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Corporate Governance Reforms in Italy: What Has Been Done and What Is Left to Do

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Abstract

This essay takes stock of the corporate governance reform efforts in which Italian policy makers have engaged since the beginning of the 1990s. After describing the reform process and its drivers (a concern for Italian equity markets’ attractiveness in an increasingly competitive and global framework, scandals, and EC activism) the essay analyses the main reforms to single out what has worked (i. e., what has had a practical positive impact on Italian listed companies’ corporate governance) and what has not. After concluding that the corporate governance legal framework has greatly improved as a result of reforms, the essay identifies a number of areas where further steps could be taken to protect investors against the risk of expropriation by corporate insiders. It is also argued, however, that the mother of all corporate governance reforms in Italy would be a change in legal and political culture; legal culture should change so as to put substance over form, function over doctrine. That would be a precondition to effective enforcement of corporate and securities laws. Political culture should change from one that deems it to be the norm for politicians to decide on the allocation of corporate control to one more respectful of property rights. Finally, two modest, bottom-up proposals to help change legal culture in the long run are put forth.

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References

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  42. To be sure, if we recalculate their pre-Draghi score to correct for a couple of disputable (and arguably wrong) coding choices (see Luca Enriques, ‘Do Corporate Law Judges Matter? Some Evidence from Milan’, 3 European Business Organization Law Review (2002) p. 765, at p. 779, n. 43 (arguing that proportional representation within the board was already allowed before the 1998 reform — and even mandated for privatised companies since 1994 — and that the law already provided minority shareholders a judicial venue to challenge management’s decisions under Art. 2409 Civil Code)) the effect of the Draghi Law is somewhat less impressive (from a pre-Draghi score of 3 to a post-Draghi score of 5).

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  43. See Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer, ‘The Law and Economics of Self-Dealing’, 88 Journal of Financial Economics (2008) p. 430.

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  44. If we recalculate the index to account for the same coding mistakes highlighted in note 42, Italy’s score goes from 2 (pre-1998) to 3 (post-Draghi).

  45. See Consob Regulation No. 11971 of 14 May 1999, as amended (Consob Regulation on Issuers).

  46. See Consob, Testo unico delle disposizioni in materia di intermediazione finanziaria.Questioni societarie, II Parte. Documento di consultazione (Note tecniche in materia di informazione societaria e revisione contabile) (1998), at pp. 18–24.

  47. For a taxonomy of ways to extract private benefits, see Vladimir A. Atanasov, Bernard S. Black and Conrad S. Ciccotello, Unbundling and Measuring Tunneling, Working Paper (2007), available at: http://ssrn.com/abstract=1030529.

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  49. See Article 78 and Schedule 3C, Consob Regulation on Issuers.

  50. See Colombo, supra n. 4, at p. 150 (‘ad evitare che l’informazione scada in pettegolezzo, è previsto che l’ammontare [dei compensi] sia indicato ‘cumulativamente’ … e non con riguardo ai singoli [amministratori]’).

  51. Aurelio Candian, ‘Delle Assemblee delle Società per Azioni Ovverossia del Dermofilo Penetrante’, 15 Temi (1961) p. 163.

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  52. Articles 125 and 129 Legislative Decree 58/1998. See Marcello Bianchi and Luca Enriques, ‘Corporate Governance in Italy after the 1998 Reform: What Role for Institutional Investors?’, 2 Corporate Ownership and Control (2005) p. 11, at p. 27, for the claim that shareholder proposals are treated as the calling of a meeting under Draghi Law rules.

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  53. Article 104 Draghi Law.

  54. Articles 127 (allowing vote by mail) and 136–144 (regulating proxy voting) Legislative Decree 58/1998.

  55. Bianchi and Enriques, supra n. 52, at pp. 26–9.

  56. See Article 126 Legislative Decree 58/1998, now embodied into Articles 2368–9 Civil Code.

  57. Enriques, supra n. 42, at p. 782 (for a brief description of the Montedison/Falck case).

  58. See Bianchi and Enriques, supra n. 52, at p. 26, n. 87 (for a brief description of the Riva Finanziaria/Intek case). More recently, see Marigia Mangano, ‘Ifi-Ifil, i Fondi Contro la Fusione’, Il Sole 24 Ore, 19 November 2008, at p. 42 (IFI/IFIL).

