By José Folgado – Chairman, Juan Lasala – CEO & Rafael García de Diego – General Counsel and Non-Director Secretary of The Board of Directors
Ethical Boardroom: Many congratulations on scooping an Ethical Boardroom Corporate Governance Award for the second year running. What does it mean to Red Eléctrica to be recognised once again as a regional governance champion among its peers?
CH: It is a great honour for us to receive this prestigious award for the second consecutive year. Undoubtedly, it is an ongoing objective of the board of directors to remain at the forefront of good corporate governance (CG), which is an element that is also highly valued by our shareholders.
For that reason, every year we gear our efforts towards listening to the investor world, the proxy advisors, our corporate advisors, the specialists and evaluators in this field and, in general, to all stakeholders that have something to say regarding this area. We are aware that ethics and integrity are values shared by society as a whole and that they need to be an intrinsic part of the foundations that the business world must uphold.
We must lead by example if we want to be leaders in corporate governance. This commitment is demonstrated through actions, not merely through statements. As Aristotle said: ‘“We are what we repeatedly do.” We try to advance a little more each year, which is a real challenge for the board of directors and for the company. What is really important is that others, such as the Ethical Boardroom Magazine, be those who evaluate us and tell us if we are on the right track or if we should take a new path.
EB: Why is it important to have environmental social governance (ESG) at the heart of your business operations?
CH: In 2015, the annual Extel Independent Research in Responsible Investment Survey, passed this question on to investors and specialists in the field of sustainability, asking them to indicate, on a global level, which companies they would highlight. Red Eléctrica was ranked among the top 10, along with other highly renowned companies, such as Apple, Microsoft, H&M, L’Oréal and Unilever.
We believe that this is how sustainability is given the importance it deserves. When we carry out our business activity as a Group, we must consider as priorities those goals related to environmental protection, our own employees and other external stakeholders, and do so by applying good corporate governance practices, carried out within a framework of ethical business conduct and transparency. If we rank these goals at the same level as those that are essential for any company to obtain the maximum financial return for its shareholders, then we will be able to pursue the ESG goals with the same intensity as the economic ones and we will be able to successfully integrate them into our corporate culture. That is the way to make our business sustainable, generating confidence and contributing to the progress and economic and social development of our world.
Sustainability must be a key factor in corporate business. This is what Red Eléctrica understands, and this is how it is being recognised by top-class international professionals and evaluators. In this regard, I would like to highlight that Red Eléctrica was recognised in 2017 by the Dow Jones Sustainability Index (DJSI) as the best company in Europe and in the world in sustainability in the Electric Utilities sector and leader in the Utilities supersector (electricity, water and gas sector), with an overall score of 93 points; a score that is even higher than that of the last winner. Similarly, the EFQM (European Foundation for Quality Management) organisation, which has recently evaluated us, has awarded us 718 points, which places us among the most recognised Spanish and European companies regarding excellence and quality.
Due to the fact that sustainability is a priority for Red Eléctrica, we have recently signed an amendment to our syndicated loan, amounting to €800million, to convert it into ‘green’ financing, becoming the first company in the Spanish electricity sector linking the interest rate of such loan, not only to the credit rating, but also to the fulfilment of sustainability goals approved by an independent agency specialised in sustainability, such as Vigeo Eiris.
EB: Red Eléctrica was one of the first IBEX 35 companies to separate the chairman and chief executive officer roles, what was the reasoning behind this?
CH: In March 2012, on the occasion of my re-election as member of the board, in view of the unanimous position of the foreign institutional shareholders and the main proxy advisors that demanded the separation of the chairman and CEO roles, a document called Statement On Key Issues Of Red Eléctrica Corporation (REC): A Corporate Governance Approach was released with the purpose of serving as support and justification for the proposal of my re-election as a board member, at the time still of an executive nature, at the general meeting. In this document, the company undertook to adopt certain measures to counterbalance the powers and responsibilities of the then unified position of chairman/CEO, to ease the way to the definitive separation of said positions once the new organisational model was mature enough to be implemented effectively. Therefore, the decision was the result of direct engagement with our shareholders.
To propose such a decision to the shareholders at the extraordinary general meeting convened voluntarily and exclusively for this purpose three years later, the board analysed in detail the new organisational model with the separation of both positions and considered that it would not only contribute to maintain the appropriate balance of powers in the composition of the board of directors and improve the corporate governance structure of the company, but it would also facilitate the fulfilment of the objectives and strategies set out in the group’s strategic plan and contribute to the appropriate sustainable development of its diverse areas of business. Time is proving it was the right decision, as the new model with the separation of positions, is working perfectly, in a very effective manner, thanks also to the excellent coordination that exists between the CEO and myself in the performance of our respective duties and responsibilities.
EB: Could you highlight some practices that are indicative of the level of effectiveness of Red Eléctrica’s board of directors and tell us why it is essential for the growth of the company?
