A Primer on Corporate Governance

Andrea Melis, Alessandro Zattoni

• Publisher: Business Expert Press
• Year: 2017
• Print ISBN: 9781606498842
• eBook ISBN: 9781606498859
• Topic: Business
• Subtopic: Finance
• Index: Business

This book provides an understanding of the characteristics of corporate governance in Italy, one of the most developed countries in the world, symbol of the family capitalism. The text presents the main peculiarities of the Italian corporate governance system, its impact on decision-making in corporate boardrooms, and the potential positive and negative consequences for the firm and its stakeholders. Several real-life case studies were included to help the reader grasp the subtleties of how power is exercised in Italian companies. The authors combine their knowledge of research with their professional experience. Such an approach helps the reader interpret the nuances of corporate governance practices in Italian companies as those practices are driven not only by the globalization of markets, but also by national economic, social, and political forces. The result is a unique corporate governance system, which deeply differs from the Anglo-American one. This book is, therefore, particularly relevant for a wide international audience (including investors, corporate directors, scholars, and practitioners) as it provides useful insights to interpret, evaluate and take sound decisions in Italian companies.

PART I

Overview of Italian Economy and Governance Model

CHAPTER 1

Italian Economy and Governance Model from a Global Perspective

A Historical Overview of the Italian Economy

Before the 20th century, the Italian economic system was mainly rural and the industrialization process was limited to the North of the country and to some industries (above all the mechanical and the textile). At the beginning of the 20th century, Italian economy joins the second industrial revolution, thanks to the important role played by the State that controls a number of companies operating in key industries such as public utilities, steel, insurance, and banking. In the first decades of the 20th century, two subjects, that is state-owned companies and large universal banks (e.g., Banca Commerciale Italiana, Credito Italiano, and Banco di Roma), dominate the national economic system as they finance the investment and the growth of companies operating in the capital-intensive industries such as public utilities (energy, telecommunication, etc.), steel, and mining.

The roots of Italian capitalism as it is nowadays are to be found in the Italian State’s reaction to the Great Crisis of 1929. The negative economic consequences affect first the industrial companies, and then the large universal banks that control them. The three main Italian universal banks collapsed due to the financial distress of their controlled companies. It emerged that an important part of nonfinancial firms was run by “mere executives using money provided almost entirely by the depositors of the commercial banks” (Saraceno 1955: 198). Since the banks’ losses were eventually covered by the State, such a situation created moral hazard.

In 1933, to avoid potential terrible consequences for the entire national economy, the Italian Government creates a holding company (called IRI or Istituto per la Ricostruzione Industriale), which buys universal banks’ shareholdings in industrial companies. IRI’s board of directors was fully under the control of the Italian Government (Saraceno 1955). At the end of this massive reallocation of shares, the IRI group becomes the controlling shareholder of a large number of Italian companies and banks.

A second effect of the Great Crisis, following the evolution of the U.S. legislation (in particular, the 1933 Glass–Steagall Act), was the issue of a new banking law in 1936. This law prohibited “universal” banks. Banks were not allowed to hold equity stakes in nonfinancial firms in order to avoid the possibility that the instability of industrial companies could have serious economic consequences on the financial industry (Amatori and Colli 2001). Since then, banks have generally preferred an arm’s-length relationship with their customers rather than relational financing. This picture of bank behavior has one notable exception, Mediobanca (see Box 1.1).

The State intervention in the economy through the IRI group, originally intended as temporary, becomes permanent in 1937, characterizing the Italian capitalism as a “mixed economy” (Barca and Trento 1997b). Since then, the State dominates the national economy through some large industrial business groups such as IRI, controlling a number of large companies operating in different industries and the largest banks in the country, ENI (Ente Nazionale Idrocarburi), controlling companies in the oil industry, EFIM (Ente Partecipazioni e Finanziamento Industrie Manifatturiere), controlling companies in the mechanical sector, and ENEL (Ente Nazionale per l’Energia Elettrica) producing and distributing electricity in the country.

Besides the State, also some large private groups controlled by wealthy entrepreneurial families promoted the growth of the national economic system. Some business groups are relatively old and have been founded between the end of the 19th and the beginning of the 20th century. They are Fiat group (Agnelli family), Pirelli group (Pirelli family), Italcementi group (Pesenti family), SMI (Società Metallurgica Italiana) group (Orlando family), and Acciaierie e Ferriere Lombarde Falck group (Falck family). These long-lasting groups are typically localized in the north of the country and are controlled by wealthy families of entrepreneurs who are strictly connected by personal relationships, mutual shareholdings, and syndicate pacts. For their characteristics, they have been called the galaxy of the North (galassia del nord) of the Italian capitalism. In the long period of growth of the national economy that follows the Second World War, also known as the Italian economic miracle (miracolo economico), new families entered into the scene. They founded and developed important business groups such as Ferrero, Benetton, De Benedetti, and Fininvest of Silvio Berlusconi.

