As highlighted in a 2005 study by Heidrick & Struggles, the Italian corporate governance regime is generally characterized by limited legal protection for investors, poor enforcement of legislation, underdeveloped equity markets, pyramidal groups, and very high ownership concentration with 90 percent of Italian companies being family-owned. The corporate structure of traditional Italian companies is also somewhat unusual, where shareholders elect a Board of Directors, as well as a separate Board of Statutory Auditors. According to the International Monetary Fund's (IMF) 2006 Financial System Stability Assessment, while, in some areas, the Italian corporate governance framework incorporates more stringent investor protection requirements in comparison to international standards, its benefits are not always fully realized. The IMF report recommends mandating a majority of independent directors, representing minority shareholders on the board, and incorporating some of the provisions of the 1999 Preda Code of Conduct into regulatory requirements. According to the 2005 Organization for Economic Co-operation and Development (OECD) Economic Survey of Italy, there was also a need to strengthen the protection of minority shareholders as stressed by the OECD Principles of Corporate Governance. In the wake of corporate insolvencies, including the Parmalat scandal, the Law on Savings No. 262 of 2005 entered into force in January 2006 to improve corporate governance of listed companies, increase transparency, and enhance consumer protection. A new Corporate Governance Code was also promulgated by the Italian Stock Exchange (Borsa Italiana) in March 2006 to strengthen corporate governance among listed companies.

General Overview

In 1999, the Committee for the Corporate Governance of Listed Companies, also known as the Preda Committee, issued a Code of Conduct (Preda Code) to enhance Italian companies' competitiveness. According to KPMG's 2001/02 Survey on Corporate Governance in Europe, the Preda Code addresses the proper control of company risks, the creation of a suitable proxy system, transparency, and the maximization of shareholder value. Compliance with the Preda Code is voluntary for Italian listed companies. The corporate structure of traditional Italian companies is somewhat unusual in comparison to the Anglo-American model or German model. According to the International Monetary Fund's (IMF) 2005 report on Selected Issues, shareholders of traditional Italian companies elect a Board of Directors, as well as a separate Board of Statutory Auditors. The Board of Directors is responsible for assessing the suitability of business plans and organization, whereas the Board of Statutory Auditors is responsible for assessing governance and internal control issues. Legislation was enacted in 2004 to give Italian companies greater flexibility in their organizational structure by allowing them to select a unitary board, a two-tier board, or the traditional Italian model. The IMF report noted, however, that, to date, virtually all listed companies continued to follow the traditional Italian model.

According to a 2002 study prepared by the international law firm Weil, Gotshal & Manges for the European Commission, the corporate governance regime in Italy has undergone considerable legislative reform, including the promulgation of the Consolidated Law on Financial Intermediation, which was enacted in 1998 and last amended in September 2007. In January 2003, the Italian government adopted Legislative Decree No. 6 of the same year (Corporate Law Reform), which governs limited liability and joint-stock companies and cooperatives. In the wake of corporate insolvencies, including the Parmalat scandal during 2003-04, the Law on Savings No. 262 of 2005 (hereafter referred to as "Savings Law") was enacted in January 2006 to improve corporate governance of listed companies, increase transparency, and enhance consumer protection. To achieve these goals, Italy has increased sanctioning powers of the National Commission for Listed Companies and Stock Exchange (CONSOB), enhanced minority shareholders' rights, introduced more stringent rules on external auditors, and reinforced compliance with the Corporate Governance Codes. A more central role was also given to CONSOB by increasing its resources and powers to act independently from the Ministry of Economy and Finance (MEF). A new Corporate Governance Code was promulgated by the Italian Stock Exchange (Borsa Italiana) in March 2006 to strengthen corporate governance among listed companies.

As highlighted in a 2005 study by Heidrick & Struggles, the Italian corporate governance regime is generally characterized by limited legal protection for investors, poor enforcement of legislation, underdeveloped equity markets, pyramidal groups, and very high ownership concentration with 90 percent of Italian companies being family-owned. While in some areas the Italian corporate governance framework incorporates more stringent investor protection requirements in comparison to international standards, as stated in the IMF's 2006 Financial System Stability Assessment (FSSA), its benefits are not always fully realized. In its 2006 FSSA, the IMF recommends mandating a majority of independent directors, incorporating some of the provisions of the Preda Code into regulatory requirements, and representing minority shareholders on the board. According to the 2005 Organization for Economic Co-operation and Development (OECD) Economic Survey of Italy, there was also a need to strengthen the protection of minority shareholders as stressed by the OECD Principles of Corporate Governance.

