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Iberdrola Tomás Redondo, 1 Madrid 28033

For the attention of the Chairman of the Nominations and Compensation Committee:

The following report includes the conclusions reached about the re-election of the Chairman of Iberdrola, S.A, according to the request described in the engagement letter dated December 3 2014, demanded by the Nominations and Compensation Committee of Iberdrola, S.A. in the context of the Annual General Meeting. The detailed analyses carried out in order to conclude are included in the Appendix of this report, so-called “Detailed Report”.

I. Purpose of the report. Present Iberdrola's model of governance and confirm the consistency of the re-election of the Executive Chairman through: 1. An understanding of the logic behind the corporate governance practice that recommends separating supervisory and management duties. 2. The presentation of the tools and technical factors to ensure the adequate separation of the supervision and management duties at companies, provide counterweights and or/mitigate potential conflicts of agency. 3. The empirical confirmation of the absence of a single alternative for the separation. 4. The analysis of Iberdrola's model and the separation of management from supervision, making use of a group of ideal tools for its circumstances. 5. The study of support from the market/shareholders for the adequacy of Iberdrola's model and, therefore, of the backing of the suitable supervisory work of its Board.

II. Conclusions.

1. Good corporate governance practices recommend separating supervision from management. This avoids agency problems. The market may penalise the company if this conflict is not well resolved as it would understand that the creation of shareholder value could be at risk. 2. Multiple studies have empirically shown that there are various tools and factors that influence the actual existence of an agency problem and, therefore, have an impact on the adequate (or inadequate) separation of duties. Specifically, tools associated with corporate governance systems have been identified and there are also external factors that do not depend on the governance model (such as the shareholder profile or the competitive environment). Each company must choose the model and the measures that best adapt to its circumstances for the moment, business model or external factors. 3. There is no empirical evidence that allows for a conclusion as to what the best alternative is to ensure the effective separation of supervision and management. 4. Iberdrola has a decentralised governance model that separates management from supervision and also has a governance system with a counterweighted executive chairman, defined based on a group of governance

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practices ideally designed to respond to the demands of heterogeneous shareholders, with a high level presence of foreign institutional investors. The decentralization of Iberdrola's governance model requires it to have a permanent and sophisticated supervision area. This duty is attributed to the holding company and requires leadership with a necessarily high level of professional commitment. The duties of the Chairman of Iberdrola, S.A. require a level of depth, presence and involvement with the work that requires this position to be understood and catalogued as "executive". 5. The practical application of Iberdrola's governance model supports its validity and the company reflects better financial performance than its comparables and the model is supported by shareholders at General Meetings and by capital markets. III. Summary of the arguments made.

1. Logic behind the corporate governance practice that recommends separating supervisory and management duties. The objective of separating duties is to obtain adequate supervision while minimizing differences in interests that may exist between managers and shareholders, such that agency problems are reduced and, ultimately, the creation of shareholder value is not put at risk.

2. Tools and factors for adequately separating management/supervision duties. Academics and experts in corporate governance demonstrate that there are multiple tools available to companies, and factors in their environment, for the effective separation of duties. Three groups may be formed based on their nature: Outline of corporate governance tools A. Governance model and structure (endogenous tools).

Governance practices B. Corporate governance practices (endogenous tools).

Governance model and C. Exogenous factors (external variables such as the structure shareholder profile or the competitive environment).

A. Governance model and structure:  Structure of the management bodies - Governance model: the decentralization of the organizational structure increases the level of supervision thanks to the involvement of a larger number of agents in decision-making processes (Wong et al)1.  Governance bodies - Independence/Counterweights: a majority of independents on the Board of Directors2 and Committees3, and the existence of an SED4 are determining factors in the prevalence of an actual external supervisory criteria for management work (Krause et al.).  Governance bodies - Diversity: a diversity of genders, nationalities and experiences enriches debates, increasing the value of the company5 (Carter).

B. Good Corporate Governance Practices

1 The effects of top management team integrative complexity and decentralized decision making on corporate social performance; Wong et al. (2011) 2 CEO duality: A review and research agenda; Krause et al. (2013) 3 Does independent board of directors really make a difference?; Chen Wang (2014) 4 Lead independent director: Impact on firm performance and risk taking; Chandar et al. (2014) 5 Corporate governance, board diversity, and firm value; Carter (2003) 2

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 Knowledge and training of directors: knowledge held by directors regarding the sector and the company contribute to the discussion and improvement of supervisory capacities (Sharpe)6.  Dedication required and practices: The level of supervision will be adequate only if directors are sufficiently dedicated (Sharma)7.  Transparency: transparency practices at the company makes the market itself act as a supervisor and improves the company's performance (Chiang et al)8.  Control of directors' conflicts of interest: to preserve independence, companies must have procedures that control and resolve conflicts of interest on the Board (T. Narayanan)9.  Rotation: The rotation of independent directors prevents a potential loss of the external viewpoint that they should contribute to the company9 (T. Narayanan).  Remuneration: An adequate compensation policy for the executive group aligns the interests of managers and shareholders10 (Hauser).

C. Exogenous factors:  Shareholder composition: An active investor such as an institutional shareholder provides efficient supervision by imposing a higher level of scrutiny due to its high sophistication and its professional knowledge of the sector and the company.  Competitive environment: A competitive and/or regulated environment provides de facto assurance of a higher level of supervisory effort of management, whether due to management itself (due to the higher levels of pressure deriving from high competitiveness), or from regulators in the case of regulated markets.

3. There is no evidence as to what the best alternative is to ensure the effective separation of supervision and management. There is no correlation between the mere existence of an executive or independent chairman and company performance. In Spain, large companies by capitalisation, leaders in their sector, do not have an independent chairman. In other countries, such as the United States, large-cap companies that have an independent chairman are a minority and show disparate performance that is not associated with the profile of the chairman. Apple is the only top Spanish and American company that has an independent chairman and obtains better performance than those that have an executive chairman.

6 The cosmetic independence of corporate boards; Sharpe (2011) 7 Independent directors and the propensity to pay dividends; Sharma (2011) 8 Board supervision capability and information transparency; Chiang et al. (2010) 9 Is the institution of independent directors irrelevant?; T. Narayanan (2012) 10 Busy directors and firm performance: Evidence from mergers; Hauser (2013) 3

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Evolution of the market capitalisation of the main Ibex 35 companies (left) and the S&P Global 100 (right) by type of chairman

Executive Independent Executive Independent 20 38

18 22 16 20

14 12

2014 (%) 2014 (%) 2014 Growth

Growth 12 – – 10 10

8 2004 2004 8 6 6

4 ave. in in ave.

ave. in in ave. 4 Capitalisation Capitalisation 2 2 0 0

-2 Market

Market -2 Compound Compound -4

-8 -6 0 10 20 30 40 50 60 70 80 90 125 150 175 200 225 250 275 300 325 350 375 650

IBEX 35 by market capitalisation in Main S&P GLOBAL 100 companies by 2014 (EUR Bn) market capitalisation (EUR Bn)

Source: Bloomberg; PwC analysis.

Neither is there any conclusive correlation whatsoever with respect to support received at General meetings from shareholders. In any event, those that have an independent chairman generally reflect a higher percentage of no votes in Spain and the United States.

Rejection obtained at General Meetings of the main companies in the Ibex 35 (left) and the S&P Global 100 (right) by type of chairman.

Executive Independent Executive Independent

13.35% 8.40%

8.19%

(%) (%)

7.59% 4.30%

3.58% 3.49%

3.25% rejection votes compared votes rejection

2.10%

1.89% to the total number of votesnumber of totalthe to to the total number of votesnumber of totalthe to 1.61% 0.68% 0.75%

0.31%

Percentage of of Percentage compared votes rejection of Percentage

Main IBEX 35 companies by market Main S&P GLOBAL 100 companies by capitalisation market capitalisation

Source: Corporate websites; PwC analysis.

Furthermore, recognition of good governance goes beyond the presence or absence of an independent chairman. o Spanish companies that are notable for their corporate governance practices have an executive chairman (e.g. Iberdrola, BBVA, Santander, Inditex) o International companies applauded for their good governance practices defend the deliberate election of an executive chairman as most adequate for their circumstances and characteristics (e.g. Johnson&Johnson). o There are cases of shareholder votes against changing an executive chairman for an independent chairman (e.g. Coca Cola, Walt Disney), given that an executive chairman was the most adequate model for their circumstances.

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Finally, according to experts in this area, the creation of value at companies is not maximized when they forcibly adopt a standard governance structure, but is when the structure adapts to their circumstances.

