EUROPEAN RISK CONFERENCE: "RISK AND GOVERNANCE" Milano, Bocconi University 11 September 2008 Risk Factors in the Italian Corporate Governance Paolo Santella Banca d’Italia

2 Interlocking Directorships in the Italian Stock Market (Santella-Drago-Polo 2007): Interlocking Directorships in Italy, France and the UK (Santella-Drago-Polo-Gagliardi 2008): Le reti di amministratori in ITA-FRA-UK, L’Industria, giugno 2008 A Comparative Analysis of the Legal Obstacles to Institutional Investor Activism in Europe and in the US (Santella-Baffi- Drago-Lattuca 2008): The papers

Interlocking directorships - 2. Institutional investors’ voting activism - 3. Country profiles as risk factors - 4. Risk factors and the regulatory debate Presentation Summary

4 1. Interlocking Directorships: the Italian case In (Santella-Drago-Polo 2007) we find that from 1998 to 2006 a high percentage of the Italian listed companies are connected with each other through a very small number of directors. Such group of interlocking (overwhelmingly male) directors shows a remarkable stability over time ( ) with very few entrants and very few exits mainly related to the passing away of the director.

5 The Italian listed companies: a tightly-knit web -The main interlocking directors tend to belong to families of directors (the first five families having each more than 100 directorships in nine years). -The highest level of connectivity concerns those companies that belong to the MIB 30/S&P-MIB 40 index, the Italian Blue Chips. -Most of the financial and non-financial Blue Chips are connected with each other through a web of directors continuously from 1998 to Decreasing number of directors shared by interlocked companies.

All the Italian Blue Chips: Financial and not financial

All the Italian Blue Chips: financial and not financial

8P.Santella, C.Drago, A.Polo8 Interlocking directorships in Italy Number of directors in common Italian Financial Blue Chips

9P.Santella, C.Drago, A.Polo9 Interlocking directorships in Italy Number of directors in common Italian Financial Blue Chips

10 Interlocking directorships in Europe: two different models In (Santella-Drago-Polo-Gagliardi 2008) we find two different national models, the French-Italian one and the British one: - the first model (FRA and ITA) is characterized by a higher number of companies linked with each other through multiple interlocking directorships; - the second model (UK) features a more limited number of companies that share just one director at the time.

11 French Blue Chips (March 2008)

12 Italian Blue Chips (Dec. 2007)

13 UK Blue Chips (March 2008)

14 Comparing Italy, France and the UK The British system does not appear to make recourse to board interlocks as a communication device among listed companies. As for France and Italy: - links among creditors point to collusion (which translates in conflicts of interest at the expense of minority shareholders); - links tend to involve all the Blue Chips, financial and not-financial: all the major listed companies operate under mutual scrutiny.

15 2. Institutional investors: the figures indicate them as an increasingly important lot… - In (Santella-Baffi-Drago-Lattuca 2008) we start by observing that institutional investors in the EU are today one of the main categories of shareholders; - they vary from about 25% in Italy to about 80% in the NED and in the UK (see next slide):

16 Institutional investors as shareholders “Foreign investors” are made of foreign institutional investors and “Collective investment” are made of resident institutional investors.

17 …but they do not always seem to vote their shares -Voting turnout across the EU is much lower than in the US -In the UK recent increase of voting turnout due to institutional moral suasion (Myners Report 2007) -In continental Europe the lowest cases of voting turnout (see next slide):

18 Low voting turnout in the EU…

19 …also considering that in continental Europe much of the voting turnout seems to be made of controlling shareholders companies consideredWeighted average free-floatPercentage of widely-held companies Austria Denmark Bel, Fra, Ned, Por Finland Germany Greece Ireland Italy Norway UK Spain Sweden Switzerland

20 Two main types of obstacles to Institutional Investors’ voting in the EU (i)Legal: -Proxy voting -National provisions (“put up or shut up” in FRA; acting in concert in GER…) -Deviations from the “one share one vote” principle (ii) Investor-related: -Conflicts of interest -“rational apathy” (investors having too small a stake in each of their portfolio companies to justify voting.

