SPANISH CORPORATE GOVERNANCE: HEADROOM FOR IMPROVEMENTS

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Alyson Neal
6 years ago
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1 MARKET REPORT SPANISH CORPORATE GOVERNANCE: HEADROOM FOR IMPROVEMENTS CONTACT Borja Monforte, Director- Head of Iberia Operations Tel.: EXECUTIVE SUMMARY According to a study performed by CRIF Ratings (CRIF) on corporate governance of Spanish listed companies, it emerges that best practices accepted by the financial community are not yet followed by the majority of companies. The study focused on several aspects of the board of directors structure and management effectiveness and it is a result of a comparative analysis, conducted on 73 corporates, between the current corporate governance of Spanish listed nonfinancial corporates and the corporate governance recommendation guide recently published by CNMV. The main outcome of CRIF s analysis is that despite the recent improvement as a result of the companies voluntary decisions, there is still quite some room for improvement to comply with best practices. Main areas for improvement include the presence of independent and non-executive members in the board of directors, a stronger and clearer division of responsibilities within the top management and a larger presence of female members in the boardroom. As expected, companies listed in the IBEX-35 index tend to have better corporate governance policies in place compared to the companies with a lower capitalization listed in the IBEX-35 mid cap or small cap indexes. CRIF notes that the analysis of a company s corporate governance plays an important role in the rating assessment of an issuer, especially for small and medium companies, where corporate governance practices tend to be weaker. An adequate corporate governance policy of a company will have a neutral impact on the rating, but a weak corporate governance assessment will have a negative rating impact. Corporate governance rules are a set of policies to implement and control the companies management values including effectiveness, integrity and independence and the way these values are transferred to the rest of the organization for the benefit of all the stakeholders. According to accepted best practices in the market, the management through its directors, is compelled to lead by example and remain a reference in terms of behaviour and conduct across the whole entity.

2 BOARD OF DIRECTORS STRUCTURE IBEX-35 companies have an average total number of members in the board of directors around 13 members which is aligned with CNMV s recommendation of minimum 5 and a maximum of 15 members. IBEX-mid cap /small cap companies also comply with CNMV s recommendations having an average of around 10 and 9 members respectively. An adequate presence of independent members in the board remains a key consideration when assessing the corporate governance of a company. In the case of IBEX-35 companies, the average percentage of independent members is around 49% which is very close to the recommendation of the stock exchange regulator which states that at least half of the board membership should be composed by independents. IBEX-mid cap and small cap companies have a lower presence of independent members in their boards with 42% and 39% respectively. However, CRIF highlights that CNMV lowers the recommendation of independent members from 5 to 33% for companies with a small capitalization. Given the latter, companies listed in the small-cap index comply on an average basis with the recommendations of the stock regulator % 35% 31% 49% 42% 39% 1 14% 19% 13% 7% 7% 8% Executive Directors Nonexecutive Dtors Others Independents IBEX 35 Mid cap Small cap IBEX-35 companies with a large percentage of independents in the board include ArcelorMittal, DIA, Iberdrola, IAG and Merlin Properties. In contrast, five companies including Abertis, ACS, FCC, Mediaset and Sacyr have a very small percentage of independent members in their board.

% Independent Members in the BoD 8 6 4 78% 77% 7 64% 64% 31% 29% 29% 27% 21% Source: Companies SPLIT OF RESPONSABILITIES 6 5 4 3 1 10 8 6 4 CEOs=Chairman in BoD 48% 12% 34% IBEX-35 Mid-cap Small-cap