CH: If the board works effectively and efficiently, it will help optimise the review process of our strategies and contribute to the development of our corporate businesses. The board is the essential engine and lever of good corporate governance and of the company’s strategic framework. Let us take a look at some practices undertaken by Red Eléctrica in this regard.
It is a small, effective and efficient board. It only has 12 members, it has a non-executive chairman, a CEO, three external nominee directors proposed by a state holding company – SEPI – and seven independent directors.
It holds a minimum of 11 ordinary sessions per year and any extraordinary ones that are deemed necessary, with an average duration of more than four hours per session. In addition, before each session, members are given a presentation, lasting approximately 1.5 hours, on relevant topics included in a previously approved annual directors’ training and information plan, in order to keep the board fully informed about matters of special interest to the board.
“We are aware that ethics and integrity are values shared by society as a whole and that they need to be an intrinsic part of the foundations that the business world must uphold”
There are no delegated committees created expressly by the board (except for the statutory audit and appointments and remuneration committees), because it is the board itself as a body, which directly assumes the supervision of the management and execution of the Group’s strategic plan. The commitment of the board, as a chartered body, and of the board directors, in a personal way, is absolute. A clear indication of said engagement is the extremely high annual percentage of attendance at board sessions, which according to figures published in 2017 is nearly 98 per cent – said data is published both on an aggregate and individualised basis by director in the annual corporate governance report.
The board spends a lot of time discussing strategic topics or relevant issues. In 2017, several presentations and long debates on digital transformation have been conducted on possible changes in the energy sector or in the corporate businesses and on new opportunities, in both a short and long-term time horizon. Given its importance in order to improve the functioning of the board, several sessions have been devoted to the annual self-evaluation process of the board, with the support of an independent consultant.
In 2017, the board drafted a detailed induction plan (welcome plan) for new board directors, to facilitate their incorporation in an agile and efficient manner.
EB: Gender board diversity is a very hot topic in Spain. What progressive steps has Red Eléctrica taken over the past 12 months to ensure that equality and non-discrimination are at the forefront of its business?
CEO: The company applies the principle of promoting the diversity of knowledge, experience and gender in the composition of the board of directors and its committees, contained in the CG policy approved in November 2014, as an essential factor to achieve its business objectives from a diverse and balanced vision.
Many years ago, the board undertook commitments in terms of gender diversity. In 2017, a new female external nominee director was appointed to the board in replacement of a male director. Currently, four of the 12 board members – representing 33.3 per cent – are women. This places the company at the top of the IBEX 35 and above the target of 30 per cent established in the Spanish Good Governance Code of listed companies for the year 2020. In addition, our lead independent director (LID)is a woman. Every year a report on gender diversity on the board and in the organisation is drafted and approved by the board of directors, containing extensive information, which this year will be again available on the corporate website.
As you know, socially responsible investment indexes are beginning to emerge that only consider investment in companies that foster gender diversity on their boards and within their organisations. In this regard, I would like to mention the Solactive Equileap Europe Gender Equality Index, which only selects 25 European companies leading the field in gender equality, among which Red Eléctrica is included.
In any case, we believe that diversity on boards of directors should be understood in a broader sense, so that the diversity of experience, knowledge, age, ethnicity, nationality, etc, is also taken into account. In this regard, we are working on updating and improving the current board’s skills matrix, so that, when dealing with the process of appointing board directors, we ensure that the board, in its dynamic and changing composition, has enough comprehensive diversity to help make the most appropriate and informed decisions at all times.
EB: Speaking of good CG practice, does the board have a succession plan in place for the Chairman and the CEO?
CEO: That is correct. The investment world is strongly demanding companies to approve these plans to reduce to the maximum one of the most important risks in an organisation: the replacement of its chairman and/or its CEO. The aim is to guarantee business continuity and the fulfilment of the approved strategic plan, which could be hampered by a leadership change, foreseen or unforeseen, on the board and/or at the senior management level.
In Red Eléctrica there was a succession plan approved in 2011, but it had become outdated. Throughout 2017, after long debates in the appointments and remuneration committee and within the board, and with the support of an independent international consultant, a design and drafting process was carried out to prepare contingency plans for the succession of the chairman and chief executive officer, once both roles have been completely separated. This was done in order to accurately determine the actions to be carried out and those responsible for its execution, in the event that, due to unforeseen circumstances, the chairman or chief executive officer leaves the position abruptly or has to cease working unexpectedly before the term for which they were appointed. These plans were finally approved by the board in the month of December. In 2018 we will continue advancing in this process, with the purpose of elaborating specific succession plans that contemplate scenarios that facilitate an orderly and planned replacement of said roles, when appropriate according to the term.
EB: What is being done in the way Red Eléctrica is working in terms of digital transformation and cybersecurity?
