Iran Corporate Governance Country Report Analysis

Iran
Corporate Governance
Country Report

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Iran Corporate Governance
Country Report
Initial Draft
September 2011
Prepared By CSR Development Center (CSRIran)
www.csriran.com
Alireza Omidvar
Hossein Faghih

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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.
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 liquid
cash 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. In none of the companies in the survey, a board member
reported to the shareholder regularly.
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

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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.

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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)

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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

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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.

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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:

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 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.

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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.

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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)

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 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;

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Iranian Market Profile
The size and the number of listed organizations has had a steady incline in recent years and
today 34510
companies 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

14
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.
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.

15
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.
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.
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. These two laws, explained above, facilitated definition and promotion
of new financial tools and products.
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
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.

16
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.

17
 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
Business Rank
Starting a
Business
Dealing with
Construction
Permits
Registering
Property
Getting Credit
129 42 143 156 89

18
Protecting
Investors Paying Taxes
Trading Across
Borders
Enforcing
Contracts
Closing a
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.
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.
Number of procedures 39 43 31

19
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.
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.
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
.
Indicator
Iran, Islamic
Rep.
Regional Average OECD Average
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
(0-10)
3 4.8 6
Corporate Governance Situation in Iran

20
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
the General Assembly
Only holders of shares above 20 percent
can
Board‘s system one-tier Board
Independent board members It‘s not common in Iran, we have non-
executive members
Board Committee It‘s not common in Iran
Disclosure of information about board and
managers
In listed firms, records and qualifications
of board and CEO should be reported.
Compensation of the board services Board‘s fees and remuneration will be
exposed cumulative.
Ownership Disclosure Yes - but understanding the ownership
structure and identifying ultimate owner
is very difficult
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.

21
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

22
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.

23
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.

24
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.

25
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.

26
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?

27
 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.

28
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

29
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?
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,
nomination and selection committee and ...)
9%
Developing compensation and remuneration mechanisms for board
of directors and executives
31%
Board Evaluation Instructions 13%
9%
45%
27%
18%
Familiar
somewhat
Not Least
very Much

30
Separation of chairman from CEO 68%
Independent and non-executive board members 27%
Developing procedures governing deals with related parties and
preventing conflicts of interest
40%
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
Corporate Governance, we prefer to keep our financial
information away from competitors and rival stakeholders
18%
We don‘t find any use in it regarding the Iranian legal and
business structure / We simply don‘t see any value engaging
with it.
9%
Lack of professional experts and consultants 54%
Lack of knowledge and expertise available to the company 77%
I do not see obstacle 4%
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%

31
Defending Shareholders Rights 50%
Improved strategic decision-making process 77%
Better access to capital and foreign partners and move towards
internationalization
40%
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
22%
68%
9%
0% not important
somewhat important
important
Very important

32
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.

33
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

34
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.
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.
60%
18%
0% 10% 20% 30% 40% 50% 60% 70%
Seven members
Six members
Four members
Five members
Three members

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