The Lex Newsletter: Italian board votes deserve a slating

Dear reader, 

Here in Italy it still feels like summer. Tourists throng the piazzas. Maybe it is the climate, the coffee and the ice cream. But some visitors depart believing we Italians have devised a better way of life. 

That, however, is a profound misunderstanding of the national character, which is enamoured of complexity. We have a lot of rules. We observe the letter of them (mostly) although not always the spirit.

Fiddling with the rule book is one of the ways we try to steal a march on rivals. 

Apparently innocuous proposals to modify the rules can turn into furious national squabbles, complete with accusations that one faction or other has captured the lawmaker.

For evidence, look no further than the debate that is now raging over how Italian company boards should be elected.

The focus of this argument is a law, at present working its way through parliament, that seeks to make it more attractive for companies to list in Italy.

MPs from Giorgia Meloni’s governing coalition are using this vehicle to ram through amendments that would give minority shareholders greater rights and make it harder for company boards to propose new directors. 

On the face of it, those sound like reasonable ideas. Corporate governance has two central obsessions: stopping managers from wresting control of companies from shareholders and protecting minority shareholders from overbearing founders.

Trouble is, the proposed rule changes are piecemeal. Onlookers fear they may be connected to corporate sagas at investment bank Mediobanca and insurer Generali. Here, local entrepreneurs have locked horns with boards.

The proposed reforms do not really stack up either. 

First, it makes little sense to approach governance changes via a flurry of amendments, particularly in the context of a law that addresses quite distinct issues. If the system needs updating, the most direct route would be for policymakers to run a consultation and design a new, internally coherent system.

Second, attempts to restrict the role of boards are misguided. Italian corporate governance is going to have to evolve to give them a bigger role.

Take a step back. The Italian system was designed to recognise the fact that most local companies were controlled by a single shareholder. This was either a founder who had listed the company or the state which had retained the rump of the stock following a privatisation. Minorities, or so the thinking went, had to be protected from such controlling investors.

Cue the current two-slate system.

Under this arrangement, Italian boards are appointed via two or more separate lists. The first, proposed by the majority shareholder and intended to receive most of the votes at the annual meeting, features the names of the future chair, chief executive and most of the board. “Majority slates” typically nominate six out of nine board directors. This is how the government exercises control over companies such as energy giants Eni and Enel.

The second slate — usually proposed by an association of investors — names a smaller number of independent directors who are supposed to represent the market. This “minority slate” is intended to receive fewer votes than the majority slate, but its proposed directors get seats anyway.

This is very different from the governance system in the UK or US. It has served Italy reasonably well but is starting to fray at the edges.

For one thing, maturing markets mean there are several public companies that do not have a controlling shareholder. Cable maker Prysmian is the oft-cited example. Second, large shareholders have in the past exercised control despite holding only 20 to 30 per cent of the stock. That is not always enough to push the majority list over the line. 

To date, companies have moved to shore up the slate system with quick fixes. To avoid upsets, friendly institutions have on occasion agreed to vote alongside the majority shareholder to get the list over the line.

The line between controlling and non-controlling shareholders has blurred. A radical overhaul is required.

Companies that have no clear controlling shareholder could move towards the Anglo-Saxon system of governance. In London or New York, potential new directors are identified by the board and individually put to a shareholder vote. 

A board-led appointment system is not without drawbacks, of course. Directors need to act in the interest of the company as a whole, rather than favouring one set of shareholders over another. Executives should play no part in selecting the directors who will oversee their work. The process by which potential board members are identified needs to be sturdy and transparent.

However, adopting this practice would be an opportunity for Italian companies. Having a quirky and convoluted governance system is not necessarily a good way to attract capital. Adopting a mainstream approach would, at the very least, simplify the country’s investment pitch.

Other things I have enjoyed this week

As I pondered what countries have to do to increase their attractiveness to investors, I took a second look at this excellent column by Helen Thomas on how the well-known negative bias of journalists is not the problem. Phew.

As a one-time COP attendee, I have also been following the preparations for the upcoming climate summit. I cannot say I am feeling particularly optimistic about it.

I hope you are having a more upbeat week yourself,

Camilla Palladino
Lex writer