Paper for Journal of Studio
Asse and Informazione Economica e Legale
Corporate Governance and Economic Performance: The Limit of
Short Termism
Francesco Di
Tommaso Arturo Gulinelli*
Francesco
Di Tommaso PhD Economics and Finance University of Rome La Sapienza – Economics
Faculty, Via del Castro Laurenziano 9, 00100 Rome, Arturo Gulinelli Studio Asse
– Iel Ets Legal and Economic Information Via degli Scipioni 132, 00192 Rome,
Abstract:
Can
corporate governance improve economic performance? The scientific literature is
contrasting on this aspect; there are studies that highlight the lack of
correlation between the performance and the practices of CG (see Bauer et al of
2003 Empirical evidence on corporate governance in Europe: The effect on stock returns,
firm valueand performance - September, 2003), while others authors believe that
a CG system can have positive effects on the economic market evaluation of a
listed company.
1. Corporate Governance: What is
it? What is its framework and mechanism?
There
is no single accepted definition of corporate governance. There are differences
in the definition based on the country we are considering. The main objective
of this document is the agenda for corporate governance reform, mainly from the
point of view of Italy. However, the American case of Enron is also used to
demonstrate the need to improve corporate governance mechanisms. Coming to a
shared definition of corporate governance is not an easy task. Corporate
governance as a stand-alone discipline is relatively new. It is believed that
the topic can be treated in a narrow or broad way, depending on the point of
view of the political decision-maker, professional, researcher or theorist. It
seems that the existing definitions of corporate governance fall into a
spectrum, with "narrow" points of view on one side and
"wider" points of view more inclusive on the other. One approach to
corporate governance that adopts a narrow view is one in which corporate
governance is limited to the relationship between a company and its
shareholders. This is the traditional financial paradigm, expressed in the
"agency theory". On the other side of the spectrum, corporate
governance can be seen as a network of relationships, not only between a
company and its owners (shareholders) but also between a company and a wide
range of other "interested parties": employees, customers, suppliers,
bondholders, just to name a few. This opinion tends to be expressed in the
"stakeholder theory". This is a more inclusive and broader way of
dealing with the issue of corporate governance and what is gradually attracting
greater attention, since the issues of corporate responsibility and social
responsibility are brought to the forefront of politics and practice in Italy
and Europe. In general, the definitions of corporate governance in the
literature tend to share certain characteristics, one of which is the notion of
responsibility. Indeed, the narrow definitions are oriented towards corporate
responsibility towards shareholders. Some narrower definitions of shareholders
in emerging market corporate governance definitions focus in particular on the
ability of a country's legal system to protect the rights of minority
shareholders. However, these definitions are applicable mainly to emerging
countries in terms of corporate governance and are not those that occur in the
legislation on corporate governance in Italy. Wider definitions of corporate
governance emphasize a broader level of accounting capacity for shareholders
and other stakeholders. It can be said that the definition of corporate
governance, which includes the responsibility towards a larger group of people
than just shareholders, was strongly supported by institutional investors. This
demonstrates an interest within the financial community for a broader
integrated approach to corporate governance. The broader definitions consider
that companies are responsible to the whole society, future generations and the
environment. For the purposes of this document we agree with the broad definition
of corporate governance, based on our research and our views on corporate
governance issues in the integrated system. We suggest that corporate
governance is the system of checks and balances, both internal and external to
companies, which guarantees that companies fulfill their responsibility towards
all their stakeholders and act in a socially responsible manner in all areas of
their activity commercial. Throughout this document, we try to demonstrate that
the theoretical frameworks that suggest that companies should be responsible
only to their shareholders are not necessarily incompatible with the
theoretical frameworks that support responsibility towards all stakeholders.
The reason behind this argument is that shareholders' interests can only be
satisfied by taking into account the interests of stakeholders, as the
companies that are responsible to all their stakeholders have more success and
more prosperity in the long run. The best definition of corporate governance is
therefore based on the perception that companies can maximize long-term value
creation by discharging their responsibility to all their stakeholders and
optimizing their governance system. This opinion is supported by the practical
cases of emerging markets. In fact, the empirical research carried out provided
substantial support for the idea that the financial performance of companies is
positively correlated with stakeholder-oriented corporate governance.
