The new Spanish Corporate Governance Code for listed companies, approved by resolution of the board of the National Securities Market Commission (CNMV) on 18 February 2015, dispenses with the recommendations that currently are legal rules, retains other recommendations that had already been included in the previous code, and incorporates some new recommendations regarding different subjects, based on the proposals made by the Committee of experts regarding corporate governance.

Main features

The Spanish Corporate Governance Code for listed companies (the Code), in contrast to its predecessors, is influenced by two unique circumstances: on the one hand, it was preceded by a broad reform of the Spanish Companies Act (Ley de Sociedades de Capital), a reform that made mandatory many of the rules that in the previous code were considered to merely be recommendations; on the other hand, the severe economic crisis that has afflicted the companies markedly increased the awareness of the convenience of improving the control and degree of transparency in the management of companies, specifically in the largest companies.

The continuity of the Code in its orientation should be emphasized: (i) the voluntary character of its compliance, subject in any event to the principle of “comply or explain”; and (ii) the reference to the market (shareholders, investors, etc.) as a means of appraising the behaviour of the destined company. Meanwhile, the amendment of its subjective scope of application by express reference to the rules governing listed companies in general, even taking into account their different size and capitalisation, means that an unequal level of implementation is expected.

Formally, the Code presents a well-known systematic structure: the recommendations are assembled and organised into three blocks (general aspects, general shareholders’ meeting and board of directors), in accordance with traditional structures; but, this time, the detail of the recommendations is preceded by certain “principles” that synthetically anticipate their particular content, which undoubtedly provides a useful prior overview which might assist the understanding of the Code. Each principle is reiterated afterwards in the body of the Code, where the particular recommendations are analysed, always with a brief explanatory statement, precedents, scope, etc., of any of them.

General aspects

Statutory limits

The Code recommends that the by-laws of the listed companies, even though they may be legally established, do not limit the maximum number of votes that a sole shareholder may issue, nor do they include other restrictions or indemnities that will complicate the acquisition of its shares in the market.

Conflict of interest

It is recommended that a conflict of interest, which may occur when several companies belong to the same group trade in the stock market, should be prevented.

Compliance of the recommendations of corporate governance

It is recommended to instruct in detail the ordinary general shareholders’ meeting of the guidelines of corporate governance of the company, its variations and the reasons for the non-performance of recommendations.

Communication and contact policy

The Code recommends that a communication policy be agreed with the shareholders, institutional investors and vote advisers, and that this be published on the website.

Delegation of faculties

It is recommended not to delegate, to the directors, the issuance of shares or convertible securities, excluding the pre-emptive right, when the extent of their ownership exceeds 20% of the share capital, in an attempt to limit the dilution effect over the former shareholders.

Shareholders’ general meeting

Information transparency and informed vote

It is recommended that the listed companies that make them, on a mandatory or voluntary basis, to publish several reports (relating to the independence of the auditor, the functioning of the committees of the board of directors, related parties’ operations, and corporate social responsibility) prior to holding the general shareholders’ meeting, on the website of the company, on which should also be broadcast the meeting.

Attendance and participation

The Code recommends facilitating the shareholders’ attendance and the exercise of their rights, opposing any discrimination against their contributing to the agenda and to suggesting resolutions including their dissemination, publication, discussion and voting.

Attendance fees

Regarding the functioning of the general shareholders’ meeting, the Code recommends that the listed companies that pay attendance fees to their shareholders formulate a general policy in this regard which is transparent and stable.

Board of directors

The majority of the recommendations, as usual, apply to the board of directors. After a first recommendation regarding the appropriate performance of the post (recommendation number 12), the rest of the recommendations (from number 13 to number 64) apply in turn to the structure and composition of the board of directors, its functioning, its organisation, corporate social responsibility and the remuneration of the directors.

Structure and composition

It is recommended that: the board of directors is composed of an appropriate number of members (between five and fifteen members): at least 30% female representation on the board of directors is achieved by 2020; the number of executive directors is the minimum necessary and the number of independent directors is at least half that number; the cessation and dismissal occurs due to fixed reasons that are specified (change of control, prejudice of the company, etc.).

Functioning

Regarding the functioning of the board of directors, the recommendations are intended to promote the dedication, knowledge and direct participation of the directors in different ways: limiting the numbers of boards of directors to which they may belong, setting up a minimum of eight meetings per year, facilitating their advice, etc., at the same time as the roles of chairman, coordinator directors and the secretary need to be clarified.

Organisation

The organisation of the board of directors, which has been the object of recent legal reform (non-delegable faculties, internal committees, etc.) gives rise to recommendations of development which are more accurate: in such a way, those referred to the duties of the audit committee (to which has been added the supervision of a control unit and management of risks), or to the appointment and retribution committee (for which has been required a separate structure of both duties in the largest companies), already mandatory, without prejudice to other incorporations of similar compositions for the supervision and control of determined subjects (compliance with the rules of good governance and corporate social responsibility), as recommended.

Corporate social responsibility

Corporate social responsibility, absent in the previous code, is now the object of express recommendations in the Code, something which is intended to define a minimum content of the policy of the company in this regard (targets, commitments, practices, etc.), as well as its evaluation and diffusion.

Remuneration of the directors

The last tranche of recommendations is dedicated to the sensitive subject of directors’ remuneration, based on the rules already included in the Spanish Corporate Act, whether generals, or particulars for listed companies, regarding the intervention of the shareholders’ meeting in its approval and to the criteria that must be followed for the directors and for the executive directors through the specific contract that may be held.

Overall, the recommendations pursue a reasonable objective: that remuneration is appropriate to attract and retain good executive directors, and is at such a level that does not question the independence of the non-executive directors. In the main, the recommendations intend to guarantee that the variable retributions, limited to the executives, are genuinely linked to both the efficiency of the company and to personal performance; for this reason it is recommended that a certain proportion of such variable retributions is postponed until such time as it can be verified that all relevant efficiency conditions have been met, that they are applied in accordance with deferred retributive concepts, as the delivery of shares and option or rights over shares (that should not be respectively transferred in volume equivalent to double that of the annual retribution, nor will it be executed until at least three years have elapsed from its assignment), that the possibility is foreseen of the refund being claimed if it is not adjusted to the efficiency or it is based on inaccurate information, and that the payments due to termination of the contract are not higher than double the total annual retribution nor paid until attainment of the verification of completion of the foreseen performance.

Conclusion

In view of its content, it should be recognised that the new Code constitutes a reasonable advance towards the attainment of the good governance of listed companies. It only remains to wait for the rapid and accurate incorporation of the new Code’s recommendations into those company’s by-laws and regulations.

The complete text of the Code published by the CNMV on 24 February is available via this link: Spanish Corporate Governance Code.