4. Iberdrola's response.  Iberdrola has a decentralised governance model that separates management from supervision and has a governance system with a counterweighted executive chairman, defined based on a group of governance practices ideally designed to respond to the demands of heterogeneous shareholders, with a high level presence of foreign institutional investors:

 Structure of the governing bodies - Governance model: Iberdrola's governance model assigns the listed holding company (Iberdrola, S.A.) the supervisory duty and the sub-holding companies in each country coordination duties, and management remains in the hands of the lead business companies. The chairman and CEO of the holding company does not have executive capacity at the lead company and is only present in the supervisory and coordination bodies at the holding company and in two sub-holding companies and therefore his executive efforts focus on the development of supervision and coordination. This separation of duties is effective in accordance with the annual certification obtained from an external evaluation of the governance model.  Governing bodies - Independence/Counterweights: The percentage of independent directors on the Board of Iberdrola (79%) is at the level of the most notable international companies and exceeds that of all its European comparables. The Board committees at Iberdrola are fully populated by independent directors and there is an SED with broad special authority.  Governing bodies - Diversity: Iberdrola's Board is diverse and balanced. Iberdrola is notable in terms of gender diversity, with 36% female directors, four foreign directors (21%) and it is positioned above most companies analysed in terms of national diversity. Practically all directors have prior experience on other Boards and relevant industry knowledge.  Director information and training: Iberdrola has an overall training plan for directors and a specific plan for each committee. The directors meet annually with the SED and provide feedback regarding the content of those plans to ensure that they continuously improve. Furthermore, directors frequently appear at committee meetings to present informational reports regarding a diverse range of areas.  Required dedication and practice: directors dedicate more time to their duties than the average at comparable companies, with a meeting ratio per director of 1.4x above the average. Iberdrola also ensures the dedication of these directors by limiting them to a maximum of membership on 3 Boards at listed companies.  Transparency: Iberdrola is notable and has received awards for its transparency and it actively and successfully drives associations with shareholders and the company. The latest recognition received was from, for example, the prestigious magazine "World Finance", "Institutional Investor" and "Ethical Boardroom".  Control of director conflicts of interest: Iberdrola has strict rules and procedures for handling conflicts of interest within its Board of Directors. It also makes use

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of ad hoc reports from external experts to evaluate the existence of conflicts of interest with respect to director candidates.  Rotation: Iberdrola has no independent director who has served for more than twelve years and the average length of service of independent directors is less than six years while the duration of the term of directors is four years. At the time of each re-election, the Nominations and Compensation Committee analyses the profile of each director and ensures that no conflict of interest has arisen and that independence has not been lost.  Remuneration: Iberdrola's remuneration policy is conceived to align the interests of managers and shareholders, following a pay for performance spirit. In addition to fixed compensation, executive directors receive incentives associated with performance based on criteria that are aligned with the interests of the business and long-term variable compensation consisting of company shares. The compensation policy and payments are published in the annual compensation report that is submitted for a consultation vote at the Annual General Meeting and a negative vote from shareholders of less than 1.5% was obtained over all of the past few years. This percentage is less than that seen by Spanish blue chips (except for Inditex, which has a different shareholder profile).  Shareholder composition: Iberdrola's shareholder composition is disperse and there is a large presence of foreign institutional investors. It has more than 600,000 shareholders and 25% of the shares are on the hands of minority shareholders and more than 55% are held by foreign institutional investors. Nearly 80% of the shares held by institutional investors are in the hands of foreign institutions, and it is the third Spanish blue chip in terms of percentage. Its share dispersion11 exceeds 65%, which puts it in fourth place among Spanish blue chips in terms of percentage and second among its European comparables.  Competitive environment: Iberdrola generates three fourths of its EBITDA from regulated businesses where, as is not the case in other markets, the regulators themselves exercise supervisory authority over management.

The decentralization of Iberdrola's governance model requires a permanent and sophisticated supervisory effort. This duty, which is attributed to the holding company, must be continuous and intense and requires leadership that necessarily involves a high level of professional commitment. The duties of the Chairman of Iberdrola, S.A. require a level of depth, presence and involvement with the work that demands that this position to be understood and catalogued as "executive". The group of counterweights and corporate governance practices in Iberdrola's Corporate Governance System completes this model and ensures the effective separation of duties.

5. Evidence of the effectiveness of Iberdrola's governance model.  Iberdrola's model has demonstrated that it operates with a performance level (economic-financial evolution) that is better than its comparables. Since the appointment of the current chairman and CEO the company's development has been as follows:

11 Shareholder dispersion: Brown's approximation to the Gini index multiplied by the percentage of institutional investors. 6

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o Capitalisation: its value has been multiplied 2.7 times, while its comparables have destroyed value, on average. o Shareholder remuneration: Since 2001 dividends per share (DPS) have doubled to €0.275 while the average for its comparables has decreased and earnings per share (EPS) increased by 46%, growing at a rate that is also higher than its comparables. o EBITDA: has grown at an average annual rate of 8% and its comparables grew at a rate of 5 percentage points less. o Assets: increased at an annual average rate of 11%, trebling the rate of its comparables. Since 2001 Iberdrola has multiplied its capital and reserves level by five, its assets and revenues by four, it has trebled its EBITDA and net profits and it has doubled shareholder remuneration. It has also progressively reduced its debt levels. Iberdrola´s main performance indicators

Year 2001 Present

23.1 7.6 Total Assets(a) Equity(a) 4x 5x (EUR Bn) (EUR Bn) 92.4 36.0

2.4 8.3 EBITDA(b) Revenues(b) 3x 4x (EUR Bn) (EUR Bn) 6.8 32.3

0.15 0.9 Dividends(b) Net Profit(b) 2x 3x (EUR/Share) (EUR Bn) 0.27 2.3

(a) Present : as of a 30/9/2014 (b) Present: 2014 estimated

Source: Bloomberg; PwC analysis.

 The market and analysts have applauded its strategic decisions and note that they have resulted in a diversified company with lower risk than its comparables.  The Group, the Chairman and executives have obtained great recognition for its management.  It has received support from shareholders, with a percentage of votes against proposals at General Meetings that is much less than the main domestic and international companies. The independent directors support the leadership of the Chairman, his vision and dedication. ***********************

This report is published with the sole aim described in the first paragraph of the document and cannot be used for a different purpose. We do not undertake responsibility towards third parties other than the addressees.

Yours faithfully,

Germán Cueva

PricewaterhouseCoopers Asesores de Negocio, S.L.

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Appendix - DETAILED REPORT

1. Good corporate governance practices recommend separating supervision from management. This mitigates agency problems.

Potential agency problems applied to the business world gain force when companies grow in size and complexity, making it impossible for the owners of the capital to continue to carry out management duties, and when professional executives are hired to do so. This leads to a separation of duties between control and supervision of the activity, the owner´s responsibility for capital, and the management and execution of the business which is under the domain of the managers. As a result of this separation, potential conflicts arise due to the different interests that owners and managers have and which represent, ultimately, a risk with respect to the creation of shareholder value. Literature regarding this matter identifies 6 main problems into which the conflict translates: 1. Information asymmetry between shareholders and managers. 2. Executive short-sightedness or differences in the vision for the company in the short and long-term. 3. Divergence of the distribution of cash available at the Company. 4. Diversity in the criteria for assuming risks. 5. Trend towards insufficient effort or shirking. 6. Other cases of seeking private interests. There is also another potential conflict to be mitigated, which is that deriving from the misalignment between a controlling shareholder and a minority shareholder. A controlling shareholder normally has certain rights, such as a seat on the Board, which provides supervisory power that the minority shareholder does not have. An adequate governance model must mitigate both conflicts. The market may penalize the company if this conflict is not well resolved. “As a result, for at least the last thirty years, modern corporate governance scholarship has focused on finding a means to bridge the agency gap between diversified risk bearers and managers.”

Deconstructing Equity: Public Ownership, Agency Costs, and Complete Capital Markets; Gilson et al. (2008) 2. There are various alternatives for effectively separating management and supervisory duties and reducing agency problems. Each company must choose the one that best adapts to its circumstances at each moment, business model or external factor, etc.

There are multiple tools that align the interests of shareholders and managers. Three groups may be formed based on their nature:

A. Governance model and structure: tools strategically defined for each company and associated with the structure of its governance and management body, such as the management structure model (centralized vs. decentralized) and the composition of its Board (more or less independent or diverse, authority counterweights, etc.). 8

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B. Corporate governance practices: practices such as remuneration policies, training and Board information policies, procedures for controlling directors' conflicts of interest, transparency and shareholder commitment policies, etc. C. Exogenous factors: are external variables (as they do not directly depend on the company's governance model) that have an influence on existing agency problems, such as the shareholder profile or the complexity and competency of the market in which the business activity is carried out.

A. Governance model and structure:

2.1. Structure of its management bodies - Governance model: The level of centralization within an organizational structure influences the level of power accumulated by its managers.

The centralization is achieved by granting certain decision powers and autonomy to various levels within a company's hierarchy, for example by geographic area or line of business. Several studies demonstrate that the decentralization of a structure decreases the agency problems by involving a larger number of actors in the decision processes. “We find that firms that are more decentralized have higher corporate social performance than do those that are more centralized. […] Highly decentralized firms involve a greater number of individuals in decision making. Employees within decentralized firms are likely to be motivated to collect information on the stakeholders with whom they interact because they exercise decision-making power and can more directly see the influence of their information gathering on stakeholder decisions”

The effects of top management team integrative complexity and decentralized decision making on corporate social performance; Wong et al. (2011)

2.2. Governing bodies - Independence/Counterweights: among the measures available to a company to ensure independent supervision are:

 Independence of the Board: this is a measure normally under which the percentage of independent directors on the Board is one of the main factors for adequate supervision because it ensures the prevalence of an outside view on the Board. It has been empirically demonstrated that with the level of supervision provided by a high percentage of independent directors, the separation of CEO and the chairman of the board is not necessarily relevant.

“With a high level of board independence, independence of the chairman position may not further benefit governance”

CEO duality: A review and research agenda; Krause et al. (2013)

 Committee independence: the consulting committees inform the Board of certain key matters. This information effort ensures that the permanence of the independent viewpoint will contribute to the supervision of the Board.

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“Instead of focusing on total board Independence, regulatory agency should take unique features of audit and nominating committee Independence level into account. […] The results show that increased level for audit and compensation committee independence can significantly improve firm performance.”

Does independent board of directors really make a difference?; Chen Wang (2014)

 LID: the Lead Independent Director is a coordination and communications channel for independent directors, serving to receive possible concerns from them and it is therefore at their service so that they may efficiently carry out their duties. It has been demonstrated that having an LID is a counterweight that ensures the voice of the external supervisor prevails and that it has a positive impact on the company's performance.

“The effect of lead independent director on firm performance hinges on CEO–Chair duality. That is, for companies with CEO-Chair duality, the existence of a lead independent director is positively associated with improved firm performance. In addition, we find that the existence of a lead independent director decreases the risk taking of a company. The existence of a lead independent director is helpful in improving board monitoring effectiveness.”

