4.5.2 What is the background of corporate governance in the country under review?

The Italian corporate governance system is often summarised by Roe's phrase "weak managers, strong block holders and unprotected minority shareholders" (Melis 2000, p. 347). Companies in Italy are mainly family-owned or organised by a structure of cross-company shareholdings, both with extremely organised shareholdings, which results in a more or less non-existent market for corporate control (Solomon 2007, p. 210) (Melis 2005, p. 479). Moreover, these organised shareholdings involved voting agreements and coalitions that lead to strong concentrations of power. This family control or family capitalism resulted in an insider corporate governance system that is relationship-based (belonging to the Latin sub-group), avoided by small shareholders and sometimes considered underdeveloped (Solomon 2007, p. 210) (Melis 2000, p. 347). Enriques uses severe words: "In the last decade, the literature has generally depicted Italy s corporate governance system as the black sheep among the most industrialized countries, sometimes associating it with such notorious ones as the Russian and Korean systems" (Enriques 2002, p. 778).

Fortunately, as a result of many law reforms, matters have improved in recent years, although the effectiveness of these law reforms often remains questionable (Enriques 2002, p. 778). On an international level, Italian corporate governance standards are still not exactly considered the highest (Melis 2005, p. 487). Melis even states that Italy's reputation as regards corporate governance is so bad that international authors feel confident enough to make severe remarks without serious research of the situation (Melis 2005, p. 478). According to Ferrarini much can be explained by the strong path dependence in Italy: "the weakness of private enforcement largely depends on the notorious dysfunctions of the Italian judicial system, which appear very difficult to cure also due to the resistance ofpowerful interest groups (including the judiciary). What is more, the limits ofpublic regulation and surveillance which were uncovered by the recent scandals are well rooted in the Italian tradition (Ferrarini 2005, p. 29). Another classical reason often provided for the existence of those block holders (mainly consisting of families and coalitions) is the limited protection of minority shareholders by Italian civil law. The private benefits of control are larger in the case of power concentration and if legal obligations are difficult to enforce block ownership becomes a logical solution (Berglof and Cleassen 2004, p. 3).

In Italy the corporate governance debate started at the end of the 90s when many state-owned companies were privatised, as a result of which the problems attached to the separation of ownership and control became an issue. In the debate it was stressed that the entire corporate governance system had to be reformed, which resulted in the Financial Markets Consolidated Act in 1998 (better known as the Draghi law after its drafting committee's chairman -Legislative Decree No. 58 of 1998), which regulates financial markets and corporate governance in listed companies. This legal reform streamlined the legal framework for securities offerings, takeover bids, disclosure obligations and audit firms (Enriques 2009, p. 9). As in other underdeveloped markets, these Draghi reforms were in fact a legally binding series ofamendments to the already existing company laws, among others concerning transparency, minority protection and takeover regulation. A voluntary corporate governance code was considered insufficient and not far-reaching enough at the time (Solomon 2007, p. 210). From 2002 until 2004 there was a more general corporate law reform, known as the Vietti Reform (after the undersecretary of justice) (Enriques 2009, p. 11). Thereafter, several post-Financial Service Action Plan directives were implemented in Italy's national law. The final major reform as a reaction to all the corporate scandals was the Law on Savings enacted in 2005 to improve corporate governance of listed companies, increase transparency and enhance consumer protection (Legislative Degree No. 262 of 2005) (Enriques 2009, p. 9) (EStandardsForum Financial Standards Foundation Report 2010, p. 3 on Italy).

The first Italian corporate governance code dates from 1999 and was not initiated after a fraud or crisis. There was even scepticism towards self-regulation (Hopt and Leyens 2004, p. 20) (Italian Corporate Governance Code 1999, Preface). A corporate governance code was desired for reasons of competition. The development of this first Italian code was market-driven and aimed at offering the Italian listed companies an instrument to reduce the costs of raising funds in the internationalising capital markets further: "In drawing up the Code of Conduct, the Committee has accordingly endeavoured to align the proposed system of Corporate Governance with international standards, while taking adequate account of specific national features, so as to allow the competitiveness and the image ofItalian companies to be appreciated in a global financial context" (Italian Corporate Governance Code 1999, p. 210).

The first code was initiated by Stefano Preda, the chairman of the Borsa Italiana, and drafted by a committee consisting of three academic experts, a secretary, the coordinator Preda and 21 committee members, mostly industrialists. The Preda code was modified further in 2002 and 2006 to increase the clarity and correctness, as a result of acquired experience (Italian Corporate Governance Code 2006, p. 3) (Weil, Gotshal & Manges 2002, p. 153). In 2002 code provisions on transactions with related parties were added to promote substantial and procedural fairness. The contents of the 2006 code are broadly similar to the 2002 code. However, more detail has been added since; criteria and comments are appended to the code principles for reasons of further clarity. New recommendations concern the maximum board appointments, on which the board shall issue guidelines, the possibility to adopt a two-tier board structure and how to apply the code in that respect, and the shareholder rights, including the participation in meetings. Besides that, the President of the Italian Stock Exchange explicitly mentions, in the code's preface, the goal of increasing the clarity and concreteness of the role of the independent directors and the board's internal committees. More recently the Corporate Governance Committee - which met on 3 March 2010 in Borsa Italiana's premises -approved the revised version of article 7 of the 2006 code on board remuneration, to be applied by the end of the financial year that begins in 2011.

According to the drafting committee, the primary objective of the code is the maximisation of shareholder value (Italian Corporate Governance Code 1999, p. 19). In the 2002 and 2006 codes this objective is neither modified nor repeated. At first glance this aim seems typically Anglo-Saxon. Nevertheless, other stakeholders are expected to benefit indirectly, although their interests are not directly taken into account by the board (Weil, Gotshal & Manges 2002, p. 159). The committee states that their interests are already protected sufficiently in the Italian legal system (Italian Corporate Governance Code 1999, p. 19).

In the Preda code corporate governance is defined as: "the result ofnorms, traditions and patterns ofbehaviour developed by each economic and legal system and is certainly not based on a single model, that can be exported and imitated everywhere (Italian Corporate Governance Code 1999, p. 18). Directly after this definition the committee emphasises the uniqueness of the Italian corporate governance system by mentioning the predominant one-tier board structure and the concentrated ownership structure. Again the path dependence can be seen: the committee is in favour of self-regulation and internationalisation, however traditions and patterns must not be neglected. This attitude seems conservative and in line with the diversity corporate governance school (differentiation in models is a necessity due to the different types of firms, shareholder strategies and agency problems and convergence is hard to reach because of path dependence and complementarity) (Van den Berghe 2002, p. 17) (see section 1.3.1).