Legislative Decree No. 58 of 1998 (Consolidated Law on Financial Intermediation) sets out the institutional framework for the regulation and supervision of the Italian securities market. According to the IMF's 2006 Detailed Assessment of Italy's compliance with the International Organization of Securities Commission's (IOSCO) Objectives and Principles of Securities Regulation, CONSOB and the Bank of Italy (BoI) share responsibility for securities regulation under a functional approach to supervision, and are required to cooperate in a coordinated manner in the areas in which they share authority. The Consolidated Law on Financial Intermediation establishes in detail the powers of both regulators and the activities they may perform, and identifies the persons and entities subject to their respective supervision. The Borsa Italiana is also entrusted with regulatory and market management powers over listed companies, and merged with the London Stock Exchange in 2007.

As noted in the World Bank's 2008 Doing Business report, investor protection in Italy in 2008 was slightly below the average achieved by member states of the OECD. The Investor Protection Index is a subcomponent of the World Bank's 2008 Doing Business Indicators, and consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indexes range from 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Italy scores 7 in the disclosure index against an OECD average of 6.4. It scores 4 in the Director Liability Index against an OECD average of 5.1 and 6 in the Shareholder Suits Index against an OECD average of 6.5.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

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The Preda Code was issued in 1999 by the Committee for the Corporate Governance of Listed Companies to enhance Italian companies' competitiveness. According to KPMG's 2001/02 Survey on Corporate Governance in Europe, the Preda Code addresses the proper control of company risks, the creation of a suitable proxy system, transparency, and the maximization of shareholder value. Compliance with the Preda Code is voluntary for Italian listed companies. According to Weil, Gotshal & Manges (2002), the corporate governance regime in Italy has undergone considerable legislative reform, including the promulgation of the Consolidated Law on Financial Intermediation, which was enacted in 1998 and last amended in September 2007. In January 2003, the Italian government adopted the Corporate Law Reform, which governs limited liability and joint-stock companies and cooperatives. In the wake of the Parmalat scandal during 2003-04, the Savings Law entered into force in January 2006 to improve corporate governance of listed companies, increase transparency, and enhance consumer protection. A new Corporate Governance Code was also promulgated by the Borsa Italiana in March 2006 to strengthen corporate governance among listed companies.

The Consolidated Law on Financial Intermediation sets out the institutional framework for the regulation and supervision of the Italian securities market. According to the IMF's 2006 Detailed Assessment of Implementation of the IOSCO Principles, the CONSOB and BoI share responsibility for securities regulation under a functional approach to supervision, and are required to cooperate in a coordinated manner in the areas in which they share authority. The Consolidated Law on Financial Intermediation establishes in detail the powers of both regulators and the activities they may perform, and identifies the persons and entities subject to their respective supervision. The Borsa Italiana is also entrusted with regulatory and market management powers over listed companies, and merged with the London Stock Exchange in 2007. However, the available sources do not directly address Italy's compliance with this principle.

Principle II: The Rights of Shareholders and Key Ownership Function

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The Italian Civil Code contains the main provisions with regard to the treatment and rights of shareholders. According to the IMF's 2006 Detailed Assessment of Implementation of the IOSCO Principles, the Civil Code and CONSOB regulations require members of the Board of Directors, Board of Statutory Auditors, as well as general managers of the company "to carry out their duties with due diligence and to be liable for losses arising from the failure to fulfill their responsibilities" (p. 13). A provision under the Consolidated Law on Financial Intermediation also permits shareholders of listed companies to bring collective action against the members of the Board of Directors for breach of their legal duties. However, the available sources do not directly address Italy's compliance with this principle.

Principle III: The Equitable Treatment of Shareholders

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As stated in the 2005 OECD Economic Survey of Italy, there was a need to strengthen the protection of minority shareholders as stressed by the OECD Principles of Corporate Governance. According to the IMF's 2006 Detailed Assessment of Implementation of the IOSCO Principles, the Civil Code and CONSOB regulations guarantee the fair and equal treatment of shareholders, and require members of the Board of Directors, Board of Statutory Auditors, as well as general managers of the company "to carry out their duties with due diligence and to be liable for losses arising from the failure to fulfill their responsibilities" (p. 13). With respect to listed companies, the Consolidated Law on Financial Intermediation requires listed issuers to guarantee the same treatment to all holders of identical financial instruments. A provision under the Law also permits shareholders of listed companies to bring collective action against the members of the Board of Directors for breach of their legal duties. In practice, however, the legal protection for minority shareholders was not fully realized, according to the IMF's 2005 report on Selected Issues, as collective action of minority shareholders for misrepresentation against the members of the Board of Directors was unlikely. Nonetheless, the available sources do not directly address Italy's compliance with this principle.

