January was an easy time for Spanish cynics. At the beginning of the month the government published its independent report on corporate governance. A week later, property company, Vallehermoso, announced it was to be taken over by the construction group Sacyr, with minority shareholders given an exchange ratio implicitly valuing the company at a 20-25% discount to net asset value. At least no one could question the need to improve corporate governance.
The Aldama Report was always going to have to face a degree of skepticism. It’s very existence is a tacit admission that past attempts at disciplining corporate Spain have failed. Its predecessor, the Olivencia Code, was published in the late 1990s. It was broadly welcomed and then ignored. Some fear that the Aldama Report may go the same way. But in truth business leaders should have little to fear from the report. A number of them sat on the commission led by Enrique de Aldama. It was then little surprise that the turkeys didn’t vote for Christmas. The recommendations it has set forth shouldn’t prove too difficult to implement.
Self-regulation is the central philosophy of the report. It recommends mandatory regulation in a few specific areas only, such as the publication of a company’s governance principles. “They are saying, ‘do whatever you want, but do it publicly’,” says José-Luis Alvarez, vice dean of the Instituto de Empresa in Madrid. “In that respect, the recommendations are very liberal.”
The government itself makes no bones about this. At the launch of the report, Rodrigo Rato, vice-president of the government, said: “the position of the commission and of the government is that companies are free to organise themselves as they wish, but they must bear in mind investor protection and transparency”. Transparency, he said, is “one of the most effective mechanisms for avoiding conflicts of interest”.
On the same press occasion, Aldama himself praised the current standards of corporate governance. “Spain is at the forefront in terms of true good governance,” he said, adding that many large companies in Spain already comply with 90% of what he is recommending. He hoped Spanish companies would include a corporate governance statement when they presented their annual reports for 2002 and called for the government to make such measures obligatory.
Spain has enjoyed its share of corporate controversy over the last couple of years, albeit not on the same level as an Enron or a WorldCom. The climate both at home and internationally put pressure on the Government to act. “They were afraid of more scandals,” says J-L Alvarez. Problems in Spain tend to centre on issues of transparency and conflict of interest rather than outright deception. Domènec Melé, professor of business ethics at the University of Navarra’s IESE business school, points to the contrast between Europe’s prudent accounting principles and the US where, he says, “they follow the letter of the law with the result that their practices can be legal but unethical”.
The result is a fairly predictable clutch of proposals concerning the role of directors, the function of the board, stock options and shareholder rights. It’s all good common sense underpinned by a call for the Government to make an annual declaration of good governance mandatory for quoted companies.
This requirement, says Aldama, could be easily monitored by the Comisión Nacional del Mercado de Valores (CNMV). Any companies that did not comply would be punished by investors. “The worst sanction that a company can have is for the CNMV to issue a note saying that it is not complying with the transparency requirements,” he told Expansión. “That is worse than a fine.”
To many though, it smacks of political posturing. “It all looks and sounds pretty wishy-washy,” says David Burns, director general of Schroders Investment Management in Spain. It’s a brief document. At 49 pages, a common sense outline rather than an in-depth technical study. “Some one in the Ministry of the Economy could have done it in three afternoons,” says J-L Alvarez. “But by externalising it, the government shows initiative and gets some one else to address the problems.”
For Fernando Alvarez, a lawyer with international law firm Baker McKenzie in Madrid, the report will have no teeth until it has at least the minimal legislation recommended to back it up. “In Spain there is no tradition of self regulation like in the US and UK,” he says. “We are used to compulsory codes. For this report to have some effect for investors it must be completed with some legal regulations. It is necessary to say to companies, you have to comply with this code or inform your investors that you aren’t doing so.”
The Aldama Report does show a difference in emphasis from the Olivencia Code. In the Olivencia Code the emphasis falls squarely on maximising shareholder value. “The Aldama Report talks more about value in the long term,” says Mele. “It pays attention to other stakeholders and more social and ethical concerns.”
And while the Olivencia Code sought to address all companies, the Aldama Report is only looking at quoted stocks. A reflection perhaps that Aldama’s objectives were restrained by a note of realism. “Aldama told us that he had had to think about what was feasible for Spanish companies, not an ideal,” says J-L Alvarez. “I buy that line, I think he’s gone as far as possible.”
At a separate function, Aldama explained what he expects to happen next. He said that Spain’s largest companies, and the banks in particular, are themselves under pressure to improve corporate governance as a result of the internationalisation of their investor bases. Aldama expects such companies to implement his recommendations without waiting for legislation and as a result other quoted companies will fall into line. BBVA, as one example, has recently modified its corporate governance principles.
Few people are holding their breaths. There is little optimism that these measures will have much effect. “The business community here has had its own way of doing things for many years,” says Melé. “I’m not optimistic they’ll change quickly. This is a positive step, but it will take time.”
There are, however, sound reasons why Aldama’s plans may yet confound the skeptics. “All of these companies want to expand abroad,” says Alvarez, “and they need capital to do that. They recognise it is in their interests to see corporate governance advanced. Given the internationalisation of capital flows companies need to give the maximum assurance possible to foreign investors.”
If that does happen, then it will make deals like the one between Sacyr and Vallehermoso far more difficult to pull off providing considerable reassurance for minority investors.
“In the end it will make things better for investors because there will be more information available,” says F Alvarez. “But it will take time for Spanish companies to understand the benefits of transparency.”

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