  59. See Guido Ferrarini and Paolo Giudici, ‘Financial Scandals and the Role of Private Enforcement: The Parmalat Case’, in John Armour and Joseph A. McCahery, eds., After Enron: Improving Corporate Law and Modernising Securities Regulation in Europe and the US (Portland, Hart Publishing 2006) p. 187.

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  60. Consob, Relazione per l’anno 2003,Discorso del Presidente della Consob al mercato finanziario (2004) p. 11. Massimo Belcredi reports that, as of June 2005, 17 out of the 40 largest companies had minority-elected board of auditors members, but only 9 of them had one nominated by institutional investors. Massimo Belcredi, ‘Amministratori Indipendenti, Amministratori di Minoranza, e Dintorni’, 50 Rivista delle Società (2005) p. 853, at pp. 867–8.

  61. Bianchi and Enriques, supra n. 52, at p. 29.

  62. Ferrarini and Giudici, supra n. 59, at p. 188.

  63. See Mario Draghi, ‘Commento sub art. 107’, in Guido Alpa and Francesco Capriglione, eds., Commentario al Testo Unico delle Disposizioni in Materia di Intermediazione Finanziaria (Padova, Cedam 1998) p. 988, at pp. 994–5.

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  64. See supra n. 21 and accompanying text.

  65. At the end of 2004, there were 16 listed companies controlled by holding companies the shareholders of which were parties to a shareholder agreement, such control structure being used to avoid the mini-breakthrough rule. See Consob, Relazione per l’anno 2004, Discorso del Presidente della Consob al mercato finanziario (2005) p. 25, note 14, available at: http://www.consob.it.

  66. See Ferrarini and Giudici, supra n. 59, at pp. 186, 188.

  67. Ibid., at pp. 188–9.

  68. Ibid.

  69. See Legislative Decree 58/1998, Article 148(3) (mainly focusing on (i) family ties with the directors of either the company or its controlling or affiliate entities, as well as on (ii) the current employment, professional and economic relationship with either the directors or the group companies). See also Corporate Governance Committee, Corporate Governance Code, March 2006, at 3.C.1 (.providing a long list of independence criteria encompassing previous employment, economic and professional relationship, the length of the tenure and cross-directorship) and 10.C.2 (extending independence criteria to statutory auditors).

  70. Ferrarini and Giudici, supra n. 59, at p. 186.

  71. See Andrea Melis, ‘On the Role of the Board of Statutory Auditors in Italian Listed Companies’, 12 Corporate Governance (2004) p. 74, at p. 81.

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  72. Dante Alighieri, La Divina Commedia, Purgatory XVI, line 97 [‘the laws are there, but none that will enforce them’].

  73. Alessandro Manzoni, I promessi sposi, Ch. 1. See also Sebastiano Vassalli, La Chimera (1990), at pp. 58–9.

  74. Ferrarini, supra n. 33, at p. 48, similarly criticises the Draghi reform from this point of view. To be sure, formal enforcement of corporate governance laws is a rarity in many jurisdictions. See, e. g., Utpal Bhattacharya and Hazem Daouk, ‘The World Price of Insider Trading’, 57 Journal of Finance (2002) p. 75, at p. 77 (at the end of 1998, insider trading laws existed in 87 countries, but enforcement, as evidenced by at least one prosecution, had taken place in only 38 of them). It should also be mentioned that private enforcement is almost nonexistent for listed companies in the UK as well (see John Armour, Bernard Black, Brian Cheffins and Richard Nolan, Private Enforcement of Corporate Law: An Empirical Comparison of the UK and US, Working Paper (2009), available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1105355). However, in the UK, control over listed companies is in the hands of institutional investors, which use governance rights (or in other words, ex ante informal enforcement) as protection against managerial misbehaviour. See John Armour, Enforcement Strategies in UK Corporate Governance: A Roadmap and Empirical Assessment, Working Paper 36-45 (2008), available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1133542.

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  75. See Legislative Decree 58/1998, Article 129 (derivative suit). The threshold was later lowered to 2.5%: see Article 2393-II Civil Code. See also Legislative Decree 58/1998, Article 128(2) (request for inspection), now embodied into Article 2409 Civil Code.

