Spain Proposes Tighter Board Independence Rules & New Corporate Governance Standards

Key Takeaways

• Board Leadership Separation: Spain's CNMV is proposing that IBEX 35 companies separate the positions of board chairman and chief executive to improve the balance of power within boards.
• Stricter Independence Standards: The proposed code would introduce additional circumstances for assessing director independence beyond those established under Spain's Capital Companies Act.
• Greater Protection for Independent Directors: The revisions would strengthen safeguards against the removal of independent directors at shareholders' meetings without adequate prior communication.
• Expanded Governance Priorities: The CNMV wants to incorporate sustainability, digitalization, cybersecurity and artificial intelligence while eliminating recommendations that have become nearly universal practice.

Deep Dive

Spain's largest listed companies would be urged to separate the roles of board chairman and chief executive under proposed changes to the country's corporate governance code, part of a broader effort to strengthen oversight without adding to the volume of rules companies are expected to follow.

The National Securities Market Commission (CNMV) has opened a public consultation on revisions to the code, which was adopted in February 2015 and last partially revised in June 2020. The proposals would introduce tougher standards for assessing director independence, strengthen protections for independent board members and bring cybersecurity, artificial intelligence and sustainability more explicitly into the governance framework.

The regulator also wants to remove recommendations that virtually every listed company already follows. Its argument is that established practices no longer need the same attention, allowing the code to concentrate on areas where stronger standards could improve board decisions.

For Spanish listed companies, the proposed changes would alter the benchmarks used to assess their governance arrangements. The most significant provisions concern who holds authority at the top of a company, how directors qualify as independent and what protections they receive when their positions are challenged.

The proposed separation of the chairman and chief executive roles would apply specifically to companies in the IBEX 35, Spain's benchmark stock index.

The CNMV considers the division of those responsibilities important to achieving a better balance of power within boards. A chief executive is responsible for managing the business, while the chairman leads the board charged with overseeing management. When the same person holds both positions, those responsibilities are concentrated in one office.

The proposal would make separation the recommended practice for IBEX 35 companies, rather than impose a statutory prohibition on combining the roles. The regulator is also proposing stricter scrutiny of directors classified as independent.

Under Spain's Capital Companies Act, directors must satisfy existing statutory criteria to qualify for that designation. The revised code would introduce additional circumstances that could raise questions about independence, with nominations and remuneration committees expected to examine their potential effect.

The proposed recommendation would go beyond the statutory criteria without replacing them. It would ask companies to consider whether circumstances not expressly covered by the law might nevertheless compromise a director's independence.

The CNMV also wants stronger protections for independent directors who face removal at a general shareholders' meeting without adequate prior communication.

The proposals address both the conditions under which directors are considered independent and the safeguards available once they hold that position. Their effectiveness would depend in part on how companies apply the recommendations when assessing appointments and considering removals.

New Priorities for Corporate Oversight

The revised code would also incorporate digitalization, cybersecurity and artificial intelligence, subjects the CNMV has identified for greater attention in corporate governance. Sustainability would be treated as a cross-cutting consideration, placing it within the broader framework of board responsibilities rather than confining it to a separate area of governance.

The announcement does not specify the detailed recommendations that would apply to each of these subjects. Those provisions would need to be examined in the draft code, and their final wording could change following consultation.

The additions are being proposed alongside a substantial reduction in the code's existing content.

The CNMV said it had identified recommendations followed by virtually all listed companies and determined that those practices were likely to continue even if the provisions were removed. It also checked that the practices were not addressed in other European governance codes before proposing their deletion.

The regulator intends to shorten the principles that remain, concentrating on their essential concepts, and reduce recommendations or descriptions of good practice that have become unnecessarily detailed.

The result would be a code with fewer provisions devoted to established practices and stronger recommendations in areas the CNMV considers important to board decision-making.

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