Lead independent director: Impact on firm performance and risk taking; Chandar et al. (2014)

2.3. Governing bodies - Diversity: Diversity in terms of gender, nationalities and experience enriches the debate by the Board, increasing the Company's value. “Researchers and experts working in the corporate governance field concentrate their attention on two aspects; the first one is considering gender diversity as more women on boards, while the second one is the mix of backgrounds and expertise. Both have been considered as able to increase company value and avoid corporate risks.”

Gender diversity in the boardroom. Context and Spanish case; A. Giovinco (2013)

“This research is important because it presents the first empirical evidence examining whether board diversity is associated with improved financial value. [...] we find significant positive relationships between the fraction of women or minorities on the board and firm value.”

Corporate governance, board diversity, and firm value; Carter (2003)

B. Corporate Governance Practices:

2.4. Director knowledge and training: in order for directors to be capable of analysing the decisions taken by the management team, they should have broad general and specific knowledge of the company and it sector.

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“A lack of knowledge about the particular company means that independent directors cannot properly evaluate or meaningfully challenge the decisions they are asked to approve. […] As a result, the board´s ability to monitor is constrained.”

The cosmetic independence of corporate boards; Sharpe (2011)

“Directors with higher-level educational degrees are expected to have better general knowledge while those who hold dual jobs are similarly assumed to have better business knowledge and experience and those who participate in more continuing education courses are expected to have enhanced supervisory abilities.”

Board supervision capability and information transparency; Chiang et al. (2010)

2.5. Dedication required and practices: The supervision duty will be adequate only if directors are sufficiently dedicated.

Such dedication is ensured in several ways such as, for example, limiting the number of companies for which a director may be a member of the Board, increasing the frequency of Board meetings or having a minimum attendance requirement. “Boards with independent directors serving on multiple boards may be ineffective at monitoring agency conflicts between management and shareholders because these directors may be too busy.”

Independent directors and the propensity to pay dividends; Sharma (2011)

It has been empirically demonstrated that the dedication and/or effort on the part of directors is higher at companies with better reputations, since directors consider their position at those companies to be of higher relevance. “Given directors' limited time and energy, an understanding is needed of how they prioritize among competing directorship responsibilities. […] Shareholders of firms that have more directors who consider this their most important directorship stand to benefit from the greater effort these skilled directors are likely to make.”

Independent director incentives: Where do talented directors spend their limited time and energy?; Masulis et al. (2013)

2.6. Transparency: it has been demonstrated that a high level of communication and transparency in general with respect to all stakeholders causes the market itself to act as a supervisor and company performance improves. It also causes a de facto reduction of one of the main motives for agency problems, which is asymmetrical information.

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“Information transparency allows stakeholders to determine the strength of corporate governance; when stakeholders can see information related to governance, companies are supervised via market forces.”

Board supervision capability and information transparency; Chiang et al. (2010)

“For a firm, greater transparency may reduce information asymmetry between investors and the firm, reducing its costs of capital”

Corporate reporting transparency, board independence and expertise, and CEO duality; Andrew et al. (2010) It is also been demonstrated that certain profiles on the Board improve the transparency of a company in the market and, ultimately, the market's perception of the company.

“Results indicate that limiting insider participation on boards while encouraging the addition of independent financial experts to boards may improve corporate reporting transparency, but splitting the role of CEO and chairman may not”

Corporate reporting transparency, board independence and expertise, and CEO duality; Andrew et al. (2010)

2.7. Control of directors' conflicts of interest: to preserve the independence of a Board, and so that it is a prevailing and valid discussion tool, conflicts of interest must be controlled and mitigated, if necessary. “Another factor that weakens the institution of independent directors (ID) is the acceptance of IDships by individuals who are beset with conflicts of interests. While promoter wouldn’t mind having IDs who may have conflicts of interests, it is the responsibility of the IDs to resist the temptation of becoming IDs in such companies. Again the law might have set certain limits regarding the permissible level of pecuniary conflicts of interests, which should not be taken as an excuse by the prospective IDs.”

Is The institution of independent directors irrelevant?; T. Narayanan (2012)

2.8. Rotation: the adequate rotation of independent directors prevents a potential loss of the prevalence of an external viewpoint that must be provided to the company. “A serious concern is the long tenures served by the independent directors. Some experts feel that such long tenures will lead to a situation where they are likely to act more as insiders. Patty Stonecifer, CEO of Bill & Melinda Gates Foundation and Amazon board member, has observed that “if directors serve too long, it becomes very difficult for them to discharge their watchdog function. After many years on the board, they can become so associate with the management that they are the ones who need to be watched! […] Carter and Lorcsh felt that a long service helps a director to understand the company better, but emotional attachment means she can’t be truly independent.”

Is the institution of independent directors irrelevant?; T. Narayanan (2012) 12

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2.9. Remuneration: An adequate compensation policy for the executive group aligns the interests of managers and shareholders.

Among the existing tools to align the compensation policy with this maxim are: i) share-based compensation associated with the market valuation of the company, ii) variable incentives associated with performance, and iii) long-term incentives to ensure the creation of sustainable value. “A well-designed remuneration package for executives, will accomplish three things: attract the right executives at the lowest cost; retain the right executives at the lowest cost; and motivate executives to take actions that create long-run shareholder value and avoid actions that destroy value.”

Remuneration: Where we’ve been, how we got to here, what are the problems, and how to fix them; Murphy et al. (2004) “Compensation, especially stock-based compensation, would seem a quite promising way to align senior managers with shareholders, and thereby reduce the vertical corporate governance problem. The theory is simple: managers get, say, options to buy the company’s stock. If their management of the firm induces stock price to rise, the managers cash in valuable options and make money. If their management of the firm doesn’t induce its stock price to rise, then the managers’ options are without value.”

Institutions of corporate governance; Roe (2004) “A strong tie between CEO compensation and firm performance suggests good governance and board effectiveness in aligning shareholder and CEO incentives (Jensen and Murphy, 1990, Kaplan, 1994). A strong sensitivity of CEO compensation to performance is widely considered a desirable feature for mitigating conflicts of interest between the CEO and shareholders. Since boards negotiate CEO compensation, high pay performance sensitivity reflects favorable board effectiveness.”

Busy directors and firm performance: Evidence from mergers; Hauser (2013)

C. Exogenous factors:

In addition to the preceding corporate governance tools, there are other external variables not specifically defined for company managers but which do influence, to a greater or lesser extent, the existing agency problem potential.

2.10. Shareholder composition: active investors such as institutional shareholders or blockholders provide efficient supervision by imposing a higher level of scrutiny due to their high sophistication and professional knowledge of the sector and the company. “Institutional ownership is expected to moderate the relationship between CEO duality and financial performance, with the relationship being positive in presence of pressure-resistant ownership.”

The effect of institutional investor type on the relationship between CEO duality and financial performance; Wahba et al. (2014)

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“Proxy fights, hostile takeovers, independent directors, institutional investors, and, most recently, hedge funds and activist shareholders have all held the mantle of favored agency-cost-reducer at one time or another.”

Deconstructing Equity: Public Ownership, Agency Costs, and Complete Capital Markets; Gilson et al. (2008) “External governance mechanisms, represented by institutional ownership and outside blockholder ownership, are negatively related to agency costs, suggesting that independent outside monitoring of management is effective.”

Corporate governance and capital structure dynamics; Morellec et al. (2010) “Because they own large blocks, and have an incentive to develop specialized expertise in making and monitoring investments, institutional investors could play a far more active role in corporate governance than dispersed individual investors traditionally have done. Institutional investors holding large blocks thus have more power to hold management accountable for actions that do not promote shareholder welfare.”

Shareholder activism and institutional investors; Bainbridge (2005)

2.11. Competitive environment: a competitive and/or regulated environment provides de facto assurance of a higher level of supervisory effort of management, whether due to management itself (due to the higher levels of pressure deriving from high competitiveness), or from regulators in the case of regulated markets. “We find product market competition makes independent directors more productive in enhancing firm value. When competition is strong, management is more active with new business initiatives/proposals which require board approval, leading to more frequent board meetings. Greater interaction with management provides independent directors with more opportunity to offer valuable advice and information necessary to monitor effectively.”

Does competition enhance independent director productivity; Kang et al. (2012) “While firms in non-competitive industries experience a significant drop in operating performance after the laws’ passage, firms in competitive industries experience virtually no effect, which is consistent with the notion that competition mitigates managerial slack.” Does corporate governance matter in competitive industries?; Giroud (2009)

3. There is no evidence as to what the best alternative is to ensure the effective separation of supervision and management.

3.1. There is no correlation between the existence of an executive or independent chairman and company performance.

 Spanish companies: The largest companies by capitalisation do not have an independent chairman but nevertheless are leading companies in their sectors.

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Figure 1. Market capitalisation evolution of companies in the Ibex 35 2004-201412

Executive Independent % Others 20 Jazztel 18 Viscofan Inditex

2014 16 REE - 14

OHL Mapfre Growth 12

2004 Ferrovial Abengoa Largest in in 10 Enagas capitalisation 8 Bankinter Gas Natural 6

verage Sabadell Abertis a 4 Santander Capitalisation ACS

2 BBVA Mediaset 0 Repsol

Gamesa Market

-2 Popular Telefonica Compound Indra Acciona FCC -8 Sacyr 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 EUR MM IBEX 35 by market capitalisation in 2014* (*) Data as of 9.12.2014

Source: Bloomberg, Corporate websites, PwC analysis.

It is also important to remember that the Spanish Unified Code of Good Governance, as is the case in other countries, does not establish or suggest a recommendation to have an independent chairman, which is coherent with the fact that companies have chosen governance models that mitigate agency problems using multiple other alternatives. This is also the case in other countries such as the United States.

