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Spain

Principles of Corporate Governance

Summary
Spain applies a one-tier board system, as reported in a 2002 study by the international law firm Weil, Gotshal & Manges. Furthermore, more than fifty percent of listed companies applied the "one share-one vote" principle at the time of the 2005 report by the Association of British Insurers. As highlighted in a 2005 study by Heidrick & Struggles, the corporate system in Spain is characterized by strong state intervention, concentrated ownership of firms, and low percentage of foreign-capital ownership. In addition, relatively few women and a low number of non-national directors sit on Spanish boards, which has led to a low turnover of board members, according to the subsequent 2007 report by Heidrick & Struggles. The level of independence on Spanish boards and committees is also relatively low. The study, however, shows a positive trend in the Spanish corporate governance framework through the increasing use of hybrid models that adopt practices from British and U.S. codes. Other developments include the substantial decline in state ownership since the mid-1990s, the rise in the proportion of domestic-owned equity, and the increase in the proportion of total equity held by private households. A Special Working Group was established in July 2005 to advise the National Securities Market Commission in updating recommendations of the Olivencia and Aldama Corporate Governance Reports by taking into account international recommendations, including the Organization for Economic Co-operation and Development Principles of Corporate Governance. The Special Working Group approved the proposal for a Unified Code on Good Corporate Governance in May 2006.

    General Overview

    According to a 2002 study prepared by the international law firm Weil, Gotshal & Manges for the European Commission, the Spanish government approved the creation of the Olivencia Commission in February 1997 for the study of an Ethical Code for Company Boards of Directors, following strong criticism on "the effectiveness of boards in protecting minority shareholders from controlling shareholder self-interest" (p. 199). A Code for Good Corporate Governance, also known as the Olivencia Report, was subsequently published by the Olivencia Commission in February 1998. The Code seeks to improve the governance of Spanish listed firms, but has neither statutory nor regulatory status. In July 2002, the Aldama Commission released a Report to Foster Transparency and Security in the Markets and in Listed Companies, better known as the Aldama Report. A Code of Ethics for Companies was issued in April 2006 by the Institute of Advisers-Administrators (ICA).
    In July 2005, the government of Spain set up a Special Working Group to advise the National Securities Market Commission (CNMV) in harmonizing and updating the Olivencia and Aldama reports. In its 2006 Report on the Good Governance of Listed Companies, the Special Working Group states that it has taken into account international recommendations, including the Organization for Economic Co-operation and Development (OECD) Principles of Corporate Governance, in its update of Olivencia and Aldama Reports' recommendations. The Special Working Group further approved the proposal for a Unified Code on Good Corporate Governance in May 2006. Common features between the Unified Code and the Olivencia and Aldama Reports, as well as international recommendations, include the size and structure of the board of directors, the formation of nomination and remuneration committees, and the independence of directors.
    In addition to the 2006 Unified Code on Good Corporate Governance, the government of Spain enacted the Law on Transparency of Listed Companies No. 26 of 2003, modifying the Securities Market Law No. 24 of 1988. The transposition of the EU Market Abuse Directive No. 2003/6/EC was completed in November 2005 with the publication of Royal Decree on Inside Information and Price Manipulation No. 1333 of 2005. In April 2007, the Spanish government published Law No. 6 of 2007 to reform the Law on Transparency of Listed Companies No. 26 of 2003. Furthermore, Law No. 6 of 2007 was enacted in August 2007, transposing both the EU Takeover Directive No. 2004/25/EC and the EU Transparency Directive No. 2004/109/EC into Spanish law. Royal Decree No. 1362 of 2007 related to transparency requirements for information about issuers of listed securities further came into force in December 2007.
    The corporate system in Spain is characterized by strong state intervention, concentrated ownership of firms, and low percentage of foreign-capital ownership, as highlighted in a 2005 study by Heidrick & Struggles. Privatization programs in the mid-1990s have led to a substantial decline in state ownership. Other developments include the strengthening of business groups through the rise in the proportion of domestic-owned equity, and the increase in the proportion of total equity held by private households (i.e. 30%), which is high relative to other European countries. In a nutshell, the 2005 study by Heidrick & Struggles underlines that "Spain is moving steadily from a "state-led" to a broadly "state-enhanced" corporate-governance and labor-relations system" (p. 30).
    A subsequent 2007 study by Heidrick & Struggles states that relatively few women and a low number of non-national directors sit on Spanish Boards, which has led to a low turnover of board members. In this context, reforms are mainly needed in "the composition of Boards, which are weighed down by too many executives and the highest proportion of reference shareholders in Europe" (p. 30). The level of independence on Spanish boards and committees is also relatively low. The study reports a positive development in the Spanish corporate governance framework through the increasing use of hybrid models that adopt practices from British and U.S. codes. According to the 2002 study by Weil, Gotshal & Manges, Spain applies a one-tier board system. The supervisory body may be composed of a unique director, two directors acting jointly, or a board of directors. In addition, shares in Spanish companies are issued either in bearer or registered form. As of July 2004, out of the seventeen Spanish companies listed on the FTSE Eurofirst 300, ten applied the "one share-one vote" principle, according to a 2005 report by the Association of British Insurers (ABI). Companies that deviated from the one share-one vote principle used a voting right ceiling of 10 percent.
    The Spanish Stock Market (BME) is supervised by the CNMV, and comprises four stock exchanges--the Madrid Stock Exchange, the Barcelona Stock Exchange, the Bilbao Stock Exchange, and the Valencia Stock Exchange. The BME, which strongly prohibits insider trading, ranks 4th or 5th at the European level, and 8th or 9th worldwide in terms of market capitalization, according to the U.S. Department of Commerce 2008 report.
    Spain is divided into 17 regions, called autonomous communities (CAs), with each CA operating under its own legal framework. The CAs are provided with licensing and sanctioning authority, and power to oversee the activities of saving banks (cajas) and cooperatives headquartered in their respective jurisdiction. In 2006, the International Monetary Fund (IMF) conducted a Financial System Stability Assessment, in which it concludes that the ownership structure of cajas requires stringent governance. The authorities should ensure that "initiatives to improve corporate governance of all credit institutions are fully implemented, strengthening them if needed" (p. 7). It is further recommended that all cajas that issue listed securities publish an annual report on corporate governance. As reported in the IMF's subsequent 2007 Article IV Consultation, corporate governance of cajas is under public scrutiny, and the IMF sees "scope for future progress in this area" (p. 14).
    As noted in the World Bank's 2008 Doing Business report, investor protection in Spain in 2008 was below the average achieved by member states of the OECD. The Investor Protection Index is a subcomponent of the World Bank's 2008 Doing Business Indicators, and consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indexes range from 0 to 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Spain scores 5 in the disclosure index against an OECD average of 6.4. It scores 6 in the Director Liability Index against an OECD average of 5.1 and 4 in the Shareholder Suits Index against an OECD average of 6.5.


