Ignacio Sánchez Galán is not excited by the possibility that EDF, a French energy company, and ACS, a Spanish construction firm, will make a takeover offer for Iberdrola, the Spanish electricity provider. Galán says he does not want his company to split up because “there is no shortage of intermediaries who could sell the company piece by piece.” Meanwhile, Iberdrola has just unveiled an organizational chart that creates a dual executive who has responsibility over both branches of the tree. This differs from the traditional separation between the managers of the business and the corporate board of directors. A takeover would mean that “Sanchez Galán would stop being the chief executive and there could be sales of specific businesses, or there would be mergers between some current divisions and the divisions of some of the companies that might be buyers,” says Jose Luis Alvarez, a professor at ESADE.
A takeover of Iberdrola? If it is true that Electricité de France (EDF) and ACS have begun talks aimed at making a joint offer for Iberdrola, as reported in the Financial Times on January 30, how would such an acquisition affect the company’s newly appointed manager with two job posts? Alvarez says that the figure of the double executive could make sense in the current organization, and that Sanchez Galán believes that he will feel comfortable in terms of his style of leadership. “A takeover would very probably mean that Sanchez Galán would stop being the chief executive and that certain businesses could be sold off. There could be mergers involving some current divisions and divisions of some of the companies.” In other words, “the two main reference points and contingencies in the entire structure of power, as well as the roles of the senior executives must adapt: both the leader and the strategy,” says Alvarez.
Joaquin Garralda, assistant dean of the Instituto de Empresa Business School and director of the PwC-IE center for corporate responsibility, believes that the impact on the company could be great at first until people decide to make changes in the organizational chart. “I know little about what EDF is doing when it comes to RSC but because it is a public-sector company I do not believe that EDF brings an innovative focus or that it tries to be a leader in this area,” he notes.
Nevertheless, Iberdrola has been an attractive target for a possible takeover offer for quite some time. The company is the largest producer of wind power and it has control over Scottish Power. Months ago, it raised €4.5 billion by selling 20% of its renewable energy division on the stock market. In case a takeover offer by EDF and ACS materializes, that kind of offer would mean the break-up of Iberdrola. Politicians and investment bankers say that EDF would keep such assets as Scottish Power, and that ACS, the Spanish construction firm, could wind up with the renewable energy division. For a long time, EDF has considered Spain an attractive market. However, after a prolonged takeover war for Endesa – which confronted Germany’s E.ON, and Italy’s Enel, among others – EDF was left with few opportunities south of the Pyrenees [in Spain]. The future of Iberdrola is up in the air.
Changes in Corporate Governance
It is becoming more and more common for companies to make reforms in their corporate governance, and this process is making corporate governance bodies more alike. According to Garralda, “Those corporate managers are also responsible for business. This is the result of the increased complexity of Iberdrola stemming from its growth; from expanded technologies in electricity generation; from differences in consumption patterns in different markets; and from the variety of administrative regulations in [different] countries.” Garralda believes that it has been “relatively easy” for a company like Iberdrola. “Apart from the fact that its principal activity is to supply a service, that company is industrial in the sense that its key activity is production, more than marketing and innovative products and services, at least for now.”
Some sources say that the company has moved secretly to carry out an idea that is novel even in the international arena. Usually, just below the chief executive, there is someone in charge of the daily management of the business. This position is from the directors of major services such as finance, human resources, strategy, communications and marketing. “In an environment of engineers, this approach is convincing when it is time to accept change. Elsewhere, in an innovative environment filled with individualists and the professionally ambitious, it would be harder to introduce this organizational change because those kinds of people contribute an important part of the success of their company or their division, and it would not be easy to relegate them to a lower level,” continues Garralda.
In Iberdrola, chief executive Ignacio Sanchez Galán assumes direct responsibility over the renewable energy business. That division is the company’s current star, and Iberdrola has brought 20% of that business onto the stock market. Jose Luis San Pedro, director of control and regulations, has taken over management of the traditional business for production and distribution of electrical energy in Spain and Latin America. Jose Luis del Valle, director of strategy, supervises activities in the United Kingdom and the United States, following acquisitions in those countries of Scottish Power and Energy East. Del Valle also holds a third post since he is chief executive of the Scottish subsidiary. Jose Sainz Armada, chief financial officer, remains in control of non-energy subsidiaries such as real estate. “The managing director focuses on general topics,” adds Alvarez. “Once in a while, he can take care of areas that are so critical that he wants to assume those roles or simply because he has a strong personal interest in them.”
Garralda thinks that there are two reasons why it makes sense to separate the post of chief executive from the post of president of the administrative council. Most important, “When you assign two roles to two different people, that enables them to better distinguish different interests that could be contradictory: an operational view focused on getting results in the short term and a long-term vision aimed at guaranteeing future profits.” In addition, he says that it is possible that “the interests of senior management (who focus on growth) are not aligned with the interests of shareholders (who focus on getting a return on their investment.)” For that reason, Garralda defends the notion that the president, from his position on the administrative council, “must care for the interests of shareholders.”