 International companies: analysing the largest companies by capitalisation in the S&P Global 100 it may be observed that a wide majority have an executive chairman and, once again, no relationship between the type of chairman and performance is appreciated. Specifically, except the particular case of Apple, which has an independent chairman and is notable for its performance, the eight largest growth companies are led by an executive chairman.

12 Amadeus is excluded from the graph due to the fact that its public offering took place in 2010. 15

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Figure 2. Stock market capitalisation evolution of the main companies in the S&P Global 100 2004-2014

Executive Independent % Others 38 Apple 22

2014 Google

- 20 12

Growth Samsung

2004 10

in in Merck&Co 8

6 Coca-Cola P&G Chevron Novartis Johnson & Johnson average 4 JPMorgan Capitalisation Microsoft 2 Wal-Mart Exxon 0 IBM Pfizer

Market -2 Compound

-4 Citigroup GE -6 140 160 180 200 220 240 260 280 300 320 340 360 380 640 Main S&P GLOBAL 100 companies by market EUR Bn capitalisation in 2014* (*) Data as of 15.12.2014 Source: Bloomberg; PwC analysis.

 Numerous empirical studies have also concluded that there is no causality concerning this question with respect to an analysis of the dual figure (the same person holding the position of CEO and Chairman) at companies. Studies by geographic regions conclude:

o Europe: a recent analysis of European companies included in the top 200 of the Global Fortune 50013 (62 European companies in France, United Kingdom, Germany, Spain, Austria, Denmark, Italy, Luxembourg, Holland and Norway, 55% of which have dual CEO-Chairman positions) conclude that there is no effect on the companies’ financial performance by the duality.

o United Kingdom: a study of 1,124 industrial companies on the London Stock Exchange14, analyses the impact of having dual or separate CEO-Chairman positions on the ROA recorded by companies, reaching the conclusion that the different models have no correlation whatsoever with the profitability of the companies.

o United States: an analysis of 1,053 companies in the S&P 1500 and Fortune 1000 15 regarding the impact of a change in governance on dividends and buy recommendations, concludes that the effect of separating the positions is even negative when the company's performance has been satisfactory.

13 CEO duality and firm performance: an empirical study of EU listed firms; Huining Chen (2014) 14 One man two hats, What’s all the commotion!; Jay Dahya (2005) 15 CEO-Board Chair separation: If it ain’t broke, don’t fix it; Krause and Semadeni (2013) 16

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3.2. Companies with an executive chairman do not receive less support from shareholders than those that have an independent chairman, and there is a tendency for the opposite situation.

 In Spain, the high level of no votes by shareholders is notable at companies that have an independent chairman compared to that seen in the main companies in the Ibex 35 that have an executive chairman. Figure 3. Average rejection votes obtained at the latest AGM of the main companies in the Ibex 35 and companies with an independent chairman (%)

Percentage of rejection votes compared to the total number of votes 14% 13.35% Executive 12% Independent 10% 8% 7.59%

6% 4% 1.89% 2% 1.61% 0.68% 0.75% 0.31% 0%

Source: Corporate websites; PwC analysis.

 Internationally it has been shown that there is no clear relationship between the type of chairman and the support obtained by shareholders at the AGM, as is demonstrated by the no votes cast at the largest companies by capitalisation in the S&P Global 100. There are cases of companies with an independent chairman such as Apple that have a relatively low no vote percentage, but also of companies with the same type of chairmen that have high no vote percentages, such as Microsoft.

Figure 4. Average rejection votes cast16 during votes at the latest shareholder AGM by the largest companies by capitalisation in the S&P global 100, based on their type of chairman (%)

Percentage of rejection votes compared to the total number of votes 10% 8.40% 8.19% Executive 8% Independent 5.80% 6% Others 4.30% 4% 3.58% 3.25% 3.49% 2.10% 2%

0%

Source: Corporate websites; PwC analysis.

16 To make this comparable with Iberdrola, the "Shareholder Proposals" voted on at General Meetings have not been taken into consideration. These proposals present high rejection levels by shareholders, on the order of between 65% and 90%, on average. 17

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3.3. Recognition of good governance goes beyond the presence or absence of an independent chairman.

 For example, of the Spanish companies in the DJSI World index, the six highest ranking in the ISS “Quickscore” have an executive chairman. Figure 5. Ibex companies with a presence in the DJSI World (Dow Jones Sustainability Index) and rankings on the ISS Quickscore (Institutional Shareholder Services) [11- 2014]

Score Score IBEX 35 companies with a presence in the DJSI World

Sc. 5 Sc. 4 Abertis Gas Natural Sc. - Sc. 4 Acciona Iberdrola Sc. 6 Sc. 2 Amadeus Inditex Sc. 1 Sc. - BBVA Indra Sc. 3 Sc. - Banco Santander Endesa Sc. 5 Sc. 6 Caixabank Ferrovial Sc. 7 Sc. 4 Enagas Repsol

Source: Institutional Shareholder Services (ISS).

 Large international companies that are recognized as companies with good corporate governance practices have an executive chairman and explain their model in their annual reports or proxy statements.

Figure 6. Explanation by companies with high capitalisation with a non-independent chairman

Main pillars of support for the Company Corporate governance tools chairmanship model “Combining the Chairman and CEO “Our independent Directors positions under the strong determined that for effective board leadership of Mr. Gorsky will governance it is important to have benefit all our stakeholders.” an independent Lead Director.” “Gives clear focus for management “The independent Directors of the to execute the Company´s strategy, Board annually elect a Presiding business plans and productivity Director from among the efforts.” independent Directors.” “Mr. Immelt’s pay reflects the “An independent director serves as MDCC’s view of his outstanding the Board´s lead director, with leadership and, consistent with broad authority and responsibility

prior years, represents a balanced over Board governance and independent chairman - approach to compensation.” operations”

“In March 2012, the Board, taking

non

model into consideration the “The Lead Director works with the demonstrated efficiencies of Chairman of the Board and other having the CEO also serve in the role Board members to provide strong, of Chairman of the Board, appointed independent oversight of the Mr. Almeida, our President and Company’s management and CEO, to serve as Chairman of the affairs.” Board.” “The Board believes that these experiences and other insights put “The Board believes the Presiding the CEO in the best position to Director can provide effective Traditionally under a Traditionallyunder provide broad leadership for the independent Board leadership.” Board.” 18

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“Mr. Cote’s combined role enables “To ensure the appropriate balance decisive leadership, ensures clear between Mr. Cote’s role as the accountability, and enhances the combined Chairman and CEO and Company’s ability to communicate board oversight, we have its message and strategy clearly and implemented a Presiding Director consistently” system.” “As lead independent director, Mr. Tessler has the authority to call “Mr. Wexner is also the Company’s meetings of the independent largest stockholder.” directors, at which he serves as the chairman.” “The board argued that its Lead “Mr. Iger will provide excellent Independent Director (LID) leadership of the Board in the ensured adequate oversight over the performance of its duties” CEO and management team.” “Mr. Graham serves as our Lead “He is our largest and Independent Director and presides controlling stockholder.” over portions of regularly scheduled meetings.” “Combining the Chairman and CEO positions is the right corporate “The Board recognizes the governance structure for the

importance of strong independent Company at this time because it leadership. Accordingly, the Board most effectively utilizes Mr. Stumpf’s has appointed a Lead Director extensive experience and knowledge who performs the duties and and provides for the most efficient responsibilities described below” leadership of our Board and Company.” “The independent Directors believe that Mr. Read, Pfizer’s Chairman and CEO, has extensive experience in “The independent Directors have and knowledge of the research-based also selected George A. Lorch to biopharmaceutical industry and serve as Lead Independent continues to demonstrate the Director—a position that, at Pfizer, leadership and vision necessary to entails significant responsibility for

independent chairman independent model lead the Board and the Company in independent Board leadership.” - our challenging industry and

non macroeconomic environments.” “The Board believes that having the “When the Board selects the CEO to CEO also serve as Chairman at this also serve as Chairman, the time fosters an important unity of independent Directors select a Lead leadership between the Board and Director from among themselves, the Company.” currently Mr. Denham.” “The Board believes that having a single person acting in the capacities of chairman and CEO promotes “The Board also has an Recentchange a to unified leadership and independent Lead Director […] direction for the Board and who chairs the Board executive executive management and allows sessions, and thereafter provides for a single, clear focus for the feedback to the chief executive chain of command to execute the officer.” Company’s strategic initiatives and business plans and to address its challenges.”

Source: Proxy statements issued by the companies.

 There are recent cases of General Meetings at large-cap companies at which shareholders have issued a majority vote against the appointment of an independent chairman and the separation of the CEO-Chairman positions.

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“Coca-Cola shareholders approve executive equity plan, reject independent chairman. A shareholder proposal calling for an independent chairman of the company was rejected by a vote of 68% against, despite support by major pension funds.” Pensions & Investments, 2014

“The company sustained a high-profile separation of chairman/CEO roles in 2005, but in 2012, it recombined the roles under the leadership of a different CEO. In 2013, Disney shareholders rejected a proposal to separate the roles with a 65% “against” vote. In its recommendation to vote against the proposal, the board argued that its lead independent director (LID) ensured adequate oversight over the CEO and management team.”

“Combined Chairman/CEO Roles: Easier Than You Think” Forbes 2014

3.4. This lack of evidence is coherent with the understanding of corporate governance as a sophisticated discipline that impedes applying the same governance model to all companies. The model must be adapted to the specific circumstances of each case, as was explained above.

Experts in corporate governance have reached the conclusion through numerous studies that there is no single optimal corporate governance structure applicable to all companies, and that those structures vary in accordance with the context of each company. The corporate governance structure is developed as an efficient manner of responding to the circumstances in the sector and the scenario in which each company operates.