Substantial evidence has been found that suggests a growing perception among
institutional investors that there is a corporate governance dividend and a
dividend linked to the responsibility of the parties involved. In conclusion,
the research shows that "good" corporate governance, as well as
corporate social responsibility, is significantly linked to the good financial
performance of companies.
2. Corporate Governance in
emerging countries
Numerous
different theoretical frameworks have evolved to explain and analyze corporate
governance in emerging countries. Each of these frameworks deals with corporate
governance in a slightly different way, using different terminology and
visualizes corporate governance from a different perspective, deriving from a
different legislation and legal culture.
For
this reason, as anticipated, we have dealt in our paper with the
"stakeholder theory", born from a more socially oriented perspective
on corporate governance. Although there are marked differences between the
various frameworks, as everyone tries to analyze the same problems but from
different perspectives. Here we try to define some of the most commonly used
theoretical frameworks in accounting and finance disciplines and to specify
some of the points in common and the differences between these competing
paradigms. Let's examine the agency's theory.
3. Theory of agencies in
developed countries
The
introduction of limited liability and the opening of company ownership to the
public through share ownership had a significant impact on the way companies
were controlled. The market system in Italy and Europe is organized in such a
way that the owners, who are mainly the shareholders of listed companies,
delegate the management of the company to the management of the company.
There
is a "divorce" between ownership and control that led to the
notorious "Agency Problem". We discuss the extent to which there was
a dispersion of participation, which consequently led to a separation of
ownership and control in Italy. It has been shown that a similar ownership and
control structure had been operating in Italy since the Renaissance. The
agency's problem defines the company's managers as "agents" and the
shareholder as the "principal" (in their analysis there is a
shareholder with respect to "managers").
In
other words, the shareholder, who is the owner or "principal" of the
company, delegates the daily decisions of the company to the directors, who are
the "agents" of the shareholders. The problem that arises following
this business ownership system is that agents do not necessarily make decisions
in the best interest of the principal. One of the most important
presuppositions of agency theory is the divergence between the objectives and
the birth of the conflict between the principal and the agent. In finance
theory, a basic assumption is that the main goal for companies is to maximize
shareholder wealth. In practice this is not necessarily the case. It is likely
that in some companies, managers prefer to pursue their personal goals, such as
obtaining the maximum possible bonuses. Managers are likely to show a tendency
to “selfishness.” This can result in a tendency to focus on investments in
projects and companies that offer short-term profits rather than maximizing
long-term shareholder wealth through investments, projects more sustainable and
lasting, so the industry and especially the financial one is known for the
“short term.” The short term has been defined as a tendency to shorten the time
horizon applied to investment decisions or to increase the discount rate to
above that appropriate to the opportunity cost of the firm's capital It is
thought to characterize the countries that are generally classified as
"outsider-dominated" where this means that the economy is dominated
by large companies controlled directly by their managers, but also indirectly
through the actions of third parties, such as institutional investors.
Furthermore,
the short-term pressure on companies emerged from the institutional investment
community, which was more interested in making quick profits from portfolio
investments than the survival and long-term growth of their investee companies.
They have been accused of "churning out" actions in order to achieve
high returns on investments, regardless of the effects of their decisions on
managers, who are consequently under pressure and have to focus on short-term
performance.
In this
economic corporate governance environment, executives are tempted to supplement
their salaries with as many benefits as possible (such as holidays through the
company, office equipment and the like, free share assignments etc), bringing
back to a reduction in value for shareholders. Italy (and other countries with
similar market systems) these policies lead to a divergence in objectives. This
"agency problem" brings shareholders the need to control the
management of the company.
An
important question is therefore: "how can shareholders exercise control
over the management of the company?"; certainly through the appointment of
independent directors, choosing systems of governance that strengthen the
control of legality and control of the accounts, adopting the decision to
control the remuneration policies of managers by linking it to medium and
long-term returns, and finally intervening in strategic decisions .
