AGCM

In the Authority’s view, the present situation means close attention must be paid to corporate governance: critical examination is needed of the risks implicit in the phenomena of cross-shareholdings and personal links. On the one hand, there is a potential domino effect: the instability of a few shareholders may destabilize the companies in which they have invested capital, the more so when several competing companies are involved. On the other hand, the interlinked and often unclear interests between investors and the companies invested in may undermine the clarity the market needs as to the financial structures and risks involved.

While State intervention in support of the banking sector appears to be a necessary measure in the short term, the points thrown up by the investigation would seem to be useful for looking beyond that, i.e. how to overcome the crisis of trust in the system and its credibility, beginning precisely from a new order of governance.

The Authority believes this investigation may serve as a useful checkpoint: even in the midst of the current turmoil in financial markets, the goal must be to identify areas where there may be competition problems linked to aspects of governance, and also to identify possible solutions, whether of a legislative/regulatory nature (taking into account the roles of the various institutions charged with oversight of the financial markets, and specifically the Bank of Italy, CONSOB and ISVAP) or in terms of recommendations to the market.

In the Antitrust Authority’s view, the results of the investigation indicate the need for new steps - in terms of regulation, self-regulation and statutory changes – to ensure transparency in decision-making processes, clarity in the attribution of the functions and responsibilities of the various corporate bodies/committees, the elimination of multiple roles and positions in competing firms, as well as a more precise definition of the requirements for key figures such as independent directors.

It is also necessary that there should be complete information as to shareholdings, especially where shares are held in competitors (beneath Consob’s limit of 2% for significant shareholdings). In order to increase the level of transparency, which is necessary to restore faith in the system, there must be greater clarity as to how companies go about appointments, their accounting methods, and investment choices by key shareholders such as foundations. Finally, incentives must be identified for the development of true institutional investors like unit trusts, and the much discussed legal changes must be introduced regarding the legal status of public (“popular”) banks, especially those with market listings, and their voting rights, maximum limits on shareholdings and clauses specifying acceptable shareholders.

The investigation concentrated on four areas of analysis: models of governance, links between competitors, the role of banking foundations, and public banks and BCC credit cooperatives.

MORE TRANSPARENT MODELS OF GOVERNANCE

The investigation revealed an extremely complex picture: the degree of concentration of shareholdings among circumscribed groups of individuals, sometimes bound by shareholder pacts, turns out to be very high even for listed companies. This means that such a nucleus, through the use of proxies, is able to “guide” other shareholders at crucial moments in corporate life, such as the approval of the accounts and the appointment of management. In this context the Antitrust Authority does not see the need to prefer either the traditional model or the dual one: what is important, rather, is that there should be a clear distinction of functions, and thus of incentives, among shareholders, management bodies and strategic/control bodies. The adoption of clear models of governance, then, becomes a priority for restoring the reputation of the system.

A study of the main banks, which account for 53% of Italian branches, showed there were multiple proprietary models involving listed and unlisted banks, banks that belong to large international groups and so on down to family banks. In all the cases examined, however, there was a significantly high concentration of shareholdings which means this industry is anything but open to competition; while on the one hand that ensures greater continuity in corporate shareholdings, on the other it reduces the likelihood that there will be changes to governance that will improve efficiency. Hence the need for governance setups to ensure, at the same time, autonomy in management choices and correct incentives for transparency in decision processes with regard to shareholders. The bank shareholdings examined also showed scant evidence of institutional investors, particularly of investment funds, while there is still a strong presence of the banking foundations.

REDUCE LINKS BETWEEN COMPETITORS

As regards personal links, the analysis shows that 80% of the industrial groups examined (representing 96% of overall assets) had members of their governance bodies who also held positions in competitors. This phenomenon holds, in different percentages, for listed and unlisted companies, for banks, insurance companies and investment houses (see Tables 1 and 2). Furthermore, this applies not just to one or two members of the governing bodies but may involve as many as 16 individuals. The extent of the phenomenon is confirmed by the number of individuals holding interlocking directorships: 325 of the 2876 positions governance bodies in the groups/companies analyzed are held by individuals who are also present in the governing bodies of competing enterprises. Of those 325 positions, 150 are in listed companies and 175 in unlisted companies. With regard to the listed companies, 49 of the 150 governance positions held in multiple companies were those of “independent directors” as defined by the TUF [unified text of finance industry regulations] or the self-regulatory code for listed companies.

