4.5.8 Based on literature and previous studies, how is the national corporate governance code applied in practice?

Up till now few studies have been performed on Italian code compliance. Their results will be discussed under this key question, together with the recent annual reports of the listed companies association Assonime, to give a brief overview of Italian code compliance in practice and as a prelude to the underlying empirical research in chapter 5.

Every year (since 2007 also in English), the listed companies association Assonime releases a report review of the level of compliance of the Italian listed companies. According to Bianco et al. the results have in general been extremely satisfactory (Bianco, Ciavarella et al. 2010, p. 3). 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). To test their hypothesis they tested the code compliance on related party transactions for 2007 of 236 companies. They analysed the annual reports on corporate governance in which the issuers have to state whether (formal compliance) and how they put the relevant provisions into practice (material compliance). The 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 gap between formal and material compliance is higher for non-financial firms and smaller companies. Moreover, they find that the material compliance is driven by some key aspects of the firms' governance. Their measured compliance is higher for firms in which:

Assonime states in its assessment of the 2007 code compliance that further improvements are possible for the reasons provided for non-compliance. Sometimes no or no explicit explanation is provided for the deviation from the code. Especially with regard to the provisions on transactions with related parties, director independence, board competence and delegated powers, and the appointment of directors and auditors, further improvement is necessary (Annual Assesment Assonime 2008, p. 10). According to Assonime the same applies to 2008; no or so-called boilerplate justifications for non-compliance are still the main weaknesses (Annual Assessment Assonime 2009, p. 11). On the other hand, compliance with some principles is just below 100% and "this year's CG Reports are more complete, easier to read and more transparent"' and "since the Code recommendations represent a best practice, a less than full compliance is perfectly normal and physiologic" (Annual Assessment Asso-nime 2009, p. 11). As regards 2009 Assonime states that improvements are still necessary for the appointment of the lead independent director, board evaluation and the composition of board committees (Annual Assessment Assonime 2010, p. 11). Moreover: "An increasing number of companies (although still below 10% of the total) declared explicitly not to have adopted the Code, or their non-compliance with one or more of its principles (...). Such results should not be interpreted as a worsening ofcorporate governance practices, but rather as a symptom ofan increased awareness ofcompanies in corporate governance matters." (Annual Assessment Assonime 2010, p. 8). In the EU comparative study on code compliance regarding the year 2008, an average of 2 deviations can be seen for the 15 Italian companies under research, with a slightly better compliance rate for large-cap companies than for mid-cap companies. The quality of the explanations was better for the large-cap companies and the most common provisions the companies deviated from were procedures of the general meeting to be voted on by shareholders and the provision on the definition of independence (RiskMetrics Group 2009, p. 93).

The answer to this key question is - probably also due to the limited studies available - quite ambiguous. Formal and material code compliance seem to differ substantially. The level of compliance is driven by some key aspects of the firms' governance. The quality of corporate governance statements has improved in recent years and some principles show a compliance rate of almost 100%. Nevertheless, an increasing number of companies explicitly declare that they do not or not totally adopt the code, which according to Assonime seems to be the result of an increased awareness of corporate governance matters and a 'one size does not fit all' mentality. Increased awareness is, however, an odd reason for explaining a decrease in code compliance. As discussed further in chapter 6, more valid reasons for explaining the stagnation in code compliance possibly exist, such as a current indifference to code compliance or perhaps, in practice, the maximum and most sufficient code compliance is yet to be achieved.