Sustainability and remuneration of directors in listed companies
Published on 22nd Dec 2021
In recent years there has been a significant increase in the importance of sustainability in society and, in particular, in the long-term strategy of companies. The latest global events have highlighted the need to seek not only economic profitability but also social profitability.
At both national and European levels, a series of regulations have emerged in recent years, especially related to listed companies, highlighting the importance of non-financial concepts in the corporate sphere of companies, including the remuneration of their directors.
Among the most prominent are: (i) Directive (EU) 2017/828 of the European Parliament and of the Council, of 17 May 2017, amending Directive 2007/36 / EC as regards the encouragement of long-term shareholder engagement; (ii) the reform of the Good Governance Code of listed companies of the National Securities Market Commission (the "Code"); and (iii) Law 5/2021, of 12 April, which modifies the consolidated text of the Capital Companies Law, approved by Legislative Royal Decree 1/2010, of 2 July, and other financial regulations, with regard the encouragement of long-term shareholder engagement in listed companies ("Law 5/2021").
The Code introduced several actions that listed companies should promote in relation to sustainability in its recommendations. It suggested setting out a sustainability policy in environmental and social matters, as a non-delegable authority of the board of directors, which should transparently offer sufficient information on its development, application, and results. Likewise, given the relevance of issues related to sustainability, social, environmental, or corporate governance aspects (also known as ESG criteria, i.e., Environmental, Social and Governance), it introduced the recommendation to assign specific functions on these matters to a specialized commission in order to promote a more intense and committed management of these matters.
Furthermore, the Code also detailed the basis and criteria for the remuneration of the directors and, specifically, regarding the variable remuneration of executive directors. In this regard, it was recommended that such type of remuneration should be related to its performance as well as to financial and non-financial factors, which were measurable and also promoted the sustainability and profitability of the company in the long term. All of this is to align the interests of the executive directors with the company's long-term sustainable social interest.
Bearing that in mind, and regarding the remuneration of the directors of listed companies, Law 5/2021 introduces for the first time in the Spanish legal system, specifically under article 529 novodecies of the Capital Companies Law: (i) that the remuneration policy contributes to the long-term sustainability of the company and (ii) the use of non-financial criteria to determine the variable remuneration of executive directors.
In this sense, Article 541 of the Spanish Capital Companies Law has been modified with respect to the annual report on directors' remuneration. Its content now shall include an explanation of how the total remuneration of the directors, accrued during the fiscal year, contributes to the long-term and sustainable performance of the company, as well as information on how the performance criteria have been applied. To this end, the National Securities Market Commission, in its Circular 3/2021, of 28 September, adjusted the model for the annual directors' remuneration report to adapt it to the new legal requirements.
The importance of ESG criteria will increase. In the next season of General Shareholders' Meetings of listed companies we will see how they adapt to the entry into force of Law 5/2021 and Circular 3/2021 and, specifically, how ESG criteria are introduced into the new directors' remuneration policies.