4. Another important and basic
assumption of agency theory
There
are several ways in which the interests of shareholders and managers can be
aligned, but some are expensive. Agency costs stem from attempts by the
shareholder to "monitor" business management. Shareholder monitoring
is expensive, as it involves the launch of activities such as the commitment of
shareholders (costly in terms of resources and time-consuming). Incentive
schemes and contracts are examples of monitoring techniques. The literature
shows that solutions to agency problems imply the creation of a
"nexus" of optimal contracts (both explicit and implicit) between the
management and the shareholders of the company. These include remuneration
contracts for the business management of m / l period. These contracts aim to
align the interests of management with those of the shareholder. Although
agency costs arise from the definition of these contracts, the costs are also
borne by the agents. Managers are eager to demonstrate to the shareholder that
they are responsible and that they are following the goal of maximizing
shareholder wealth with a view to sustainability. They can provide additional
information on risk management in their annual reports, for example, which will
add costs to the accounting process, but will make the management useful and
transparent. They can spend additional resources in organizing meetings with
primary shareholders. The costs associated with these initiatives are called
bonding costs. The cost of the agency resulting from management problems is also
linked to the principal's monitoring costs and any residual losses (see Hill
and Jones, 1992). One of the main reasons why the decisions of the principal
and the agent diverge is their different attitude towards risk. This is
referred to as the "risk sharing" problem, as managers and
shareholders prefer different lines of action because of their different
attitudes towards returns.
Now
let's briefly introduce direct ways in which shareholders can
"monitor" business management and help resolve agency conflicts.
First, as owners of the company, the shareholders have the right to influence
the way in which the company is managed, and can do so by voting for the best
management of operating assets. Shareholder voting rights are an important part
of its financial activity. An area of financial literature is devoted to
investigations on the use of voting rights by shareholders, in particular
institutional investors. Shareholders can influence the composition of the
board of directors in their investee companies (the companies in which they
invest) by voting for operational assets. There are also a number of other
issues on which shareholders can vote by expressing an attitude of greater
participation (so-called "shareholder activism"). Although the right
to vote is considered part of a shareholder's financial assets, institutional
investors do not necessarily consider it an advantage, but rather a burden and
a conditioning. Some pension fund managers believe that a weak point in the
current system of corporate governance is precisely in the desire to exercise
the right to vote, as the responsibility for ownership rests with people who
often do not want to exercise it. Ownership of the shares is done because they
give a good return, the enhancement of the right to vote is almost a burden and
a responsibility from which one flees (this often happens for small
shareholders).
Linked
to the voting rights of shareholders is the acquisition mechanism, which
represents another means of controlling the management of the company; it is
necessary to underline the importance of the stock market as a means to
regulate corporate management through the acquisition mechanism.
If the
shareholders are not satisfied with the management structure of a company, they
can vote in favor of an acquisition. Clearly, the threat of acquisition is in
itself a disciplinary force for managers, as it is unlikely that they will lose
their jobs. The long-term contracts of the administrators represent one of the
means by which these can get a bit of security (even if the long-term contracts
are becoming less used and less popular as the corporate governance reform
proceeds after the financial crisis ).
There
are two theoretical approaches to Corporate Governance: The Finance Model
Theory and the Stakeholder Theory.
5. Traditional economic theory:
the finance model
Based
on the agency's traditional theory (Jensen, Meckling 1976), there should be a
positive relationship between corporate governance and business performance.
The foundation of this theory lies in the assumption that the adoption of
particular models of corporate governance making the supervision of the
business model more stable creates the conditions for better performance; how?
Precisely through careful monitoring, governance would force top management to
invest in projects with a positive net present value and to reduce waste, so
that many of the benefits fall on external investors.
The
theory also argues that those working in companies with government models that
are not properly devised are more likely to adopt sub-optimal strategies,
manipulating social communications to highlight over-performance, resist
acquisitions; as a result, their economic returns would be lower than those of
similar companies that have more extensive corporate governance models. (see.
Core et all 2006). Instead, by adopting good governance practices, companies
can reduce agency costs and improve their performance. For these reasons, based
on the agency's theory, we should find a positive relationship between the companies'
performance and a high rating attributable to the implemented corporate
governance model.
Not
only are these assumptions not verifiable and verifiable in empirical evidence,
as many international studies have claimed, but the supposed positive effect of
increasing performance for example by discouraging investments with a low Net Present
Value is often obtained, as we will see
later, using discount rates that are too high, which lead to determining
negative or reduced net present values, discouraging investments.
