Enacted Summary

The corporate structure of traditional Italian companies is somewhat unusual in comparison to the Anglo-American model or German model. According to a 2005 International Monetary Fund's (IMF) report, shareholders of traditional Italian companies elect a Board of Directors, as well as a separate Board of Statutory Auditors. Legislation was enacted in 2004 to give Italian companies greater flexibility in their organizational structure by allowing them to select between unitary board, a two-tier board, or the traditional Italian model. Nevertheless, the IMF report noted that virtually all listed companies at the time continued to follow the traditional Italian model. A 2009 Chartered Financial Analyst (CFA) Institute report however, cites that more changes to existing corporate governance models are expected due to an “evolving market structure”, which suggests the potential for greater engagement of shareholders and a broader distribution of shareholder rights. The corporate governance regime in Italy has undergone considerable legislative reform, including the enactment of the 1998 Draghi Law, which was last amended in 2008. A new Corporate Governance Code was also promulgated by the Italian Stock Exchange (Borsa Italiana) in March 2006, replacing the 1999 Preda Code. According to the 2009 CFA report, compliance with the Corporate Governance Code is on a “comply or explain” basis and companies that have adopted the Code are required to publish annual statements regarding the extent of their compliance. As stated in the same report, a number of companies have disclosed their corporate governance mechanisms and have even modified their systems in order to comply with the Code. On April 9, 2009, in response to financial market volatility, Italy adopted Law No. 33 of 2009 in order to protect listed companies against speculative hostile takeovers.

General Overview

A 2005 study by Heidrick & Struggles highlighted that the Italian corporate governance regime was generally characterized by limited legal protection for investors, poor enforcement of legislation, underdeveloped equity markets, pyramidal groups, and very high ownership concentration with 90 percent of Italian companies being family-owned. While in some areas the Italian corporate governance framework incorporates more stringent investor protection requirements in comparison to international standards, as stated in the International Monetary Fund's (IMF) 2006 Financial System Stability Assessment (FSSA), its benefits were not always fully realized. According to the 2005 Organization for Economic Co-operation and Development’s (OECD) Economic Survey of Italy, there was also a need to strengthen the protection of minority shareholders as stressed by the OECD’s Principles of Corporate Governance.

The corporate structure of traditional Italian companies is somewhat unusual in comparison to the Anglo-American model or German model. According to the IMF’s 2005 report on Selected Issues, shareholders of traditional Italian companies elect a Board of Directors, as well as a separate Board of Statutory Auditors. The Board of Directors is responsible for assessing the suitability of business plans and organization, whereas the Board of Statutory Auditors is responsible for assessing governance and internal control issues. A 2009 European Corporate Governance Institute’s (ECGI) report by Luca Enriques states that revisions to Italy’s general corporate law in 2001-2005 allowed companies to select between adopting an Anglo-American-style unitary board, German-style two-tier board, or the status quo of the traditional Italian model. The report observed that most companies have retained the traditional Italian model in part due to the “unclear and complex features in the law devising the alternative ones” (p. 29). As of December 31, 2008, 7 two tier companies and 4 one-tier companies were listed on the Italian Stock Exchange. However, a 2009 report by the Center for Financial Market Integrity of the Chartered Financial Analyst (CFA) Institute asserts that changes to existing corporate governance models are expected due to an “evolving market structure” (p. 48), which suggests the potential for greater engagement of shareholders and a broader distribution of shareholders’ rights. According to the same report, the most change so far has been induced by majority shareholders “forcing out underperforming old-style managements,” albeit with still little involvement from minority shareholders. The report does go on to note, however, that new laws have provided minority shareholders with mechanisms to appoint board directors.

