The Center for Good Governance, a joint initiative of IE Business School and Grant Thornton, has presented a report headed “Recommendations for Good Corporate Governance for Non-Listed Firms” aimed at helping non-listed companies create a high-performance board of management.
The recommendations include a strong, professionalized board of management, with extended faculties that are well-defined and non-delegable, coupled with a large majority of non-executive board members. The recommendations are aimed at public interest entities, which, for the purposes of the report, are considered to be private companies with an annual turnover of more than 750 million euros or a workforce with more than 1,500 employees.
Report authors Tomás Garicano and Pablo Hafner adapted Spain’s norms of good governance of listed companies to the reality of public interest entities and added a good number of the recommendations listed in the Code of Good Governance for Listed Companies of 2015. They also used measures that formed part of other European initiatives or taken from their extensive experience in the field of corporate governance.
“Non-listed firms make up 85% of Spain’s industrial fabric. Nevertheless, the greater part of legislation and recommendations related to good corporate governance are aimed exclusively at listed companies,” said Tomás Garicano, director of IE Business School’s Center for Good Governance and senior advisor for corporate governance for Grant Thornton. “Extending good governance practices to more business segments serves to strengthen the sustainability and development of our companies and, by extension, of our economy and our society.”
“When selecting and adapting recommendations we gave careful consideration to ensure that their economic and organizational impact were highly justified,” said Pablo Hafner, president of Hafner & Partners and member of the Center for Good Governance’s panel of experts. “We believe that companies of this size require measures that are not only perfectly actionable but which are also highly recommendable from the point of view of how they affect the economy in general. Many of them could even apply to very small businesses.”
The report had a special focus on management boards and their separation from the operational management of the firm. “The professionalization of a management board and its independence from senior management is a pre-requisite for our recommendations to be met” says Hafner. “If we consider the size and complexity of public interest entities, they should all be in an advanced phase of evolution in this respect.”
The authors of the report recommend a strong management board, with extended non-delegable faculties that are well defined and a large majority of non-executive members. When selecting members of the board the report states that is essential that they be professionals with experience and prestige, and that it is highly desirable but not essential in most public interest entities for them to be independent. It is also recommendable for companies to achieve the right level of diversity in their boards, and to ensure that there is a minimum of 30% of either gender.
The recommendations also covered remuneration of board members. Remuneration should be based on a policy approved by the general committee, and should be sufficient to attract and retain talent, but not so high that it might affect the board’s independence and freedom of criteria.
In the case of public interest entities, the report advises against stock options forming part of board members’ remuneration. It recommends that variable remunerations be aimed solely at CEOs, and underlined the need for safeguards which either defer payment or ensure that it may be reclaimed if established objectives are not achieved.
In order to ensure that the board is functioning well certain measures are recommended, including the creation of commissions (for auditing, appointments and remuneration), the existence of an information system that enables the firm to carry out previous analyses of issues at hand, the maintenance of sufficiently exhaustive acts, and the preparation of regulations and statues which clearly establish their functions and procedures.
Jaime Romano, partner in the areas of Management, Risk & IT Consulting at Grant Thornton explained that with regard to the level of information a well-run management board should have, companies must ensure not just its precision and integrity, but also its quality in an environment with a massive amount of data, which in many cases can alter the way members of the board perceive given situations and may thus affect decisionmaking processes.
Transparency and responsibility are the two main concepts that drive these recommendations. They include the recommendation that public interest entities publish their management board rules on their websites, and provide full information on their corporate governance and remuneration systems, their board members, the firm’s strategy, and their track record in the field of corporate social responsibility. The report proposes that CSR form an integral part of the company’s strategy, which means that the identification and analysis of the needs and expectations of stakeholders should be non-delegable tasks.
“Following all these recommendations can serve, if accompanied by a strategic focus and the right kind of kind of corporate culture, to build a high-performance management board which permits the defense of social interests, such as the creation of sustainable value in the long-term,” said Tomás Garicano.
Jaime Romano added: “The strategic focus of companies in which corporate culture plays a pivotal role rests on a good organizational structure, with well-defined procedures and constantly updated knowledge and systems in place to evaluate risks that are inherent to companies’ activities. All this is aimed at not only optimizing short-term results, but also at guaranteeing profit levels and the sustainability of the company in the medium and long term.”
The study forms part of the International Business Report (IBR), a survey undertaken by Grant Thornton since 1992 to gauge trends, perceptions, decisions and the expectations of companies in the short and medium term. The 36 countries included in the study represent over 80% of the world economy. Hence, over the years, the IBR has served as a barometer that provides a medium-term forecast for changes and trends in the global economy and local markets.
- Universe: companies from all economic sectors, mid-sized to large (in the case of Spain, between 100 and 500 employees).
- Sample: Over 10,000 interviews per year with senior managers: Presidents, CEOs, general directors, or other top executives. 400 of them were in Spain.
- Fieldwork: Telephone interviews on a quarterly basis carried out in Spain by Análisis e Investigación and coordinated worldwide by Millward Brown.
In order to prepare the International Business Report series over 2,500 top managers were interviewed in 36 countries during the months of November and December of 2015 (100 in Spain).
Source: IE Business School