Recommendations of the new good governance code for listed companies (II): board of directors
Today we round off our review of the main new features introduced by the new good governance code, following on from the recommendations relating to the shareholders’ meeting that we looked at recently, by focusing on aspects relating to the board of directors, which we summarize below.
The board must act with unity of purpose and be guided by the corporate interest, reconciling the economic development of the company with the interests of its stakeholders, the wider community and the environment (R12).
- Size and composition
- A director selection policy should be approved that fosters a diverse range of knowledge and experience – informing the shareholders’ meeting – as well as gender diversity – with the number of female directors increasing to represent at least 30% of the board (R14).
- In general, at least half of all directors should be independent directors (R17).
- The board of directors should hold at least eight meetings a year (R26).
- Clarity on the agenda regarding the items to be discussed, so that directors can get information in advance (R31).
- Directors should be informed of changes in the shareholding structure and of how significant shareholders, investors and ratings agencies view the company (R32).
The recommendations regarding the chairman and secretary are redrafted and further powers are given to the coordinating director, such as the power to chair the board in the absence of the chairman and deputy chairmen, to contact investors and shareholders, to coordinate the succession plan for the chairman, etc. (R34).
The evaluation of the board should be carried out by an independent external expert at least once every three years (R36).
The majority of the recommendations of the Unified Code are maintained, notably:
- The audit and compliance committee and the appointments and remuneration committee should be made up of a majority of independent directors (R39 and R47).
- The audit committee will supervise the unit that takes on the internal audit function, which will be functionally dependent on the non-executive chairman of the board or of the chairman of the audit committee (R40). Greater detail is provided on the internal control and risk management function and on its competencies (R46).
- Companies with a high market capitalization are recommended to split the appointments and remuneration committee (R48).
- Functions are added to the audit, appointments and remuneration committees (R42, R44 and R50) and recommendations are included on the rules regarding the composition and functioning of other supervisory committees that may be created, in line with the mandatory committees (R52).
- Corporate Social Responsibility (CSR).
The inclusion of recommendations in this area is one of the main new features of the Code:
- CSR policy, corporate governance rules and internal codes of conduct will have to be supervised by one of the committees (R53).
- There must be a CSR policy with a stipulated minimum content (R54).
- CSR matters must be reported on in a separate document or in the management report, using one of the internationally accepted methodologies (R55).
Remuneration must be that necessary to attract and retain the desired profiles, without compromising the independent judgment of non-executive directors and without taking on excessive risk. The recommendations in this area, which expand on and supplement those contained in the Unified Code, notably include:
- The inclusion of guidelines and criteria on the variable components of remuneration (R58).
- The deferral of payment of part of the variable component until fulfillment of the previously established performance conditions has been confirmed (R59).
- The tying of a significant percentage of the variable remuneration of executive directors to the award of shares or financial instruments linked to the share value (R61).
- Once the shares and share options or rights have been granted, directors are prevented from transferring ownership of a number of shares equal to twice their fixed annual remuneration, and cannot exercise the options or rights until at least three years have elapsed since their award (R62).
- Clawback clauses for variable remuneration when its payment is not in keeping with the performance conditions or it has been paid in consideration of inaccurate data (R63).
- Restriction on payments for contractual termination, which may not exceed an amount equal to two years’ total annual remuneration (R64).
The 64 recommendations contained in the new good governance code complete the reform of the legislative framework for the enhancement of corporate governance in Spain, the precursor of which was the reform of the Capital Companies Law as amended by Law 31/2014, of December 3, 2014.
The document prepared by our Corporate Governance and Corporate Social Responsibility experts containing a more detailed review of the main new features introduced by the new Code for listed companies can be found on our website.
Garrigues Corporate/Commercial Law Department