 These studies confirm that imposing a common governance structure to resolve the agency problem may destroy company value.

“The overall results suggest that imposing the same board structure for all companies independently of their specific characteristics and needs is likely to reduce the value of firms that may be forced to depart from corporate governance structures which have been successful.”

Board Structure and Agency Costs; Lasfer (2012)

“Overall, our results show strong relations between board structure and firm characteristics, suggesting that any regulatory framework that imposes uniform requirements on board structure could be ill-conceived.”

The determinants of board structure; Linck Netter and Yang (2008)

 Experts in this area confirm the need to adjust corporate governance guidelines to the circumstances and characteristics of each company.

“The optimal design for corporate governance varies between contexts.”

Does independent board of directors really make a difference?; Wang (2014)

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“One problem with corporate governance, and this is a challenge to academics and code makers who want to understand causal relationships and develop structural prescriptions, is that it ultimately it is an issue which is to be dealt with company by company, board by board, as each individual board member steps up to the plate or doesn’t. Structural features of governance are a very poor indicator of real quality of checks and balances in practice.”

Corporate governance and the current crisis; Haspeslagh (2010)

 Analysts of this discipline advise of the need for each company to evaluate and choose the model that best adapts to them.

“The experienced nonexecutive chairs we spoke with, as well as most governance observers, underscore that the model may not be appropriate for every board and that each board should evaluate for itself whether it makes sense for their company’s situation.”

The Nonexecutive Chairman: Offering New Solutions; Spencer Stuart (2008)

 International companies, leaders in corporate governance matters, declare that they are not tied to one model or another but rather evaluate both options and choose the most adequate based on the circumstances.

“Our charter documents and policies do not prevent our CEO from also serving as our Chairman of the Board. Our Board evaluates its leadership structure and elects the Chairman and the CEO based on the criteria it deems to be appropriate and in the best interests of the Company and its stockholders, given the circumstances at the time of such election.”

Proxy Statement from Qualcomm, a top 10 company with respect to shareholder relationships in accordance with the ranking from Proxy advisor ISS.

4. Iberdrola has a decentralised governance model that separates management from supervision and also has a governance system with a counterweighted executive chairman, defined based on a group of corporate governance practices ideally designed to respond to the demands of heterogeneous shareholders and with a high level presence of foreign institutional investors.

In addition to the governance model and structure, Iberdrola has a series of corporate governance practices and it is conditioned by certain exogenous factors, indicated in this section, that influence the efficiency of the Company's governance over supervision efforts and reduces potential agency problems.

A. Governance model and structure:

4.1. Structure of its governing bodies - Governance model: Iberdrola's governance model assigns the listed holding company (Iberdrola, S.A.) the supervisory duty and the sub-holding companies in each country coordination duties, and management remains in the hands of the lead business companies. The chairman of the holding company does not have executive capacity at the lead company and is only present in the supervisory and coordination bodies at the holding company and in two of the five 21

13 February 2015 sub-holding companies and therefore the executive efforts focus on the development of supervision and coordination.

 The duties of the Holding company are to supervise the business, define the company's strategy, design the governance model and take relevant and critical decisions. The executive directors of the Holding company cannot take management decisions at the lead business companies, which is the maximum reflection of the separation of the supervisory and management duties.

Iberdrola's governance model has been profoundly revised and evolved over the past few years. The spirit that has guided this modification was obtaining the decentralization of operation execution so that it falls closer to each geographic area and each business segment.

Accordingly, over the past few years a company structure has been created that separates supervisory and management duties. The companies have been configured into 3 levels in this respect:  Iberdrola S.A. or listed parent company: the Parent Company's duty focuses on the establishment of the Group's policies and strategies and the basic guidelines for its management, as well as in-depth supervision of the development of those policies, strategies and guidelines as well as the decisions regarding matters of strategic relevance at the Group level. Continuous and intense supervision is necessary for the decentralization of the model.

 Sub-holding companies: these companies group together the shares in the lead business companies that carry out their activities in the various countries in which the Group operates and they centralize the rendering of common services to those companies.

The sub-holding companies are responsible for communicating, implementing and ensuring the monitoring of the Group's policies, strategies and general guidelines in each of the countries in which it operates, taking into account the characteristics and singularities of one of them. In this respect, the sub-holding companies facilitate the coordination of the companies in which they hold a stake, while also respecting the provisions of regulations regarding the separation of regulated activities.

 Lead companies: The third level of the Group's governance system consists of the lead companies in each business area (the regulated business, regulated business, renewables, etc.) and for each relevant geographic area. These companies assume the decentralized executive responsibilities for the Group's businesses, assuming the ordinary and effective management of each of the businesses, as well as their ordinary control. The level of sophistication arising with respect to having Boards at the second level subsidiaries is infrequent. Other listed companies that also choose a decentralized responsibility model do not attain the depth of this model. 22

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Not only are Boards created at each company, but they are configured with characteristics of a listed company with high corporate governance standards. The Boards therefore have a significant percentage of independent directors. The presence of this type of director encourages good management and supervision of the business processes, in addition to providing an external viewpoint to the company. In addition, most of the sub- holding companies have a CEO with executive duties.

Independent directors form part of the audit committees at those companies that have such a committee. Most of these committees have a majority of independent directors.

Iberdrola's governance structure, described at a high level in the Policy for the definition and coordination of Iberdrola Group and bases of the corporate organisation, specifies the assignment of roles to each of the key decision areas making up the activities of these companies (see Appendix I for further details). The 8 main decision areas are: . Management and control of the ordinary business activity. . Identification and materialization of business investments. . Approval of purchases. . Application of results and management of the capital structure. . Preparation and communication of the financial reporting package. . Modifications to the corporate governance system and monitoring of risk limits. . Supervision of the separation of activities. . Appointment of directors and executives.

The executive directors of Iberdrola, S.A. do not have the capacity to take management decisions at the lead business companies but rather they execute the ordinary management and control efforts within their businesses. At these companies the management decisions are taken jointly between a person responsible for the business and the Control Department or Legal Services.

 This separation of duties is effective, as is certified annually by an external evaluation of the governance model.

In order to ensure compliance with this model, Iberdrola obtains an annual evaluation from an independent external expert. This year the composition and operation of the boards of directors and committees at all companies were evaluated using criteria applicable to listed companies, with the intention of obtaining integral corporate governance excellence and reaching every level of management.

This evaluation shows that Corporate Governance and Regulatory Compliance Policies are met with respect to the decentralization of the management of the business and the separation of the supervision and control areas at the Parent Company and at the sub-holding companies, and that execution is carried out by the lead company. It covers the 8 decision areas described above, verifying that each company effectively meets its responsibilities and that the Parent Company does not intervene in the management of the businesses. The results

23

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obtained from these evaluations have been very positive in all of the years reviewed and no serious failures to comply were detected that could put into question the spirit of the governance model and improvements were seen over time.

4.2. Governing bodies - Independence/Counterweights:

 Board independence: Iberdrola has a board with a wide majority of independent directors, specifically 11 of the 14 directors are independent, and this ratio falls within the most notable companies.

o The evaluation of the composition of the board performed by an external expert in 2014 reaches the conclusion that Iberdrola's board has an ideal composition. The high number of independent directors is notable and based on a comparative analysis 17 the company has the highest percentage of independent directors. The percentage of independent directors is in line with the most notable international companies and exceeds that of all of its European comparables.

o The percentage of independent directors on Iberdrola's Board of Directors provides a voting majority that is sufficient to take any decision that is necessary to defend shareholders, including censuring the executive chairman.

 Committee independence: Iberdrola's Board committees are completely formed by independent directors.

o Iberdrola is the only domestic company in the comparative analysis17 carried out at which the Nominations and Compensation Committee (NCC), the Corporate Social Responsibility Committee (CSRC) and the Audit and Risk Supervision Committee (ARSC) fully consist of this type of director.

 Specially Empowered Director (SED): Iberdrola has an independent director with broad special powers. This counterweight ensures the prevalence of external supervisory criteria. The SED also presides over the NCC. “In the event that the chairman of the Board of Directors has executive duties, the Board of Directors will empower, at the proposal of the Nominations and Compensation Committee, an independent director to: a) Request the chairman of the Board of Directors to call a meeting of this body when deemed advisable. b) Request the inclusion of matters in the agenda on the day Board Meetings are held in the terms of Article 28 of this Regulation. c) Coordinate and hear the opinions of external directors. d) Direct the evaluation of the Chairman of the Board of Directors.”

17 For the purposes of this section, the following company sample is used: companies with best practices: Banco Santander, BBVA, Inditex, Gas Natural and Repsol among domestic companies and Intel Johnson & Johnson, Unilever, Vodafone and Allianz among international companies. Sample of comparable companies: Telefónica, Enagas, REE, Banco Popular and Banco Sabadell (shareholder composition profile) among domestic companies and Dominion, Centrica, Duke Energy, NationalGrid and Exelon, among international companies. 24

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Source: Board Regulations of Iberdrola, S.A. This role has been strengthened over the past few years with important milestones in that role such as the enrichment of the evaluation of the chairman through specific individual meetings by the SED with directors or coordination with the chairman to define the agenda covering the matters to be discussed at board meetings:

o For 4 years Mrs. Inés Macho has led the evaluation of the chairman, coordinating with an independent external evaluator. The Director holds meetings with directors on an individual basis to hear any concerns they may have regarding the operation of the Board, as well as to obtain their evaluation of the chairman's performance. o The considerations or proposals for improvements received from the directors over the past few years have been successfully implemented For example, during a round of meetings within the framework of the 2012 evaluation, the director suggested including more details regarding the impact of the financial crisis in board meetings. The following year included specific meetings in this respect. o Since 2012 this director works in coordination with the chairman to develop the agenda for the board meeting before the start of the year.