It is
appropriate that other studies confirm the existence of a positive link between
CG models and company performance. Since there is no single address it is
difficult to arrive at a clear and definitive position; it is evident that a CG
system based on the implementation of practices that ensure a management
attentive to the creation and preservation of value in the medium and long term
and that strives to promote respect for the rights of all stakeholders, more
than others systems, reduce risks and guarantee, if not the achievement of
better short-term economic performance, certainly a preservation of the
company's assets over time.
Among
the most relevant drivers that a good Corporate Governance system can introduce
in the decision-making practices of companies there is probably the attention
of managers and shareholders to the preservation of the value of the company in
the future.
In
fact, in the pre-crisis years, many private companies showed clear strategic
management limits especially in the choice of investments and dividend
policies, both pushed and voted to respond to short-term logic.
The
agency relationship and the information asymmetries, which represent the most
significant problems in relations between shareholders and management, have
led, in the last thirty years, above all large companies, to a strong expansion
of investment contraction policies, especially those long term. Dividend
distribution and share buybacks were often preferred for investments to push
quarterly prices.
Strategies
of this type undermine, however, the flows directed to the economic investments
of the future. Preferring the distribution of dividends instead of investments
in research and development activities can make the company attractive to
speculative investors but certainly not to the attention of institutional
investors.
In this
way, capital is collected, but a capital that is not stable and that will
probably soon move towards more profitable returns.
Instead,
companies depend on the income flows and the cash flows that they will achieve
in the future and these depend on productive and innovative investments made in
the present.
6. Short termism
In this
sense, the analysis conducted by Andrew Haldane (chief economist of the Bank of
England) who together with other scholars has analyzed the financial statements
of 624 companies listed partly on the British FTSE index and partly on the
S&P index is interesting. . The period covered by the study concerns the
years from 1980 to 2009. The model used by Haldane allowed the identification
of short-termism policies, used by the target companies, through the
measurement of the applied discount rate, which generally turned out to be be
much higher than the real one. A high discount rate reduces the net present
value of future flows, making an investment less attractive and cost-effective
(the investment cost exceeds the NPV and is therefore discarded).
The
author continues by commenting on the studies made by other economists and
concludes that in Great Britain as in the USA, the two countries that have
highly developed financial markets, the lack of investments in research and
development are very large and that, while in the nineties or so half of the
first two hundred companies worldwide that invested in research and development
were, in fact, US or British, in 2009 the share of Anglo-Saxon companies active
in R&D activities had fallen by over 18%. The reduction in investments
leads to a contraction in the ratio between capital and production, thus a reduction
in production capacity, national production and aggregate demand, with obvious
macroeconomic effects.
Short-term
strategies risk not only undermining the solvency of companies in the long term
but also economic growth and the competitiveness of the nation's economy.
Addressing
the issue of corporate governance by taking the traditional theory based on the
finance model as a basis, it opens the reflection to other contradictions in
the economic sphere; the governance model, also thanks to the theory of value,
in corporate practices seems to have to be extended and oriented almost
exclusively to the protection of shareholders' interests and to the
maximization of the profit to be distributed. But this finalistic destination
would seem to incorporate a possible defect or rather an absence of
specification. What profit are we talking about? Short-term or medium-long
term? The distinction is not trivial.
If we
take the operating economic result, we essentially measure ourselves with the
profitability of the own capital, which is a concept of the end of the period
and of the remuneration of the risk capital; and it is in this area that the
principle of efficiency comes into play, which forces companies to achieve the
best result with the least use of resources. Efficiency, especially in times of
economic crisis, pushes companies to adopt organizational models that reason in
terms of short term, focusing on saving and cutting costs. And instead, in
particular in the current production contexts in which the company is
confronted with the variability of demand, the real challenge is to focus not
only on costs - giving the level of prices - but on the best mix of process and
product that leads to the maximization of the company's capital value. Thus the
point of view is changed, passing from the side of the remuneration of the
equity to that of the invested capital - from the perspective of the net assets
to that of the investments - and at the same time as the idea of efficiency
we add that of effectiveness (achievement of objectives of mounth / l term).
