Corporate governance in Italy: Behind the scenes

Marcello Bianchi & Mateja Milič – Marcello is Deputy Director General at Assonime and Chair of Technical Secretariat, ICGC, Mateja is Assonime and Staff at the ICGC

The 2017 Italy Corporate Governance Conference, hosted once more by the Italian Corporate Governance Committee (ICGC), provided an opportunity for an open dialogue between public institutions, issuers and investors about the evolution of corporate governance in the country and beyond.

Organised by Assogestioni and Assonime, in cooperation with the OECD and with the support of the Italian Stock Exchange, the conference represents the long-standing commitment of the Italian system, which began with a corporate governance meeting in December 2014 during the semester of the Italian Presidency of the EU Council and has carried on with conferences since.

The attendance of policymakers and key market players testifies to the importance of such an event in promoting a stronger development of the Italian capital markets, through candid and constructive debate on main corporate governance issues.

Corporate governance provides investors with confidence and encourages companies to open their capital to the market. This delicate mechanism faces important challenges raised by a rapid and deep evolution of financial markets, with new forms of intermediation, new trading platforms and techniques, as well as new business models.

All developed economies, particularly after the financial crisis, have experienced a structural and deep decline in the ability of capital markets to attract new companies and to support their growth – and this problem is particularly relevant in Italy. Although there are some positive signals that this trend can be reversed, there is still a big gap between the increasing amount of savings and the growing need for investments (especially
for SMEs) that are necessary to support growth that can meet demand for long term economic sustainability on a global scale.

Collaboration of key players

This is the reason why the Italian Corporate Governance Committee, which represents all the main actors of our capital markets (issuers, financial intermediaries, institutional investors and the Stock Exchange), brings together experts from Italian and international sides to discuss the main issues and the way ahead. And, for this reason, the OECD’s active engagement at this event is very important. The role of corporate governance in creating value and supporting growth is well acknowledged by the main international fora, such as the G20, whose endorsement of the OECD Principles, revised in 2015 to face those new challenges and first presented to an international audience at the first Italy conference here in 2015, represents a milestone for economic policymaking.

On the first day of the Conference, the participants focussed on the need for a flexible and proportionate approach to policymaking on corporate governance in order to support growth, with a particular nod to small and recently listed companies. The panel also considered a more specific issue regarding the role of the board in changing ownership structures of listed firms, especially in larger Italian companies, where the growing weight and activism of institutional investors and some peculiar features of the Italian framework are challenging the traditional distinction between controlling and minority shareholders.

In this regard, Professor Stella Richter, considering the effects of legal provisions regulating the composition of Italian boards, affirmed that expert, independent, plural and diverse boards require more leeway for self-regulation, which would ‘enable each listed company to adopt its own proper organisational solutions, finally doing away with a ‘one-size-fits-all’ approach’.

Board effectiveness

The second day of the conference addressed the role of corporate governance in creating incentives for a more responsible business, with particular regard to a board’s effectiveness and accountability. Sustainability issues are of growing importance for all listed companies, inasmuch they are carefully considered by a number of investors and companies face increased expectations by civil society for higher standards of ethical behaviour.

Regulation and self-regulation meet those expectations through increased disclosure duties, new and more detailed recommendations on long-term strategies, company’s culture and core board’s responsibilities (e.g. G20/OECD Principles).

“Such sustainability issues put into question many of the pillars of traditional corporate governance culture: the purpose of corporation, the nature of fiduciary duties of both companies and institutional investors, the information to be provided on the impact of business activity on the social and environmental framework”, said Stefano Micossi, director general of Assonime. On this regard, Micossi pointed out that such challenges ‘need to be faced with a substantial but balanced and flexible approach, providing for an adequate and suitable system of incentives for companies and investors’.

Finally, the debate addressed the key function of the board of directors in developing an appropriate, efficient and long-term management of the company.
The corporate governance scandals and the financial crisis have cast doubts on the effective functioning of corporate boards and on their ability to ensure an effective management of the different tasks they are called to perform to set the strategies and to monitor their implementation. International standard setters highlighted the fundamental responsibility of the board in guiding corporate strategy, monitoring managerial performance and the effectiveness of internal control and risk management systems (OECD Principles core recommendations).

Innocenzo Cipolletta, chairman of Assonime, highlighted that also in Italy ‘an increasing attention is given to some aspects of board effectiveness, such as the disclosure about the effective completeness and promptness of the pre-meeting information and the role of the board in ensuring adequate skills and competences of its members’.

These areas of further improvement are, together with other aspects, clearly highlighted in Assonime-Emittenti Titoli’s analysis of the corporate governance of Italian listed companies, an in-depth annual study, issued since 2002, on their compliance with Italian Corporate Governance Code recommendations.

According to the Assonime-Emittenti Titoli analysis, “The Italian Corporate Governance Committee recognises the board evaluation process as a key tool for dealing with board’s effectiveness and the goal of smooth but thoughtful decision-making.’ In fact, in its 2017 annual report, the Committee calls upon issuers to carefully consider the opportunity to widen the board assessment on its effective performance, considering, among other tasks, the adoption of strategic plans and effective board oversight, especially with regard to an appropriate system of internal control and risk management.

