4.5.4 What are the main features ofthe national corporate code regarding contents and do they reflect the country s culture?

The Italian corporate governance regime is in general characterised by strong block holders (47% of the companies researched in 2008) (Centre for Financial Market Integrity 2009, p. 48), many family-owned companies (90% of all Italian companies in 2005) (EStandardsForum Financial Standards Foundation Report 2010, p. 2 on Italy), unprotected minority shareholders (i.e. limited legal shareholder protection), companies with a pyramid structure, an Italian board model with a board of statutory auditors and an insider corporate governance model (EStandardsForum Financial Standards Foundation Report 2010, p. 2 on Italy). Although reforms can be seen, these main characteristics remain persistent and visible in the code contents as reviewed below. This is discussed by means of two main features: (i) board structure, (ii) shareholders and stakeholders, and (iii) culture is taken into account to see whether the contents of the code reflect Italy's culture. As stated several times before, these features are only discussed in relation to the contents of the corporate governance codes and for reasons of comparison, in order to analyse the application of the comply or explain principle theoretically and empirically (see chapter 6), as is the case for all the countries under research.

Since 2004, Italian companies can choose between three organisational structures: a one-tier board, a two-tier board and the traditional Italian model (Hopt and Leyens 2004, p. 18) (Ferrarini 2005, p. 25). In the - still most common (EStandardsForum Financial Standards Foundation Report 2010, p. 2 on Italy) - traditional model, companies have a one-tier board structure (the consiglio di amministrazione) with executives and non-executives appointed by the shareholders' meeting (often appointed by a block holder). The consiglio di amministrazione mainly consists of non-executive directors responsible for monitoring the senior management (Melis 2004, p. 77). The chairman of the board and the chief executive officer are, in general, two different persons. A distinctive feature of this traditional board model is the board of statutory auditors (collegio dei sindaci), which monitors the management board and has been a legal requirement since 1882 (Melis 2004, p. 80). The board of statutory auditors represents the majority and minority shareholders and is appointed at the general shareholders' meeting. The board of statutory directors consists of at least three permanent members and two substitute members, all chartered accountants (Hopt and Leyens 2004, p. 17) (Melis 2004, p. 79) (art. 148 Draghi Law). The duties of the statutory directors are threefold: (i) checking the compliance of acts and decisions of the board of directors against the law and the corporate bylaws, thus observing the 'principles of correct administration' by the board, (ii) monitoring the adequacy of the organisational structure1 and (iii) ensuring that the instructions to subsidiaries concerning the information requirements are adequate (Melis 2004, p. 80) (Hopt and Leyens 2004, p. 17) (art. 149 Draghi Law). Melis considers their tasks somewhat similar to those of the British non-executive directors (Melis 2004, p. 80) and Hopt and Leyens state that, as regards its tasks, the board of statutory directors resembles the German supervisory board although it does not have a strong advisory function (Hopt and Leyens 2004, p. 17). The traditional view in Italy is that these statutory auditors are rather complacent since they are appointed by the shareholders (often the managers that have controlling ownership), based on friendship or professional ties (Ferrarini and Giudici 2006, p. 186). The task of the external auditors is to discover mismanagement and fraud; the internal statutory auditors have more general monitoring duties, such as monitoring the independence of the audit firm and verifying compliance with the law and regulations (Ferrarini and Giudici 2006, p. 186). Overlap with the duties of the external auditors is therefore no longer an issue since the Draghi reform; overlap in duties between the non-executives and the statutory directors is more of a pitfall nowadays (Melis 2004, p. 78).

The Italian Corporate Governance Code traditionally reasons from a one-tier board structure. Nevertheless, in the latest code (2006) article 12 regarding two-tier management has been added, stating that in the event of a two-tier board structure the other articles shall apply in so far as compatible. It is furthermorenoticeable that the internal control committee is one of three specific internal committees of the board of directors (article 8 of the 2006 Code). In other countries, this board committee is normally referred to as the audit committee. As discussed above, the code contents deal primarily with the position of the directors, in an attempt to give the 'weak managers', as Roe calls them, several instruments with which to improve their board practice.