In 1999, the Committee for the Corporate Governance of Listed Companies, also known as the Preda Committee, issued a Code of Conduct (Preda Code) to enhance Italian companies' competitiveness. According to a KPMG's 2001/2002 Survey on Corporate Governance in Europe, the Preda Code addressed the proper control of company risks, the creation of a suitable proxy system, transparency, and the maximization of shareholder value. Compliance with the Preda Code was voluntary for Italian listed companies. In 2006, the Preda Code was replaced by a new Corporate Governance Code (CG Code). According to the 2009 CFA Institute report, compliance with the CG Code is on a “comply or explain” basis and companies that have adopted the Code are required to publish annual statements regarding the extent of their compliance. As stated in the same report, a number of companies have disclosed their corporate governance mechanisms and have even modified their systems in order to comply with the CG Code. Amendments to the CG Code made in 2008 also required companies to, as much as possible, ensure that shareholders have access to information related to understanding and exercising their rights. Further amendments to the Code were adopted on March 3, 2010. According to a press release on the Italian Stock Exchange (Borsa Italiana) website, new principles regarding remuneration and disclosure independence requirements were included in the revision.

In 2002, a study prepared by the international law firm Weil, Gotshal & Manges for the European Commission, noted that the corporate governance regime in Italy had undergone considerable legislative reform. Legislative Decree No. 58 of 1998 (Consolidated Law on Financial Intermediation or the “Draghi Law”) set out the institutional framework for the regulation and supervision of the Italian securities market. The Draghi Law, per the IMF’s 2006 Detailed Assessment of Italy's compliance with the International Organization of Securities Commissions’ (IOSCO) Objectives and Principles of Securities Regulation, establishes in detail the powers of the CONSOB and BoI, as well as the activities they may perform, and identifies the persons and entities subject to their respective supervision. Per the 2009 ECGI report, the Draghi Law “streamlined the legal framework on securities offerings, takeover bids, disclosure obligations and audit firms” as well as granted additional rights to minority shareholders and lifted the ban on proxy voting. In addition to this, the Italian government adopted Legislative Decree No. 6 (Corporate Law Reform) in January 2003, which governs limited liability and joint-stock companies and cooperatives. In the wake of corporate insolvencies, including the Parmalat scandal of 2003-04, the Law on Savings No. 262 of 2005 (Savings Law) was enacted in January 2006 to improve corporate governance of listed companies, increase transparency, and enhance consumer protection.

According to the 2009 CFA Institute report, amendments to the Draghi Law made in 2008 contributed to increased shareholder protection in Italy. The amendments resulted in a requirement for the bylaws of all Italian issuers to “now include specific processes that ensure equitable appointments to the board of directors” (p. 49), the report notes. Company bylaws are now required to contain directions stating that at least one member is elected from the minority slate, and that minority candidates must not be in any way linked with shareholders representing the majority slate. In April 2009, Law No. 33 of that year (Law on Economic Incentives) was adopted by the Italian Parliament, amending several provisions in the Italian Securities Act and Civil Code. The law was enacted in order to discourage speculative hostile takeovers fueled by the depressed value of many listed companies in the current financial market turbulence. According to a 2009 Shearman & Sterling report, the law aims to allow “for more effective defensive measures against hostile takeovers” (p. 1) by amending provisions concerning mandatory tender offers, disclosure on shareholdings and treasury stock. The report however does also state that it was “too early” to predict the impact of the provisions of the new law.

Italy has also increased the sanctioning powers of the National Commission for Listed Companies and Stock Exchange (CONSOB), enhanced minority shareholders' rights, introduced more stringent rules on external auditors, and reinforced compliance with the Corporate Governance Codes. A more central role was also given to the CONSOB by increasing its resources and powers to act independently from the Ministry of Economy and Finance (MEF). According to the IMF's 2006 report, the CONSOB and the Bank of Italy (BoI) share responsibility for securities regulation under a functional approach to supervision, and are required to cooperate in a coordinated manner in the areas in which they share authority. The Borsa Italiana, Italian Stock Exchange, is also entrusted with regulatory and market management powers over listed companies. The Borsa Italiana merged with the London Stock Exchange in 2007. According to the 2009 CFA report, the Borsa Italiana “monitors both the implementation of the CG Code” along with the “ongoing development of the regulatory framework” (p. 48).

