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Introduction to the new Corporate
Governance Code
Michele Monti
Executive Director
Legal & Institutional Affairs
Borsa Italiana S.p.A.
London, September 28, 2006
This presentation is solely for the use of the attendees to this event. No part of it may be circulated, quoted, or reproduced for
distribution without prior written approval from Borsa Italiana S.p.A. This material was used by Borsa Italiana S.p.A. during an
oral presentation and it is not a complete record of the discussion.
The New Corporate Governance Code
Introduction
Evolution of the legislation
Contents
1999-2006 - how did it go
3
Introduction
A new Code, Why?
Changes in the laws and regulations (EU Commission Financial
Services Action Plan, new corporate law, Investor Protection Act)
Need to tailor the recommendations of the Code to the various types
of listed companies
Issuers became more mature after few years of implementation of the
previous Code
4
Introduction
Effectiveness
The new Code substitutes the one released in October 1999 and
revisited in July 2002
The principle “comply or explain” is confirmed: listed companies are
invited to implement the Code within the closing of the fiscal year
beginning in 2006 and to give information to the market within the
report on corporate governance to be filed in 2007
Borsa Italiana will monitor the implementation of the Code and will
follow the continuous upgrading of corporate governance principles
5
Introduction
Corporate governance in Italy: main steps
1999: Release of the Code of Corporate Governance
2000:
Mandatory deposit of the C.G. Report provided in the Rules
2002: Code of Corporate Governance Revised
2003: Borsa’s Guidelines on the preparation of the Report
2004: Corporate law Reform / Assonime Guidelines
2005: Investor Protection Act
2006: New Code of Corporate Governance
6
The New Corporate Governance Code
Introduction
Evolution of the legislation
Contents
1999-2006 - how did it go
7
Evolution of the legislation
1. The European Union legislation 1/2
Corporate Law Action Plan May 21, 2003
Section: Corporate Governance
Recommendation on independent directors
(published on 02/15/2005)
Audit Directive
(approved – still to be
published in EUOG)
Shareholder rights Directive
(Commission proposal filed on 01/05/2006)
Directive on the protection of
Company’s capital
(recently approved by the EU Parliament)
Recommendation on compensation
(published on 12/29/2004)
Directive
•Issuers disclosure on corporate governance
•Liability for financial information
(Commission proposal filed on 10/28/2004)
Investors Disclosure Directive
(still to be adopted)
Directive on Groups
(still to be adopted)
8
Evolution of the legislation
1. The European Union legislation 2/2
2003 Action Plan
•
a single European code on corporate governance has not been deemed useful (due to the
variety of company laws in the Member States; it would have resulted in a list of abstract
principles or it would have allowed too many derogations);
•
on the contrary it has been deemed useful to introduce a common approach at the EU level
regarding a limited number of main principles, so to adequately coordinate the codes of the
single Member States;
•
Main goals in the corporate governance field:
a) Increasing the transparency in the corporate governance
b) Strengthening the Shareholders Rights
c) Updating of the Board of Directors
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Evolution of the legislation
2. National scenario: evolution
Corporate law reform
(a.k.a Vietti’s law)
Law on Market Abuse

• role of the Board of Directors
 role of the C.E.O.
 conflicts of interests
 alternative models
internal dealing
approved in April 2005 and
implemented by Consob
in force as of 01/01/2004
Decree Amending Vietti’s law
(D. Lgs. 310/04)
supervisory board: independence
and role
 interests of the sole director
 related parties

