No enterprise is more likely to succeed than one concealed from the enemy until it is ripe for execution. – Niccolò Machiavelli, The Prince

For today’s Italian executives, the words of the Florentine political philosopher still come uncomfortably close to describing their own world.

Alessandro Profumo of UniCredit and Matteo Arpe of Capitalia, chief executives of two leading banks, are both cited as examples of a new corporate Italy that strives for transparency and wants to court outside shareholders, particularly international investors.

But both have to operate in a business environment that is entangled by an intricate web of cross-shareholdings and power-sharing arrangements, which can discriminate against minority shareholdings and deter foreign investor interest.

Mr Profumo acknowledged last week that shareholder pacts – agreements among small numbers of core shareholders to vote together to dominate the way companies are run – “are negative . . . I don’t like them”. But UniCredit, he added in an interview with the Financial Times, could not leave the pact that controls the influential Mediobanca because that investment bank was “a sort of crossroads for future changes in the Italian system”.

Since Mr Arpe joined Capitalia in 2001 the percentage of shares held by non-Italians has risen from almost nothing to over one-third. But these and other new investors had to watch last month as Cesare Geronzi, a renowned Italian power-broker and Capitalia’s chairman, tried to enlist the pact’s support to remove Mr Arpe – on the eve of a record profits announcement.

Italian businesspeople agree that foreign investment could be a significant help to the slow-growing Italian economy; its companies cannot afford to continue to deter large US and UK funds. But the idea that decisions are being made within pacts, round a table and far from outside scrutiny, continues to harm perceptions of the Italian business environment.

Foreign investors, according to the Federation of European Securities Exchanges, would rather buy shares almost anywhere else. In 2005 Italy had the smallest percentage of foreign ownership of any stock market in Europe. Foreign investors owned on average one-third of the value of listed shares, compared with 13 per cent in Italy.

Over the past 15 years, to meet long-standing concerns over investor protection, at least three laws on corporate governance have been enacted in Italy and a code of company behaviour was also updated and enhanced. Italian boards are today more independent, company shareholders have more power and corporate disclosure has increased greatly.

Researchers at Consob, the market regulator, and the Bank of Italy wrote recently: “All these changes – which upgraded the Italian institutional framework in terms of international standards – should have deeply affected the governance structure of Italian companies.” But the study concludes that in the past few years “no radical change occurred”.

Shareholder pacts are even on the rise, replacing older forms of control. In 1990, barely 20 per cent of the Milan stock market’s capitalisation was controlled by a shareholder coalition. Within 15 years that proportion had risen to nearly half.

An extreme example of governance problems has been on show recently at Capitalia, which is controlled by a pact that owns 31 per cent of the shares. Mr Arpe may have been deemed to be at fault over something, but who knows? Neither Mr Geronzi nor the company offered any explanation and a week of internal warfare looked as if “old” and “new” Italy were engaged in a bitter and murky struggle.

When Mr Arpe survived, thanks to an uneasy truce that shows little sign of lasting, a roomful of analysts at the results presentation were so relieved they gave him a round of applause.

Behind such disputes lies the issue of whose interests directors are there to represent. As Paolo Scaroni, chief executive of Eni, the oil group, puts it: “In the UK shareholders want one thing: to become rich . . . If you make them poor they are very unhappy. In Italy the controlling shareholders might have other ideas than solely becoming rich. They are interested in power.”

Davide Serra, an asset manager at Algebris Investments in the UK and an expert on Italian banking, says: “Shareholder pacts are intrinsically against shareholder interests, as market forces are weakened in favour of a group of small shareholders. A shareholder pact . . . is more about power and influence than running the business.”

Italy is hardly the only country where arrangements between groups of shareholders can freeze out ordinary investors. Shareholders with Anglo-Saxon sensibilities, who are mostly money managers, are frequently disappointed in continental Europe, where dominant shareholders are often industrial companies or banks.

Umberto Mosetti, a professor at the University of Siena who advises minority shareholders, says shareholder pacts are a peculiar feature of Italy but are just one of the many ways to preserve control of listed companies. “There are super-voting shares in Nordic countries, special anti-takeover provisions in Germany or interlocking directors and cross-shareholdings in France,” says Mr Mosetti. “One way or another, all continental European countries have mechanisms to protect controlling shareholders.”

Pacts, formed when certain shareholders agree to formulate strategy and vote together, are difficult for other investors to challenge: even if the controlling group has less than one-third of the shares, there is little chance of a greater proportion than that turning up and voting cohesively at a meeting.

