them.
B. Why Does Governance Remain Weak in Family Companies?
The distinguishing feature of a family company is the overlap of the family, ownership and management subsystems and the fact that individuals hold more than one role at the same time. Family members may at times be employees, at times shareholders, and at times both. If the interests of people in these different roles are not managed properly, differences of opinion can endanger the company.
Unlike companies with dispersed ownership, the shareholder-manager structure of these companies weakens the effect of external monitoring. Balances within the family, for their part, may aggravate rather than alleviate agency problems, because in family companies non-financial goals such as family ties, reputation and the preservation of control also influence decisions.
This is seen most clearly on the board of directors. According to a study of S&P 500 companies, firms in which independent directors balance family representation have a higher market value, whereas family companies with few independent board members perform worse.
According to a study of S&P 500 companies, the companies in which independent members balance family representation are the most valuable; in family companies with few independent members, performance lags markedly behind that of non-family companies. According to another study, as the family’s weight on a firm’s board increases, sensitivity to CEOs’ poor performance decreases.
In Türkiye, it has been established that the boards of large family holding companies have almost no independent members, and that the non-executive members are mostly either members of the family or group executives. According to a 2023 study, the proportion of firms whose board members are all family members is 36% worldwide, whereas in Türkiye it is 59%.
C. Governance Gaps and Legal Instruments
1. The Board of Directors and Delegation of Management
A joint-stock company is managed and represented by the board of directors (TCC Art. 365). Duties such as determining the management structure, establishing the accounting and financial system, and the ultimate supervision of the persons entrusted with management cannot be delegated (Art. 375(1)); leaving them in practice to the founder or to a single family member empties the board’s supervisory function of substance. If management is to be left to professional managers, the articles of association must contain a provision permitting this and the board of directors must prepare an internal directive; in that case, management may be delegated wholly or partly to one or more members or to third parties, and otherwise it belongs to all members of the board of directors (Art. 367). The first step is therefore the articles of association.
The law also leaves wide latitude with respect to the formation of the board of directors and its managerial acts. The articles of association may grant share groups, shareholders forming a particular group, and the minority the right to representation on the board or to nominate candidates (Art. 360); balanced representation of the family branches can be established in this way. The requirement to have independent members, however, applies to companies listed on the stock exchange; since this requirement was introduced, boards have come to object to family decisions to some extent, but the direct monitoring power of independent members has remained weaker than expected. Although having independent members is a voluntary choice in closely held family companies, academic studies show that having independent member(s) brings significant benefits to companies.
2. Drawing the Line Between the Family and the Company
One of the greatest dangers in a family company is the confusion of the family with the company. Turkish legislation, as it should, draws this boundary at a minimum level. Examples of this boundary are as follows: a board member cannot enter into a transaction with the company without the permission of the general assembly, and the company may assert that the transaction is void (Art. 395(1)); a member cannot take part in deliberations in which the company’s interest conflicts with the personal interest outside the company of the member or of the member’s descendants, ascendants, spouse, or blood relatives or relatives by marriage up to the third degree (Art. 393(1)); members who are not shareholders, and those of these relatives who are not shareholders, cannot borrow cash from the company (Art. 395(2)); and unauthorized competition is also prohibited (Art. 396(1)).
The solution that goes beyond the statute is to subject transactions with family members, such as leases, loans, supply, employment and remuneration, to a written related-party transactions policy that sets the approval thresholds and market conditions for such transactions. In principle, a text that could be called a “family constitution” can be drawn up for this purpose, and, legally, an internal directive can be used as the instrument.
3. Protection of Shareholders and the Decision-Making Regime
Family shareholders who do not take part in management are protected first and foremost by rights arising from the law. Shareholders representing at least 10% of the share capital (5% in publicly held companies) may request that the general assembly be convened or that an item be added to the agenda. This threshold can be lowered by the articles of association, and if the board of directors rejects such requests, the shareholders may also apply to the court (TCC Arts. 411–412). The right to obtain information, a special audit and the appointment of a special auditor (Arts. 437–439), and the action for annulment (Art. 445) are also the principal protections of the minority. Profit distribution depends on a resolution of the general assembly (Arts. 408(2), 507), and that resolution is passed by the majority; for this reason, having the principles of profit distribution written down in the articles of association, a shareholders’ agreement or the “family constitution” makes the expectations of minority shareholders predictable.