Box 1.1 The History of Mediobanca: The “Hub” of Italian Capitalism

Founded in 1946 under the initiative of Raffaele Mattioli, the chairman of the Banca Commerciale Italiana, and Enrico Cuccia, Mediobanca offered a wide set of activities to its industrial and financial customers, including the placement of their bonds and shares and the advice on strategic and financial issues.

Mediobanca was formally controlled by some of the largest banks in Italy (Banca commerciale, Credito Italiano, and Banco di Roma), but de facto independent and under the strong leadership of its chief executive officer (CEO), Mr. Enrico Cuccia, who exercised his power until his death in 2000.

Not only did Mediobanca act as a merchant bank, but also played an important role in corporate governance, being able to influence CEO turnover of nonfinancial listed firms. This role was not justified by the relatively small proportion of shares directly held by Mediobanca in Italian nonfinancial listed firms, but by the fact that Mediobanca was the “hub” of the main cross-shareholding network (including shareholders’ agreements) among the most important industrial groups in Italy.

Sources: Barca and Trento (1997a); Aganin and Volpin (2005); Colli (2009); Zattoni and Cuomo (2016).

After the Second World War, small and medium enterprises (SMEs) have significantly increased their importance within the national 6 A PrIMEr oN CorPorAtE GoVErNANCE economy. These companies are usually controlled by an entrepreneur or a family and operate in small industries or niches of large industries. The most competitive Italian SMEs are usually diffused within limited geographical areas (the so-called industrial districts) where there is a high density of companies operating in a strictly related cluster of industries (Porter 1990). So, for example in Sassuolo, where there is the district of the ceramic tile production, it is possible to find not only the most competitive producers of ceramic tiles, but also the most sophisticated suppliers of goods and service related to the production of ceramic tiles.

Finally, the Italian economic system is also characterized by a large number of cooperatives—that is, worker cooperatives, consumer cooperatives, social cooperatives, or consortiums—operating in several businesses (e.g., services, agriculture, retail, manufacturing, construction, and banking). The large number of cooperatives—there are something less than 80,000 cooperatives employing about 1.3 million workers in Italy—has been favored by both cultural and political values and the presence of tax incentives (Zattoni 2015). While some cooperatives are small and play a limited role in their industry, other cooperatives are large and play a leading role at national or international level. Think, for example, of Coop Italia in the domestic retail business, Sacmi in the global production of machineries for ceramic tiles, or CMC in the national and international construction business.

In sum, various actors played a leading role and promoted the national economic development along the time (see Table 1.1). Between 1900 and 1930, during the first phase of the industrialization process, the State and some large universal banks dominated national economy, with a minor role of wealthy entrepreneurial families and cooperatives. In the second phase, when the financial crisis of the 1930s pushed the Italian Government to dismantle universal banks and to buy their shares in industrial companies, the state became the most important shareholder and the driver of the national economic development, flanked by an increasing role of entrepreneurial families and cooperatives after the Second World War. In the current phase, that is, after the large privatizations and the new banking law of the 1990s, entrepreneurial families are the key drivers of the national economy together with the state.

Table 1.1 The role of main actors within major periods of national economy

	1900–1930	1930–1992	1992–current
Major events in the period	Take off of industrialization	Economic crisis followed by the economic miracle New banking law separating commercial and industrial banks Large nationalization	Stagnation of economic development New banking law allowing commercial banks to own shares in industrial companies Large privatization
State	Highly involved as entrepreneur in capital-intensive industries	Highly involved as entrepreneur in a number of industries	Focused on key strategic industries
Entrepreneurial families	Involved as entrepreneurs of large companies	Highly involved as entrepreneurs of small and large companies	Highly involved as entrepreneurs of small and large companies
Banks	Universal banks as controlling shareholder of large companies	Co...

Table of contents

• Cover
• Title
• Copyright
• Preface
• Introduction
• Part I Overview of Italian Economy and Governance Model
• Part II External Corporate Governance Mechanisms
• Part III Internal Corporate Governance Mechanisms
• Part IV Conclusions
• References
• Index
• Adpage
• Backcover