Pacts exercise power by nominating the majority of board members. Capitalia’s pact nominates 14 of 20 directors. Pirelli, the tyre and real estate company, effectively nominates 16 of 20 directors at Telecom Italia, even though Pirelli and smaller partners own barely a quarter of the shares.

Pact members are also typically given the first chance to buy shares of any member that wishes to leave. If a takeover offer arrives from outside, the pact’s rules are by law dissolved, but some believe that the pact’s existence is in itself a deterrent to takeovers.

Groups involved in pacts often talk of the stability they bring to a company. Stability is a concern close to the heart of the family-run small companies that still dominate the Italian economy and it is an ingrained value even for those that have listed.

Eni’s Mr Scaroni says laws and codes of behaviour have had the effect of “moving all our corporate governance towards a more transparent system”. But he says that the Anglo-Saxon model has not always transplanted well, because Italian listed companies tend to have sprung from such family-controlled enterprises. Corporate governance codes in the UK have been built around companies without a controlling shareholder, says Mr Scaroni. “It’s not tailor-made for our legislation and our companies.”

The stability conferred by a pact is further strengthened when companies have shares in each other, an old method in Italy for sharing out power among the same small group with limited amounts of capital. Mediobanca used to be at the centre of this power-sharing arrangement, known as the salotto buono (favoured salon) and it is still a focal point.

Capitalia is a large shareholder in Mediobanca, which is in turn the largest shareholder in Generali, the insurer. UniCredit and Intesa SanPaolo, the country’s two largest banks, are shareholders in Generali. UniCredit also owns a large stake in Mediobanca, where Capitalia’s Mr Geronzi is a deputy chairman.

One senior financier in Milan suggests the system creates paralysis, likening interlocking pacts to Romano Prodi’s Italian government, a broad and unwieldy coalition: “Nothing happens because you can’t please everyone and it defaults to the status quo.”

Not all foreign investors are deterred by this incestuous arrangement – though Vincent Bolloré, the French investor who owns 5 per cent of Mediobanca, seems one of only a few able to play as astutely as the Italians.

For example, ABN Amro of the Netherlands is the largest shareholder and the only non-Italian member of Capitalia’s pact. It has twice recently been pushed into the awkward situation of voting with other pact members to reinstate Mr Geronzi after the chairman had been suspended amid criminal proceedings. ABN’s merger talks with Barclays of the UK are prompting speculation that a different owner or new managers at ABN might be less willing to take part in Italian power games and could sell ABN’s stake.

Spain’s Banco Santander was the largest member of a pact that controlled SanPaolo IMI. But any thoughts that its position might one day enable it to buy the Turin bank vanished when SanPaolo last year announced a merger with Banca Intesa.

As intractable as all this seems, some of Italy’s larger groups are making a break. Fiat, the carmaker, and Telecom Italia are leaving the shareholder pact at Mediobanca and a number of banks are looking at new governance models. The deal between Intesa and SanPaolo dissolved the shareholder pact. Corrado Passera, chief executive of the merged bank, says the “main shareholders have been very wise” in eliminating the arrangement.

Mr Passera came from Intesa, where the pact had a right of veto over budgets and important merger and acquisition plans. “The shareholders’ pact has played a crucial role in the development of the group,” he says, “but given the size we have reached, the market would not accept that a small number of shareholders can go on having such an internal influence”.

Intesa SanPaolo and two other bank combinations have opted for the dual structure, common in Germany, of a supervisory board and a management board. Mediobanca has itself just announced that it is studying a move to two boards. The idea is to separate responsibilities better, so that management and shareholders have clearer roles. But Intesa SanPaolo has not followed the German practice of putting mostly executives on the management board, and some critics have viewed the proliferation of boards and directors as a way simply to ease mergers by putting off uncomfortable decisions about removing senior people.

Mr Passera does not agree with criticism that the 19 directors on the supervisory board and 11 on the management board are too many. “If you put together two banks in a deal which looked impossible a few months ago, and the price is a supervisory board with 19 people, then it’s worth paying. It’s a minor problem because the roles are well defined.” But Mario Draghi, governor of the Bank of Italy, said in a recent speech: “The two-tier system has facilitated the mergers; it may prove not to be functional in the future.”

The shift at the banks could, as with other corporate governance changes, prove to be three steps forward, two steps back. But at least many executives know where they need to go.

Alessandro Benetton, who has recently taken charge of the clothing company founded by his family, says: “The whole concept needs to evolve further . . . we need to be wary of the vision of corporate governance as a tool for tight control which can limit the capacity of a company and its management to take risks and make choices.”

Copyright The Financial Times Limited 2018. All rights reserved.

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