Corporate Governance: the new code is almost complete

José Luis Álvarez. Professor. Instituto de Empresa

22 February 2006

Spain’s new code on corporate governance is largely in line with past codes. But it could divide corporate boards, instead of giving more power to the general Shareholders’ meeting.

Though specific aspects of it may stir debate, the corporate governance code drawn up under the supervision of Manuel Conthe, the chairman of Spain’s National Stock Exchange Commission, doesn’t break with Spain’s two previous codes. And that’s the way it should be. After all, we are dealing with legal and institutional rules for regulating corporate governance that already exist in many advanced economies.

For example, the code seeks to ensure that independent board members are really what they say they are; independent. It does not introduce many new requirements for independents, but instead clarifies how they should be appointed. This process should involve the Appointments Commission, which is dominated by independent directors. Despite all the conflicts of interest described in a corporate governance code, determining who is independent will always be a difficult and frustrating process.

The pressures of working within a small group, such as a board or a commission of delegates, can affect the decision-making process of individuals or minority subgroups in many ways. And, of course, we must not forget the pressures unleashed by Spanish capitalism, which is still dominated by a reduced number of social cliques. In fact, boards would likely be more independent if companies were to become more responsive to the views of shareholders and professional directors.

In addition to finding independent directors, the challenges facing companies include determining the scope of the board’s duties, which are dependent on the needs of the company in question. Perhaps for that reason, the draft code suggests, albeit in an overly prudent way, that board members, as well as professional training and orientation programs, be evaluated on a regular basis.

Whatever the case, the issue of board independence would be of less concern if the general shareholders’ meeting—and its influence over matters of corporate governance—were more relevant and more closely monitored. Interestingly, the draft code only addresses this issue in an annex, as if corporate governance were only of concern to the board of directors. Or, as if it were something so complex, technical and even experimental that it need not be included in the main body of the text.

In the end, independent parties are there mainly to represent the interests of shareholders who are not organized enough to express their own opinions at meetings. Organizing a large number of people to such an extent as to enable their participation in decision-making is very complicated and many limited liability companies automatically exercise a kind of `census-taking’ democracy. Furthermore, most general shareholders’ meetings fail to refer to best practices, since even the most advanced countries are still in the early stages of using new technologies for convoking meetings, determining interests and tallying votes.

The Conthe project draws on corporate governance codes in the US and Britain for inspiration for Spain’s own reforms. Unfortunately, some aspects of these codes—for example, the figure of the independent vice-chairman—can have undesired side-effects for a system like ours. This figure, modelled on the lead-director of the US or British company boards, is entrusted with coordinating non-executive board members.

For Britain and the US, this figure makes sense because the executive directors often outnumber the non-executives on the board and are more influential than their Spanish counterparts. What’s more, the CEO in these countries is more powerful and much more independent of ownership than his counterpart in Spain. Consequently, the ´lead director´ helps the shareholder representatives control the executive directors. However, in Spain, a difference is made between two types of shareholder representatives, because the executive chairman is either the controlling shareholder or the controlling shareholder´s direct representative.

An artificial dichotomy

This divides shareholders into two groups and creates an artificial and unnecessary dichotomy in the heart of the board of directors, whose main task of making strategic decisions requires the active and continuous participation of all the members. The shareholders should ultimately take charge at their annual meeting.

The directors’ main role is to make strategic decisions. For this to happen, an air of cooperation must exist among the board members. They must also be flexible towards continuous and sudden changes. Control should be exercised above all by the GSM (the general shareholders meeting), where the main differences among shareholders and the balance of power among them should be addressed.

Except for the rules regulating the shareholders’ meetings and a few other minor points, the standards of good corporate governance for listed companies are already well defined. But the need for high-performance boards of directors opens up a whole new frontier for corporate governance. This requires assessing board members, as well as the boards themselves. Doing that properly depends on the decision-making practices of each company--something that cannot easily be regulated.


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