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Massimo BelcrediProfessor of Corporate Finance,

Università Cattolica del S.Cuore,

Consultant to Assonime

The revised Corporate Governance Code

London, June 26th 2003

Content

The role of self-regulation in Italy

Main features of the Italian Code

Conclusions

The role of self-regulation in Italy

Main features of the Italian Code

Conclusions

Contents

The role of the Italian CG Code

• Self-regulation has an important role to play even in a civil law country. It may:– fill voids in regulation (it is a complement to

corporate law)– create incentives for market participants

(through a reputation mechanism)• Full adoption generally requires some years• Though self-regulation cannot modify the

regulatory framework, what is today best practice may over time:– become the minimum standard– be embedded in the law

The role of the Italian CG Code

• Though slowly converging, European CG Codes still show major differences

• Omissions/differences usually justified by a different legal and institutional framework:– appointments to Board (shouldn’t directors “submit for

re-election at regular intervals”? Mandated by law)– role of audit committees (Board of Statutory Auditors,

mandated by law)– “number and calibre” of non-executive and

independent directors (requirements differ from country to country, according to prevailing ownership structure and other institutional arrangements, e.g. codetermination)

The Italian CG Code

• Issued (1999) by a Committee for the CG of Listed Companies– Chaired by the former Chairman of Borsa (Prof. Preda)– Composed by representatives of issuers (Assonime) and

the financial community (Borsa, associations of banking and mutual fund industry)

– intended to monitor adoption and formulate revision proposals (revision effective as of July 2002)

• Borsa Italiana recommends the adoption of CG principles on a “comply or disclose” basis (first non-UK example in the EU)

• Listed companies are required to provide information annually to shareholders on the occasion of the AGM

Additional requirements

• STAR (Stock Market Segment with High Requirements) segment

• Nuovo Mercato (hi-tech, innovative SMEs)– Requirements similar to - though not identical

to - the Code (BoD and committee composition, internal control, directors’ remuneration, etc.)

– Borsa Italiana:• monitors compliance,• may require additional information• evaluates situations of non-compliance• may impose sanctions (e.g. exclusion from

the Star segment)

The role of self-regulation in Italy

Main features of the Italian Code

Conclusions

Contents

Main features of the Italian Code

• “Core” provisions of the Code (BoD):– Composition (non exec./independent

directors)– Functioning (delegated powers; information

flows; significant transactions; transactions with related parties)

– Structure: Committees and their functions (Nomination, Remuneration, Audit)

Traditional corporate governance model

Chairman

Executive Directors Non Executive/Independent Directors

Board of StatutoryAuditors

Shareholders’ Meeting

Committee for Appointment of Directors

Committee on Remuneration and Stock Option

Internal Control Committee

Internal Control System

InvestorRelations

Internal Procedures for Confidential Information

Board of Directors/Sole Director

Audit Firm

The Code Governance Model

• According to Italian corporate law, the Board has the ultimate responsibility for strategic and organisational guidance

• It may delegate (and revoke) powers to managing directors and/or an executive committee– some matters are reserved to the Board by law (e.g.

approval of financial statements, issue of new capital, capital reduction) or by the company by-laws

– the Code recommends (art.1.2., comment) that delegated powers do not cover the most important transactions (including unusual ones and transactions with related parties)

• Managing directors/executive committee shall regularly report to the Board on the exercise of delegated powers

The role of the Board (art.1.2.)

1) examine and approve strategic, operational and financial plans and corporate structure

2) delegate (revoke) powers to managing directors and executive committee; specify the limits of delegated powers

3) determine remuneration of managing directors 4) supervise company performance5) examine and approve transactions having a significant

impact on the company’s profitability, assets and liabilities or financial position, with special reference to transactions involving related parties

6) check adequacy of organisational structure7) report to shareholders8) pursue value creation9) devote sufficient time to their duties (information on

positions held in other listed companies, banks, etc. to be disclosed in financial statements) (new)

– No mandated separation Chairman-CEO• Disclosure of powers delegated to Chairman

(art.4.3.)

– Non-executive Directors:• their views should “carry significant weight” (art.2.1.)