And in
fact the economic result of the period is not enough to ensure long-term
profitability, because the profit and therefore the efficiency of the
management, although necessary, is continually called into question by the
changed operating conditions in which the company operates and by the
variability of all the factors of production (of their prices), and not only of
financial capital. Without investments in research and development and without
investments in human capital, the stability of every business model would be
compromised.
An
entity is really competitive if its government is able to manage and increase
the value of its resources and distinctive skills, preserving them over time.
An
economic value that takes into account only the short-term profit undermines
the existence of every economic organization.
7. La stakeholder Theory
We need
to rethink the role of governance in terms of corporate management, moving
towards a model that takes into account the needs of each stakeholder.
The
stakeholder teory can represent a valid alternative for a "healthy"
management of corporations.
It
assumes that the management is the owner of a multi-fiduciary and exclusive
relationship, which does not only concern the shareholders, but is aimed at a
broad audience of stakeholders: the stakeholders.
This
theory considers it necessary that companies do not have as their only concern
the goal of creating share value; they must also meet the expectations of
various stakeholders.
Therefore,
the corporate governance processes include, in addition to the internal actors
(shareholders, human capital), also the external ones (communities and control
institutions etc.).
How
should government action be exercised?
-
identify the stakeholders;
-
assess its weight with respect to the future development of company management;
-
adopt the appropriate strategy to create common interests;
-
understand the way in which the relationships between companies and
stakeholders can guide the change in the management of the company;
-
evaluate which practices can be put in place to manage collaboration between
the various stakeholders;
-
manage feedback with respect to deviations between governance actions applied
and the result achieved.
It
often happens that a governance structure inspired by the stakeholder teory
creates a new corporate management culture, in which the company produces
wealth and distributes it to the various subjects that contribute to its
development.
Company
performance is conditioned by the system of rights and obligations that binds
it to each stakeholder.
Companies
that achieve satisfactory long-term performance are those that manage to create
a system of rights and obligations that allows them, not only to attract
stakeholders, but also to ensure a balance between contributions received and
rewards paid.
The
sound management of society therefore passes from listening to the various
positions and acting in an attempt to protect the interests of a multiplicity
of subjects.
A
company policy that complies with these principles can:
-
reduce the reputational risk deriving from violations of regulations or
environmental damage;
-
creates a climate of trust that increases motivation and a sense of belonging;
-
mitigates conflict with external control and supervisory organizations (trade
unions, external supervisory bodies).
There
is an opinion now widely shared on the fact that the company must answer for
its choices and participate in the management of the problems of the community
as a "social institution" that draws from the community the resources
it needs to carry out the activity and that , through its actions, produces
effects of various kinds (not always positive) on the environment that
surrounds it.
Company
economists refer to the concept of socialization of production costs, when the
company transfers part of the costs to the community, which must be sustained
in the course of production.
Moreover,
there is a sort of implicit contract between the company and the company, from
which derive a series of obligations of the first towards the second.
The
company, as belonging to a community, assumes rights and duties towards the
community in which it operates, both "local" and "global".
According
to this socio-economic vision, as anticipated, the company therefore plays a
social role, and therefore the content of corporate responsibility extends to a
significant extent also including non-economic purposes such as the reduction
of environmental pollution, the improvement of working conditions etc.
The
social function of the company is complementary to the economic function.
The
acceptance of the socio-economic vision, which now appears to be the prevailing
one, implies a new concept of management of society: the assumption of social
obligations is based on a renewed relationship between business and the
socio-economic environment, in its various components. The company and its
management must act being accountable to all stakeholders - both the
"primary" and the "secondary" ones - by assuming
obligations that go beyond the fair distribution of the economic value produced
among all the subjects participating in its generation (workers, suppliers,
customers, etc.): it must contribute to the "creation of the"
extended value ", or the overall value for the stakeholders", which
takes the form of increasing social well-being, improving the quality of life
and in protecting the natural environment.
Even
the strenuous defenders of the agency's theory, which wants the company managed
to the direct and exclusive advantage of the shareholders, recognize the need
for it to prove itself "sensitive" to that complex of unwritten laws,
which are the fruit of the culture developed in the environment in which it
operates. In the absence of this sensitivity, the company would risk losing
that consent and that social legitimacy, which are indispensable for its
survival and development.
