In a context of growing social and economic inequality, the remuneration earned by the members of the Boards of Directors of some large corporations causes alarm and dismay among citizens, and is of concern to political leaders who look for a way to deal with this situation without recurring to significant government intervention.
Throughout the text we will provide some figures that allow us to grasp the magnitude of the subject in question, and we also comment on measures adopted in Spain to avoid abuses with the remuneration of directors.
It should be noted that we are referring exclusively to the situation in listed companies and that we are only discussing the remuneration of the directors, which is not the same as the company´s top management. Although some members of the company's senior management do belong to the Board of Directors (called executive directors), the majority of the members of the Board of Directors do not perform executive or managerial functions within the company (external or outside directors). In public limited companies the Board of Directors is the company´s highest governing body and therefore is not responsible for the day to day management of the company, but rather is responsible for approving its main strategies or lines of action. The Board of Directors is positioned between the company´s owners (to whom they are accountable and in whose interest they act) and senior management (whom they supervise to ensure that the business is efficiently managed).
According to the data published by the Comisión Nacional del Mercado de Valores [National Securities Market Commission] (CNMV) in its most recent reports (on corporate governance and on the remuneration of directors in listed companies), the average number of members of the Board of Directors of these companies is ten. Of those ten, one or two of them are executive directors and the rest are outside directors. The average annual compensation for being on the Board, which meets, on average, less than once a month (11 times per year), stands at 382,000 euros per director (1,674,000 euros for an executive director and 135,000 euros for an outside director).
In addition to the status of the director (executive or outside), the size of the company is another fundamental determinant of the heterogeneity of the remunerations. The average annual remuneration for executive directors for companies on the IBEX, is 3,176,000 euros, while for the rest of the listed companies, executive director remuneration stands at 821,000 euros per year. In the case of outside directors, the remuneration is 222,000 and 89,000 euros, respectively.
The determination of the compensation of the members of the Board of Directors enters into the private sphere of each company. The proposal for the remuneration corresponds to the Board of Directors itself, and it is up to the shareholders to approve it at the annual General Shareholders Meeting. The shareholders trust that the remuneration will be sufficient to attract and motivate competent professionals and ensure their total dedication to company. However, excessive remuneration implies a misappropriation of corporate resources by the directors that harms the shareholders, has a negative impact on the reputation of the company as well as on the morale of the employees who perceive an unequal and unfair distribution of the wealth created.
Although on occasions the amounts reported are scandalous and bear no relation to the evolution of the company´s results, nor to those of their workforce, the governments of capitalist countries are reluctant to intervene directly in this matter (they have only done so in the cases of banks that have had to be rescued with public money). However, governments have tried to curb abuses through more subtle means such as corporate governance recommendations, obligations of increased transparency for companies and the empowerment of shareholders, although without great success to date.
Companies in Spain traditionally have been very opaque regarding the remuneration of the members of their Boards of Directors, so the first step was to initially recommend, and then demand, greater transparency. Therefore, following in the wake of the Cadbury report published in the UK (1992), when the rules of good corporate governance reached our country, the first codes published (Good Governance Code (Código Olivencia) (1998), Aldama Commission´s Report (2003) and the Unified Good Governance Code (2006)) included recommendations for informing investors about the remuneration policies for each one of the members of the Board of Directors in detail. The Aldama and Unified Codes also recommended submitting the compensation policy for directors to a consultative vote at the General Shareholders' Meeting. However, as the CNMV itself reported, these recommendations repeatedly made the list of the recommendations least followed by listed companies.
In light of the situation, Law 2/2011 of March 4 on Sustainable Economy, made the recommendations obligations, and requires listed companies to prepare an annual report of the compensation of their directors, which, furthermore, must to be submitted to a consultative vote at the General Shareholders' Meeting. Said report is required to include, among other things, itemized details of the composition of the remuneration corresponding to each individual director.
The idea that underlies demanding greater transparency from the companies is that the market will be able to discipline abusive behavior if it has the necessary information. However, for this to be true, it is also necessary to grant shareholders sufficient power, since a consultative vote such as that required by the aforementioned law has shown to be insufficient.
Therefore, the next step was to endow shareholders with more rights to decide on the remuneration of the directors (say on pay). Law 31/2014, of December 3, which modifies the Law of Capital Companies for the improvement of corporate governance, established that the maximum total amount for the remuneration of the Board had to be approved at the General Shareholders' Meeting at least once every three years. The determination of the specific amount to be received by each of the directors - within the maximum set by the Shareholders - continues to be left to the discretion of the Board and is subject to a consultative vote at the Shareholders´ Meeting.
The data indicate that, except for in specific cases, opposition to the remuneration of directors by shareholders is rather low in Spain. Perhaps the situation may change over time and also as a consequence of greater activism detected among the institutional investors. In 2020, votes opposing the directors´ compensation in Ibex 35 companies averaged 8.9%, compared to 7.9% in 2019 (article in El País, 05/09/2021).
Continuing on in this attempt to ensure that increased information transparency and greater shareholder empowerment exert pressure for more responsible and ethical behavior by companies, the latest regulatory development concerning this issue was included in a law approved just a month ago: Law 5/2021, of April 12, to encourage long-term commitment of shareholders in listed companies.
With respect to the remuneration of directors, the new law expands informational requirements by increasing the mandatory content of the Annual Directors' Remuneration Report. In Reports corresponding to financial years closed after December 1, 2020, it will be mandatory, among other things, to include how the remuneration of the directors contributes to the sustainable and long-term performance of the company. It also requires the company to put the remuneration of the Board in relation to the average remuneration of the company's workers. The obligation to publish the relationship between the remuneration of senior management and that of employees (commonly known as the pay ratio) already exists in countries such as the USA (since 2018) or the UK (since the beginning of 2020). The pay ratio constitutes a measure of vertical inequality within the company that is of interest to owners and/or shareholders. Furthermore, some studies undertaken found that shareholders consider this information useful in deciding which way to vote on the remuneration policy for the Board, not only because of ethical or social responsibility issues, but also due to the possible impact that the information provided by this ratio could have on the motivation and productivity of the company's workers and, consequently, on its economic performance.
In Spain, some organizations such as the union CCOO, or some newspapers, such as El País, have already been publishing information periodically on the relationship between the remuneration of the top management of listed companies and the average salary of the employees. For example, according to the latest report published by CCOO on the evolution of good governance indicators in IBEX 35 companies, the average remuneration of an IBEX35 director was, in 2019, 18.2 times higher than that of the employees. If only the salary of the highest paid executive is taken into account, the ratio is 118 times the average salary of an employee.
Here forth, listed companies must themselves provide this information and explain it. It will only be a matter of time before we see if these new reporting requirements have any real effect on limiting abuses or on investor decisions.
Authors: Nuria Alcalde and Isabel Acero
(The opinions expressed in this article are the sole responsibility of the authors)