As discussed previously under section 4.5.3, the topics of the Italian corporate governance code are mainly formulated from and focus on the role of the board members. As stated in the code's preambles, other stakeholders are of less importance since they ought to benefit indirectly, or their position is protected otherwise. "The Code contains a minimum set of recommendations that outline an organisational structure for companies ofwhich the fundamental feature is the central position of the board of directors" (Italian Corporate Governance Code 1999, p. 18). This seems to result in minimal attention in the code for the shareholders and stakeholders. Italian listed companies are characterised by high ownership concentration (Italian Corporate Governance Code 1999, p. 19); on average the largest shareholder owned 45 per cent of the votes in 1947, 55 per cent in 1987 and 48 per cent in 2000 and the same applies to the shareholder votes (Aganin and Volpin 2003, p. 11) (Bianco and Casavola 1999, p. 1058). The powerful and active majority shareholder (the block holder) - i.e. the state, a family, a coalition or other company - monitors the management (Bianco and Casavola 1999, p. 1058) (Ferrarini 2005, p. 18). In conjunction with this are the pyramidal groups, described as a cascade of companies with a complicated shareholding structure at minimum cost, sometimes very difficult to fathom. The aim is to maintain control, with a maximised ratio between the money invested by the company itself and the amount of resources controlled (Melis 2000, p. 348). The result of this pyramidal structure is again a block holder. The main agency problems that occur in Italy are not the ones between the managers and shareholders but the ones between majority and minority shareholders (Melis 2004, p. 75). One would expect these problems to be addressed in the Italian corporate governance codes and recommendations, particularly since the position of minority shareholders is considered to be insufficiently protected by Italian law. Notwithstanding this, the 2002 code contains only two articles (articles 12 and 13) regarding shareholders, stating that it must actively be endeavoured to develop a dialogue with (institutional) shareholders and that participation in the shareholders' meeting must be encouraged and facilitated. The focus is on the institutional shareholders, i.e. not the minority shareholders. Compared to the 2002 code, the 2006 code contains some extra criteria for developing a good dialogue with the shareholders. Nevertheless, based on the Italian code contents, the shareholders are not recognised as important stakeholders, nor are the other stakeholders. Of further interest in understanding the Italian corporate governance system is that the principle of one share one vote is not as sacred as in other countries, since a practice of preferred, privileged or saving shares exits. These specific shares only have voting rights attached to them in extraordinary circumstances, such as in extraordinary shareholder meetings or regarding aspects concerning their share class (Weil, Gotshal & Manges 2002, p. 151). Next to non-voting shares, voting caps and voting agreements are common practice as well (Weil, Gotshal & Manges 2002, p. 151).

The design of corporate governance systems is influenced by the culture factor and to be effective the corporate governance principles must be part of the culture (Mintz 2005, p. 587). In section 3.3.2 the outcomes of several studies on the cultural dimensions are reviewed. The results for Italy are repeated in table 4.5.4a below and table 4.5.4b summarises the above.

Italy in particular scores high on individualism and masculinity (Hofstede 1984) (Melis 1998, p. 14) and a relation with the code contents can be seen. Individualism refers to a preference for loosely knit social relationships in which individuals are expected to care only for themselves and their immediate families. This strongly applies to Italy since, as discussed above, pyramidal groups, family ownership (family capitalism) and cross shareholdings are common practice (Barca and Trento 1997, p. 533) (Aganin and Volpin 2003, p. 3). Banks and other financial institutions have a minor role, the market for corporate control is considered underdeveloped and the capital market poor (Melis 2004, p. 74). The cultural dimension of masculinity refers to the preference in society for achievement, heroism, assertiveness and material success. In Italy it is believed that these aims can be achieved by control and power concentration. Hence the limited separation between ownership and control, the pyramid structures and cross shareholdings. By these means the majority of the voting rights in a group can be owned relatively cheaply and thus disproportionate control in relation to ownership is made common practice in Italy. Although the strict principles and criteria of the Italian code are increasingly in line with international corporate governance practice, the code's aims and emphases still show the cultural traditions (see table 4.5.4b for a summary in key words), and a strong path dependence (Van den Berghe 2002, p. 17). The high individualism and masculinity scores can be seen in the primary objective of the code, the maximisation of shareholder value (Italian Corporate Governance Code 1999, p. 19). And, as stated above, the position of the powerful block holders remains unchanged. The Italian corporate governance committee itself acknowledges the importance of culture by stating that corporate governance is the result of norms, traditions and patterns of behaviour and is certainly not based on a single model, that can be exported and imitated everywhere (Italian Corporate Governance Code 1999, p. 18).