There are few domestic and comparable companies by sector that have a specially empowered director with a practical development level higher than Iberdrola.

4.3. Governing bodies - Diversity: Iberdrola's Board is diverse and balanced in terms of gender, nationalities and experience:

 Gender diversity: The high percentage of female directors on the board (36%) is also notable, and there is only one out of twenty one companies analysed that has a higher percentage than Iberdrola.

 Diversity of nationalities: with four foreign directors (21% of the board), Iberdrola is in a position that is higher than most of the companies analysed with respect to its national diversity. These directors provide the company with their view of key markets in which the Group operates.

 Experience: practically all directors have prior experience on the Boards of other companies and have industry knowledge, and most have experience in the energy or industrial sectors.

B. Corporate Governance Practices:

4.4. Knowledge and training: Iberdrola's Board is adequately trained and informed:

 Iberdrola has an orientation program for new directors, as well as an Overall training plan and specific committee training plans.

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 On an annual basis the directors meet with the SED and, among other matters, provide feedback regarding the content of these training plans to ensure their continuous improvement.

 Executives continuously appear before committees to not only report their work and results but also to present training information regarding diverse matters.

4.5. Required dedication and practice: Iberdrola ensures the dedication of its directors and they spend more time on those efforts than the average for the companies analysed.

 Iberdrola limits directors to participating in 3 Boards of Directors of listed companies.

 In 2013 (to make it comparable) 42 annual Board, NCC and ARSC meetings were held by Iberdrola, which is 1.5 times higher than the average for the companies analysed. As there are 14 members of the Board, the ratio of meetings to director is 1.4 times higher than the average.

4.6. Transparency: Iberdrola has received awards for its transparency.

 Iberdrola actively drives the involvement of its shareholders and their association with the company.

o Iberdrola was a pioneer in holding corporate governance road- shows, strengthening the association with its shareholders by establishing contact beyond the key moments such as the General Meeting, and using a philosophy that the Group calls "365 day Meeting". Its current "Involvement policy 3.0" takes a further step to involve company shareholders. o It provides incentives for shareholders to participate in the General Meeting by offering an attendance premium that increased attendance from levels of less than 50% in 2004 to more than 80% in the past few years. o Iberdrola's governance system is a vehicle for complying with the sustainability commitment and attaining social interests for the communities and territories associated with the company, as well as with its employees and other stakeholders.

 Iberdrola has been frequently recognized for its informational transparency.

o Among the most recent awards regarding corporate governance (which evaluate aspects associated with transparency and communications) are: the recognition of World Finance as the Spanish company with the best corporate governance practices, the Institutional Investor as the best European utility, top Spanish company and second in Europe and the Ethical boardroom as the best European utility in corporate governance.

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o Iberdrola also maintains its presence in the DJSI and is the only utility in the ranking since it was created in 1999. It is also in the FTSE4Good for the fifth consecutive year and in the New York Stock Exchange sustainability index that was created in 2013.

4.7. Control of director conflicts of interest: Iberdrola has strict rules and procedures for handling conflicts of interest within its Board of Directors.

Iberdrola's corporate governance system establishes:

 The obligation of directors to report the conflict and abstain from participating in any deliberations and voting on the matter concerned.

 The Company has the obligation to report to the market any conflict of interest situation in the annual corporate governance report and the half-yearly report on related-party transactions.

 Permanent conflicts of interest, such as structural competition situations block access to the Board of Directors in accordance with the law and Iberdrola's corporate governance system.

 Iberdrola makes use of ad hoc reports from external experts to evaluate the existence of conflicts of interest with respect to director candidates.

4.8. Rotation: In the case of Iberdrola,

 There is no independent director that has served for more than twelve years and the average length of service by Iberdrola's independent directors is less than six years.

 Directors' terms are for four years. At the time of each re-election, the Nominations and Compensation Committee analyses the profile of each director and ensures that no conflict of interest has arisen and that independence has not been lost.

4.9. Remuneration: Iberdrola's remuneration policy is conceived to align the interests of managers and shareholders, following a pay for performance spirit.

 The compensation policy for Iberdrola's executive directors follows the pay for performance policy. Executive directors receive a fixed annual amount based on the positions they hold. They also have the following incentive structure:

o Short-term variable remuneration associated with performance: mainly associated with performance concerning pre-set and quantifiable specific economic-financial, industrial and operating parameters aligned with business interests. Corporate Social Responsibility matters, such as personal performance, are also taken into consideration.

o Long-term variable remuneration: Iberdrola includes shareholder- approved delivery of company shares or options to shares or compensation

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rights associated with their value. Medium and long-term compensation plans have an orientation time horizon of three years.

 Design and approval of the remuneration policy

o The compensation policy and the subsequent settlement are published in the annual compensation report that is submitted for a consultation vote to shareholders on an annual basis and the percentage of no votes has been less than 1.5% in all of the past few years.

o The NCC was created in 1997 and is led by the SED and is entirely made up of independent directors, who analyse and bring the policy to the Board. It is therefore informed by a body completely consisting of independent directors.

o Iberdrola makes use of external advisors to obtain support for the evaluation of the performance of the indicators included in the variable systems in order to quantify the remuneration to be paid, as well as to supervise proposed remuneration models and to compare the compensation amounts. Over the past few years some of Iberdrola's advisors in this respect have been Spencer Stuart, Mercer and PwC, among others.

C. Exogenous factors:

4.10. Shareholder composition: Iberdrola has a disperse shareholder composition in which foreign institutional investments have great weight.

 The company has more than 600,000 shareholders. Twenty-five percent of shares pertain to minority shareholders and 55% to foreign institutional investors.  Nearly 80% of the shares held by institutional investors are held by foreign institutions, and it is the third Spanish blue chip company in terms of percentage.  It shareholder dispersion18 exceeds 65%, which puts it in fourth place among Spanish blue chips in terms of percentage.  It is ranked second in terms of shareholder dispersion after E.On.

4.11.Competitive environment: Iberdrola generates three fourths of its EBITDA from regulated businesses where, as is not the case in other markets, the regulators themselves exercise supervisory authority over management.

The decentralization of Iberdrola's governance model requires a permanent and sophisticated supervisory effort. This duty, which is attributed to the holding company, must be continuous and intense and requires leadership that necessarily involves a high level of professional commitment. The duties of the Chairman of Iberdrola, S.A. require a level of depth, presence and involvement with the work that requires this position to be understood and catalogued as "executive". The group of

18 Institutional shareholder dispersion has been calculated based on Brown's approximation to the Gini index multiplied by the percentage of institutional investors. 28

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counterweights and corporate governance practices in Iberdrola's Corporate Governance System completes this model and ensures the effective separation of duties.

5. The practical application of Iberdrola's governance model supports its validity and the company reflects better financial performance than its comparables and the model is supported by shareholders at General Meetings and by capital markets.

5.1. Financial performance: Iberdrola's performance is supported by its governance.

Iberdrola's model has demonstrated that it operates with a performance level (economic-financial evolution) that is better than its comparables. The main indicators are as follows:

 Evolution of the listed price19 vs comparables20:

i. Since 2001, Iberdrola's listed price has increased by 53,1%, compared with an average decline of -35,6% seen by its comparables, while the Euro Stoxx Utilities index fell by -5,3%. ii. There has been a slight decline in the share value over the past 10 years (-3.0%) while the Euro Stoxx Utilities index has fallen by -26.2% and the value of comparables declined by -39.4% on average. iii. Since 2010 there has been a decline in the share value (-3.0%), although much less than that seen by its comparables (-28.2%) and that of the Euro Stoxx Utilities index (-16.0%). Figure 7. Iberdrola's listed price vs. European comparables 2001-2014

2001=100%

300 Executive 280 Independent

260

240

220

200 Growth compared 180 to 2001*

160 Iberdrola +53% 140

120 E.STOXX -5% Utilities 100 GDF Suez -22% 80 E.On -27% EDF -29% 60 ENEL -34% 40 RWE -39%

20

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 (*) Except for EDF and GDF Suez due to the lack of data Source: Bloomberg; PwC analysis.

19 Data at 31 December each year 20 GDF Suez, EDF, E.On, Enel, RWE. GDF Suez is the result of the merger between Suez and GDF in July 2008. The information prior to that merger was taken from Suez S.A., which was larger than GDF before the merger. 29

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 Evolution of Iberdrola's capitalisation19 vs comparables20:

i. Since 2001, the Group has multiplied its value in terms of capitalisation by 2.7 times (average annual growth of +8.0%) while the average for its comparables was a -8.2% decline. ii. Over the past ten years it has grown by a total of +71.8%, while its comparables have seen a -21.7% decline in their capitalisation. iii. Since 2010 it has achieved total growth of +13.0% while its comparables saw an average decline in value of -26.1%. Iberdrola is, in fact, the only one among its comparables that has seen positive growth.

 Evolution of dividends: since 2001, total shareholder returns (TSR) increased 5 points to 9.5%21. Dividends per share (DPS) have doubled to €0.275 when the average for its comparables has decreased and earnings per share (EPS) increased by 46%, growing at a rate that is also higher than its comparables. Figure 8. Evolution of TSR, EPS and DPS at Iberdrola (EUR) 2001-2013

16 TSR 14 12 9.46 10 8 +5.13pp 6 4.33 4 2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Data per share

0.6

0.5 EPS (EUR) DPS (EUR)

0.4 0.37 0.33 0.33 0.33 0.34 0.33 0.30 0.3 +46% 0.27 0.27 0.28 0.22 0.19 0.2 +83% 0.15 0.15 0.17

0.1

0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E

Source: Bloomberg; analyst reports; PwC analysis.  Since 2001 (the year in which the current chairman and CEO was appointed) the company has multiplied its capital and reserves level by five, its assets and revenues by four, it has trebled its EBITDA and net profits and it has doubled shareholder remuneration. It has also progressively reduced its debt (net debt/EBITDA ratio) to the current value of 2.7 from around 4-4.5 times EBITDA.

