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The revised
Corporate Governance Code
Massimo Belcredi
Professor of Corporate Finance,
Università Cattolica del S.Cuore,
Consultant to Assonime
London, June 26th 2003
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 Assonime. This material was
used by Assonime during an oral presentation and it is not a complete record of the discussion.
Content
The role of self-regulation in Italy
Main features of the Italian Code
Conclusions
Contents
The role of self-regulation in Italy
Main features of the Italian Code
Conclusions
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)
Contents
The role of self-regulation in Italy
Main features of the Italian Code
Conclusions
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
Internal Control
System
Executive Directors
Non Executive/Independent
Directors
Board of Statutory
Auditors
Investor
Relations
Board of Directors/Sole Director
Shareholders’
Meeting
Internal
Procedures for
Confidential
Information
Committee for
Appointment of
Directors
Committee on
Remuneration
and Stock Option
Internal Control
Committee
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 performance
5) 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 structure
7) report to shareholders
8) pursue value creation
9) devote sufficient time to their duties (information on
positions held in other listed companies, banks, etc. to
be disclosed in financial statements) (new)
Board Composition
– No mandated separation Chairman-CEO
• Disclosure
(art.4.3.)
of
powers
delegated
to
Chairman
– Non-executive Directors:
• their views should “carry significant weight” (art.2.1.)
– An “adequate number”
Directors (art.3.1.):
of
independent
• 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)
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
Internal Control
• 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)
The revised Corporate Governance
Code
The role of self-regulation in Italy
Main features of the Italian Code
Conclusions
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)