As noted in the International Bank for Reconstruction and Development/The World Bank's (IBRD/WB) 2010 Doing Business report, investor protection in Italy is slightly below the average achieved by member states of the OECD. The Investor Protection Index is a subcomponent of the IBRD/WB's 2010 Doing Business Indicators, and consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indexes range from 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Italy scores 7 in the disclosure index against an OECD average of 5.9. It scores 4 in the Director Liability Index against an OECD average of 5.0 and 6 in the Shareholder Suits Index against an OECD average of 6.6.

The Principles

IIPrinciple I: Ensuring the Basis for an Effective Corporate Governance Framework

As mentioned earlier, the Preda Code was issued in 1999 by the Committee for the Corporate Governance of Listed Companies to enhance Italian companies' competitiveness. According to the KPMG's 2001/2002 Survey on Corporate Governance in Europe, the Preda Code addressed the proper control of company risks, the creation of a suitable proxy system, transparency, and the maximization of shareholder value. Compliance with the Preda Code was voluntary for Italian listed companies. In 2006, the Preda Code was replaced by a new Corporate Governance Code. According to the 2009 CFA report, compliance with the CG Code is on a “comply or explain” basis and companies that have adopted the Code are required to publish annual statements regarding the extent of their compliance. According to the same report, a number of companies have disclosed their corporate governance mechanisms and have even modified their systems in order to comply with the CG Code.

According to Weil, Gotshal & Manges (2002), the corporate governance regime in Italy has undergone considerable legislative reform. In January 2003, the Italian government adopted the Corporate Law Reform, which governs limited liability and joint-stock companies and cooperatives. In the wake of the Parmalat scandal during 2003-04, the Savings Law entered into force in January 2006 to improve corporate governance of listed companies, increase transparency, and enhance consumer protection. The Draghi Law sets out the institutional framework for the regulation and supervision of the Italian securities market. According to the IMF's 2006 Detailed Assessment of Implementation of the IOSCO Principles, the CONSOB and the BoI share responsibility for securities regulation under a functional approach to supervision, and are required to cooperate in a coordinated manner in the areas in which they share authority. The Draghi Law establishes in detail the powers of both regulators and the activities they may perform, and identifies the persons and entities subject to their respective supervision. The Borsa Italiana is also entrusted with regulatory and market management powers over listed companies, and merged with the London Stock Exchange in 2007. According to the 2009 report by the CFA Institute, the Borsa Italiana “monitors both the implementation of the CG Code” along with the “ongoing development of the regulatory framework” (p. 48).

The 2009 CFA Institute report notes that amendments to the Draghi Law made in 2008 contributed to increased shareholders’ protection in Italy. Per the same report, these amendment resulted in a requirement for the bylaws of all Italian issuers to “now include specific processes that ensure equitable appointments to the board of directors” (p. 49). In addition to this, the Draghi Law also requires companies to disclose information on their compliance with their adopted code of conduct. However, despite fairly recent developments, available sources do not directly address Italy's compliance with this principle.

IIPrinciple II: The Rights of Shareholders and Key Ownership Function

The Italian Civil Code contains the main provisions with regard to the treatment and rights of shareholders. According to the IMF's 2006 Detailed Assessment, the Civil Code and CONSOB regulations require members of the Board of Directors, Board of Statutory Auditors, as well as general managers of the company "to carry out their duties with due diligence and to be liable for losses arising from the failure to fulfill their responsibilities" (p. 13). A provision under the Draghi Law also permits shareholders of listed companies to bring collective action against the members of the Board of Directors for breach of their legal duties. The 2009 CFA Institute report details the 2008 amendments made to this same law, which it referred to as having contributed to increased shareholder protection in Italy. Per the same report, these amendments resulted in a requirement for the bylaws of all Italian issuers to “now include specific processes that ensure equitable appointments to the board of directors” (p. 49). Alongside this, the report also states that shareholders representing at least 10 percent of holdings are able to request shareholder meetings and have the power to add items onto the meeting agenda. A 2008 amendment to the CG Code requires companies to, as much as possible, ensure that shareholders have access to information related to understanding and exercising their rights. Proxy voting is allowed in Italy, but is subject to certain restrictions. However, despite the above information, available sources do not directly address Italy's compliance with this principle.