21 Up to 2013 30

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Figure 9. Growth of Iberdrola's main performance indicators 2001-now.

Year 2001 Present

23.1 7.6 Total Assets(a) Equity(a) 4x 5x (EUR Bn) (EUR Bn) 92.4 36.0

2.4 8.3 EBITDA(b) Revenues(b) 3x 4x (EUR Bn) (EUR Bn) 6.8 32.3

0.15 0.9 Dividends(b) Net Profit(b) 2x 3x (EUR/Share) (EUR Bn) 0.27 2.3

(a) Present : as of a 30/9/2014 (b) Present: 2014 estimated Source: Bloomberg; PwC analysis.

 EBITDA growth22 vs comparables20: i. Since 2001, Iberdrola's EBITDA has grown at an average annual rate of +8.4%, which is three times higher, while on average its comparables have grown at a rate that is 5 points lower (+3.5%). ii. Over the past ten years, the average annual growth rate of Iberdrola has more than doubled that of its comparables (+8.1% vs. +3.1% on average). iii. Since the last re-election (2010) the Group has maintained its EBITDA (- 0.1%), in an environment in which its comparables have seen a decline in their EBITDA at an average annual rate of -5.1%. Figure 10. Iberdrola's EBITDA vs. European comparables 2001-2014

EBITDA Growth 2001-2014

Executive EBITDA (EUR MM) Independent 18,000

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0 -5 0 5 10 15 20 25 70 75 80 85 90 95 100 105 110 115 120 125 130 135 140 170 175 180 185 190 EBITDA absolute growth 2001-2014 (%) Source: Bloomberg, Corporate websites, PwC analysis.

 Asset growth21 vs comparables20: i. Since 2001, the rate of asset growth trebled that of its comparables (+11.3% vs. +3.7%).

22 Comparison of complete financial years. 31

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ii. Over the past ten years, the rate of asset growth has also almost trebled that of its comparables (+13.1% vs. +4.8%). iii. Since 2010 it has maintained asset volume (-0.4%) while its comparables decreased at an average annual rate of -1.8%. Figure 11. Iberdrola's assets vs. European comparables 2001-2014

Total assets growth 2001-2014

Executive Total assets (EUR MM) Independent 260,000 240,000 220,000 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 -10 0 10 20 30 40 50 60 70 80 90 170 180 280 290 300 310 Total assets absolute growth 2001-2014 (%)

Source: Bloomberg, Corporate websites, PwC analysis.

 Evolution of Iberdrola's capital and reserves21 vs comparables20: i. Since 2001, capital and reserves increased at an average annual rate of +12.8%, five times higher, while its comparables grew at a rate of +4.6%. ii. Over the past ten years it has trebled the growth rate of its comparables (+16.1% vs. +5.2%). iii. Since 2010 it has maintained 3.3% growth while its comparables saw a decline at an average annual rate of -4.7%.

Figure 12. Iberdrola's capital and reserves vs. European comparables 2001-2014

Equity growth 2001-2014

Executive Equity (EUR MM) Independent 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 -3 -2 -1 0 1 2 3 4 5 6 7 8 150 151 152 153 154 155 156 157 158 159 373 374 375 376 377

Equity absolute growth 2001-2014 (%)

Source: Bloomberg, Corporate websites, PwC analysis.

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5.2. Strategic decisions: the company has taken strategic decisions in terms of market and business positioning that have allowed Iberdrola to be in a better position today.

 In 2000 Iberdrola generated 99% of its EBITDA on production and distribution in Spain.

 Starting in 2006, Iberdrola implemented an international diversification strategy consisting of a series of acquisitions, notably Scottish Power (UK), Energy East (USA) and Elektro (Brazil). These acquisitions were well received by the markets and applauded by important financial analysts. Figure 13. Analyst opinions regarding Iberdrola's main acquisitions.

2006 2007 2011

“An Iberdrola/Scottish Power combination represents a further “Elektro is a fully regulated sector consolidation in line with “The importance of this deal is business in one of the most the vision of the EU Energy not at the price level but rather populated States in the country Commission. The deal’s strategic the strategic positioning in the that adds critical mass and a rationale rests in optimal US market, the company’s size base for future growth in the diversification in a fast- and its better balance between country, and enjoys a stable and integrating European energy regulated and non-regulated predictable stream of cash flows market. In short, with a activities. The acquisition of with a significant low-risk” combination of the two entities, Energy East will allow Iberdrola BPI, Ene. 2011 we have a ‘global champion’ in to achieve an even better balance one swoop.” between the contributions from “Iberdrola wants to further ING Bank, Nov. 2006 regulated and non-regulated strategically raise its exposure to activities after the acquisition of fast-growing Brazil, thus “We see strategic rationale to Scottish Power, and to build up lowering the weighting of Spain this EPS enhancing deal, that the contribution from the US and liberalized activities. Overall will result in a larger, market to a reasonable level. we believe the deal looks positive geographically more diversified This means that the annual and makes strategic sense as it company, with less emerging performance of its different increases the exposure to market weighting, biggest businesses is very predictable regulated and growing business, renewables player in the world and stable.” and it will be funded with debt and higher exposure to regulated Fortis, Jul. 2007 and should be EPS enhancing” activities. Just from a financial Deutsche Bank, Mar. 2011 angle the deal looks attractive.” Deutsche Bank, Nov. 2006

Source: Analyst reports gathered by Thomson Reuters.

 As a result of this strategy, today Iberdrola is a diversified company in terms of activities and geography, with low risk due to its limited exposure to non- regulated businesses. Figure 14. Breakdown of Iberdrola's EBITDA by region and type of activity as set out in the Strategic Plan 2014-2016.

Recent analyst opinions 40% Network 48% “Its regulated profile stands out, weighing regulated businesses Regulated 77% about 20 percentage points above the European average, 25% which allows the company to have greater leverage margin” Generation and 30% Commercialisation Banco Santander, Nov. 2014

21% “Show s a far more regulated profile than its comparables, Latam Renewables 22% Non-regulated 23% implying a more demanding RoW 13% multiples and closer at TSOs” 1% Mirabaud, Oct. 2014

EBITDA EBITDA by EBITDA Business by Activity by Region Source: Iberdrola information.

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5.3. Recognition: the chairman has been the primary driver of Iberdrola's development of the governance model and system. This development has allowed the company to occupy the top positions in the best good governance rankings.

 Iberdrola obtains many of the best recognition due to its management and good practices:

‘Best Chief Executive Officer (CEO) in European utilities according to the 2014 All-Europe Executive Team ranking’ to Don Ignacio S. Galán

Commander of the Most Excellent Order of the British Empire granted by Her Majesty The Queen Elizabeth II to Don Ignacio S. Galán

ELEKTRO, best energy distribution company in Brazil

IBERDROLA, best European utility, first Spanish company and second of Europe

‘Best Chief Financial Officer (CFO) in European utilities according to the 2014 All -Europe Executive Team ranking’ to Don José Sainz Armada

‘Best Investor Relations director of European utilities according to the 2014 All-Europe Executive Team ranking’ to Don Ignacio Cuenca

IBERDROLA, ‘Responsible Capitalism’ award

IBERDROLA, the Spanish company with the best corporate governance practices

IBERDROLA, Honourable Mention

IBERDROLA, one of the most ethical companies in the word, according to the 2014 World’s Most Ethical Company ranking

IBERDROLA, ‘2014 Computin Award in the areas of R&D and IT’

IBERDROLA, Capital Humano award in the Internal Communication category

ELEKTRO, ‘Ibero-American Quality Award 2014’

ELEKTRO, best company to work for in Brazil in 2014

IBERDROLA USA, ‘Ethie Award 2014’

 Its market position is also recognised with respect to corporate governance and CSR:

This evolution has allowed Iberdrola to be included in the main CSR indexes and rankings. As has already been indicated, the company has been selected to form part of all of the editions of the Dow Jones Sustainability Index (DJSI) and it was the top utility with nuclear assets selected by the FTSE4Good index.

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Numerous studies conclude that there is a positive correlation between Corporate Social Responsibility and financial performance.

“The results indicate that the sign of the relationship (between Corporate Social Responsibility and financial performance) is positive and statistically significant, supporting the view that socially responsible corporate performance can be associated with a series of bottom-line benefits.”

Corporate social responsibility and financial performance; Tsoutsoura (2004)

“In general, we find evidence that higher levels of CSR disclosure are associated with higher share prices.”

Corporate social responsibility: Country-level predispositions and the consequences of choosing a level of disclosure; Villiers et al. (2014)

The Company has also maintained a recurring presence in indexes and rankings such as the Carbon Disclosure Leadership Index, the Corporate Reputation Business Monitor (Merco), the NYSE Euronext, the Sustainability Yearbook 2014 and the Newsweek Green Ranking and Corporate Knights.

Finally, in 2014 Iberdrola entered into two new indexes: Climate Performance Leadership Index 2014 and Water CDP. Although not yet made public, recently Iberdrola received an award for the best corporate governance in Spain from World Finance 2014 and an award for the best corporate governance among European utilities in 2014 from Ethical Boardroom Magazine.

5.4. Shareholder support: support for the resolutions submitted for shareholder votes has been high and it exceeds that received by the rest of the Spanish blue chips.

No votes as a percentage of the total votes cast by shareholders at Iberdrola's General Meeting have been compared to the 5 largest Spanish companies in terms of capitalisation. The average no votes against resolutions adopted by Iberdrola's shareholders in 2014 was 0.31% of the votes cast, which is lower than the average of 1.4% for these companies. Figure 15. Comparison of the rejection votes cast compared to the total number of votes issued at the latest AGM held by the main Spanish companies.

