Spain Code of Best Practices for Corporate Governance – For Listed Companies ; Structure, membership, meetings and committees of Board of Directors

The structure and membership of the board of directors is a cornerstone of good corporate governance that conditions its effectiveness and influences both the qual­ity of its decisions and ability to successfully promote the corporate interest.The board of directors should have an optimal size to promote its efficient functioning and maximise participation. The recommended range is accord­ingly between five and fifteen members.

Independent directors should be at least half of all board members.However, when the company does not have a large market capitalisation, or when a large cap company has shareholders individually or concertedly con­trolling over 30% (thirty percent) of capital, independent directors should occupy, at least, a third of board places.

The Board of Directors should meet at least 08 (eight) times a year, in ac­cordance with a fixed calendar, and with pre-set agendas to which each director may propose the addition of initially unscheduled items.

1. Executive Committee:

   The executive committee, where one exists, should have a composi­tion mirroring that of the board of directors, and keep the board regularly informed of its decisions.

   Role of Executive Committee:

   The executive committees poses two risks for the quality of corporate governance. Firstly, they may become a de facto substitute for the board, divesting it of any meaningful power. And secondly, when their composition does not match the board’s, they may discharge their responsibilities from a different perspective.

   The first of these risks is defused by the regulation of non-delegable board powers – essentially the core management and supervisory function – in company legisla­tion.

   The second can be mitigated by the repeat recommendation that the executive com­mittee’s membership mix should reflect that of the board itself, and their secretaries should be the same person.

   Finally, the board in full should also be cognisant with the decisions adopted by the executive committee.

2. Audit Committee

   All members of the audit committee, particularly its chairman, should be appointed with regard to their knowledge and experience in accounting, au­diting and risk management matters. A majority of committee places should be held by independent directors.

   Role of Audit Committee:

   With respect to internal control and reporting systems:

   1. Monitor the preparation and the integrity of the financial informa­tion prepared on the company and, where appropriate, the group, checking for compliance with legal provisions, the accurate demar­cation of the consolidation perimeter, and the correct application of accounting principles.
   2. Monitor the independence of the unit handling the internal audit function; propose the selection, appointment, re-election and re­moval of the head of the internal audit service; propose the ser­vice’s budget; approve its priorities and work programmes, ensur­ing that it focuses primarily on the main risks the company is exposed to; receive regular report-backs on its activities; and verify that senior management are acting on the findings and recommen­dations of its reports.
   3. Establish and supervise a mechanism whereby staff can report, confidentially and, if appropriate and feasible, anonymously, any significant irregularities that they detect in the course of their du­ties, in particular financial or accounting irregularities.

   With regard to the external auditor:

   1. Investigate the issues giving rise to the resignation of the external auditor, should this come about.
   2. Ensure that the remuneration of the external auditor does not com­promise its quality or independence.
   3. Ensure that the company notifies any change of external auditor to the CNMV as a material event, accompanied by a statement of any disagreements arising with the outgoing auditor and the reasons for the same.
   4. Ensure that the external auditor has a yearly meeting with the board in full to inform it of the work undertaken and develop­ments in the company’s risk and accounting positions.
   5. Ensure that the company and the external auditor adhere to cur­rent regulations on the provision of non-audit services, limits on the concentration of the auditor’s business and other requirements concerning auditor independence.
3. Nomination and Remuneration Committee

   The nomination and remu­neration committee, which in large cap companies should be split into two separate committees, should have a majority of independ­ent members. Its members should be appointed with regard to their knowledge, skills and experience, while its terms of reference should reinforce its remit, independence and scope.

   Role of Remuneration Committee:

   1. Propose to the board the standard conditions for senior officer con­tracts.
   2. Monitor compliance with the remuneration policy set by the company.
   3. Periodically review the remuneration policy for directors and senior of­ficers, including share-based remuneration systems and their applica­tion, and ensure that their individual compensation is proportionate to the amounts paid to other directors and senior officers in the company.
   4. Ensure that conflicts of interest do not undermine the independence of any external advice the committee engages.
   5. Verify the information on director and senior officers’ pay contained in corporate documents, including the annual directors’ remuneration statement.

The Committee is of the opinion that self regulation is the best form of regulation in relation to Corporate Governance and this view is shared globally. However, this requires that society, companies and investors should have positive attitude towards Corporate Governance. In order to create the transparency necessary for investors, companies must consider each of the recommendations and provide information on whether or not they will be complying with the recommendation concerned. The descriptions provided for each of the recommendations must therefore be specific and adequate.