    The Principles

    Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

    The Olivencia Commission was created in February 1997 for the study of an Ethical Code for Company Boards of Directors, and subsequently published the Olivencia report in February 1998. The Code seeks to improve the governance of Spanish listed firms, but has neither statutory nor regulatory status. In July 2002, the Aldama Commission was created, which released a Report to Foster Transparency and Security in the Markets and in Listed Companies in January 2003. A Code of Ethics for Companies was issued in April 2006 by the ICA. In July 2005, the government of Spain set up a Special Working Group to advise the CNMV in harmonizing and updating the Olivencia and Aldama reports. In its May 2006 Report on the Good Governance of Listed Companies, the Special Working Group states that it has taken into account international recommendations, including the OECD Principles of Corporate Governance, in its update of the Olivencia and Aldama Reports' recommendations. The Special Working Group further approved the proposal for a Unified Code on Good Corporate Governance. Common features between the Unified Code and the Olivencia and Aldama Reports, as well as international recommendations, include the size and structure of the board of directors, the formation of nomination and remuneration committees, and the independence of directors.

    The transposition of the EU Market Abuse Directive No. 2003/6/EC was completed in November 2005 with the publication of the Royal Decree on Inside Information and Price Manipulation No. 1333 of 2005. In April 2007, the Spanish government published Law No. 6 of 2007 to reform the Securities Market Law No. 26 of 2003, and amend the system of public takeover bids and the transparency of issuers. Royal Decree No. 1362 of 2007 related to transparency requirements for information about issuers of listed securities further came into force in December 2007. Law No. 6 of 2007 was enacted in August 2007, transposing both the EU Takeover Directive No. 2004/25/EC and the EU Transparency Directive No. 2004/109/EC into Spanish law. However, the available sources do not directly address Spain's compliance with this principle.

