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EUROPEAN RISK CONFERENCE: "RISK AND GOVERNANCE"
Milano, Bocconi University
11 September 2008
Risk Factors in the Italian Corporate Governance
Paolo Santella
Banca d’Italia
[email protected]
The papers
Interlocking Directorships
(Santella-Drago-Polo 2007):
in
the
Italian
Stock
Market
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1027947
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-BaffiDrago-Lattuca 2008):
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1137491
2
Presentation Summary
-
1.
2.
3.
4.
Interlocking directorships
Institutional investors’ voting activism
Country profiles as risk factors
Risk factors and the regulatory debate
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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 (1998-2006) with
very few entrants and very few exits mainly related to
the passing away of the director.
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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 2006.
- Decreasing number of directors shared by interlocked
companies.
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All the Italian Blue Chips:
Financial and not financial
1998
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All the Italian Blue Chips:
financial and not financial
2006
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Number of directors in common
Interlocking directorships
Italian Financial Blue
in Italy 1998-2006
Chips
P.Santella, C.Drago, A.Polo
1998
8
Interlocking directorships
in Italy 1998-2006
Number of directors in common
P.Santella, C.Drago, A.Polo
2006
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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.
10
French Blue
Chips (March
2008)
11
Italian Blue Chips (Dec.
2007)
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UK Blue Chips (March 2008)
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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.
14
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):
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Institutional investors as shareholders
share ownership of European listed companies in 2005
France
Germany
(2004)
Italy
Netherlands
(2003)
Poland
Spain
Sweden
UK
EU
weighted
average
Foreign Collective
Banks Private
investors investment and
non
other financial
companies
39%
20%
9%
15%
21%
8%
7%
42%
Individual
Public
investors/households sector
6%
15%
11%
7%
13%
69%
12%
12%
11%
0
28%
Na
26%
11%
10%
2%
38%
34%
34%
33%
33%
16%
9%
26%
49%
24%
1%
8%
3%
2%
7%
8%
25%
11%
2%
16%
17%
24%
18%
14%
15%
20%
.3%
8%
.1%
5%
Source: FESE (2007).
“Foreign investors” are made of foreign institutional
investors and “Collective investment” are made of
resident institutional investors.
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…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):
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Low voting turnout in the EU…
Average voting turnout in 2006
UK (FTSE 350)
Netherlands
Italy
France
Germany (Dax30)
Spain
US (S&P 500)
61%
36%
52%
57%
49%
65%
87%
Source: PIRC (2007).
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…also considering that in continental Europe
much of the voting turnout seems to be made
of controlling shareholders
companies considered
Weighted average free-float
Percentage of widely-held companies
Austria
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46.8
18.2
Denmark
24
61.2
50
Bel, Fra, Ned, Por
197
74.7
37.6
Finland
26
89.3
53.8
Germany
87
72.9
37.9
Greece
28
58.6
21.4
Ireland
16
95
75
Italy
79
59.1
17.7
Norway
15
46.2
33.3
UK
317
96.1
83.3
Spain
49
70.3
26.5
Sweden
56
77.9
51.8
Switzerland
76
87
57.9
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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.
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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.
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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 controlenhancing mechanisms, ownership
concentration, and to the origin of the national
legal system.
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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).
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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).
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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…
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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
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…Consob is consulting (i)
Consob is running an ad hoc consultation
(http://www.consob.it/main/aree/novita/consulta
zione_emittenti_20080429_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.
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…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:
http://www.consob.it/main/aree/novita/consultazione_emittenti_20080409_parti_correl
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).
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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-BaffiDrago-Lattuca, 2008)
- 1/3 minority blocking according to the Italian
legislation
- signs that already inst. invs. are making
themselves heard in the largest Italian nonfinancial Blue Chips where the free-float is higher
(Santella-Drago-Paone 2006)
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…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.
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