This anomaly regarding interlocking directorships is a peculiarly Italian phenomenon: it does not exist in companies listed on the Spanish stock exchange or on Euronext-Amsterdam; it applies to only 26.7% of companies listed on Euronext-Paris, 43.8% of those on the Deutsche Boerse and 47.1% of those on the London Stock Exchange. The corresponding figure for Italian companies listed on the Borsa Italiana is, as mentioned, around 80% (see Table 3).

Interlinked shareholdings can also be a critical factor: it emerges that around 42.3% of shares of the financial sector companies considered in the sample are owned by competitors. Such links reach particularly high levels for listed companies (over 60%) and, in terms of industrial sectors, for banks (over 47%). (See Tables 4 and 5.)

So the question of links with competitors is, in the Authority’s opinion, an area where improvements can be made with a view to encouraging a proper competitive dynamic in the financial sector. The legal analysis showed that the phenomenon is inadequately regulated. For example, the prohibition on competition specified in Article 2390 of the Civil Code may be simply set aside by an authorization from a general meeting of shareholders. Current regulations on conflict of interest and independent directors also seem inadequate for resolving the problems of competition deriving from links between competitors. As of today, the regulatory situation is not compensated for by satisfactory self-regulation and company practice; so statutes need to be changed to ensure the absence of personal links. Very few companies adopt rules of governance intended to address this problem effectively.

3) BANKING FOUNDATIONS SHOULD PLAY THE ROLE OF INVESTORS

The survey went on to examine the nature of some shareholders and discovered that the foundations are still key investors in many banks: they are present in 26 banks out of the 83 in the sample; sometimes with a controlling stake (at least in practical terms), other times as the largest minority shareholder or one whose minority shareholding carries great weight. In addition, their function seems to be ever more strategic both in terms of influencing appointments and in taking part in shareholder pacts: one need only look at how shareholder meetings are carried out. Besides, their role as shareholder is central: the investment in the bank may represent up to 90% of the book value of some foundations’ shareholdings and there are certainly cases where they are also shareholders in competing companies. Moreover, several foundations are sometimes simultaneously important shareholders in the same bank. The stability they bring, especially now, must therefore be weighed against the need for a new and transparent mode of operation. An evaluation of this kind of shareholder must be balanced: while on the one hand they represent critical factors that need to be overcome in order to develop discipline in the market, on the other, especially in a time of crisis like this, a foundation, better than other types of shareholders, can protect the companies it invests in from instability.

In any case, the foundations should become more like true institutional investors by adopting high standards of transparency and using adequate risk/return benchmarks so as to promote a virtuous cycle that will allow the banking system to regain its individual and collective reputation. Finally, their presence in more than one banking group is an additional important reason for clarifying how things operate within the companies so as to avoid the risk of the kinds of overlap that may create “problem” links in terms of competition.

4) CARRY THROUGH REFORM PROCESS FOR LISTED “POPULAR” BANKS

The investigation analyzed the specific legal status of the various kinds of banks, and in particular that of the public (“popular”) banks and the Cooperative Credit Banks (BCC). Listed “popular” banks are more and more similar to the SpA formula (ordinary share-capital companies) and thus without those particular characteristics – links to a local territory, limitation of activities to a local level and business with shareholders – that used to justify their legal form and their specific rules, e.g. “one man, one vote”. For this reason, the much discussed regulatory changes must be introduced as to voting rights, maximum limits on shareholdings and clauses specifying acceptable shareholders.

The Cooperative Credit Banks (BCC) and unlisted “popular” banks, instead, do indeed have differentiating characteristics – in terms of size, use of profits, lending strategies – but these need to be evaluated in the light of the fact that they operate in combination/association, competing more at an inter-bank rather than intra-BCC level.

Table 1: Personal links – Companies whose governance bodies include individuals having overlapping positions in competitors, divided between companies that are listed and not listed on the Borsa Italiana

Rome, 10 January 2009

CONCLUSION OF INVESTIGATION INTO CORPORATE GOVERNANCE