In Madrid, we complain about the non-existence of a true spring season. After a cold but dry winter, followed by unstable and rainy weeks, a heatwave invades the country and temperatures suddenly rise up to near 40ºC to remain like that throughout the whole summer period. Then we enjoy a long and mild autumn with wonderful weather while we prepare for the next season.
During recent years, while US, UK, Germany, France and other European companies have been facing a shareholder uprising, with investors starting to raise their hands and challenge their agendas at the annual general meetings (AGMs), Spanish and Portuguese companies have remained relatively quiet, with a few exceptions.
Their investors, far behind their European peers, have not shown great interest in matters, such as corporate governance, responsible investment or engagement. When voting, and only for domestic companies, they would usually support the board proposals without much analysis or discussion. This approach is fast evolving and, with the new EU Shareholders’ Rights Directive (SRD II), Iberian asset managers and insurance companies will be encouraged to improve transparency and active investment. No spring then, but after the summer, autumn will bring new responsibilities and activities for investors.
The birth of the first Spanish proxy advisor, CORPORANCE, member of the international partnership of independent proxy advisors Expert Corporate Governance Service (ECGS) is another milestone in this process. It will increase the presence of the Spanish and Portuguese markets on the proxy map, both providing a better understanding of local practice globally as well as introducing international practices of voting and engagement policies for their investors.
Proxy voting in Spain and Portugal
In terms of voting, Iberian markets do not differ much from other European countries. Average participation in AGMs (last three years, as percentage of total capital) in Spain was about 68 per cent and Portugal 72 per cent. Western Europe averages 66 per cent, ranking from 73 per cent in the UK and 70 per cent in France to 52 per cent in the Nordic countries.
We can see in Figure 1, the typical shareholder structure of a listed Spanish company, also showing the level of participation in the AGMs within the different groups. Strategic investors still count for roughly one-third of the capital and they usually vote massively in favour of the board proposals. Retail shareholders withdrew slightly from equities during the financial crisis but are coming back now to levels near 20 per cent. Their current voting rate is around 38 per cent, quite high for retail investors. Different legal initiatives to foster electronic voting and minority investors forums have not achieved the desired objectives, direct actions from listed companies having had more success in this sense.
In Spain, foreign institutional investors follow similar patterns to those of other markets, with an average participation of 62 per cent, the highest of the free-float constituents. Depending on their country of origin, this participation ranks between around 70 per cent for US institutional investors and 10 per cent for their German counterparts. In Figure 2, right, we can observe the evolution over the last decade. The precipitous decline in participation rates among local institutional investors in Spain since 2013 is telling as current rates are dwarfed by those of US and UK investors. The message could not be any clearer: Spanish institutional investors have regrettably failed to effectively engage with issuers on their home turf.
As mentioned above, Spanish institutional investors do not play an active role in local AGMs. Representing less than 10 per cent of capital, only 40 per cent of them vote, just over the retail tranche and usually in favour of the agenda proposals, delegating their vote to the board. Their voter turnout and engagement at AGMs in companies they invest in outside of Spain is negligible, a behaviour which strongly contrasts with that of their European peers.
Spanish general meetings
Figure 3, below, shows the most contentious items during the last AGM season in Spain. We observe an increase in average opposition rates over the last three years. The higher dissent is due to an increased weighting of independent shareholders, but also to the creation of several Spanish boards. Unlike other European countries, the highest level of opposition is not about remuneration-related items, but is more related to the appointment of non-independent directors, in particular the ‘proprietary directors’ (13.4 per cent), a classic Spanish figure (‘consejeros dominicales’: directors representing a strategic shareholder, or more than three per cent of capital).
Remuneration-related items are also contentious, with an average opposition rate of eight per cent. In 2016, we saw a rejection of both the remuneration policy and report in an Ibex-35 company. Capital and voting limits are also of concern, due to significant opposition regarding the authorisation to issue convertible bonds and to increase the share capital without pre-emptive rights. These resolutions are almost standardised in Spain (up to 50 per cent of the share capital with the possibility to exclude pre-emptive rights in connection with 20 per cent of the share capital), with no or little reference to the actual needs of the company. Again, Figure 3 shows this behaviour in more detail.
Dissidence from voting recommendations of proxy advisors ranks from 10 per cent to 40 per cent roughly, depending on the companies and markets. Again, remuneration, board composition and capital are the most contentious topics. Actual opposition, albeit significantly increasing, is noticeably lower, ranging between less than one per cent to almost 10 per cent in some cases, with an average in European AGMs of four per cent. At Spanish AGMs, the average dissidence ratio was 2.9 per cent while in Portugal it held at a higher 3.6 per cent.
International investor codes
In the US, mutual and pension fund managers are obliged to exercise their voting rights since 2003. This rule has created a global practice that has spanned overseas. The Organisation for Economic Co-Operation and Development (OECD) Principles of Corporate Governance of 1999 were updated in 2004 to add stewardship duties to institutional investors. In Germany, France, Holland, Switzerland or Denmark, responsible investment codes have been enacted with strong recommendations to enhance transparency and apply effective governance criteria to investment decisions, disclosing their voting and engagement policies, under the ‘comply or explain’ principles.
Since 2014, the UK Stewardship Code of 2010 has been updated together with the UK Corporate Governance Code to show how duties and interest of both issuers and investors come together to achieve sustainable profits and long-term growth for companies. As a result, participation of European shareholders has improved significantly, not only in their local markets but also in other European and international markets, in line with their portfolios. No such investment or stewardship code exists in Spain or Portugal.