– An “adequate number” of independent Directors (art.3.1.):

• do not entertain, directly or indirectly, nor have recently entertained, business relationships with the company, its subsidiaries, executive directors, controlling shareholders or shareholders exercising a “considerable influence”

• do not own a control (nor a “considerable influence”) shareholding

• are not immediate family members or executive directors of the company or of the subjects above mentioned

Board Composition

• companies controlled by another listed company: “audit committee made up exclusively of independent directors” (art.3.2., comment)

• issuers controlled by a (listed or unlisted) company operating, directly or indirectly, in the same industry: board composition should “ensure adequate conditions of management autonomy and hence the maximisation of the issuer’s own economic and financial objectives” (ibidem)

– Star and Nuovo Mercato (revised, March 2003)• N. of independent directors related to boad size• Numerical criteria to identify independent

directors (e.g income from professional relationships with the firm not exceeding 5% of the director’s total income)

Board Composition

Information flows to the Board

• Ex ante information (art.4.1.):– The Chairman shall take steps to ensure

directors are provided with documentation and information reasonably in advance of Board Meetings

• Ex post information (art.5.):– Managing directors shall provide the Board with

adequate information on:• the activities performed in the exercise of their

delegated powers• transactions which are “atypical, unusual, or with

related parties”, whose examination and approval are not reserved to the Board

Transactions with related parties (art.11.)

– Transactions with related parties (as defined by Consob) shall comply with criteria of substantial and procedural fairness

• directors shall disclose any direct and indirect interest they may have in a transaction

• they shall abandon the meeting when the issue is being discussed

• the Board shall take appropriate decisions when this would result in there no longer being the necessary quorum

– Where necessary, the Board may require the assistance of independent experts

• for the valuation of assets• for financial, legal or technical advice

Appointment of Directors

• In accordance to a transparent procedure (art.7.1., comment)– Detailed Information on Candidates’ personal

traits and professional qualifications (with an indication of their eligibility to qualify as independent directors) shall be deposited at least 10 days before GM (art.7.1.)

• Nomination Committee (art.7.2.)– Declaredly a “possibility”, especially useful

where “it is difficult for shareholders to make proposals, as may be the case in listed companies with a broad shareholder base”

– A majority of non-executive directors

Directors’ Remuneration• As a general rule, part of managing directors’

remuneration shall be linked (art.8.2.):– to the company’s profitability– possibly, to the achievement of specific objectives

• Remuneration Committee (art.8.1.)

– Shall submit proposals (in the absence of persons directly concerned)

– for the remuneration of:– Managing Directors– Directors appointed to particular positions (e.g.

Chairman, Vice President)– for the criteria to be used in the remuneration of

the main company officers (on a proposal from the managing director)

– A majority of non-executive directors

Internal Control

• Explicit reference to the CoSO Report (art.9.4., comment)

• The board shall (art.9.2.):– lay down guidelines– periodically check that the system is adequate and

properly working– verify that the main risks are identified and managed

appropriately

• Managing directors shall (art.9.3.):– identify the main risks and submit them to Board– implement the guidelines laid down by the Board– appoint an audit supervisor (not placed hierarchically

under persons responsible for operations: art.9.4.)– provide him with adequate resources

• The Internal Control (i.e. Audit) committee shall (art.10.2.):– assess the work programme prepared by audit

supervisors (and receive their periodic reports)– assess proposals by auditing firms– assess appropriateness of accounting

standards

• Audit Committee composition (art.10.1.):– made up entirely of non-executive directors– a majority of independent directors(recall special cases: companies belonging to

groups)

Internal Control

The role of self-regulation in Italy

Main features of the Italian Code

Conclusions

The revised Corporate Governance Code

Conclusions

• The Italian CG Code:– Is in line with international best practice– Is adopted on a “comply or disclose” basis

(compliance monitored by Borsa Italiana)– Is periodically revised

• The interplay with Corporate Law– The Code has a leading role, increasingly

regnized by corporate law• new art.2387 C.C.: by-laws may establish special

requisites of “reputation, competence and independence” for directors (possibly referring to self-regulatory Codes issued by professional associations or by the Stock Exchange)

• Some principles subsequently embedded in the law (e.g. new discipline on conflict of interest)