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In the energy sector, ESG investors often focus on the “E” (environment); largely sidestep the “S” (social), and completely ignore the “G” (governance). In many cases, green trumps, or even obscures, murkiness. Iberdrola, the European utility that’s a champion in renewables, is a case in point.

The company, one of the world’s largest wind power generators, is embroiled in a murky case of alleged corporate espionage that’s now an official criminal investigation in Spain. Its chair and CEO, Ignacio Galan, will appear in court alongside other top executives on Tuesday as suspects, which in Spanish law refers to unindicted subjects of official probes.

The probe is part of a broad scandal involving other blue-chip Spanish companies. According to investigators, several companies — including Iberdrola — allegedly hired a firm owned by a former senior police officer to spy on rivals and their executives.  

The events under investigation date back to 2004 and include a couple of colourful corporate battles. According to court documents, Iberdrola allegedly asked the former police officer turned private investigator to dig up information on the chair of a local competitor. It also allegedly asked for intelligence on a local tycoon, Florentino Perez (better known as the chair of the Real Madrid soccer club) and his family, amid a takeover fight, according to the filing.

The investigation is still in its preliminary stages. Iberdrola strongly denies the charges, arguing that hiring the former cop was part of normal business and all payments were for proper services. 

So far, shareholders have taken Iberdrola’s legal troubles in stride. The company is trading at a price-to-earnings ratio of nearly 18 times, compared to the 13 times of Enel, the Italian company that is its closer and larger rival, according to Bloomberg data. Iberdrola shares have outperformed too. Over two decades, Galan has turned a parochial coal-fired electricity producer in northern Spain into a global renewable giant, with subsidiaries from the UK to Mexico. Its green credentials have won plaudits; and few investors have complained about governance. 

That may change as the criminal probe starts to affect the company’s ability to grow in a key market. Iberdrola is trying to expand aggressively in the US but its most recent attempt — buying a New Mexico-based utility called PNM Resources for more than $8bn, including debt —  failed when regulators blocked the deal citing the probe in Spain, among other factors.

The US regulators were not so much worried whether Iberdrola’s use of the former police officer was illegal as they were about what that said about the company’s governance. “Apart from whether the actions of Iberdrola’s executives and its subsidiary constitute crimes under Spanish law, their actions appear to represent methods of doing business that should raise concerns,” a report prepared for the New Mexican state regulators said in a report.

“The criminal investigation is relevant as it may reflect the culture of Iberdrola.”  

The company has made some good moves to defend itself: it commissioned PwC to do a forensic report, which it sent to the court, for example. But it needs to go beyond that to shore up its reputation. Galan has been running the company, first as CEO, and then as both chair and CEO, for nearly 21 years. That’s a very long reign.

Controlling both management and the board is often a recipe for subpar corporate governance. Splitting the role would go a long way to improve the “G” in ESG. Iberdrola’s shareholders, led by the sovereign wealth fund of Qatar and BlackRock, should press for an independent chair at the earliest opportunity to revamp governance.

More stories like this are available on bloomberg.com/opinion



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