  76. See Ferrarini and Giudici, supra n. 59, at p. 202. See also infra, section 6.

  77. See Paolo Giudici, ‘Representative Litigation in Italian Capital Markets: Italian Derivative Suits and (If Ever) Securities Class Actions’, 6 European Company and Financial Law Review (2009) p. 246.

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  78. This is a little known result of the Draghi Law. The act granting the Government the authority to issue a consolidated law also allowed it to ‘coordinate’ criminal and administrative sanctions for violations of securities laws with the sanctions already in place for violations of banking laws (Article 21, para. 3, Law 52/1996), which were much more lenient. The Government made use of this authority.

  79. See supra n. 26.

  80. See Enriques, supra n. 27, at pp. 172–3, for a critique of the Vietti reform from this point of view.

  81. Article 2370 Civil Code (for public companies, share deposit cannot be imposed for longer than two days in advance of the meeting and, whenever shares are in electronic form, as is always the case with listed companies, the deposit is replaced by a communication from the intermediary which holds the relevant account); see Carmine Di Noia, Matteo Gargantini and Salvatore Lo Giudice, ‘General Meeting-Related Processes in Italy: The Role of Listed Companies, Intermediaries and Central Securities Depositories in Light of Recent EU Developments’, 1 Journal of Securities Operations & Custody (2008) p. 195, at pp. 202–3. Currently, one sixth of companies out of a sample of 283 impose share blocking after the electronic communication is sent and until the meeting is concluded, while two thirds require that the communication is sent in advance of the meeting but do not impose share blocking; the remaining companies (one sixth) simply require a communication before the meeting is opened (source: author’s elaboration on companies’ charters and notices convening annual meetings).

  82. See Assonime, Analisi dello stato di attuazione del Codice di Autodisciplina delle società quotate (Anno 2008), Note e Studi No. 1, at p. 18, note 17, and p. 25 (2009), available at: http://www.assonime.it/AssonimeWEB/public/initAction.do?evento=getDocumentAttach&idSelectedDocument=210648&idSelectedAttach=210649 (as of 31 December 2008, 7 two-tier and 4 one-tier companies were listed on the Italian Stock Exchange. However, the figure on companies adopting the two-tier model is partial, because not all the companies which had announced or implemented a change in their governance structure published a corporate governance report as of the end of 2008).

  83. See Federico Ghezzi and Corrado Malberti, ‘The Two-Tier Model and the One-Tier Model of Corporate Governance in the Italian Law Reform of Corporate Law’, 5 European Company and Financial Law Review (2008) p. 1, at p. 7 (provisions for the alternative board structures affected by ambiguous wording).

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  84. Article 2441(4) Civil Code. On the vagueness of the ‘market value’ criterion, see Marco Ventoruzzo, ‘Experiments in Comparative Corporate Law: The Recent Italian Reform and the Dubious Virtues of a Market for Rules in the Absence of Effective Regulatory Competition’, 40 Texas International Law Journal (2004) p. 113, at pp. 127–9.

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  85. Article 2443 Civil Code.

  86. See Ventoruzzo, supra n. 84, at pp. 130–31 (criticising the increase in the power of the board of directors to issue new shares excluding pre-emption rights).

  87. See, e. g., Luigi Foffani and Francesco Vella, ‘“Nuovo” Falso in Bilancio: un Passo Indietro nel Cammino verso l’Europa’, 4 Mercato Concorrenza Regole (2002) p. 125, at p. 129.

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  88. See Article 2377 Civil Code (in listed companies, shares representing 0.1% of outstanding capital are required to file a nullification suit against a shareholder meeting’s resolution).

  89. See Pierre-Henri Conac, Luca Enriques and Martin Gelter, ‘Constraining Dominant Shareholders’ Self-Dealing: The Legal Framework in France, Germany, and Italy’, 4 European Company and Financial Law Review (2007) p. 491, at p. 513.

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  90. Luca Enriques and Andrea Zorzi, ‘Spunti in Tema di Rimedi Risarcitori Contro l’Invalidità delle Deliberazioni Assembleari’, 104 Rivista di diritto commerciale (2006) p. 1, at pp. 14–21.

