What is good corporate governance? Although there is no commonly accepted definition, the one that comes closest belongs to management experts [Andrei] Sheifer and [Robert] Vishny. They explain that “corporate governance has to do with the means through which those who provide financial funding guarantee adequate return to their investors.” The term ‘good’ adds another connotation. It indicates that, in addition to guaranteeing adequate rewards, one must do so in a diligent way. That is to say, one must not only need to respect current legislation but also various ethical and moral principles.


Nevertheless, daily practice has shown that this is not always the case. One merely have to remember the financial scandal of Enron, the energy trading company, which once again is generating news in a trial of two former executives now taking place in the United States. In Europe, there have been other cases, such as the Ahold supermarket chain, which manipulated the accounts of Disco, its Argentine subsidiaries, and a case involving US Foodservice. There have also been the secret accounts that Banco Bilbao Vizcaya operated in tax havens. To avoid these types of fraud, and recover lost confidence in the markets of publicly traded companies, good governance codes have emerged. These codes bring together recommendations and principles of action that are not obligatory. Until now, Britain’s Combined Code was considered the most representative such code because of the important historical role the United Kingdom has played in this area. Other important reference points are the rules of the New York Stock Exchange, which is the only stock market where non-compliance is punishable by the law.


Starting in January, Spain has been playing a major role with its Unified Code Project, presented by Manuel Conthe, president of the country’s National Stock Market Commission (CNMV). This code brings together the criteria of both the Olivencia and Aldama commissions (previous codes), and incorporates directives proposed by the European Union, thus harmonizing the criteria used within the euro zone.


According to Conthe, “it will be odd” if his Unified Code plan for good governance is approved as it is outlined in its current text. Conthe expects “a debate focused on improving the current text.” Comments about the text can be presented until February 28, so it can be debated and edited. By March 31, the definitive text of the code will be presented to the Spanish government. So far, the CNMV has not received a lot of letters about this topic, although sources at publicly traded companies have been critical of the Unified Code, assuring the public that “it is mediocre. Although it is a good point of departure, it is significantly below the British requirements, which are — or should be — the model we follow. So we should improve this code.”




In contrast, some experts assert that although the text involves only voluntary measures, it is a step in the right direction because “it will have a positive impact on shareholders,” and because the market itself will be responsible for punishing or not punishing those who do not comply with its recommendations. Nevertheless, in the opinion of Javier Foncuberta, law professor at the Esade business school in Barcelona and a partner at the Landwell-PwC law and accounting firm, this code “explains the reasons why people disregard these recommended practices. All by itself, it implies a certain level of intervention.”


According to Mark Wippel, a partner in the good governance practice at Allen & Overy, a British law firm, “The idea is that companies will comply because it is a question of their reputation. Also, if they do not comply, the market will force them to provide explanations about why they are not doing so.” In his opinion, “The function of a code is to make it possible for investors to be confident that senior managers of the company are behaving correctly. For the details, you already have the traditional legal framework. … What does not make too much sense is that the management board meetings must spend more time talking about how to comply with these good governance norms than they spend on talking about how to manage the company properly.” In the United Kingdom, he adds, “we try to combine a series of general principles with other principles that are more specific but we do not regulate how many women have to be on the board.”


Joan Enric, professor at the IESE business school in Barcelona, believes that the areas covered in the text are “positive.” He reminds people that the current document is only “an open proposal to public debate,” so people can exchange their views before the definitive text is completed. José Luis Álvarez, director of the Center of Corporate Governance at the Instituto de Empresa business school in Madrid, stresses that the text will be applied in a voluntary way. He notes, for example, that the code says nothing about any separation between the managing director and the chief executive. That is something he considers “correct and prudent.” For Álvarez, this plan “is a good piece of work,” although he notes that “the most controversial” part of it is the addition of a “vide-president of the council,” a concept imported from the British system. Nevertheless, because of the economic differences between the two countries, that concept “doesn’t make too much sense” in Spain; especially given the “dynamics of the balance of power between Sunday shareholders (those who represent their own capital) and the independents.” In his view, this proposal “can introduce an unnecessary dynamic of tension into the council and fuel distrust among shareholders.” That’s because “the place for confrontations among shareholders is the board meeting, not within the board itself.”


The Argument is Served


For Fontcuberta, “The question that has probably created the most commotion is about the principle of whether to do one’s duty or to explain [why you are not]; this is going to change the concept of norms of good governance in Spain. This is the case despite the fact that this was mentioned in the Aldama code.” Although a company can distance itself from the provisions of the Conthe Code, it will have to clarify its motives in detail for those who have acted that way, so that fulfilling this obligation will be “without doubt, something uncomfortable,” notes Wippel.


Enric notes that some of the most novel aspects of the code are “its simplicity and its clarity in defining the good practices of corporate governance. Some questions that raise suspicion, such as the number of council members and meetings, are worthy recommendations, I believe, [and are] far from the dominant ambiguity in previous documents.” Currently, the code establishes that councils must be formed by between seven and 15 members, of which at least one-third must be independent. Nevertheless, some critics argue that this measure cannot be applied realistically to all publicly traded companies. That’s because they vary in size and, as a result, the number of board members can vary considerably. Given the diversity of the Spanish business environment, Fontcuberta wonders if “there is any reason to authorize that specific categories of companies should remain exempt from the application of one or several of these recommendations?”


