How corporations are governed is one of the topics that have attracted most the attention of the academia, the policy makers, and the practitioners in the recent years. In this book, we show a primer of the corporate governance in Spain. Spain is considered a civil-law country with a bank-oriented financial system in which banks play an active role relative to markets. But, while the size of financial intermediaries is near the international standards, nonbank intermediaries are much less important in Spain than in other Europeans countries, which renders a bank-centered model of financial organization.
Currently, the Spanish financial system is going through a process of deep restructuring and consolidation due to the financial crisis. This process has modified the landscape of the banking system, which was characterized by the heterogeneous kinds in the legal status of banks. The former savings banks, namely, private foundations with a board of trustees with representatives from regional authorities, city halls, workers, depositors, and nonprofitable founding entities, have been the core of a wave of mergers and acquisitions that has dramatically decreased the number of financial intermediaries. This change has not affected the outstanding role played by banks and their close ties with the governance of nonfinancial firms. Banks in Spain are not only creditors, but also reference shareholders or sit at the board of directors of nonfinancial firms.
Most of the corporate governance issues in Spain have emerged in the 1990s and have come hand in hand with European Union initiatives and recommendations. Indeed, the codes of good governance are strongly influenced by the ones developed in other European countries. Thus, the effectiveness of the Spanish corporate governance system is affected by the differences between the environment where they were set up (normally Anglo Saxon origin countries with a market orientation) and the Spanish national framework where they apply.
Because of the bank orientation, the corporate governance system relies heavily on the so-called internal mechanisms of governance (i.e., large shareholders and the board of directors). As in other Continental European countries, the controlling shareholders mitigate the conflict between management and minority shareholders, but instead another conflict arises between controlling shareholders and minority shareholders.
Regarding ownership structure, Spanish firms show a concentrated ownership with a significant presence of families and banks. Large controlling shareholders frequently own substantially more control rights than cash flow rights, which gives them a high expropriation potential. This fact explains the attention that policy makers have paid recently to the protection of minority shareholders.
As the previous codes of good governance, the latest Unified Code of Governance focuses on the role of the board of directors. Following the international trends, this last issued code emphasizes some characteristics as the size and composition of the board, its different committees, and the compensation structure of the directors. However, it omits other issues that could also have a significant impact on the board effectiveness such as the qualification and engagement of individual directors, the boardroom dynamics, and the processes by which the board fulfills its duties.
The firms’ financial characteristics have also a relevant influence as internal mechanisms of control. As far as the capital structure is concerned, the level of financial leverage among Spanish firms is not different from the other Continental European countries. Nevertheless, coherently with the importance of banks, the proportion of banking debt in Spain is higher than in the European counterparts. In the same vein, dividends work as a mechanism of managerial discipline, and the Spanish payout ratios are above the ones of the most developed countries.
The external mechanisms of control, basically the market for corporate control, are less important than in the Anglo-Saxon environment. The low number of listed companies, along with the relative illiquidity of the market reduce the informativeness of the stock prices and decreases significantly the possibility of success of takeovers. Another factor that reduces the functioning of the market for corporate control is the usually concentrated ownership structure and the implementation of some control-enhancing mechanism as means to increase the control power of the main shareholder among Spanish firms.
In the very moment, when this book is in print there are some shifts in the Spanish corporate governance that deserves at least a comment. Despite considerable advances, we do not know yet what the best pattern of corporate governance both at a firm and a national level is. Furthermore, we do not have yet a clear view about how these two levels of corporate governance interact. In general, the attention of regulators, shareholders, and directors has shifted in the past 10 years. Although in the first years of this century the focus was on accounting, the financial crisis which begun in 2007 has led to a rising importance of the risk management. Thus, a highly controversial and time pertinent question on corporate governance is whether companies have adequate risk controls and to what extent the executive compensation can encourage wrong corporate risk taking.
The Spanish Government has recently appointed a special committee for the reform of the corporate governance in the country. The conclusions and suggestions of this committee are likely to translate into forthcoming laws or even a new Code of Good Governance. In January 2014, the Government announced the project of a new Company’s Act Law, which will broaden the function of the Shareholders’ General Meeting, deliver to directors more control over the corporate risk taking, and will tie the directors’ compensation to the long-term performance and sustainability.
This view is in line with a rethink of the executive compensation principles, which emphasize a focus on pay for performance and the integration of risk management functions into the executive compensation structure. It is also consistent with the implementation of shareholders say-on-pay votes. The principle underlying say-on-pay is that shareholders must have the opportunity to express their views on the compensation decisions and on the policies of the companies. The say-on-pay is an important part of an ongoing, integrated engagement process between shareholders and boards, and can be the primary communication tool for shareholders expressing dissatisfaction with compensation practices.
As we can see, the Spanish corporate governance is moving forward as it does in most of the countries. Most of the stakeholders agree that a good corporate governance system is the cornerstone of an economic system oriented toward growth, employment, value creation, and sustainability. There is a number of challenges that should be addressed in the coming years, and new efforts to design well-functioning mechanism that avoids the repetition of new crisis episodes partially due to the failure of the corporate governance are vital.