The decision-making regime is largely determined by the articles of association. Quorum and majority requirements may be set more stringently than in the statute, whereas relaxing them is limited to the cases the law expressly permits (Arts. 340(1), 418, 421). In companies whose capital is dispersed among many family members, veto-like protection can be achieved by raising the quorum requirements. Privileged shares are created through the articles of association, and a share carrying a voting privilege may, in principle, be given at most fifteen votes; a voting privilege cannot be exercised in resolutions on amending the articles of association, release from liability, or bringing a liability action (Arts. 478–479). Introducing a privilege by later amending the articles of association, or restricting the transfer of registered shares, requires the affirmative vote of shares representing at least 75% of the share capital (Art. 421(3)).
In a limited liability company, a veto right may be granted through the articles of association (Art. 577(1)); in a joint-stock company, however, the law contains no provision on the matter. In legal scholarship, there are views holding that a veto can be established as a privilege attached to shares, as well as views that find it contrary to the majority principle. Supporting a veto clause with stricter quorum requirements and a shareholders’ agreement is therefore a controversial measure.
Since who ends up holding a share determines voting power, transfer rules are also important. In a joint-stock company, the articles of association may make the transfer of registered shares subject to the company’s approval (Art. 492); in the case of shares not listed on the stock exchange, the company may refuse its approval only on the basis of an important reason stated in the articles of association or by offering to take over the shares at their real value (Art. 493; İncesu, 2022). In a limited liability company, the transfer is made in writing, the signatures are notarized and, unless otherwise provided, the approval of the general assembly is required (Art. 595). Exit rules and the dispute resolution method (arbitration, mediation, conciliation) can be established in a shareholders’ agreement.7 Otherwise, in a joint-stock company, shareholders representing at least 10% of the share capital may request dissolution for just cause, and the court may, instead of dissolution, order that the plaintiffs be paid the real value of their shares and removed from the company (Art. 531(1)). In a limited liability company, by contrast, every partner may bring an action for withdrawal for just cause (Art. 638(2)).
4. Audit, Internal Control and Transparency
Among the non-delegable duties of the board of directors are establishing the accounting and financial control system and ultimate supervision (Art. 375(1)); these require a functioning internal control system, whereas in family companies controls are often neither written nor formal but dependent on individuals, and it is important here that internal audit not report to positions with executive responsibility.7
For closely held family companies as well, the law offers two instruments: the committee for the early detection of risk, which is established immediately if the auditor considers it necessary and gives notice to that effect (Art. 378), and independent audit, which is mandatory for companies designated by the President of the Republic (Art. 397(4)). The procedures and principles for the audit of other joint-stock companies are left to regulation (Art. 397(5)). Companies outside the scope may also use these instruments as a voluntary step toward institutionalization.
5. Written Family Rules and the Succession Plan
A family constitution is an atypical contract that regulates family members’ relationships with one another and with the company; it binds only the family members who sign it and is not automatically binding on the company or on shareholders who are not parties to it. As a rule, the principles it contains can acquire legal character when they are added to the articles of association, the shareholding policy and the shareholders’ agreement and thereby aligned with the legislation; the drafting process is as important as the constitution itself. Legal scholarship treats the family constitution as an instrument that contributes to the continuity of family companies. , This is because the growing complexity of families over time is one of the main reasons for resorting to such institutions, and the constitution process can strengthen harmony within the family.
A family council is technically not an organ of the company. Not only is there no such concept in the TCC, but the non-delegable duties and powers of the board of directors or the general assembly also cannot be delegated to it. However, in some Spanish companies in which the family council has partly assumed the roles of the owners’ meeting and the board of directors, it has been observed to provide firms, above all, with communication within the family.
