The separation between ownership and control that characterises listed firms entails an agency problem between those who own the company (shareholders) and its decision makers. On the one hand, shareholders' limited liability reduces the incentive to supervise the decisions taken as their losses are limited to their own particular contribution. On the other hand, ownership of the firm tends to be spread thinly among many different shareholders so that, individually, each one expects the rest to take on the job of supervision (free-riding). Moreover, the free transmission of ownership rights (shares) on the stock market offers the chance to abandon the company should you not agree with its management, without the need to bring about any change in the governance bodies. Consequently, which mechanisms should ensure the quality of decision-making in listed companies is currently under debate. In fact, improving corporate governance has been an issue since the very start of limited liability companies, with the chartered trading companies in 17th-century Great Britain and the Netherlands when separation of ownership and control was viewed with some suspicion.
The Spanish Securities and Investments Board (Comisión Nacional del Mercado de Valores, or CNMV for short) has recently promoted the reform of the Corporate Enterprises Act (LSC in Spanish), which provides mandatory requirements concerning corporate governance, and the adoption of a new code of good governance for listed companies, of voluntary compliance, to replace the Unified Code of 2006. This new code complements some of the legal regulations contained in the LSC. For example, the LSC requires listed companies to include at least two independent members on the audit committee and on the appointments and remuneration committee. For its part, the code of good governance recommends that independent members should account for at least 50% of the board (compared with one third in the old code), with some exceptions for companies that do not form part of the Ibex 35 or that form part of it but have one shareholder who controls more than 30% of the shares.
The new code is made up of 25 principles and 64 recommendations and applies to all listed companies irrespective of their level of capitalisation. As in the previous code, it is based on the principle of «comply or explain». Most companies comply with the vast majority of the recommendations (see the first graph), so the new code will force companies to be more transparent in everything related to their corporate governance decisions. Spain has a poor position in international corporate governance rankings and this has worsened in the last few years (see the second graph), so any initiative aimed at good governance is more than welcome.
In this respect, it is very positive that the new code includes measures to improve transparency, control and supervision of the decisions taken, that it encourages the professionalisation of administrators and directors and promotes a long-term view in decision-making. In this last aspect, particular attention is paid to remuneration for directors in order to link this more closely to long-term results, for instance by including clawback clauses (refunding variable payments when they are not in line with the actual performance). Moreover, and as its key addition, it also includes recommendations on corporate social responsibility (CSR), recommending greater involvement by the board in implementing, assessing and supervising CSR policy.
This new code represents a step forward in bringing Spain's corporate practices up to international standards. Achieving this is, ultimately, essentially to attract international investors and improve the competitive position of Spanish firms.