    Principle II: The Rights of Shareholders and Key Ownership Function

    As of July 2004, out of the seventeen Spanish companies listed on the FTSE Eurofirst 300, ten applied the "one share-one vote" principle, according to the 2005 ABI report. Companies that deviated from the one share-one vote principle used a voting right ceiling of 10 percent. However, the available sources do not directly address Spain's compliance with this principle.

    Principle III: The Equitable Treatment of Shareholders

    Following strong criticism on "the effectiveness of Boards in protecting minority shareholders from controlling shareholder self-interest" (p. 199), according to the 2002 study by Weil, Gotshal & Manges, the Spanish government approved the creation of the Olivencia Commission in February 1997 for the study of an Ethical Code for Company Boards of Directors. As stated in the IMF's 2006 detailed assessment of Spain's compliance with the International Organization of Securities Commission's (IOSCO) Objectives and Principles of Securities Regulation, "Spain has a fairly complete system for the protection of minority shareholders and is compliant with the European legislation laid down in the prospectus and market abuse directives, as recently transposed into the Spanish framework" (p. 38). The EU Prospectus Directive No. 2003/71/EC was incorporated into Spanish legislation through the Royal Decree on Public Offering of Securities No. 1310 of 2005. The transposition of the EU Market Abuse Directive No. 2003/6/EC was completed in November 2005 with the publication of Royal Decree on Inside Information and Price Manipulation No. 1333 of 2005. However, the available sources do not directly address Spain's compliance with this principle.

    Principle IV: The Role of Stakeholders in Corporate Governance

    The 2007 study by Heidrick & Struggles reports a positive development in the Spanish corporate governance framework through the increasing use of hybrid models that adopt practices from British and U.S. codes, with the aim of protecting small investors. However, the available sources do not directly address Spain's compliance with this principle.

    Principle V: Disclosure and Transparency

    Following the Aldama Report, the government of Spain enacted the Law on Transparency of Listed Companies No. 26 of 2003, which modified the Stock Market Law No. 24 of 1988, to reinforce transparency in public listed companies. Furthermore, the Corporate Governance Unified Code was published in May 2006. According to the 2007 study by Heidrick & Struggles, the Unified Code should help improve disclosure of director remuneration by recommending that "companies publish information about Board remuneration in the annual reports" (p. 31). According to the IMF's 2006 detailed assessment of Spain's compliance with the IOSCO Principles, "Spain has in place a very comprehensive regulation that covers completeness, accuracy, and timeliness of financial results disclosure" (p. 36). It is further highlighted that "entities are required to publish their audited financial statements in their public offering prospectuses when they issue securities, as well as in their listing prospectuses when a security is admitted to trading on a regulated market" (p. 38). The EU Prospectus Directive No. 2003/71/EC was incorporated into Spanish legislation through the Royal Decree on Public Offering of Securities No. 1310 of 2005. Law No. 6 of 2007 was enacted in August 2007 to reform the Law on Transparency of Listed Companies No. 26 of 2003, transposing both the EU Transparency Directive No. 2004/109/EC into Spanish law. Royal Decree related to transparency requirements for information about issuers of listed securities No. 1362 of 2007 further came into force in December 2007.

    Per the February 2008 update available from the Deloitte & Touche IAS Plus website, the Spanish government has adopted the new Spanish Generally Accepted Accounting Principles or GAAP (Plan General de Contabilidad), effective January 1, 2008, based on International Financial Reporting Standards (IFRSs). The Spanish GAAP issued by the Institute of Accounting and Auditing (ICAC) --an autonomous entity whose objective is to implement EU accounting principles and policies in Spain--apply to individual companies and unlisted consolidated groups. Conversely, listed consolidated groups are subject to IFRSs. However, unlisted groups have the option to use IFRSs since 2005. According to the regulatory and standard-setting framework assessment published by the Institute of Auditors of Spain (ICJCE) in June 2005, the CNMV issues Circulars that provide additional reporting obligations for listed companies. However, the available sources do not directly address Spain's compliance with this principle.