A shareholders’ agreement is an atypical instrument that is more flexible than the articles of association and is not public; however, it binds only its parties and cannot be asserted against shareholders who are not parties to it. Votes cast in breach of a voting agreement are nonetheless valid, and annulment of a general assembly resolution adopted with such votes cannot be requested. Consequently, the remedies available in the event of a breach are largely limited to contractual damages and contractual penalties. Matters such as offering shares to the other shareholders first, valuation, call options and non-competition covenants are regulated in this agreement. It is stated in the literature that such agreements should be designed to fit the characteristics of the family rather than drawn up in boilerplate form.
A succession plan is also a governance document. Succession is a three-stage process consisting of determining the basic rules and first steps, developing the successor, and handover. Here, the law is mostly concerned with the first stage. Upon death, the share becomes part of the estate and passes to the heirs (Turkish Civil Code [TCivC] Art. 599); in a joint-stock company, the company can refuse its approval of an acquisition by inheritance only by offering to take over the shares at their real value (TCC Art. 493(4)). A similar regime applies to limited liability companies (Art. 596). The distribution among the heirs is, in turn, limited by the reserved portion (TCivC Arts. 505–506) and the action for reduction (Art. 560 et seq.). Because the same regime also applies to acquisition through the matrimonial property regime and through enforcement proceedings, the rules should also cover scenarios involving marriage.
D. An Integrated Approach
None of the five gaps mentioned above can be closed with a single document. This is because both formal and social control mechanisms affect the nature of the decisions to be taken. Likewise, unwritten governance rules can be as important as formal rules. Formal instruments such as the articles of association, the internal directive and the shareholders’ agreement should therefore be considered together with relational mechanisms such as the family council and the family constitution (Table 1).
Table 1. Governance gaps in family companies and their legal responses
| Gap | Main legal basis | Main instruments |
| Board of directors is dysfunctional; delegation of management is unclear | TCC Arts. 360, 365, 367, 375 | Authority to delegate management in the articles of association, internal directive, representation on the board, non-family or non-executive member |
| Boundary between the family and the company is blurred | TCC Arts. 393, 395, 396 | Written related-party transactions policy, approval thresholds |
| Shareholders and the minority are not adequately protected | TCC Arts. 411–412, 437–439, 445 | Lowering the minority threshold in the articles of association, written profit distribution policy |
| Decision-making and share structure are uncontrolled | TCC Arts. 418, 421, 478–479, 493, 577, 595 | Stricter quorum requirements, privileges, transfer restrictions, shareholders’ agreement, exit rules |
| No audit or internal control | TCC Arts. 375, 378, 397 | Internal control, internal audit, risk committee, voluntary independent audit |
| No written family rules or succession plan | TCC Arts. 493(4), 596; TCivC Arts. 505–506, 560 et seq., 599 | Family council, family constitution, shareholders’ agreement, estate plan |
The order of implementation can run from the family to the company. First, a family council is established, and once its meetings have reached a certain maturity, the family constitution is adopted.7 Next, authority to delegate management is provided for in the articles of association, and the internal directive, signing authorities and related-party policy are written; the shareholders’ agreement is then designed together with the articles of association. Finally, internal control and internal audit are established, and the estate and succession plan and the exit and dispute resolution rules are aligned with these documents.
E. Conclusion
The corporate governance deficit in family companies stems most often not from the absence of legislation but from the instruments the law provides going unused and from intra-family agreements never being put in writing. Although the TCC provides no regime specific to family companies, it offers joint-stock and limited liability companies instruments such as internal directives, minority rights, stricter quorum requirements, privileges and a risk committee; the family constitution and the shareholders’ agreement complement the law by addressing family relationships it cannot reach. Because these cannot be asserted against the company, they should be designed together with the articles of association and the internal directive and put in writing before a dispute arises.