Italian Governance Code

As in the past, the Conference included the Italian Corporate Governance Committee’s meeting and the approval of its 5th Annual Report on the compliance with the Italian Corporate Governance Code.

The Committee, promoted by main issuers’ and investors’ association and the Italian stock exchange, pursue the promotion of good corporate governance of Italian listed companies, either by a constant alignment of the Corporate Governance Code for listed companies with best practices or through other initiatives which would enhance the credibility of the Code. Assonime is actively engaged in the Committee’s activities, providing data analysis on the evolution of corporate governance in Italy, which is the main basis for the Committee’s annual report.

This year, the report provides a general overview on the Committee’s activities, updates on national and international developments in corporate governance and an in-depth analysis of Italian corporate governance and the compliance of Italian listed companies with main Code recommendations. Such analysis gave the Committee the chance to identify main areas of weak compliance or scant disclosure in order to ask Italian listed companies for a better implementation of the Code but also to have a detailed overview of the new challenges for Italian corporate governance, identifying current standards and practices that could be further improved in order to meet investors’ requests and to settle on market developments.

The Committee monitors corporate governance trends and evolutions at European and international level, in order to detect the evolution of new best practices and assess market expectations toward listed companies. To this aim, the report analyses the debate and initiatives regarding corporate governance codes, as a primary self-regulatory standard for listed companies in the main countries and the evolution of rules and regulations that affect the corporate governance of Italian listed companies.

At the same time, the report provides information about the Committee’s active involvement in the corporate governance debate in Europe and internationally through: (i) the active involvement of its chair through the organisation of meetings with the representatives of other corporate governance committees in France, Germany, the Netherlands and the United Kingdom and the publication of common statements regarding national and European legislators’ approach to corporate governance issues; (ii) the contribution, through the chair of its technical secretariat, to the OECD international standard setting on corporate governance; (iii) the participation through its representatives in the European Corporate Governance Codes Network.

Considering such developments, the Committee observed some general trends that are developing all over Europe and at international level, pointing out the increasing interest of policymakers in: (i) developing flexibility and proportionality in corporate governance ruling, both at self-regulation and mandatory regulation levels, in particular to encourage smaller and growth companies’ access to capital markets; (ii) enhancing institutional investors’ stewardship responsibilities, to be discharged also through the development of an open dialogue with investee companies, with the provision of adequate procedures from both investors’ and companies’ side; (iii) promoting sustainability as a key principle in defining a company’s corporate governance model, long-term oriented strategies and remuneration policies and overall company culture.

As to the Italian framework, the report provides a global overview on the compliance rate of all Italian listed companies with main Corporate Governance Code recommendations. The adoption of the Corporate Governance Code is voluntary, but once companies opt in to such a governance system, their non-compliance with one or more Code recommendations must be clearly disclosed in their Corporate Governance Report. As to 2017 data, 90 per cent of Italian listed companies have adopting the last edition of the Corporate Governance Code and their compliance rate is generally high.

Compliance and disclosure

Considering the most important CG Code recommendations, the Committee observed that, on average, companies implement effectively about 75 per cent of these – with a significant size-related effect: overall compliance picks up to 90 per cent among larger firms, while it is about 80 per cent for medium-sized ones and around 65 per cent for smaller companies.

According to the Code’s requirements, companies mostly always explain individual cases of non-compliance, but the quality of such explanations should be improved to enable investors to assess a company’s governance and take their own decisions, both for trading and engagement purposes.

The main areas of weaker compliance and disclosure, where the Committee calls on issuers for a stronger implementation of the Code, are: (i) the promptness and completeness of the board pre-meeting information; (ii) the role of the nomination committee (in companies with a more concentrated ownership structure and the quality of disclosure regarding their effective activity); (iii) aspects of the remuneration policy – having particular regard to the long term-orientation of variable components for executives, the provision of claw-back clauses and a clear governance of possible severance payments.

At the same time, the Committee identified further areas for evolution of corporate governance, where companies reached a high compliance rate with individual Code recommendations, but their governance model might still be improved in order to meet market expectations and evolve in the international governance framework. In this regard, the Committee suggested listed companies consider: (i) the adoption of well-structured succession plans for executive directors, in order to ensure continuity and stability in the company’s management; (ii) a thorough evaluation and disclosure about effective directors’ independence, considering also the appropriateness of their remunerations; (iii) the enhancement of the board evaluation process, through the assessment of a board’s effectiveness and performance, considering, among other tasks, the adoption of strategic plans and a board’s oversight on company’s management and on the appropriateness of the internal control system.

In this respect, the Committee will continue with its aim of enhancing the evolution of corporate governance standards and the behaviour of Italian listed companies, as well as promoting stronger engagement by investors. These goals will be pursued through the strengthening of code recommendations on the main critical issues highlighted in the Committee’s monitoring activity and more generally to support companies to develop strong corporate governance that focusses on sustainability of business activity.

About the Authors:

Marcello Bianchi is Deputy Director General at Assonime (Association of the Italian joint stock companies), in charge of Corporate Governance and Capital Markets Area from March 2016. Prior to this position he has held various offices in Consob (the Italian Securities Regulator) where he has been working since 1990. Among others he was Director of the Regulatory Strategy Division and of the Corporate Governance Division.

Mateja Milič – Assonime and Staff at the ICGC