Home > Director Elections, Minority Shareholder Rights > How are board directors elected? The Spanish case.

How are board directors elected? The Spanish case.

In a previous post, (1) I briefly compared the US/Canada system to elect directors to a board with the Spanish case. Not being an expert in the North American system, I only considered the main difference with the Spanish system. In a very recent post (2) I again dealt with the Proxy Access failed legislation and the recent trend in US companies to receive shareholder proposals that aim at introducing it in a company by company case, (modifying the company bylaws).

In this post though, I will try to unveil the Spanish electing system, which in public companies combines proportionality with different majority systems.

First, we will refer to the different qualification of directors according to their origin, as described by the Spanish (CL) Corporate law`s article 529 duodecis (3):

  • Executive directors: they have a role in the company or group management team.
  • Non executive directors: if they don`t have a role, directors are labeled “non-executive”, and there are three categories:
    • Dominical director: those owning a “significant –legal concept- stake”, “having been named because of his shareholder condition”, or representing one of these two. Shareholders have the right to elect a number of directors in proportion to their ownership, (so that if there are ten seats at the board, each shareholder or group of shareholders owning 10% of the social capital has the right to designate one director). Of course this group of shares lose their right to vote when the rest of directors are chosen.
    • Independent: they can only be proposed by the Nominating Committee of the board, and they can be considered independent if they have no personal nor professional ties to the company, (broadly speaking).
    • Other external directors: an old executive promoted to the board would belong to this category; not being an executive yet, not being an owner, he can`t either be considered an independent director.

Second, directors can only be proposed by the Board, (except in the case of the independent directors where only the Nominating Committee can propose them, as has been said), but they must be approved to the board by the General Shareholders Meeting. Between meetings the board itself can nominate a director that becomes a member of the board, but the next Shareholders Meeting must approve him on board.

Third, how are directors designated by the General Shareholders Meeting? According to the general voting system (article 201 of the CL), which is a majority one, where an election can be made by a simple majority of the present votes, not a majority of the voting power, provided the bylaws don`t require wider or strengthened majorities. A majority requires more positive than negative votes.

Apart from Corporate law (hard law), Corporate Governance in Spain is led by the Corporate Governance Code, (renewed in 2015 it uses the “comply or explain” method); the code recommends that boards have a majority of non-executive directors, with a balanced combination of “dominical” and “independent” directors; companies are recommended to have at least 50% of their directors in the independent category, or at least a third in companies where significant shareholders collectively own a high percentage of shares. This recommendation mitigates the possible opposition between dominical and independent directors from where dysfunctionalities could arise in the board. The enhanced role independent directors receive also helps.

How could these different systems be judged from a Corporate Governance perspective?

On the one hand, the US system where the board controls the proxy materials and director nominations, even if shareholder proposals can modify that, gives certainly more power to the board than it gives to shareholders. The proportional system in Spain clearly assigns more power to shareholders, and the fact that independent directors are proposed by a Nominating Committee (which needs to be chaired by an independent and to be fully composed of non-executive directors) also reduces the proposal power by the incumbent board.

On the other hand, it is true that the fact that relevant shareholders have a seat at the board can sometimes introduce the particular shareholder agenda into the board. Capital allocation decisions, (investments, dividend policy…) and other issues could eventually be controversial because of the different interests different shareholders could have. The case of an indebted shareholder who could push for a high dividend in an company where this policy could go against the general interest of shareholders, is not rare. I nevertheless think that controversies can emerge in boards without the proportional component also, and I guess controversies are good when moderated by the directors` fiduciary duties. In fact, diversity and debate are good ingredients and better than unanimity and group thinking, (not themselves the only possible result in the US system, of course).

 

  1. https://joaquinbarquero.wordpress.com/2013/10/11/how-are-board-directors-elected-the-uscanada-and-spain-cases/
  2. https://joaquinbarquero.wordpress.com/2016/01/16/proxy-access-and-proportional-election-systems/
  3. http://noticias.juridicas.com/base_datos/Privado/r15-rdleg1-2010.html
  4. http://www.cnmv.es/DocPortal/Publicaciones/CodigoGov/Good_Governanceen.pdf
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