Finally, Garralda argues that “if the president is an outstanding shareholder and he is the top executive in the company, it seems that those interests will always be aligned. Yet you can have a conflict when you include the interests of the small shareholders [into senior management] because you can’t have the interests of the shareholders take control over the company,” he says.
A Hierarchical Organization
Experts interpret this integration process in various ways. On the one hand, Iberdrola has moved toward giving greater importance to corporate directors by increasing their responsibilities. On the other hand, the heads of the business no longer report directly to the chief executive; they must now do so through other personnel. The only person who is immune from this restriction is the head of renewable energy, Xavier Viteria, who connects directly with the president.
As a result, the organization is become hierarchical. This evolution can be explained by the aggressive growth of Iberdrola. As a result of acquisitions and investments in new power stations, the company has doubled in size in only five years. If this hadn’t happened, Galán would have had to trust the three super-executives to take the reins of the business. “In many large companies, such as Telefónica and Repsol, there has been a movement toward simplifying and reducing the number of the members on the managerial committee. This is a correct approach since the ideal number of members is from five to seven. A committee made up of twelve members means straining the team dynamics. We are very interventionist. As a result, the ideal thing is for five to seven people to take part in a debate.”
Is this change in responsibilities directly related to the aggressiveness and growth of the company? “Not necessarily,” said Alvarez. “I would not call it a movement toward centralization. It is a movement directed more at facilitating the strategy because that is something necessary.”
For his part, Galán has named a number-two person for each of his trusted managers in the corporate arena. This designation is another significant novelty in the new structure of Iberdrola. Jose Luis San Pedro has appointed Juan Carlos Rebollo as his number-two; Del Valle has Pedro Azagra for his support person; and Jose Sainz has Asis Canales. Sources at Iberdrola explain that the two appointments enable substitutes for these positions to act as replacements when senior people are traveling or are busy. Other sources within Iberdrola say that Galán wants to clarify who will be the successor to the chief executive, and put pressure on executives, warning them that they are not irreplaceable. Alvarez says this novelty is a great success. “All companies should have a succession plan with one or two candidates, because succession is something that is necessary. This should be a generalized practice.”
On the contrary, the chief executive of Iberdrola does not have a clear number-two person. The administrative council could dominate power in the administrative council and the managerial organization. What advantages and disadvantages does this new structure provide? “This is beneficial because it centralizes control. You react more rapidly to big changes and you are tied more to the company and have a greater capability to respond,” comments Alvarez. The disadvantages depend a great deal on the careers and ambitions of the executives. “Perhaps, these three super-executives can make a difference politically, and that is dangerous,” says Alvarez. “You can also create alliances of two people against one. When you are talking about a company where a succession problem could result, this process could become much more visible and the protagonists could experience it with greater intensity.”
Telefónica, Repsol, FCC…
Other Spanish companies have drawn up organizational charts that are quite different from those at Iberdrola. For example, Cesar Alierta, president of Telefónica, has just named Julio Linares as his chief operating officer. This post was imported from the English-speaking world where there is the position of the chief operating officer who supervises day by day operations. The COO manages people who head various departments in order to lighten the burden on the chief executive. However, the heads of various departments lose their position in the hierarchy, and that sometimes leads to disappointments and resignations.
Repsol YPF created such a position during the first half of 2007 when it named Miguel Martinez the manager who chairs the company’s board of directors. Now, the people responsible for the different businesses of that oil company report directly to Martinez. Some experts see the post of COO as an alternative to having a board of directors that appoints chief executives.
Other Spanish companies prefer to share power between their board of directors and the chief executive. FCC has just named Baldomero Falcones its chief executive, and he shares power with Rafael Montes, president of that Spanish construction company. At Endesa, the electricity company, new shareholders who have control of the company shared top positions: Acciona, the Spanish construction company, still controls the presidency, now occupied by Jose Manuel Entrecanales. At Enel, the energy company, Rafael Miranda is chief executive.
In Spain, both corporate boards and committees have become professionalized in recent years. “Ten years ago, there were bank boards that had 30 people on them. All the measures coming out of executive boards nowadays are trending toward having a lower number,” he adds. “To the degree that Spanish companies have been going on the stock exchange and have international shareholders, they are behaving with more discipline. The growing number of such examples gives us reason to believe that, except for a few unusual cases, managerial boards are now composed of between five and seven executives.”
Nevertheless, each sort of managerial hierarchy has advantages and disadvantages. Experts say that in the case of companies run by only one or two top executives, where there is no hierarchy, people work blindly, without any point of reference. “In addition, things are very complicated because you can’t cope with having just one person [at the top].” Almost always, when this situation exists, the top executive is the owner or part owner of the company, “and that,” says Alvarez, “makes it very hard to correctly manage daily operations.”