Spain: Adaptation Of Best Corporate Governance: New Obligations For Board Members Of Capital Companies

The new reform of the Capital Companies Act includes new obligations for directors to prevent bad company management.

On 4 December 2014, the Official State Gazette published the Bill modifying the Capital Companies Act to improve corporate governance. The imminent entry into force of this regulatory text includes some new elements in terms of company administration, establishing new duties and obligations for directors of listed and other companies.

With the new modifications, the law sets out to adapt the practices of good corporate governance to the area of company management, so as to provide them with greater efficiency in their administrative framework. This acts as a response to the need for companies to have good administration and management, thereby preventing the negative consequences - mostly economic - brought about by careless decisions of the upper management of the companies.

Special mention should be made of listed companies, which are characterised by larger organisational infrastructures in terms of directors and board members, to the extent that it is not always easy to define the particular responsibilities within the organisation.

Some of the most relevant issues affecting company directors are considered below:

Duties of the Administrative Body.

The new Act consolidates the previous one, specifying the basic duties of any director: the obligations of diligence, company discretion and loyalty. Therefore directors and board members of companies should comply with their obligations with sufficient diligence and dedication, acting in good faith and in the best interests of the company.

These duties are specified in a series of particular obligations that are developed by the law, which basically focus on the prohibition of directors with regard to "taking advantage" of the position they hold in the company, using insider information, benefiting from its assets or business opportunities and generally acting in their own interests or those of a person related in some way to the director himself. However, it seems reasonable to think that in certain decision making processes that at first sight might seem to be based on self-interest, there is in fact a real benefit for the company, so the option is provided that enables a request to be made for the appropriate permission from the General Board of the company.

Responsibility of directors.

As regards the responsibility of directors, the new Law sets out three relevant points for determining the extent and scope of the responsibility.

Firstly, the concept of the de facto director is defined as a person that acts with powers in company dealings without holding the title of director or who gives instructions to the real directors of the company. In this sense, the doctrine sustained by current doctrine and the courts is consolidated and the concept of the de facto director as someone who is responsible is regulated.

On the other hand, there are occasions when a company is appointed as director of another firm, in such a way that responsibility might in fact be limited to only involve the administrating company and not include the person acting on its behalf. In this particular case, the law extends responsibility to the individual acting on behalf of the administrating company, so that both figures are regarded as jointly and severally liable persons.

Finally, another important new element has been introduced for those situations in which there is a board of directors that has not appointed a managing director or person with executive powers. In cases such as these, the responsibility that falls on the shoulders of the directors could be extended to upper management, who are understood to be those persons who have been given the highest executive powers in the company.

The Board of Directors

The most notable new features of the new bill focus on the specialities of the boards of directors of listed companies. In this regard, the bill introduces complete regulations to watch over the operational and organisational systems of this body.

Firstly, one notable feature is that now the establishment of a board of directors as a governing body is an obligatory procedure, as is the character of the member of the board as a remunerated position, at least for those who are obliged to attend board meetings in person.

In addition, a distinction is established between "executive directors" or members who perform management functions in the company; "proprietary directors", who possess significant shareholdings in the company and "independent board members", who have no relationship whatsoever with the company, the group or its shareholders. An additional concept is that of the "coordinating director", who is an independent director, responsible for duties such as periodic assessment of the president or coordination work between the non-executive directors.

On the other hand, board members should form at least two commissions: the internal auditing commission and the appointments and remuneration commission. The first shall be responsible for the internal auditing and control of the company, while the second performs the tasks related to appointments and sets the remunerations policies.

Finally, the law obliges the board of directors of all companies to meet at least once every quarter. The aim by doing so is for board members to be constantly present in the life of the company, thereby preventing purely instrumental or political posts, in which little is known of the day to day life of the firm.

The managing director's contract

The new law makes special mention of the figure of the managing director, which up to now was regarded as the highest-ranking representative of the company with the greatest powers to act within the company administration. With the entry into force of the new law, measures are taken to prevent the existence of powers that might be too far reaching in scope; some of the managing director's powers have been restricted, such as establishing the general policies and strategies of the firm, for which a majority vote from the other directors shall be required. In this regard, special mention should also be made of listed companies, where restrictions imposed on the managing director are extended beyond those that are generally laid down for other companies, and which mostly affect the essential nucleus of management and supervision.

On the other hand, a customary practice is for the position of board member to be performed without remuneration, with the exception of the managing director, who normally receives payment as a result of the special functions that he performs as an executive in the organisation. In this regard, the new law states that members of the board who are appointed as managing directors should enter into a contract with the company, which should specify all the items for which they shall receive remuneration, including, where applicable, compensation for terminating said duties. What is important in this case is that the contract has to be approved by a majority of the other board members, who are also the ones to propose the appointment of the managing director. In addition, the paid items that appear in the contract cannot contravene the remunerations policies of the company.

The aim in this case is to exercise greater control over board members who have been granted executive powers and who enjoy a certain degree of autonomy in the management of the company, as well as to regulate the payment they receive in return for performing their roles.

Compensation policy

The main changes made to remuneration of Directors basically affect the criteria to be followed in establishing them. While the new law enumerates more precisely what type of items the directors should be paid for, the legislator has also placed special emphasis on the need for compensation to be reasonably proportional to the nature of the company itself. To this end, the size of the company, the financial situation it is undergoing at each moment and the existing market criteria for other similar companies are factors that need to be taken into account.

In addition, the global sum set for all the directors should be approved by the General Board of Directors, without prejudice to the fact that the directors themselves are the ones to distribute this amount between them, using their specific roles and tasks in the company as a guideline.

As regards listed companies, they shall be obliged to appoint a compensation commission within the board of directors, which shall be made up of independent board members whose job is to prepare a well-argued and complete report defining the compensations policy to be followed by the company for the next three years. This special commission shall also be responsible for proposing to the board the paid items to be received by the members.

To conclude, the modifications introduced by the bill set out to provide greater transparency and efficiency to the managing bodies of corporations. The measures are geared towards achieving better management of directors and improving the performance of boards of directors. As a result, the imposition of new duties and obligations on directors, and the demarcation of scopes of responsibility provide greater specialisation when performing these roles. In short, the reform sets out to professionalise the position of director or board member, especially in listed companies.

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