UPDATE 1-BlackRock calls for better Spanish governance rules

Tue Jan 28, 2014 8:42am EST

* Spanish government looking to overhaul governance rules

* World's top asset manager wants even more done

* International money flooding back to IBEX

By Simon Jessop and Sarah Morris

LONDON/MADRID, Jan 28 (Reuters) - BlackRock, the world's biggest fund manager, has urged Spain to improve governance at its top companies to protect investors flooding back into a country showing signs of emerging from a long and deep recession.

BlackRock's directors of corporate governance on Jan. 9 wrote to the head of Spain's CNMV regulator, who is reviewing Spain's often opaque corporate governance rules, to lend support to initial reform plans and suggest some more of their own.

"As a major investor in Spain, BlackRock is keenly interested to ensure a robust corporate governance regime is in place, one that protects the interests of our clients as long-term shareholders and that ensures there is sufficient information in the public domain to enable investors to hold boards and management to account," they said in the letter.

Building on suggestions from a panel of experts appointed by the government to review corporate governance, BlackRock, which invests more than $3 trillion on behalf of clients, called for three further changes to help protect investors.

As well as calling for an opportunity to re-elect directors on an annual basis and improved engagement from companies on corporate governance, it also wants at least half of the board at companies in the blue-chip IBEX to be independent, rather than the third currently recommended by the regulator.

"Board independence is a problem in Spain," said Rob Hardy, European Head of Corporate Governance at J.P. Morgan Asset Management, which manages about $135 billion in European equities. "Independent boards are unusual. Enagas has got one, BBVA is pretty close, but there are not very many."

While acknowledging recent steps to improve governance in Spain, BlackRock said increasing the number of independent directors would help rebalance the power within boards, "especially in cases where there is a combined chairman/CEO".

Power has traditionally concentrated in the hands of chairmen since Spain, a dictatorship until the 1970s, was slow to embrace stock markets.

Oil group Repsol, chaired by Antonio Brufau, has no chief executive, nor does utility Iberdrola, chaired by Ignacio Galan. At Inditex, the world's largest clothing retailer, Pablo Isla is both chairman and chief executive after the founder and largest shareholder of the firm, Amancio Ortega, proposed him on stepping down in 2011.

The issue of poor governance is particularly keenly felt by so-called passive funds that track an index and must invest in a company and look to improve it from within, as opposed to active mangers which can choose to not buy a company they dislike.

After a bumper 2013 in which it gained 21.5 percent, the IBEX is flat in early 2014, though still outperforming rivals including France's CAC-40, down nearly 3 percent. That has been helped by record inflows to Spanish stocks in the week to Jan. 22, data from fund tracker EPFR showed.

JPM-AM's Hardy said Spain had made strides in recent years in areas such as the number of women on boards, and was not the worst place to invest. "I've more issues in France, from a governance standpoint, than I have in Spain," he said.

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