IIPrinciple III: The Equitable Treatment of Shareholders

As stated in the 2005 OECD’s Economic Survey of Italy, there was a need to strengthen the protection of minority shareholders as stressed by the OECD’s Principles of Corporate Governance. According to the IMF's 2006 Detailed Assessment of Implementation of the IOSCO Principles, the Civil Code and the CONSOB regulations guarantee the fair and equal treatment of shareholders, and require members of the Board of Directors, Board of Statutory Auditors, as well as general managers of the company "to carry out their duties with due diligence and to be liable for losses arising from the failure to fulfill their responsibilities" (p. 13). With respect to listed companies, the Draghi Law requires listed issuers to guarantee the same treatment to all holders of identical financial instruments. A provision under the Law also permits shareholders of listed companies to bring collective action against the members of the Board of Directors for breach of their legal duties. In practice, however, the legal protection for minority shareholders was not fully realized, according to the IMF's 2005 report on Selected Issues, as collective action of minority shareholders for misrepresentation against the members of the Board of Directors was unlikely.

As mentioned earlier by the 2009 CFA Institute report, amendments to the Draghi Law made in 2008, contributed to increased shareholder protection in Italy. Per this report, the amendments resulted in a requirement for the bylaws of all Italian issuers to “now include specific processes that ensure equitable appointments to the board of directors” (p. 49). Company bylaws are now required to contain directions stating that at least one member is elected from the minority slate, and that minority candidates must not be in any way linked with shareholders representing the majority slate. However, the 2009 Enriques paper reports a “little known” consequence of the Draghi Law, involving fines for violations of securities laws being significantly lowered. According to the report, the resulting sanctions for insider trading and market manipulations were low enough to disincentivize prosecutions due to the “interplay between statute of limitations rules and the pathological length of criminal trials” (p. 27).

According to the 2009 Shearman & Sterling report, the new Italian Law on Economic Incentives outlines provisions concerning mandatory tender offers. The law states that any person holding over 30 percent of shares in a listed company may increase their holdings by up to 5 percent without launching a mandatory tender offer on the remaining shares in issuance. This is an increase over the previous threshold of 3 percent, previously set out by CONSOB Regulation. The law also increased the maximum amount of treasury stock from 10 percent of overall share capital to 20 percent, thus amending Article 2357 of the Italian Civil Code. Due to treasury stock not corresponding to voting rights, any repurchase of shares would indirectly increase the voting power of existing leading shareholders. Nonetheless, available sources do not directly address Italy's compliance with this principle.

IIPrinciple IV: The Role of Stakeholders in Corporate Governance

The 2005 OECD’s Economic Survey of Italy underlined the need to update the Bankruptcy Act (Royal Decree No. 267 of 1942), which failed to ensure the protection of creditors, or to allow companies' owners to start a new business. Following several prominent Italian insolvencies, including Parmalat, the Parliament issued Legislative Decree No. 35 in March 2005 to introduce important amendments to the Italian insolvency framework, which had remained largely unchanged since 1942. On May 14, 2005, the Legislative Decree was subsequently converted into legislation by Law No. 80 of 2005. However, available sources do not directly address Italy's compliance with this principle.

