This year marks the 20th anniversary of the corporate governance movement in Spain, two decades after the first voluntary good governance code, titled The Governance of Listed Companies, was prepared by a special commission led by Professor Olivencia (February 26, 1998). The document comprised two separate parts: (i) a report on boards of directors, the key focus of the Olivencia Commission's study, and (ii) a code of good governance, setting out voluntary governance recommendations.
The document brought about a new way of understanding and practicing corporate governance in listed companies, establishing voluntarily soft law under the "comply or explain" principle.
The "comply or explain" principle had seen its most prominent application a few years before in the United Kingdom's Cadbury Report (1992). Both the Cadbury and the Olivencia reports, along with other less salient documents such as the Vienot Report (France, 1995) and the Peters Report (Netherlands, 1997), share similar backgrounds and address the same concerns: they were published in the midst of a movement to privatize European state-run companies; they focused on the structure and functioning of the board of directors, defined more as a strategic supervision and control body than a management body; they introduced into the European legal framework the distinctions between types of directors and, in particular, the figure of the independent director; they provided the blueprint for improving the one-tier administration system through the new structure of board committees; and they spurred a progression in good governance codes and reports, under the shared "comply or explain" principle.
These texts reflect the introduction of the corporate governance movement in Europe, even before the EU's institutions did so through a directive. It is significant, for example, that the "comply or explain" principle was not analyzed in detail in the European Union until the Green Paper on the EU corporate governance framework was published in 2011 and was not enshrined in law until Directive 2013/34/EU came into force in 2013.
Although the Olivencia Report's provisions are indeed relevant, the legacy of the document itself is far-reaching:
- Corporate governance of listed companies has continued to evolve through later codes: the report by the special commission to foster transparency and security in the markets and listed companies presided by Enrique Aldama (2003); the 2006 Unified Good Governance Code of Listed Companies, prepared by a committee under the then-chairman of the Spanish National Securities Market Commission (CNMV), Manuel Conthe; and, lastly, the 2015 Good Governance Code of Listed Companies, issued by the committee headed by the CNMV chairwoman, Elvira Rodriguez.
- The recommendations have served as a testing ground for the effectiveness of certain good practices later enshrined in law. This includes, among others, new provisions such as the obligation to establish an audit committee (2002 financial system reform law); the introduction into Spanish law of regulations applicable to listed companies and the extension to all public limited companies of a new regulation on directors' duties, with particular reference to their duty of loyalty, introduced under the 2003 Transparency Law; and the very significant amendment of the Capital Companies Law through Law 31/2014, incorporating a large number of provisions taken from good governance codes and often applying to all corporate enterprises.
- The codes have helped standardize corporate governance in the European Union, filling the gap left by the absence of an EU directive on company governance.
During these past 20 years, corporate governance has come very far in Spain, and this looks set to continue in the coming years. Yet there are many multifaceted challenges for the years ahead. I believe that the most relevant challenges are as follows:
1. The interplay between corporate governance and corporate social responsibility: The 2015 Good Governance code of Listed Companies took the first step toward this interaction by citing corporate social responsibility in its principle 24: "The company should deploy an appropriate corporate social responsibility policy, as a non-delegable board power, and report transparently and in sufficient detail on its development, application and results" and in the related recommendations nos. 54 and 55.
As a result of such interplay, the traditional definition of corporate interest and the principles that should govern the companies' relationships with all their stakeholders need to be profoundly revisited: The board of directors' actions to safeguard the corporate interest must be made compatible with the interests of the remaining stakeholders: employees, suppliers, clients, other interest groups, the community at large and the environment.
2. The long term as the new paradigm for business sustainability and its alignment with the interests of the different stakeholders: The long-term horizon as the point where the interests of companies, shareholders and other stakeholders converge is making headway in the corporate governance movement. While the introduction of this horizon in the 2015 G20/OECD Principles of Corporate Governance and even in the EU's latest directive in 2017 amending the 2007 Shareholder Rights Directive as regards the "encouragement of long-term shareholder engagement" is significant, perhaps even more important, due to its practical implications, is that leading institutional investors such as Blackrock and Vanguard have included this concept in their voting policies.
These changes have spilled over into Spanish law as well. The Olivencia report stated that "(…) we recommend establishing that the company's ultimate goal and, accordingly, the principle presiding over the Board's operations, is to maximize the company's value, i.e. to employ a term used widely in financial circles, to create shareholder value," while the 2006 Unified Code prescribed that "the Board of Directors should perform its duties with unity of purpose and independent judgment, according all shareholders the same treatment. It should be guided at all times by the company's best interest and, as such, strive to maximize its value over time (…)." The 2015 Code holds that the Board should be guided by a long-term intentions:"(…) the creation of a profitable business that promotes its sustainable success over time, while maximizing its economic value."
Going forward, the challenge is how this principle, which today has been broadly embraced, will be woven into the remaining expressions of corporate governance and into the relationships between corporate enterprises and shareholders with short term interests.
3. Shareholder engagement: Existing formulas are being enhanced and new mechanisms are being put in place to make the relationship between companies and their shareholders more effective and interactive, while strictly observing the principle of equal treatment.
4. The composition of the board and the diversity challenge: Diversity on boards of directors has been called for in the different good governance codes, in particular, in the 2015 code after this diversity was highlighted in the European Union's 2011 Green Paper. Gender diversity targets for boards of directors were set out in recommendation 14 of that code, with the aim of female directors comprising 30% of total membership by 2020.
5. The international standardization of the different director categories and the asymmetrical criteria applied in the proxy advisor policy: Classifying a director as independent has considerable implications on that director's functions. Consequently, efforts must be made to harmonize the different jurisdictions, with their notable differences both in terms of where this classification is defined (good governance recommendations or legal provisions) and in the definition itself, in particular, the maximum ownership interest such directors can hold in a company. In Spain, for example, this percentage is 3%, compared to 10% in other countries (such as Germany).
Proxy advisors should ideally apply a unified policy irrespective of the definition laid out by the good governance recommendations or national legislation.
6. Risk control, the corporate compliance structure and liability of the board of directors: Among the causes of the recent international financial crisis, the G20 has identified the failure of corporate governance structures to effectively control entities' risks. In addition, aspects such as privacy and cyber security have given rise to new risks in companies, which must be addressed systematically.
7. Institutional investors and their investment strategy: The obligation set out under Directive (EU) 2017/828 whereby institutional investors and asset managers must disclose their investment strategies and how their shareholder engagement policy is integrated in their investment strategy will be implemented and developed in the coming years.
8. Transparency and liability of proxy advisors: This aspect is currently being developed, and is particularly relevant in a highly concentrated market.
9. A statutory regime governing corporate groups: The elephant in the room that, sooner than later, will have be to be dealt with, is the lack of a clear regime that can both safeguard external shareholders' legitimate interests in corporate groups and provide certainty to controlling companies about the precise boundaries of their rights over controlled subsidiaries.
10. The extension of certain good governance principles to non-listed companies: Efforts should be made to avoid simply mimicking principles and to instead encourage the application of tried-and-true best practices that are also adapted to the needs of non-listed companies.
Undoubtedly, these ten aspects, along with a few more, will shape the near future of corporate governance and merit our close attention. Their development over the next years will be at least as significant as it has been over the last 20.