4.5.9 Summary question: What are the developments after having the comply or explain principle in place for several years?

Italy is a country that is interesting to research among the others due to its history of scandals, its strong traditions, the criticism and yet also its reforms. Italy has an insider corporate governance system that is relationship-based, avoided by small shareholders and sometimes considered underdeveloped (Solomon 2007, p. 210) (Melis 2000, p. 347). Since the end of the 90s the corporate governance system has been reformed by several new or modified laws and of course by the Italian corporate governance codes of 1999, 2002 and 2006. The development of the first Italian corporate governance code was market-driven and for reasons of competition. The Italian corporate governance code became more comprehensive after each modification, especially through the adding of the criteria in 2006. Moreover, it is remarkable that the topics of the codes are mainly formulated from and focus on the role of the board members and, according to the drafting committee, the primary objective of the code is the maximisation of shareholder value (Italian Corporate Governance Code 1999, p. 19).

Initially, compliance with the Italian code was entirely voluntary. Nevertheless, the Borsa Italiana obliged listed companies to draft a corporate governance statement. At first judicial corporate governance arrangement B (self-regulation supported by non-statutory norms) applied to Italy. However, in 2006 the Law on Savings as incorporated in the Consolidated Law on Finance was enacted and has given legislative effectiveness to the comply or explain principle. As a result of this shift corporate governance arrangement C applies to Italy nowadays; self-regulation facilitated by statutory rules. The Italian comply or explain principle has only been clearly defined since the 2006 code: "A listed company shall yearly disclose information (...) specifying which recommendations of the Code have actually been implemented by the issuer and how. (...) If the issuer has not implemented, in whole or in part, one or more recommendations, it shall supply adequate information with regard to the reasons for the omitted or partial application" (Italian Corporate Governance Code 2006, Introduction Principle). Regarding the disclosure of the comply or explain principle, the listed companies have to draft a corporate governance statement, which is made available to the shareholders and sent to the Borsa Italiana. The Handbook on Corporate Governance Reports of February 2004, as published by the listed companies association Assonime and Emittenti Titoli, focuses on the drafting of the corporate governance statement and distinguishes between required and useful information to be mentioned in the statement. It is recommended that two separate sections be incorporated in a company's corporate governance statement: (i) the company's corporate governance structure in general and (ii) the compliance with the provisions contained in the code. To be able to understand the code compliance more easily, three model tables, which should preferably be used, have been developed. The companies the corporate governance code is applicable to should indicate their compliance by ticking the YES or NO boxes in the tables and, in the case of ' no', give an explanation in their corporate government statement. Unfortunately it is not indicated which table parts are exactly linked to which code recommendations.

The Italian corporate governance committee clearly assigns the supervisory role regarding the contents of the corporate governance statement to the shareholders. As a result thereof, the Italian code does not rely on enforcement mechanisms. The market should impose reputational sanctions to non-compliant or insufficiently compliant issuers. Nonetheless, as regards the formal code compliance the CONSOB has an important supervisory role and can impose disciplinary measures, such as financial penalties and the publication of its imposed disciplinary measures. The external auditor supervises formal compliance as well by checking whether the corporate governance statement has been provided.

Up till now few studies have been performed on Italian code compliance. Every year the listed companies association Assonime releases a report review of the level of compliance of the Italian listed companies. It claims that the results have been extremely satisfactory. The Assonime assessments show that in 2007 93%, in 2008 95% and in 2009 96% of the listed Italian companies researched adopted the Italian corporate governance code. However, these figures reveal nothing about the actual degree of code compliance (formal or material). Bianco et al. reviewed these figures further in their study and hypothesised that the actual level of compliance differs from what is stated formally (Bianco, Ciavarella et al. 2010, p. 3). Their results confirm their hypothesis; where 85.9% is formally compliant only 32.6% has implemented the recommendations in a sufficiently satisfactory way (Bianco, Ciavarella et al. 2010, p. 3). The Assonime reports from 2008-2010 show that the quality of corporate governance statements has been improving in recent years and some principles have a compliance rate of almost 100%. Nevertheless, an increasing number of companies explicitly declare that they do not or not totally adopt the code. Especially with regard to the provisions on transactions with related parties, director independence, board competence and delegated powers, the appointment of (lead independent) directors and auditors, board evaluation and the composition of board committees further improvement is still necessary.

Having a corporate governance model that is heavily criticised, Italy scores quite high in the optimum framework (see table 4.5.9). Further points to be optimised are the rather limited annual compliance study and the three tables prescribed in the Compliance Handbook, since it is unclear which part of the table is linked to which code provision.

After having the comply or explain principle in place for several years, Italian companies have - based on empirical research - improved their corporate governance structure. However, the important influence of culture and tradition must not be neglected (strong path dependence). Sometimes innovation is thwarted by cultural patterns such as family capitalism and power concentration (block ownership), hence the many criticisms of the Italian corporate governance system. For the future, vigilance must be exercised as regards indifference and a ' one size fits all' mentality.