CEO: Technology in the 21st century advances at a frantic pace. It affects us all in our daily work and, in such a globalised world, in particular, it impacts companies head-on. In the case of Red Eléctrica, the impact is even greater, because as Transmission System Operator (TSO) we are legally a critical operator in Spain and we operate and manage electricity transmission grids in Peru and Chile, as well as telecommunications backbone networks, activities that require very demanding and comprehensive security measures.
The Red Eléctrica Group has developed an ambitious and innovative model of comprehensive security, based on applicable best practices, a model that considers the physical security of people and assets of the Group, and the cybersecurity of our information systems and operational technologies to safeguard the continuity of our activity and the services we provide to society in the face of the complex threats it suffers.
This issue is so important for us that we have recently approved a ‘Digital transformation strategy in the Red Eléctrica Group’ based on three pillars: the change of organisational culture and ways of working; the digital transformation of our operations; and the development of business opportunities. The first of them, the cultural change, is especially important to be able to successfully face this fourth industrial revolution and for that reason, in Red Eléctrica, we have defined the IMAGINA project, directly promoted by myself and focussed on the transformation of our culture, our leadership model and our ways of working.
We seek to be an agile, flexible organisation with the ability to react quickly to change, capable of capturing value in the new opportunities that arise in the sectors in which we operate; to be an international benchmark reference in the management and operation of critical infrastructure and oriented to our clients in a global environment, maintaining our position as a profitable and sustainable organisation that looks to the future. Since October 2017, the meetings of the board of directors are held using digital mobile devices (smartphones and tablets) and electronic servers that provide all the necessary documentation, thus avoiding the need for paper.
EB: Stakeholder engagement is one of the pillars of long-term value creation, tell us about your engagement strategy and why you believe it’s important to have an open and transparent dialogue?
SB: A clear example of engagement between the board of directors and its shareholders, is the one that led to the final decision to separate of the positions of chairman and chief executive officer, but I could quote many others. It has taken us years to develop and evolve the concept of engagement with our shareholders.
The process began a few years ago when Red Eléctrica adopted a listening approach in order to understand the CG recommendations that our shareholders and their advisors were passing on to us. Over time, this approach between Red Eléctrica and its shareholders became bidirectional, nowadays becoming ‘empathetic’ and of absolute confidence, as a result of the commitments fulfilled over the years.
This dialogue is carried out through business road shows, in which the CEO participates, and other specific CG road shows, in which our LID – along with the proxy advisors – has been taking an active part for some years now. In addition, Red Eléctrica is present in international CG forums, which are attended by international investors (as is the case of the International Corporate Governance Network (ICGN), of which we are a full member as a listed company), we have permanent top-level international external advice on corporate governance topics and we carry out annual self-assessment processes of the board of directors with external support to improve its functioning.
EB: Last year, you told us that you were developing a new regulatory compliance system. Where are you at the moment with that process?
SB: That is true, in fact we have taken the need to implement a comprehensive regulatory compliance system very seriously. The system has been carefully designed and planned so that it can be applied to any area of Red Eléctrica that is subject to regulatory compliance. It is a dynamic system that we must keep under continuous review and adaptation.
It has been a very laborious process, which we started more than two years ago and whose implementation was completed in 2017, after developing a comprehensive map of regulatory compliance of the Group, composed of 17 functional areas, and after having established a specific methodology to manage non-compliance risks and assign them the necessary controls. In the process, we have had international external advice; we have created the Regulatory Compliance Unit, providing it with the necessary resources so that it can properly manage the system; we have undertaken an ambitious awareness raising and dissemination plan so that everyone understands it and that the entire organisation complies with it; and we are now finalising the process of adapting the IT systems that support it. In 2018, the new system, once implemented, will allow us to carry out a more efficient, comprehensive, anticipated, systematised and harmonised management of regulatory non-compliance risks that may occur within the Group.
EB: In 2016, the ‘CG Story’ that you published on your corporate website since your IPO in 1999 was highly valued by Ethical Boardroom. Could you highlight any progress made in 2017 regarding information transparency in CG?
SB: Our commitment to the investment world in terms of transparency in CG requires that we continue taking steps in that line. We will update our CG Story annually on the website, to continue showing in a synthetic graphic and visual way the highlights of each year.
In addition, this year we have made a complete return to the ACGR. With the support of an international external consultant, we have reviewed the format and content prepared voluntarily by the company, analysing what some comparable companies or other leading companies in CG do internationally, to improve our communication with our shareholders and investors, attempting to synthesise, eliminate reiterations and legal technicalities, introduce graphics and hyperlinks to web pages for those who want to delve into some specific content of the report, etc. In short, we have carried out an exercise of self-criticism in order to improve transparency and seek to provide the highest quality information, as proclaimed by the CG policy approved by our board of directors.
Lastly, we are going to submit the 2017 ACGR to independent review by an international external auditor, so that it verifies not only whether we comply adequately with the applicable legislation, but also whether Red Eléctrica has undertaken the generally accepted international standards in terms of CG.
