4.5.5 What is the judicial corporate governance arrangement in the country under review?

"Self-regulation is not a firmly established tradition in the Italian legal system or in the Italian economy.(...) Successful application of the Code will thus be an important signal ofthe success ofself-regulation, which it will then be possible to use to advantage in other fields" (Italian Corporate Governance Code 1999, Preface). As it was not part of tradition and given the scepticism towards self-regulation (Hopt and Leyens 2004, p. 20), the Italian self-regulation corporate governance code was a novelty in Italy.

Initially, compliance with the Italian code was entirely voluntary: "The Code is an organisational and operational reference model and as such does not give rise to any legal obligations" (Italian Corporate Governance Code 1999, p. 20). Nevertheless, the drafting committee invited the Borsa Italiana (the Italian Stock Exchange) to acknowledge the code and to facilitate listed companies to report on the compliance with the code (Italian Corporate Governance Code 1999, p. 20). The Borsa Italiana responded to this invitation by obliging listed companies to compose a corporate governance statement made available to the shareholders and sent to the Borsa Italiana (Markets Instructions IA.2.12 and the Nuovo Mercato Instructions IA.2.13) (Assonime and Emmittenti Titoli 2004, p. 70). Both the company and the Borsa Italiana were then to publish the statement on their websites (Assonime and Emmittenti Titoli 2004, p. 70) (Weil, Gotshal & Manges 2002, p. 152). To be precise, the Italian code involved self-regulation based on the comply or explain principle and companies that adopted the voluntary code published a corporate governance statement as required by the listing rules (EStandardsForum Financial Standards Foundation Report 2010, p. 3 on Italy). Thus the judicial corporate governance arrangement B (self-regulation supported by non-statutory norms) applied to Italy (see section 3.2.2). Self-regulation did not apply to Italy since the self-regulation code was supported by norms/regulations that were not formal legislation, i.e. the listing rules. However, in 2006 a shift in the judicial corporate governance arrangement happened. In the wake of corporate insolvencies (such as the Parmalat scandal) and inspired by the Sarbanes-Oxley Act, the Law on Savings (Legislative Degree No. 262/2005 and amending decree no. 303/2006), as incorporated in the Consolidated Law on Finance (Legislative Decree No. 58 of 1998 - the Draghi Law), was enacted in January 2006 to improve the corporate governance of listed companies, increase transparency, and enhance consumer protection. This Law on Savings "has given legislative effectiveness (...) to the rule "comply or explain ", according to which it is mandatory to inform the market about compliance with the code" (Mosco 2009, p. 5). Article 123-bis of the Consolidated Law on Finance states, after the slightly late implementation of Directive 2006/46/EC on 6 November 2008 (Gazzetta Ufficiale delle Repubblica Italiana 260, 2008), that: "The management report ofissuers with securities admitted to trading on regulated markets shall contain a specific section entitled: «Report on corporate governance and ownership structures». (...) Information shall be provided regarding (...) adoption of a corporate governance code ofconduct issued by regulated stock exchange companies or trade associations, giving reasons for any decision not to adopt one or more provisions, together with the corporate governance practices actually applied by the company over and above any legal or regulatory obligations".Asa result of this shift, corporate governance arrangement C applies to Italy nowadays; self-regulation facilitated by statutory rules. The Italian corporate governance committee has drawn up the code and national legislation refers to the code. The code has found a legal base in national legislation and as a consequence, whilst involving self-regulation, has a kind of hybrid form (Wymeersch 2005, p. 3) (see section 3.2.2).

The Italian judicial corporate governance arrangement and the comply or explain principle are difficult to pierce and qualify since no clear definition of the Italian comply or explain principle is provided. Whilst in the 1999 code the comply or explain principle is only mentioned in vague terms and it is not mentioned in the 2002 code, the 2006 code has an introduction principle mentioning the comply or explain principle: "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). As already stated under section 4.5.3, code compliance is required as regards the principles and criteria of the 2006 code (Italian Corporate Governance Code 2006, Introduction Principle). Moreover, the code uses the phrase "a listed company adopting this Code", while not mentioning which listed companies ought to adopt the code. Companies listed in Italy, Italian listed companies, listed on a regulated exchange? Possibly a strict definition of the comply or explain principle is not necessary since international legislation on the principle is in place (Directive 2006/46/EC), or it may not even be desired since the comply or explain principle ought to be a hybrid concept. Nevertheless, understanding the - often criticised - Italian corporate governance system is not made any easier.