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  91. Conac, Enriques and Gelter, supra n. 89, at pp. 504 and 518.

  92. See Assonime, supra n. 82, Table 26 (60 listed companies out of 291 declare to be subject to the direction and coordination (‘direzione e coordinamento’) of another company according to Article 2497 Civil Code).

  93. No attention is paid here to changes in Italian laws that follow directly from directives and are therefore common to other EU Member States, such as the adoption of International Financial Reporting Standards and the provisions requiring that shareholders are informed of a company’s corporate governance arrangements.

  94. Article 114(7) Draghi Law.

  95. Legislative Decree No. 229 of 19 November 2007.

  96. Article 15 Law Decree No. 185 of 29 November 2008.

  97. Marco Onado, ‘Il Protezionismo sull’Opa’, Il Sole 24 Ore, 30 November 2008, at p. 1; Alessandro De Nicola, ‘Il Gioco dell’Opa non Vale per Tutti’, Il Sole 24 Ore, 21 December 2008, at p. 10.

  98. Article 126-II Draghi Law.

  99. Assonime, supra n. 82, at pp. 43–6 (as of the end of 2008, 38 companies out of 291 had minority board members, a presence that was compulsory only for companies whose directors had been appointed after 1 July 2007. In 40% of the cases for which information was available, institutional investors had nominated them).

  100. Formally, the rules on self-dealing described below were part of the general corporate law reform of 2001–2005, but they would never have been enacted had the Cirio and Parmalat scandals not come to light.

  101. The only provision addressing self-dealing transaction then was Article 150. The provision requires directors to inform the board of auditors, on a quarterly basis, of both the course of business and every major new development, including conflicted transactions. I cannot resist telling a personal anecdote here. The Draghi Law was first issued as a Draft Law in order to obtain the Parliament’s advice on it. The Lower House’s opinion recommended that the Government revise the regime on directors’ conflicts of interests as then to be found in Articles 2391 and 2631 of the Civil Code. At the time, as a Bank of Italy employee, I was part of the team in charge of revising the Draft Law in light of Parliament’s opinions, but I was also in my last year as a Doctorate in Business Law candidate. My thesis topic was corporate directors’ conflicts of interests. I spoke with my boss at the Bank of Italy about the idea of following the Parliament’s recommendation by revising Articles 2391 and 2631 vis-à-vis listed companies. His reaction was stiff: ‘Sia chiaro: la tua tesi non la scrivi qui’ [‘Let me be clear: you won’t write your thesis here.’] I did not bring up the topic again and unfortunately no one else did.

  102. Changes were made in the Civil Code’s provision relating to directors’ self-dealing, but only on paper (if at all) did they introduce a more stringent regime. See Conac, Enriques and Gelter, supra n. 89, at p. 504. Furthermore, the reform clarified what was previously at least doubtful, i. e., that controlling shareholders can cast their vote on shareholder meeting resolutions regarding which they have a conflict of interests. Article 2373 Civil Code.

  103. Article 71-II, Consob Regulation on Issuers. The provision is still in force, but will soon be amended in connection with the implementation of Article 2391-II of the Civil Code.

  104. Consob Communication No. 1025564 (6 April 2001).

  105. Companies have seldom disclosed related party transactions pursuant to Article 71-II Consob Regulation on Issuers (Consob, Consultation document on the regulation of related party transactions (2008), at p. 64, note 51).

  106. See Djankov et al., supra n. 43, at p. 453.

  107. One is reminded here of Professors Milhaupt and Pistor’s story about the ‘scholar from Beijing who began a presentation about China’s new Company Law by highlighting the fact that it scores significantly higher on the investor protection index of La Porta et al. than the law it replaced. But he noted a bit wistfully that the index had been recently updated and that the new law would no longer score as high’, Milhaupt and Pistor, supra n. 32, at p. 248.

  108. For the variables description, see Djankov et al., supra n. 43, at p. 434.

  109. Columns 2, 3, 5, 6 and 7 are the product of my own assessment of Italian law, based on Djankov et al.’s questionnaire.

  110. Article 2428 Civil Code.

  111. See, e. g., Luca Enriques, Il Conflitto d’Interessi degli Amministratori di Società per Azioni (Milano, Giuffrè 2000), at p. 122, note 143.