Principle IV: The Role of Stakeholders in Corporate Governance

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The 2005 OECD Economic Survey of Italy underlined the need to update the Insolvency Act (Royal Decree No. 267 of 1942), which failed to ensure the protection of creditors, or to allow companies' owners to start a new business. Following several prominent Italian insolvencies, including Parmalat, the Parliament issued Legislative Decree No. 35 in March 2005 to introduce important amendments to the Italian insolvency framework, which had remained largely unchanged since 1942. On May 14, 2005, the Legislative Decree was subsequently converted into legislation by Law No. 80 of 2005. However, the available sources do not directly address Italy's compliance with this principle.

Principle V: Disclosure and Transparency

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At the time of the IMF's 2005 report, disclosure and financial reporting requirements applicable to listed companies in Italy were quite rigorous, particularly in comparison with other European countries. However pecuniary and administrative sanctions that could be imposed on issuers or management for breaches of these requirements remained limited in practice. Moreover, the CONSOB could not impose penalties directly, but had to act through the MEF. Pursuant to the Savings Law, the CONSOB was given more resources and powers to act independently from the MEF. In its 2006 Detailed Assessment of Implementation of the IOSCO Principles, the IMF notes that the current legal and regulatory framework will be revised to transpose and implement the EU Prospectus Directive No. 2003/71/EC. The CONSOB has reported that its disclosure requirements are already substantially in line with the forthcoming EU Directive. However, the available sources do not directly address Italy's compliance with this principle.

Italian listed companies are required to prepare quarterly, semi-annual and annual reports, and publish financial statements on an annual basis. Furthermore, both EU Directives and Italian legislation require individual and consolidated financial statements of listed companies to be audited by an external auditor. Per a regulatory and standard-setting framework assessment published by the National Board of Chartered Accountants and Accounting Experts in 2005, the CONSOB has the power to recommend accounting and auditing standards for listed entities. Conversely, the Italian accounting standards are enacted by the Organismo Italiano di Contabilità. As of 2005, provisions for regulating the accounting and auditing profession in Italy were among the strongest in Europe, as stated in the IMF's 2005 report. Furthermore, the CONSOB's audit quality assurance system was quite comprehensive. In this regard, the IMF report recommended providing substantial staff resources to conduct these intensive and on-going reviews. Beginning in 2005, pursuant to Legislative Decree No. 38 of 2005, Italian listed companies are required to prepare their consolidated financial statements using International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board. As for individual company accounts, CONSOB regulations mandate the use of IFRSs and national accounting standards.

Principle VI: The Responsibilities of the Board

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As part of Italy's unusual corporate structure, shareholders of traditional Italian companies elect a Board of Directors, as well as a separate Board of Statutory Auditors. The former has the authority to assess the suitability of business plans and organization, whereas the latter is responsible for assessing governance and internal control issues, and monitoring the external auditing firm. According to the IMF's 2005 report, while an independent Board of Directors is key to protecting shareholders' rights, there are no legally mandated requirements for Board independence in Italy. Furthermore, neither Italian law nor the Preda Code addresses the issue of representation of minority shareholders on the Board of Directors. In its 2006 FSSA, the IMF recommends mandating a majority of independent directors, incorporating some of the provisions of the Preda Code into regulatory requirements, and representing minority shareholders on the board. In performing their functions, per the same report, members of the Board of Statutory Auditors have wide-ranging powers to obtain information from the Directors. Furthermore, legislation requires the Board of Statutory Auditors to be independent, and to include at least one member appointed by the company's minority shareholders. However, the effectiveness of this provision is limited in practice, as the ability of any one of the board members to act unilaterally is constrained. Nevertheless, the available sources do not directly address Italy's compliance with this principle.

According to Heidrick & Struggles (2005), the average number of committee meetings in 2005 in Italy was the lowest in Europe. Furthermore, remuneration committees did not include any independent directors. Conversely, the proportion of independent non-executive directors increased in 2005. However concerns remained regarding the independence of directors in Italian companies.