IIPrinciple V: Disclosure and Transparency

At the time of the IMF's 2005 report, disclosure and financial reporting requirements applicable to listed companies in Italy were quite rigorous, particularly in comparison with other European countries. However pecuniary and administrative sanctions that could be imposed on issuers or management for breaches of these requirements remained limited in practice. Moreover, the CONSOB could not impose penalties directly, but had to act through the MEF. Pursuant to the Savings Law, the CONSOB was given more resources and powers to act independently from the MEF. In its 2006 Detailed Assessment of Implementation of the IOSCO Principles, the IMF noted that the current legal and regulatory framework will be revised to transpose and implement the EU Prospectus Directive No. 2003/71/EC. The CONSOB has reported that its disclosure requirements are already substantially in line with the forthcoming EU Directive.

Italian listed companies are required to prepare quarterly, semi-annual and annual reports, and publish financial statements on an annual basis. Furthermore, both EU Directives and Italian legislation require individual and consolidated financial statements of listed companies to be audited by an external auditor. Per a regulatory and standard-setting framework assessment published by the National Board of Chartered Accountants and Accounting Experts in 2005, the CONSOB has the power to recommend accounting and auditing standards for listed entities. Conversely, the Italian accounting standards are enacted by the Organismo Italiano di Contabilità. As of 2005, provisions for regulating the accounting and auditing profession in Italy were among the strongest in Europe, as stated in the IMF's 2005 report. Furthermore, the CONSOB's audit quality assurance system was quite comprehensive. In this regard, the IMF report recommended providing substantial staff resources to conduct these intensive and on-going reviews. Beginning in 2005, pursuant to Legislative Decree No. 38 of 2005, Italian listed companies are required to prepare their consolidated financial statements using International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board. As for individual company accounts, CONSOB regulations mandate the use of IFRSs and national accounting standards.

As mentioned earlier, according to the 2009 ECGI report, the Draghi Law “significantly improved mandatory disclosure for listed companies” (p. 18). The 2009 CFA Institute report states that the Draghi Law requires that companies annually disclose “comply-or-explain” statements based on their adopted code of conduct. The report also states that not only have a number of companies disclosed their corporate governance mechanisms, some have even modified their systems in order to comply with the CG Code. In April 2009, the Law on Economic Incentives introduced provisions to the Italian Securities Act requiring disclosure of shareholdings below 2 percent. The law also outlines sanctions concerning the failure to undertake such disclosure measures. However, available sources do not directly address Italy's compliance with this principle.

IIPrinciple VI: The Responsibilities of the Board

As part of Italy's unusual corporate structure, shareholders of traditional Italian companies elect a Board of Directors, as well as a separate Board of Statutory Auditors. The former has the authority to assess the suitability of business plans and organization, whereas the latter is responsible for assessing governance and internal control issues, and monitoring the external auditing firm. According to the IMF's 2005 report, while an independent Board of Directors is key to protecting shareholders' rights, there are no legally mandated requirements for Board independence in Italy. Furthermore, neither Italian law nor the Preda Code addressed the issue of representation of minority shareholders on the Board of Directors. In performing their functions, per the 2006 FSSA, members of the Board of Statutory Auditors have wide-ranging powers to obtain information from the Directors. Furthermore, legislation requires the Board of Statutory Auditors to be independent, and to include at least one member appointed by the company's minority shareholders. However, the effectiveness of this provision is limited in practice, as the ability of any one of the board members to act unilaterally is constrained

According to Heidrick & Struggles (2005), the average number of committee meetings in 2005 in Italy was the lowest in Europe. Furthermore, remuneration committees did not include any independent directors. Conversely, the proportion of independent non-executive directors increased in 2005. The 2009 CFA Institute report states that the release of the CG Code urged boards of directors to facilitate the participation of as many shareholders as possible in shareholder meetings. Boards have also been entrusted with enabling shareholders to increase their rights, as well as with maintaining consistent communication with shareholders. Amendments to the CG Code in 2008 also required companies to, as much as possible ensure that shareholders have access to information related to understanding and exercising their rights. Companies are thus required to create an identifiable and accessible section of their website containing such information. This webpage should contain details on procedures for shareholder participation, voting rights, as well as documentation related to items on a meeting agenda. These sources of information however, do not directly address Italy's compliance with this principle.