In Spain, only the Funds Regulation in 2015 sets up the obligation to vote for those shareholders holding more than one per cent of a (Spanish) listed company for at least 12 months, unless there are clearly explained reasons not to do so. As a result, since it is unusual to reach this threshold, asset managers have decided not to develop voting guidelines and engagement policies until it becomes compulsory. In addition to the lack of obligation (or strong recommendation), other reasons to remain inactive are processing costs, unwillingness to take on responsibilities, little ability to influence company decisions or reluctance to get involved in potential conflicts.
New regulations and obligations for investors
On 17 May 2017, we saw the adoption of the new 2017/828 Directive of the European Parliament and of the Council amending Directive 2007/36/EC regarding the encouragement of long-term shareholder engagement. The new requirements will help institutional investors and asset managers to be more transparent in their approach to listed companies. They will have to develop and publicly disclose a policy describing how they integrate governance criteria in their investment strategy and the engagement activities they carry out.
Major European markets have approved policies and codes to manage this regulation from 2007. Member states will have two years to transpose the directive. For those countries, such as Spain, Portugal, Italy and others, it will represent an excellent opportunity to get up-to-date, and a challenge for regulators. Institutional investors in these countries will have to adopt international standards and mirror their peers’ behaviour as to transparency and active engagement.
There is no need for more corporate governance codes for issuers in Spain. The first Olivencia Code of 1998, was followed by the Aldama Report in 2003, the Unified Code (or ‘Conthe Code’, 2006) and the recent Good Governance Code of Listed Companies of 2015 (CNMV, the Spanish regulator), all underpinned by new rules under the revised Companies Act of 2014, completing the picture. However, there is a missing piece: not a single code for investors, other than the aforementioned soft obligations for mutual and pension funds.
Spanish investor behaviour
After more than a decade of efforts to strengthen the corporate governance of listed companies, Spanish corporations have reached international standards, even though there is still room for improvement in some aspects, such as board independence, remuneration and transparency (see Figure 3). Now it is time for the buy-side – the Spanish institutional investors – to manage their fiduciary role and act as responsible owners of the companies they invest in. After all, this is a dual responsibility; it defeats the purpose if companies improve but investors shirk their duty to monitor, more aptly put ‘it takes two to tango’.
Another survey among Spanish asset managers highlights some interesting points: one-third declared that they never vote, and in more than 20 companies only one-quarter vote. This implies that not even companies on the Ibex-35 are monitored regularly from a corporate governance standpoint by their domestic institutional investors. Furthermore, the use of proxy advisors’ recommendations is scarce or almost non-existent. And of those voting, the vast majority neither disclose their vote nor receive confirmation from the company.
Making matters worse is the fact that institutional investors have no structure in place to accommodate voting decisions, which are typically delegated to investment managers with other priorities or supporting staff. In a recent survey, 60 per cent of Spanish asset managers declared not to have developed a voting policy and 40 per cent not to have carried out engagement activities with their investees. Almost 80 per cent, however, showed interest in corporate governance matters. It is time to convert desire into action.
Proxy advisors: CORPORANCE joins ECGS
The lack of a Spanish proxy advisor has not helped with this process. Most global institutional investors rely on the advice of these voting consultants to carry out their fiduciary duties. Otherwise it would be impossible to manage the voting process of thousands of companies in their portfolios. US advisors were the first to be created and are still the largest, following their asset managers’ obligation to vote. In Europe, Germany’s DSW, Proxinvest in France, Ethos in Switzerland, Frontis Governance in Italy and the UK’s Manifest were formed to help the needs of their local investors to fulfil their investment and engagement duties.
“CHALLENGING TIMES ARE AHEAD. LIKE ISSUERS, IBERIAN INVESTORS WILL HAVE TO EVOLVE IN TERMS OF TRANSPARENCY AND STEWARDSHIP. WE MAY HAVE MISSED OUT ON A SHAREHOLDER SPRING BUT WE ARE PREPARED FOR A LONG AND EVENTFUL AUTUMN”
In 2001, they set up the European partnership ECGS, to join forces and extend service coverage globally, while retaining in-depth local market knowledge and independence. Every year, their members analyse and discuss voting results and governance levels to prepare and publish the ECGS Corporate Governance Principles and Voting Guidelines.
CORPORANCE has just joined the alliance as representative for Spain and Portugal, to contribute with local knowledge of these markets and help institutional investors to adopt European best practices and international transparency standards, in order to improve corporate governance in the Iberian markets. The Spanish proxy advisor will adhere to the Best Practice Principles for Shareholder Voting Research Providers and will publicly disclose its corresponding policies and activities.
The Spanish autumn
Challenging times are ahead. Like issuers, Iberian investors will have to evolve in terms of transparency and stewardship. We may have missed out on a shareholder spring but we are prepared for a long and eventful autumn. The evolution of the regulatory landscape in Europe, particularly with the arrival of the much-anticipated EU SRD II, has the potential to transform local investor behaviour, upending decades-old practices and ushering in a new era of shareholder engagement on a par with that of other markets. In Spain and Portugal, all players will work collectively for the sake of improved transparency and governance. Markets, regulators, intermediaries, proxy advisors and especially institutional investors must rise to the occasion.