21 The point of view of those institutional investors that publish their voting record -Institutional investors in the US seem to have a more adversarial voting pattern vis-à-vis company managements than in the UK; this might be due to the fewer voting rights given to shareholders by the US regulatory framework. -Institutional investors' voting pattern in the EU is by far the most adversarial in France, where there is a high incidence of control-enhancing mechanisms.

22 Voting patterns in Europe and US -Institutional investors seem to have an adversarial voting stance also in Greece, Belgium and Sweden, where control-enhancing mechanisms are also present, while in Italy they tend to have a low voting turnout. -More in general, EU investors' voting pattern seems to be sensitive to the presence of control- enhancing mechanisms, ownership concentration, and to the origin of the national legal system.

23 3. Country profiles as risk factors (i) - The high number of companies connected through interlocking directorships a potential source of conflicts of interest (FRA – ITA)… - …all the more so since very few directors are involved as connectors (FRA – ITA). - Low voting turnout from non-controlling shareholders (ITA). - Conflicts of interest affecting domestic institutional investors’ willingness to vote (ITA).

24 Country profiles as risk factors (ii) -Low voting record by foreign institutional investors because of company opacity (ITA). -Adversarial voting record by institutional investors accompanied by high incidence of control-enhancing mechanisms (FRA).

25 4. Risk factors and the regulatory debate in Italy new regulatory measures introduced since 2003: directors and statutory auditors elected by minority shareholders; more stringent independence requirements; minimum number of independent directors on the board; limits to the number of directorships (in force since 2008) ↓ doubts on their effectiveness on the basis of our empirical findings and also…

26 A few examples from the Italian 2008 shareholder meeting season (i)circumstantiated doubts expressed by a minority shareholder on the independence of independent directors unanswered by the board; (ii)A director elected by a coalition of minority shareholders denounced (by a foreign institutional investor and minority shareholder) as connected to the controlling shareholder; (iii)Statutory auditor nominated (and elected) by a minority shareholder who is also a family member of the controlling shareholder

27 …Consob is consulting (i) Consob is running an ad hoc consultation ( zione_emittenti_ _osservazioni.htm): recourse to the courts might be the only possibility for shareholders denouncing irregularities… …but very lengthy judicial procedures in Italy make recourse to courts unappealing to investors.

28 …Consob is consulting (ii) Related-party transactions. Consob is considering requiring: -Immediate disclosure to the market; -Approval required by independent directors (open Consultation by Consob at: ate.htm ) ate.htm Pros: reducing potential for shareholders’ expropriation Cons: (i) the measure relies on the actual independence of independent directors; (ii) it might be difficult to introduce criteria to identify related-party transactions falling within the perimeter of this requirement. An alternative approach is to require non-controlling shareholders to approve such transactions (required in the UK and FRA).

29 Under the current circumstances the strength of minority investors seems to be the best hope… - 25% on average held by institutional investors in the Italian listed companies (Santella-Baffi- Drago-Lattuca, 2008) - 1/3 minority blocking according to the Italian legislation - signs that already inst. invs. are making themselves heard in the largest Italian non- financial Blue Chips where the free-float is higher (Santella-Drago-Paone 2006)

30 …if only investors cared to (could) vote: obstacles to Institutional Investors’ voting in the EU: regulatory answers (i)Legal -Proxy voting : Directive 2007/39/CE (to be adopted by EU Member States by July 2009); -National provisions (“put up or shut up” in FRA; acting in concert in GER…): self-restraint at national level? National legislation should guarantee shareholders’ rights to coordinate their voting policies. -Deviations from the “one share one vote” principle: The European Commission recently announced it would adopt no initiative; the ECJ (WV ruling) seems to have outruled “extreme” forms of deviations from the 1s1v principle. (ii) Investor-related: -Conflicts of interest: separating fund managers from other interests in the portfolio companies. No current initiative at EU level; moral suasion under way in Italy according to the press; -“rational apathy” : in the UK moral suasion at institutional level raised investors’ presence at company meetings; Directive 2007/39 should reduce voting costs thereby increasing propensity to vote.