In force as of 01/01/2005
Investor Protection Act (262/05)




slate voting to appoint directors
independent/minority directors
minority auditor
enforcement
In force as of January 2006
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The New Corporate Governance Code
Introduction
Evolution of the legislation
Contents
1999-2006 - how did it go
11
Contents
Committee
Borsa Italiana promoted the formation of a Committee representing market
participants and entrepreneurs
The works of the Committee have been supported by a Working Group made of
experts designated by Borsa Italiana and by the relevant business associations
(Abi, Ania, Assirevi, Assogestioni, Assonime, Confindustria) coordinated by 3
highly reputable experts
The Working Group was assisted also by contributions made by other
associations, professionals and experts
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Contents
Structure of the Code
The principles in the new Code replicates the order of the old Corporate Governance
Code but the new Code has deeply changed the structure; every article is now divided
in three different sections:
Principles, having a general character
Criteria, containing detailed indication on how to comply with the implementation
of the Principles
Comments, aiming at clarifying Principles and Criteria, giving also adequate
examples.
13
Main innovations
Contents
•
Role of the Board of Directors: the recommendations of the Code have been adapted to the
new laws and regulations on corporate law, also regarding group of companies; further the new
Code contains recommendations on the limitations of the plurality of offices and on the yearly
self-assessment of the Board
•
Composition of the Board of Directors: improved definition of the role of the non executives
directors; introduction of the lead independent director in case of concentration of the office of
Chairman and C.E.O. in the same person
•
Independent Directors: introduction of the principle that substance prevails over form in
evaluating the independence of a director; list of examples to be used by the Board of Directors
in evaluating the independence; active role of the Board of Statutory Auditors in controlling the
correct implementation of the criteria to evaluate independence; independent directors meetings
•
Committees within the Board of Directors: general provision on the compositions, functions
and procedures to be adopted by the Committees
14
Contents
Main Innovations
•
•
•
•
•
Appointment of Directors: transparency in the appointment procedures; list of examples of the
functions of the nomination committee
Remuneration of the Directors: definition of the structure and objective of the remuneration,
distinguishing between executive and non executive directors; specification of the functions of the
remuneration committee
Internal Control System: update of the notion of internal control to put it in line with the
international best practice as evolved; improved definition of the roles and relationship among the
various bodies involved in the definition, monitoring and updating of the internal control system (in
particular between the board of statutory auditors and internal control committee)
Directors interests and transaction with related parties: recommendations in line with the
changed laws and regulations (Article 2391 and 2391-bis of the Civil Code)
Statutory Auditors: broadening of the independence of the auditors and definition of measures
aimed at guaranteeing an efficient and effective performance of their role
15
Contents
Main innovations
•
Relationship with shareholders: promotions of initiatives aimed at increasing the
knowledge of the corporate information and easing the participation to the general
meetings and the exercise of shareholders’ rights
•
Alternative systems: recommendations to companies adopting the one-tier or two-tier
system to implement the recommendations of the Code adapting them to the chosen
system and to give ample disclosure on the adaptations made and on the reasons behind
the choice
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Contents
Concentration of the role of Chairman and C.E.O.
Yesterday:
Where, in order to promote the
effective and efficient
management of the company, the
board has delegated powers to
the chairman, it shall disclose
adequate information in its annual
report on the powers delegated
(Art. 4.3)
Today:
Where the Board of Directors has delegated
management powers to the chairman, it shall disclose
adequate information in the report of corporate
governance on the reasons for such organisational
choice (Art. 2.P.5)
In the event that the chairman of the BoD is C.E.O. of
the company, as well as in the event that the office of
chairman is covered by the person controlling the
issuer, the board shall designate a lead independent
director, who represents a reference and coordination