Another area that has attracted attention, especially in the United States, is the obligation to introduce a minimum number of women onto the administrative board. For Enric Ricart of IESE, “Positive discrimination is good, and perhaps we should do away with equality in other aspects and create more diversity on corporate boards.” Fontcuberta’s response is that “The absence of a woman on the representative bodies of publicly traded companies is strictly the result of generational issues. With or without normative intervention, you can predict a natural balance of participation.”


According to José Luis Álvarez, this is not merely a positive measure. “It is hard to accept the notion that there are no women qualified to be on the board of a company or that there are only a few women who are qualified. It is even much harder to conceive of the idea that the nomination committee [in the company] does not make it a policy or priority to correct this imbalance.” According to data Watson Wyatt collected from the CNMW, on a day-to-day basis, only 3.6% of all board members at Ibex 35 companies are women. In the United States, no such specific regulation exists. However, as a result of social pressure, practically every publicly traded company has at least one woman on its board. Norway now requires that at least 40% of all corporate board members be women.


Nevertheless, Spain’s corporate code has a lot to learn from its counterparts in the U.K. and the U.S. In that regard, Álvarez believes that capitalism in the U.K. and the U.S. are still very different from capitalism in Spain, even if they are slowly beginning to resemble each other. “One difference that should be emphasized between the [Spanish and] U.S. norms is that the classics, such as fraud and the embezzlement of funds in Spain, as well as their penalties, are treated more lightly. Relative to the United Kingdom, we can say that both the regulation of independents and of shareholders’ boards are more advanced [in the U.K.] than in Spain.”


“The trends within Europe are similar,” adds Fontcuberta, “although with nuances. For example, the Higgs report in the U.K. differentiates between the leadership that manages the business — the CEO — and the leadership of the board – the president. It also argues openly that it would not be advisable to bring together the power and authority of both those responsibilities in a single person. However, the proposal of the Conthe Code contemplates such a move as feasible.”


Critical Voices


Banks have been the first to react to the measures proposed by Conthe. Angel Ron, executive director of Banco Popular, was the first senior manager to openly criticize the new text. In his opinion, the regulations in the code “are excessive.” And, “on occasion, the code tries to substitute for the will of the managerial board.” This code “needs to be changed in some places because it burdens Spanish companies with a disadvantage compared with other European and multinational companies,” he added. Regarding the obligation to include a minimum number of women in corporate boards, he goes on to note that “it is acceptable that they take positions of responsibility but more because of their skills than because they have been imposed” [on the company.] Responding to such criticisms, AEMEC, the Spanish association of retail shareholders of publicly traded companies, said that the Conthe Code is “good news, in and of itself.”


Emilio Botín, president of Santander [bank], met with Ron’s critics, and made it clear tha, the way the text is currently edited, it can “endanger” the unity that must exist at the very heart of corporate boards of directors. Botín explained that he is a “supporter of self-regulation.” He said he hopes that the definitive code “focuses on general criteria and general guidelines that companies can adapt to their own needs and characteristics, explaining it all to the market.”


Along the same lines, Enrique Aldama, ex-president of the commission, asked for his name to be removed from the good governance recommendations. Meanwhile, José Manuel Martínez, president of Mapfre, the insurance firm, said that the text has been edited in ways that “impose excessive requirements, rather than make recommendations.” Midsize companies have asked for “an approach that is less strict,” so that the rules can be adapted to the reality of each company, depending on the size of its board of directors, which can be between seven and 15 members, according to the Conthe Code. Natraceutical, the biotech firm; Cleop, a construction and public works company; and Bancaja, the financial institution, have announced that if there is no flexibility in the text, midsize companies will be at a disadvantage when they compete with big companies, and have trouble issuing shares on the stock exchange.


Meanwhile, ICA, which brings together about 200 representatives of the managing councils of large Spanish companies, described the Conthe Code as “a good point of departure.” Beyond that, ICA has added that the code should be “broadened and improved” through a process involving public consultation. Nevertheless, the most surprising thing has been that, in the viewpoint of ICA, Spain’s executive branch should study whether it would make sense if “specific recommendations have their own normative development.”


Unification of Criteria


Historically, one of the complaints of large, publicly traded companies has been about the large number of codes that exist in the world. When a Spanish company wants to have its shares quoted simultaneously on both the London and New York stock exchanges, it has to deal with the expenses involved in adapting its company and its governing organs to three types of different recommendations.


One novelty of the Unified Code proponed by Manuel Conthe, president of Spain’s National Stock Market Commission, is the stature of Spain in the recommendations that Conthe made at the European Union about good corporate governance. Begoña Benito, general director of Watson Wyatt, believes European companies have a “positive” view of Spanish companies. Spanish companies are becoming more and more international. As a result, “it is a positive factor if good governance directives become similar” throughout Europe. Beyond that, “it is a positive factor if the European perception of the Spanish code is good, because it unifies,” [the continent], says Benito.


The criteria seem to be starting to come closer. However, it is important to remember that, until now, there have been irreconcilable differences between Europe and the United States. “The two types of guidelines are very different from each other,” notes Benito.