  112. Commission Regulation (EC) No. 1606/2002; Commission Regulation (EC) No. 2238/2004; and Legislative Decree 38/2005. See IAS 24, § 18 (disclosure on related party transactions may be rendered on an aggregate basis provided that a distinction among categories of transactions is given). See also OIC, Guida 2 — Guida Operativa sulla Informativa di Bilancio Prevista per i Soggetti Che Adottano i Principi Contabili Internazionali (2007) p. 140. Companies do aggregate related party transactions in their annual reports (see Consob, supra n. 105, at p. 38).

  113. See http://www.consob.it/main/documenti/Regolamentazione/osservazioni_consultazione/parti_correlate/consultazione_emittenti_20080409_osservazioni.htm. Many Italian respondents as well as international institutional investors and their representing associations criticised Consob’s proposal to entrust independent directors with the power to conduct negotiations and decide whether to enter into material self-dealing transactions, the former because their role would erode the whole board’s authority to decide on major transactions and/or managerial autonomy, the latter because a better way to ensure procedural fairness would be to let shareholders decide themselves, like under British regulations. Incidentally, to let Italy score even higher on the Anti-Self-Dealing Index, Consob’s rules could follow institutional investors’ advice on shareholders’ decision-making and require independent fairness opinions (see rows 2 and 5 in Table 6). Consob has never been close to adopting either of such solutions.

  114. See, e. g., Milhaupt and Pistor, supra n. 32, at p. 20. See also Mark J. Roe, ‘Legal Origins, Politics, and Modern Stock Markets’, 120 Harvard Law Review (2006) p. 460, at p. 495 (labour regulation predicts corporate ownership separation better than legal origin, providing the basis for a political economy explanation for financial market strength); Holger Spamann, On the Insignificance and/or Endogeneity of La Porta et al.’s ‘Antidirector Rights Index’ under Consistent Coding, ECGI Law Working Paper No. 67 (2006), available at:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=894301 (if all countries are categorised according to the same La Porta et al. criteria in a consistent manner, most of the differences among legal families in the Anti-Directors Rights Index are eliminated or reversed).

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  116. See, e. g., John C. Coates IV, ‘The Goals and Promise of the Sarbanes-Oxley Act’, 21 Journal of Economic Perspectives (2007) p. 91 (US); Paul Davies, ‘Enron and Corporate Governance Reform in the UK and the European Community’, in After Enron,supra n. 59, at p. 415 (UK). See also Garen Markarian, Antonio Parbonetti and Gary J. Previts, ‘The Convergence of Disclosure and Governance Practices in the World’s Largest Firms’, 15 Corporate Governance (2007) p. 294 (showing that all major jurisdictions have converged towards a common core of corporate governance best practices, but the US and the UK were closer to the core to begin with and moved faster in that direction).

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  117. In Italy, general meetings held in April account for around 50% of the total number of general meetings held from January to August (the highest concentration in Europe): see Georgeson, Proxy Voting Season Review 2007 — UK and Europe (2007), at p. 28, available at: http://www.georgesonshareholder.com/emea/research/1)%20Proxy%20Voting%202007%20-%20A%20Pan-European%20Perspective.pdf/emea/research/1)%20Proxy%20Voting%202007%20-%20A%20Pan-European%20Perspective.pdf. The concentration of meetings at the end of April depends on the fact that, on the one hand, under the Transparency Directive the annual financial report must be published four months after the end of the fiscal year at the latest; on the other hand, the Italian traditional view is that the annual financial report can only be published as such (as opposed to mere draft reports) after approval by the meeting. That view is obviously idiosyncratic and nothing would prevent the law from requiring publication of the report as approved by the board before the end of April. General meetings could thus be held, e. g., within six months from the end of the fiscal year, so that companies could pick any date between April and June to hold their meeting.

  118. Article 2369 Civil Code.

  119. See ESME, Preliminary Views on the Definition of ‘Acting in Concert’ between the Transparency Directive and the Takeover Bids Directive (2008), at p. 4, available at: http://ec.europa.eu/internal_market/securities/docs/esme/acting_in_concert_20081117_en.pdf.

