The new frontier of independence in listed companies

The original version of this article was published in Spanish in the Esade Center for Corporate Governance Newsletter. 

The report ‘The Relevance of Independence in the Boards of Directors of the Ibex’ identifies the key debates surrounding independence in the boards of listed companies and highlights areas where there is no consensus within the corporate governance community. We have identified six key debates regarding independence in the boards of listed companies, incorporating my position as director of the Center for Corporate Governance. 

Presidency of the Board 

The first debate focuses on the scarcity of presidencies held by an independent director, which remains at 15% of Ibex companies. Following the reform of the Capital Companies Act and the Good Governance Code in 2014 and 2015, there was an initial increase in non-executive presidencies. Between 2015 and 2019, the volume of independent presidencies rose to levels similar to the current ones, but later shifted towards non-executive presidencies held by other external directors (currently 21%). These other external directors often include former executives or other types of directors who, due to their previous ties with shareholders, cannot be classified as independent. Since 2019, our selective index is close to perfect parity between non-executive and executive presidencies. 

Our companies, especially those without controlling shareholders, should aim to separate the roles of chairman and CEO in line with best governance practices and the recommendations of investors and proxy advisors. This would improve investor confidence in our markets. It is not about forcing changes that risk value creation or cause unwanted instability in management teams, but rather preparing management and governance structures through solid and well-planned succession processes towards this goal. Future companies with executive chairmen should move towards orderly processes of separating these roles. 

Non-executive but non-independent chairmen 

A second debate arises when the chairman is non-executive but not independent. Our governance model was configured with reference to the British model, which includes some counterbalancing measures against the executive chairman (such as appointing a lead independent director with enhanced functions) and has consolidated alongside other general good governance practices for listed companies (e.g., a minimum of independent directors, independent chairs of committees, or a majority of independents on committees). However, our model did not account for the Spanish market's ownership structure, which differs from the British one, where business groups (private or public) control companies or significantly influence the appointment of the chairman or top executives due to their substantial board presence. Controlling or significant shareholders have a legitimate interest in influencing key corporate decisions, but this should always be balanced with respect for minority shareholders and their interests. 

Our model should evolve towards solutions such as legally requiring a lead independent director even when the non-executive chairman is not independent. It is legitimate for those controlling a company to aspire to influence the appointment of the chairman or even for it to be held by a director representing them (proprietary director), but the governance model must ensure that the interests of minorities, who do not sit on the board but have invested in the company, are adequately considered. Strengthening the role of independents is necessary to instill market confidence. It's not about pitting different types of directors against each other but establishing appropriate mechanisms for effective coordination and cooperation. 

Other areas for consideration include the election process for the lead director (only by independents), the renewal of independent directors (especially to protect uncomfortable directors during board renewal periods), or the selection of new independent directors to limit excessive control influence. The study highlights the vulnerability of independent directors: their average tenure has decreased by over 17% since 2015, while that of executives has increased by nearly 10%. 

Role of proprietary directors in advisory committees 

The third debate concerns the role of proprietary directors in advisory committees. International trends and voting recommendations from investors and proxy advisors push for transitioning from committees with a majority of independents to committees composed exclusively of independents. In our interviews with directors and debates attended, we've observed additional difficulties in advancing this direction. The regulatory threshold for being considered a proprietary director in the Spanish market is 3% of capital, much lower than in other jurisdictions. 

Before advancing towards committees exclusively composed of independents, it would be desirable to introduce regulatory changes, either raising the 3% threshold or differentiating between micro-proprietary and proprietary directors, allowing micro-proprietary directors to participate in committees with a role comparable to independents. The role of micro-proprietary directors in committees like remuneration can be particularly valuable, as highlighted by numerous directors. 

Existence of executive committees 

A fourth debate centers on the existence of executive committees. There is broad consensus on the risks of such committees in board structures, which limit independent directors' participation in key debates. 

We view the 2020 Good Governance Code change negatively, and it is advisable to revert to the previous wording, limiting these committees to situations where business dynamics necessitate them (e.g., high volume of approvals or the need for agility in approving high-frequency risk operations) to avoid seriously harming the business due to delays in calling an extraordinary or the next ordinary board meeting. 

Dedication-responsibility-remuneration balance 

The fifth debate addresses the balance between dedication, responsibility, and remuneration. The risk of “capturing” an independent director with high remuneration, which advises prudent remuneration, is complicated by the increased dedication required due to regulatory complexity and growing board functions. 

Two aspects resonate in this debate: first, focusing remuneration increases on participation in advisory committees where much of the activity increase is concentrated; second, the concept of an overburdened director and the need for internal regulations to define criteria for being considered overburdened. Additionally, changing the limits from “maximum number of listed boards” to “total number of remunerated positions” a director holds seems a more appropriate indicator for evaluating their availability to adequately fulfill their role. 

Diversity beyond independent directors 

The sixth debate revolves around the need for diversity beyond the category of independent directors. This category reached 53% women by the end of 2023, representing 79% of all female directors in the Ibex. Meanwhile, the presence of women in other categories is very limited, especially among executives and other external directors. 

This data is a clear call to action. We must ask our shareholders to review the criteria they use to select directors representing them in companies. There are no longer credible excuses for the lack of experienced women who can represent them. It requires an effort to step outside usual circles, promote the development of female executives who can assume executive director roles, professionalize the search for proprietary directors, and value functional and gender diversity in all director categories. 

In these six debates, we are playing for the improvement of market confidence and competitiveness, the quality of our boards, and ensuring that investors not represented at the board table are adequately considered.