point for the requests and contributions of nonexecutives directors, in particular, the independents
(art. 2.C.3)
17
Contents
Independent Directors
Yesterday:
Today:
The independent director (Art. 3.1):
Principle (art.3.P.1): substantially unchanged
•
Criteria:
•
•
has not recently entertained business
relationship with the company, its
subsidiaries, the executive directors or
the shareholders or group of
shareholders who controls the
company of such a significance to
influence his/her autonomous
judgment;
does not own a quantity of shares
enabling him/her to control the
company or exercise a considerable
influence over it nor participate in a
shareholders’ agreement to control the
company;
The independence shall be
periodically assessed by the board of
directors (Art. 3.2)
The BoD shall evaluate the independence of its nonexecutive directors having regard more to the
contents than to the form keeping in mind that a
director usually does not appear independent
when (3.C.1):
[a list of examples follows in the text of the Code]
The Board of Auditors shall ascertain the correct
application of the assessment criteria by the BoD
(3.C.5)
The independent directors shall meet at least once a
year without the presence of the other directors
(3.C.6)
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Contents
Composition of the Remuneration Committee
Yesterday:
The BoD shall form an inside
committee on remuneration and
stock option or equity based
remuneration plans. The majority of
the members of this committee shall
be non executive … (Art. 8.1)
Today:
The BoD shall establish among its
members a remuneration committee
made up of non-executive directors, the
majority of which are independent (Art.
7.P.3)
19
Composition of the Internal Control Committee
Yesterday:
The BoD shall establish an
internal control committee
charged with the task of giving
advice and making proposals
made up of non-executive
directors, of which the majority
shall be independent (Art. 10.1)
Contents
Today:
The BoD shall establish an internal control
committee, made up of non-executive
directors, of which the majority shall be
independent. […] At least one member of the
committee must have an adequate experience
in accounting and finance, to be evaluated by
the BoD at the time of his/her appointment (Art.
8.P.4)
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Contents
Two tier and One tier management and control systems
Yesterday:
No provision
Today:
In the event of adopting a two tier or one tier
management and control system, the articles of
the Code shall apply insofar as compatible,
adapting individual provisions to the particular
system adopted, consistently with the objectives
of good corporate governance, transparency of
information and protection of investors and the
market pursued by the Code (Art.12.P.1)
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The New Corporate Governance Code
Introduction
Evolution of the legislation
Contents
1999-2006 - how did it go
22
1999-2006
From 2001 to 2006: how did it go so far for companies included in the
S&P/MIB Index
Issuers continuous increase of compliance with the principles of
the Code
Continuous and significant increase in the communication to the
market by listed companies, from a quantity and a quality
perspective
23
Composition of the board of directors
S&P: 14 - 15 directors (average)
100%
STAR: 9 - 10 directors (average)
50%
38%
60%
37%
31%
40%
13%
31%
80%
20%
0%
S&P
Exe cutive dire ctors
STAR
Non e xe cutive dire ctors
Inde pe nde nt dire ctors
24
Independent directors in the STAR companies
257
300
250
193
200
150
+33%
100
50
compared with
STAR requirement
0
Independent directors Independent directors
according to STAR listing appointed by STAR
requirements
companies
25
Internal committee of the board of directors
 Nomination committee

97%
100%

S&P: optional appointment

STAR: optional appointment
Remuneration committee

S&P: recommended appointment

STAR: mandatory appointment (unless
92%
100%
93%
80%
60%
40%
remuneration linked to company’s profitability is
adopted)
18%
20%
12%
 Internal control committee

S&P: recommended appointment

STAR: mandatory appointment
0%
Nom ination
com m ittee
Rem uneration
com m itte
S&P
Internal control
com m ittee
STAR
26
Disclosure on appointment of directors and statutory
auditors
Advanced deposit of proposals and CV
89%
100%
85%
85%
74%
80%
60%
40%
20%
0%
Appoi n tm e n t of di re ctors
Appoi n tm e n t of au di tors
S &P
S TAR
27
Transactions with related parties
 Transactions with related parties shall
comply with criteria of substantial and
procedural fairness (art. 11.1)
100%
100%
95%
90%
79%
80%
64%
60%
 Directors who have an interest,
inform the board about it and abandon
the board meeting when the issue is
discussed (11.2).
60%
40%
20%
 If necessary, transaction with related
parties is concluded with the assistance
of independent (art. 11.3).
0%
Art. 11.1
Art. 11.2
S&P
Art. 11.3
STAR
28