  120. See supra text accompanying notes 92–97.

  121. See Institutional Shareholder Services, Sherman & Sterling LLP & European Corporate Governance Institute (ECGI), Report on the Proportionality Principle in the European Union (2008) pp. 24 and 58–63, available at: http://ec.europa.eu/internal_market/company/docs/shareholders/study/final_report_en.pdf. (Italy ranks among the European countries where the percentage of companies featuring at least one control-enhancing mechanism is higher).

  122. See Luca Enriques, ‘Il ruolo delle Autorità di Vigilanza sui Mercati Mobiliari nelle Controversie Economiche’, 63 Rivista Trimestrale di Diritto e Procedura Civile (2009) p. 695, at p. 697.

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  124. See Enriques, supra n. 122.

  125. See Luca Enriques, ‘A Dieci Anni dal Testo Unico della Finanza: il Ruolo delle Autorità di Vigilanza’, 15 Giornale di Diritto Amministrativo (2009) p. 329, at pp. 331–2.

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  126. See, e. g., Howell E. Jackson, A Pragmatic Approach to the Phased Consolidation of Financial Regulation in the United States, Working Paper (2008), at p. 28, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1300431 (describing the carefully crafted, 55-month long transition process which led to the consolidation of supervisory functions into the British Financial Services Authority as a model to establish a US FSA).

  127. See John C. Coffee Jr., ‘Do Norms Matter? A Cross-Country Evaluation’, 149 University of Pennsylvania Law Review (2000) p. 2151 (enforceable legal rights constraining managers and controlling shareholders count less than social norms in determining a country’s financial development); Amir N. Licht, ‘The Mother of All Path Dependencies: Toward a Cross-Cultural Theory of Corporate Governance Systems’, 26 Delaware Journal of Corporate Law (2001) p. 147 (national cultures can be seen as the mother of path dependence dynamics in the sense that they play a role both in the origin and in the future development of corporate governance systems).

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  128. Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer, ‘The Economic Consequences of Legal Origins’, 46 Journal of Economic Literature (2008) p. 285.

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  129. See, e. g., Edward L. Glaeser and Andrei Shleifer, ‘Legal Origins’, 117 Quarterly Journal of Economics (2002) p. 1193.

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  131. See, e. g., Thorsten Beck and Ross Levine, ‘Legal Institutions and Financial Development’, in Claude Ménard and Mary M. Shirley, eds., Handbook of New Institutional Economics (Dordrecht, Springer 2005) p. 251, at p. 257.

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  132. More generally, it is well known that ‘[g]overnment respect of property rights is the first step toward the development of financial markets’, Raghuram G. Rajan and Luigi Zingales, Saving Capitalism from the Capitalists (London, Random House Business Books 2003), at p. 201.

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  133. See Tony Barber and Martin Arnold, ‘EDF Plans Expansion As Italy Agrees to Abolish Cap’, Financial Times, 7 May 2005, at p. 9 (on the EDF/Italenergia-Edison case); Adrian Michaels, ‘Taking a Toll: How Italy Is Giving the Sale of a Road Operator a Bumpy Ride’, Financial Times, 11 May 2006, at p. 11 (on the Abertis/Autostrade case); Adrian Michaels and Andrew Parker, ‘AT&T Quits Telecom Italia Talks’, Financial Times, 17 April 2007, at p. 13 (on the Telecom Italia/AT&T-Slim case). On the Banca Popolare di Lodi/ABN AMRO/Antonveneta case, see supra n. 30.

  134. See Enriques, supra n. 42, at pp. 794–807.

  135. Cf., Milhaupt and Pistor, supra n. 32, at p. 214. Bernard Black, ‘The Legal and Institutional Preconditions for Strong Securities Markets’, 48 UCLA Law Review (2001) p. 781, at p. 848. The Bank of Italy has long and meritoriously been encouraging law graduates to study abroad with its Menichella scholarships (see http://www.bancaditalia.it/bancaditalia/lavorare/borse).

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    Luca Enriques

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Enriques, L. Corporate Governance Reforms in Italy: What Has Been Done and What Is Left to Do. Eur Bus Org Law Rev 10, 477–513 (2009). https://doi.org/10.1017/S1566752909004777

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