Percentage of rejection votes compared to the total number of votes 4.0% 3.5% 3.0% Average ex- 2.5% 2.04% Iberdrola 1.89% 2.0% 1.61% 1.5% 1.4% 1.0% 0.68% 0.75% -1.1pp 0.5% 0.31% 0.0%

Source: Corporate websites.

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There has also been notable shareholder support for the annual compensation report that is submitted for a consultation vote to shareholders on an annual basis and the percentage of no votes has been less than 1.5% in all of the past few years.

5.5. Support from independent directors: The SED's report relating to directors' evaluation of the chairman in 2013 (latest available to date) shows that the directors emphasise the leadership of the chairman, his vision and dedication to the company.

 The directors consider that the chairman is managing the economic environment in Spain and in the other countries in which it operates very well and that adequate strategic measures have been taken given the situation.

 In prior years (2011 and 2012) directors also provided evaluations and the conclusions were very positive.

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Appendix I – Details regarding Iberdrola's governance model I/II Decision Parent company's Sub-holding Lead companies' role areas role companies' role

Management Preparation of Strategic organisation Application of the strategic and control of strategic guidelines and coordination of the guidelines approved by the the ordinary for the Group. subsidiary lead companies, in Group during the business coherence with the plans ordinary management activity. approved by the parent of its business and company. subsequent monitoring and follow-up of the results obtained.

Identification Recording of the most Recording of the most Identification of and relevant investment relevant investment projects investment materialization projects. executed by its subsidiary opportunities, of business lead companies approval and investments. execution of the investment and reporting of results.

Approval of Without Board Approval of the purchases Approval of the purchases purchases. participation that pertain to the area of made by the lead company common services rendered to its lead companies

Application of Resolution of the Raising of the proposal to Raising of the proposal results and application of results the application of results to apply results for the management of Approval of the to the parent company. sub-holding company to the capital proposals to issue and Resolution to apply the which it reports. structure reduce capital or results obtained by the Execution of the debentures by lead companies. operations to issue or subsidiaries. Execution of the reduce capital and the operations to issue or issue of bonds and reduce capital and the issue financial debentures that of bonds and financial the parent company may debentures that the parent delegate. company may delegate and which affect the sub-holding company.

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Decision areas Parent company's Sub-holding companies' Lead companies' role II/II role role

Preparation and Recording of the Preparation and supervision of Preparation and supervision of communication reports prepared by the the integrity and sending to the the integrity and sending to of the financial sub-holding companies parent company of the the sub-holding company to reporting Approval of the subgroup's consolidated which they report of the package. consolidated quarterly and annual quarterly and annual accounts accounts, directors' report and accounts, directors' report and the notes to the accounts the notes to the accounts Approval from the prepared by the Audit prepared by the Audit external auditor of its Committee Committee. sub-holding companies Recording of the financial reports regarding the lead companies. Approval of the appointment of the external auditor for its lead companies.

Modifications to Preparation of the Approval/adoption/recording of Approval/adoption/recording of the corporate General Risk Policy the modifications to the the modifications to the governance and approval of the risk Governance System. Governance System. system and policy for each lead Identification of the main risk Identification of the main monitoring of company. limits. risk limits. risk limits. Supervision of Establishment and monitoring of Establishment and monitoring of compliance with the mechanisms that allow its mechanisms that allow its risk limits for its risks to be controlled, as well risks to be controlled. subsidiaries. as those of its lead companies.

Supervision of Verification of the Monitoring of the internal Monitoring of the internal the separation effective legal and procedures that allow the procedures that allow the of activities.23 functional effective legal and effective legal and functional separation of the functional separation of the separation of the lead company companies that engage lead companies that engage in that engages in regulated in regulated activities. regulated activities and which activities. depend on the sub-holding.

Appointment of Approval of the Approval of the appointment of Approval of the appointment directors and appointment of sub- the directors of the lead of subsidiary directors. executives. holding company companies. Execution of the directors. Execution of the appointment of the company's appointment of the company's directors. directors. Appointment by the Company's Appointment by the Company's board of its chairman, CEO board of its chairman, CEO and other senior executives. and other senior executives.

23 Only applicable to companies engaging in regulated activities. 38

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Appendix II – Primary studies regarding CEO-Chairman duality.

International literature applies an analysis from the point of view of the effect of the CEO- Chairman duality and not explicitly with respect to independence. The concept of duality is broader than just executive/independent chairman since duality implies an executive chairman position. The studies that contradict the alleged shortfall of the dual model and the general recommendations of proxy advisors in this respect are summarised below.

Publication Conclusions regarding the CEO-Chairman duality

CEO duality and firm “The results conclude that the effect CEO duality has on firm performance: an empirical performance is insignificant, which means that CEO duality does not study of EU listed firms; have much influence on firm performance based on EU listed firms.” Cheng (2014)

CEO Duality: A Review and “The most consistent finding in the CEO duality literature is that separating Research Agenda; Krause et the CEO and board chair positions does not, on its own, improve al. (2014) firm performance.”

“As for practical implications, to assume that ‘one board leadership The effect of institutional structure fits all’ and argue that ‘CEO duality or CEO non-duality’ investor type on the is always the right choice is an idealistic argument because this relationship between CEO assumption ignores the fact that the effectiveness of board of directors, as a duality and financial corporate governance mechanism, is more likely to be contingent on some performance; Wahba et al. contextual variables, as well as the power of key internal and external (2014) actors.” “In our view, boards should view their choice of leadership structure as a strategic concern to be assessed in the context of the company’s internal strengths/weaknesses and external opportunities/threats. In other words, the form of governance selected by the board is a reflection of how the CEO-Board Chair Separation: company can best deploy its governance resources to gain and sustain a If It Ain´t Broke, Don´t Fix It; competitive advantage.” Krause et al. (2013) “The results of the analysis show strong support for the prediction that a CEO-board chair separation would promote strong future performance only when it followed weak performance, as well as for the hypothesis that a separation following strong performance would hurt performance going forward.”

“Due to the insignificance of the regression results*, the remaining hypotheses could not be accepted, nor rejected. Hence, no clear-cut answer could be Board characteristics and firm established with regards to the other characteristics of corporate performance in Spain; boards in Spain: independence, occupation and duality.” Rodríguez-Fernandez et al. (*) This article analyses size, composition, duality of the president, number of (2013) annual meetings and positions held by the directors of Spanish listed companies. To assess the company performance, they used three different financial ratios: ROA, ROE and Tobin’s Q.

“Similarly, based on the findings of several statistical studies Michael Useem, "The myth of the separate Wharton Business School professor, noted that separating the CEO and CEO" article by Gabler et al. board chair positions ‘has no bearing on corporate financial for the Financial Post (2012) performance.’”

Does CEO duality affect “No correlation was found between bank failure and CEO duality.” corporate performance? “Surprisingly, it was also found that Regulators accepted CEO duality Evidence from the US banking for several reasons and have no agenda to limit it.” crisis; Carty et al. (2012)

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“The results* suggest that the value of Spanish firms increase as ownership concentration rises, and that beyond 60% firm value is negatively affected by ownership concentration, which supports both Firm value and ownership the monitoring and expropriation hypothesis.” structure in the Spanish (*) This study analyses the performance of Spanish listed companies which capital market; García-Meca have different ownership structures that could be reflect a series of conflicts of et al. (2011) interest: ownership concentration, insider ownership and bank ownership. The study aims to conclude whether there is a relationship between ownership structure and firm performance regarding value creation. They use Tobin’s Q. Management entrenchment “Consistent with theory, and using a changes analysis, the results show a and the cost of equity capital; significant positive association between the degree of Collins et al. (2011) management entrenchment and the cost of equity capital.” “Across all tests*, we find generally robust evidence of negative stock price reactions for firms whose governance practices would be affected by the proposed regulations. The results support the notion that the proposed governance regulations harm shareholders of affected The Market Reaction to firms.” Corporate Governance (*) This paper analyses the market reaction to recent legislative and Regulation; Larcker et al. regulatory actions pertaining to corporate governance from the Securities (2010) and Exchange Commission (SEC), the State of Delaware and some senators and congressmen of the USA. This actions are related to limiting directors’ retributions, limiting firm control over proxy advisors and banning certain leadership structures such as CEO – chairman of the board duality.

“Finally, having different people serve as CEO and chairman of the board is not related to greater corporate reporting transparency. These results indicate that limiting insider participation on boards while Corporate Reporting encouraging the addition of independent financial experts to boards may Transparency, Board improve corporate reporting transparency, but splitting the role of CEO and Independence and Expertise, chairman may not.” and CEO Duality; Felo (2010) “I also find that contrary to expectations, firms in which the CEO and chairman positions have been split display lower overall disclosure transparency and in particular, lower financial transparency.” “Contrary to the conventional view, our results based on market reactions to the switch announcements, subsequent market performance and CEO and Board Chair Roles: market valuations of investments following the switch suggest To Split or Not To Split?; Dey that performance implications are worse for the firms that et al. (2009) separate the roles, particularly so for the firms that separated the roles due to environmental pressures.” “We find that compliance with this one recommendation calling for the One Man Two Hats - What´s separation of the combined CEO and COB position is not All the Commotion!; Dahya associated with any (statistically or economically significant) (2005) improvement in operating or stock price performance relative to benchmark companies.” Good governance and the “Accordingly, there is no research that has established a link misleading myths of bad between the split leadership roles and firm performance.” metrics; Sonnenfeld (2004)

"Separating them [the two roles], of course, is no panacea for making Chairman and CEO - one job boards effective. A structurally independent board won't necessarily or two?; Coombes et al. exercise that independence: some companies with a separate chairman and (2004) CEO have failed miserably to carry out their oversight functions."

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