3 % Independent Members in the BoD % 77% 7 64% 64% 31% 29% 29% 27% 21% Source: Companies SPLIT OF RESPONSABILITIES CEOs=Chairman in BoD 48% 12% 34% IBEX-35 Mid-cap Small-cap Clear Division of Responsibilities 48% 82% 56% IBEX-35 Mid-cap Small-cap A clear division of responsibilities for the top management remains a key corporate governance issue with a clear differentiation between the running of the board (task to be developed by the Chairman of the BoD) and the executive responsibility of the company (with the CEO as the office with the highest responsibility). Higher corporate governance standards suggest that the roles of chairman and chief executive officer (CEO) should not be exercised by the same individual in order to prevent an individual having unfettered powers of decision. The chairman should be responsible for the board leadership and ensuring its effectiveness on all aspects of its role including an effective communication with shareholders. Up to 13 companies (48% of non-financial corporates) listed in IBEX- 35 do not comply with a clear division of responsibilities and roles of chairman and CEO are exercised by the same individual. In this sense, IBEX-35 companies are clearly less compliant with this suggestion compared to mid-cap and small-cap companies with only 12% and 34% of the total. CRIF highlights that in some cases the roles are exercised by different individuals but with a family relationship/linkage. According to CRIF s analysis, mid-cap companies tend to have a clearer division of responsibilities compared to small-cap companies but also to IBEX-35 companies, which still have a lot of work to do in this area.

4 25% 15% 1 5% Female directors in BoD 16% 12% IBEX 35 Mid cap Small cap FEMALE PRESENCE IN THE BOARDROOM Female presence in the board of directors is still scarce in IBEX-35 companies with only around of total members. CNMV recommends that all listed companies should, by 2020, at least have 3 of their boards composed by women. currently only five IBEX- 35 companies (Fcc, Grifols, Iberdrola, Merlin Properties and Red Electrica) comply with this recommendation but five companies (Abertis, Acciona, Aena, Gamesa and Gas Natural) are very close this threshold with female presence representing between 25% and 3 of the board. On the other hand, two companies (Sacyr and Tecnicas Reunidas) still do not have women in their board of directors. Mid and small-caps are lagging behind IBEX-35 companies and female directors are still a clear minority in the board of directors with only 16% and 12% respectively. In the mid-cap index only two companies (Euskaltel and Prosegur) have more than 3 of female directors compared to three companies (Cementos Portland, Europac and Realia) in the small-cap index. Small-cap companies have still a long way ahead in order to fulfil the lack of female directors in their boards as currently eleven companies only have male presence in their managing structures compared to two companies in IBEX-35 and in mid-cap index. 45% 4 35% 3 25% 15% 1 5% Top-10 Companies with Higher Number of Female Directors Board Remuneration vs EBITDA 0.3% 1.2% 2.2% BOARD OF DIRECTORS REMUNERATION Board remuneration is an additional aspect to focus when assessing the corporate governance of a company. The remuneration should be designed to promote the long-term success and stability of the entity and in line with similar companies in the market. Remuneration policies and incentive structures generally reveal the financial discipline of a company. In relative terms, IBEX-35 companies board remuneration compared to its EBITDA (0.3%) is lower compared to mid-cap (1.2%) and small-cap companies (2.2%).

5 Indra s board remuneration to EBITDA ratio was around 20.4% in 2014 (latest available data) which in CRIF s view is not aligned with a balanced remuneration policy. However, CRIF understands that the latter was affected by a one-off impact as Indra s EBITDA in 2013 was significantly higher and board remuneration to EBITDA was around 1.6%. The latter figure is more consistent with listed peers. DISCLAIMER CRIF and INFORMA D&B have entered a partnership agreement to develop the corporate ratings activity in Spain. INFORMA D&B supports CRIF in both business development activities and the usage of its financial and sector informations on the Spanish companies' landscape.

Contract Group: Financial Derivatives. Date: 28 December Effective Date: 3 January Liquidity Provider Program for IBEX 35 Options.

Number: I-EX-DF-09/2018 Instruction Contract Group: Financial Derivatives Date: 28 December 2017 Effective Date: 3 January 2018 Replaces: I-EX DF-06/2016 Subject Liquidity Provider Program for IBEX 35