    Principle VI: The Responsibilities of the Board

    At the time of the 2005 study by Heidrick & Struggles, Spain ranked second after Germany in terms of size of boards. The report notes that boards and board committees meet regularly relative to the European average. In addition, virtually all companies have audit committees, and in most cases, remuneration committees--which are often integrated with nomination committees. However, some remuneration committees still lack independent directors. The study concludes that the large share of executives and reference shareholders on Spanish boards constitutes a major weakness. A subsequent 2007 study by Heidrick & Struggles states that relatively few women and a low number of non-national directors sit on Spanish boards, which has led to a low turnover of board members. The level of independence on Spanish boards and committees is also relatively low. In this context, reforms are mainly needed in "the composition of Boards, which are weighed down by too many executives and the highest proportion of reference shareholders in Europe" (p. 30) according to the study. The same study by Heidrick & Struggles states that the Unified Code should help improve disclosure of director remuneration by recommending that "companies publish information about board remuneration in the annual reports" (p. 31). However, the available sources do not directly address Spain's compliance with this principle.

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    Sources of Assessment

    Association of British Insurers, "Application of One Share-One Vote Principle in Europe," March 2005. Available from Association of British Insurers website. Accessed on August 5, 2008. (ABI 2005)

    Heidrick & Struggles, "Corporate Governance in Europe: What's the Outlook?" 2005. Available from Heidrick & Struggles website. Accessed on August 5, 2008. (Heidrick & Struggles 2005)

    Heidrick & Struggles, "Corporate Governance in Europe: Raising the Bar," 2007. Available from Heidrick & Struggles website. Accessed on August 6, 2008. (Heidrick & Struggles 2007)

    Weil, Gotshal & Manges LLP, "Annex IV: Discussion Of Individual Corporate Governance Codes Relevant To The European Union And Its Member States," Consultation with the EASD and ECGN, January 2002. Available from European Union website. Accessed on August 11, 2008. (Weil et al. 2002)

    Relevant Organizations

    Barcelona Stock Exchange - Bolsa de Barcelona

    Bilbao Stock Exchange - Bolsa de Bilbao

    Institute of Advisers-Administrators - Instituto de Consejeros-Administradores (ICA) (website in Spanish)

    Institute of Accounting and Auditing - Instituto de Contabilidad y Auditoria de Cuentas (ICAC)

    Institute of Auditors of Spain - Instituto de Censores Jurados de Cuentas de España (ICJCE) (website in Spanish)

    Madrid Stock Exchange - Bolsa de Madrid

    Ministry of Economy and Finance - Ministerio de Economía y Hacienda (MEH)

    National Securities Market Commission - Comisión Nacional del Mercado de Valores (CNMV)

    Spanish Institute of Financial Analysts - Instituto Español de Analistas Financieros (IEAF) ) (website in Spanish)

    Spanish Stock Market - Bolsas y Mercados Españoles (BME)

    Valencia Stock Exchange - Bolsa de Valencia (website in Spanish)



    Relevant Legislation/Regulation

    Code of Ethics for Companies, 2006

    Report of the Special Working Group on the Good Governance of Listed Companies (includes the Unified Code on Good Corporate Governance), 2006

    Principles of Good Corporate Governance, 2004

    Code for Good Corporate Governance (Olivencia Report), 1998

    Aldama Report to Foster Transparency and Security in the Markets and in Listed Companies, 2003

    Companies Law approved by Royal Decree No. 1564, 1989 - Ley de Sociedades Anónimas aprovado por el Decreto Real No. 1564, 1989 (in Spanish only)

    Private Limited Companies Law, 1995 - Ley de Sociedades de Responsabilidad Limitada, 1995 (in Spanish only)

    Law on Securities Market No. 24, 1988 - Ley del Mercado de Valores No. 24, 1988 (last amended December 2006) (in Spanish only)

    Law on Reform Measures of the Financial System No. 44, 2002 - Ley de Medidas de Reforma del Sistema Financiero No. 44, 2002 (in Spanish only)

    Law on Transparency of Listed Companies modifying the Securities Market Law No. 24 of 1988, No. 26, 2003 - Ley por la que se modifica la Ley No. 24 de 1988 del Mercado de Valores, No. 26, 2003 (in Spanish only)

    Law on the Regime applicable to Takeover Bids and to the Transparency of Public Offerings modifying the Law on Securities Market No. 24 of 1988, No. 6, 2007 - Ley de Reforma de la Ley del Mercado de Valores No. 24 de 1988, para la Modificación del Régimen de las Ofertas Públicas de Adquisición y de la Transparencia de los Emisores, No. 6, 2007 (in Spanish only)

    Royal Decree related to Transparency Requirements for Information about Issuers of Listed Securities No. 1362, 2007 - Real Decreto en Relación con los Requisitos de Transparencia de la Información Sobre los Emisores Cuyos Valores Estén Admitidos a Negociación en un Mercado Secundario Official o en otro Mercado Regulado de la Unión Europea No. 1362, 2007 (in Spanish only)

    Royal Decree on Inside Information and Price Manipulation No. 1333, 2005 - Real Decreto por el que se Desarrolla la Ley No. 5 del 2005 de Supervisión de los conglomerados financieros y por la que se modifican otras leyes del sector financiero No. 1332, 2005 (in Spanish only)

    Royal Decree on Public Offering of Securities No. 1310, 2005 - Real Decreto, de 4 de por el que se Desarrolla Parcialmente la Ley No. 24/1988 del Mercado de Valores, en Materia de Admisión a Negociación de Valores en Mercados Secundarios Oficiales, de Ofertas Públicas de Venta o Suscripción y del Folleto Exigible a Tales Efectos No. 1310, 2005 (in Spanish only)

    EU Market Abuse Directive No. 2003/6/EC, 2003

    EU Prospectus Directive No. 2003/71/EC, 2003

    EU Takeover Directive No. 2004/25/EC, 2004

    EU Transparency Directive No. 2004/109/EC, 2004



    Supplementary Sources

    Aguilera, R., "Corporate Governance and Employment Relations: Spain in the Context of Western Europe," Corporate Governance And Labour Management: An International Perspective, Andrew Pendleton and Howard Gospel, eds., Oxford: Oxford University Press, 2004. Available from Social Science Research Network website. Accessed on August 5, 2008. (Aguilera 2004)

    Deloitte & Touche Tohmatsu IAS Plus website. Accessed on August 5, 2008. (Deloitte IAS Plus website)

    Endesa website. Accessed on August 6, 2008. (Endesa website)

    Institute of Auditors of Spain, "Assessment of the Regulatory and Standard- Setting Framework," Self-assessment prepared as part of the International Federation of Accountants' Member Body Compliance Program, March 2005. Available from International Federation of Accountants website. Accessed on August 5, 2008. (ICJCE 2005)

    International Monetary Fund, "Spain: Financial System Stability Assessment including Reports on the Observance of Standards and Codes on the following topics: Banking Supervision, Insurance Supervision, Securities Supervision, Payment Systems, Securities Settlement Systems, and Financial Policy Transparency," Country Report No. 06/212, Washington, D.C.: IMF, June 2006. Available from International Monetary Fund website. Accessed on August 5, 2008. (IMF 2006a)

    International Monetary Fund, "Spain: Financial Sector Assessment Program--Detailed Assessment of Implementation of the IOSCO Objectives and Principles of Securities Regulation," Country Report No. 06/220, Washington, D.C.: IMF, June 2006. Available from International Monetary Fund website. Accessed on August 6, 2008. (IMF 2006b)

    International Monetary Fund, "Spain: 2007 Article IV Consultation--Staff Report; Staff Statement; and Public Information Notice on the Executive Board Discussion," Country Report No. 07/175, Washington, D.C.: IMF, May 2007. Available from International Monetary Fund website. Accessed on August 5, 2008. (IMF 2007)

    Spanish Institute of Financial Analysts, "Observatory on Reforms of the European Financial Market 2007: Report and Conclusions," 2007. Available from Spanish Institute of Financial Analysts website. Accessed on August 6, 2008. (IEAF 2007)

    U.S. Department of Commerce, "Doing Business in Spain: 2008 Country Commercial Guide for U.S. Companies," U.S. & Foreign Commercial Service and U.S. Department of State, March 2008. Available from U.S. Department of Commerce website. Accessed on August 5, 2008. (U.S. DoC 2008)

    World Bank, "Doing Business 2008: Spain," 2008. Available from Doing Business website. Accessed on August 6, 2008. (WB 2008)
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