Here,
then, that an enlarged CG, which involves the involvement and listening to the
positions of all stakeholders, becomes a fundamental tool in the current
socio-economic context, which, if well addressed, can increase the value and
sustainability of the business in the long term, increasing and improving
corporate reputation.
Proper
management of microeconomics (and therefore of businesses) is a vehicle for
reducing the risk of systemic crises. In the last economic crisis, CG models
too often did not prevent negative behavior contrary to the legitimate
expectations of markets, customers, consumers and institutions in general.
In this
perspective, micro and macroeconomics merge into a single social vision.
8. The profitability of
companies that claim to be socially responsible
Organizations
that evaluate the social, environmental and economic impact of businesses have
multiplied for years.
An
observatory at European level for example is that of Eurosif (www.eurosif.org).
In 2018, this organization carried out a study that reveals how, in general, in
recent years there has been a growth in the implementation of the strategy
lines linked to the sustainability of the business of companies. In the
financial sphere, large EU funds and not only are better orienting their
investment portfolios towards ESG sustainability (an increase of around 60%
with values managed close to 4 trillion).
The
voting strategies exercised by asset managers in company assemblies assume an
absolute importance in influencing the adoption of sustainability policies.
The
reasons that tend to exclude companies from portfolio management are often
anchored to sector logics (exclusion of companies that deal with arms, tobacco,
fossil fuels, etc., where the tobacco industry is the most common exclusion
criterion). The most common sectors also move, such as the involvement of
businesses that operate in the retail trade with growth since 2014 that
concerned only 3.4% of the activities, with significant value reached in 2018
with an interest recorded by 30% of the companies .
The EU
legislator has understood the importance of the Corporate Governance models
that ensure sustainability and we will see the EU SRDII Directive below.
9. The importance of the
Legislative Decree of 10 May 2019 n.49.
Perhaps we should go back to the origin and as a note sir.
Adrian Cadbury (see the Cadbury Code of the 1990s) brought back the sense of governance
that at the time of Caucher Geoffrey meant sensibility and responsibility.
In this logic, the CG should not be seen as the set of rules
and mechanisms that govern the management and control of companies but, rather,
as the process by which companies are made sensitive to the rights of
stakeholders.
As always, the issue is cultural and the spread of a
corporate culture aimed at protecting general interests is favored by the
existence of good rules and by the presence of efficient authorities that monitor
their compliance.
As we know On 10 June 2019, Legislative Decree 10 May 2019,
n. 49 (the "Decree"), which implemented Directive (EU) 2017/828
(Shareholder Rights Directive II, "SHRD II"), amending directive
2007/36 / EC on the encouragement of long-term commitment of shareholders. It
is true that the Decree came into force, except for the deferred application of
some provisions, the same 10 June 2019. It should also be noted that the Decree
provides, with certain exceptions, that the implementing provisions of the
Decree are implemented within 180 days after its entry into force. The
implementing provisions issued pursuant to the provisions replaced as we know
will be repealed from the date of entry into force of the new provisions in the
corresponding matters. Until that date, they continue to be applied without
interruption.
Therefore, it should immediately be emphasized that the
sanctions provided for ex novo by the Decree on the subject of related
transactions in relation to the remuneration policy and the compensation paid,
described below, would appear to apply only upon completion of the regulatory
framework and therefore starting from adoption of regulatory provisions and
vice versa.
We can summarize that the main changes introduced by the
Decree to the Civil Code and Legislative Decree 58/1998 ("TUF")
concern the following profiles.
10.
Transactions with related parties.
The Decree in fact amends the art. 2391-bis cod. civ. on the
subject of related parties, now explicitly providing that CONSOB identifies:
a) the significance thresholds of transactions with related
parties taking into account quantitative indices linked to the value of the
transaction or its impact on one or more company size parameters. CONSOB can
also identify criteria of relevance that take into account the nature of the
transaction and the type of related party;
b) procedural and transparency rules proportionate to the
relevance and characteristics of the transactions, to the size of the company
or to the type of company that makes use of the risk capital market, as well as
the cases of exemption from the application, in whole or in part , of the
aforementioned rules;
c) the cases in which the directors, without prejudice to
the provisions of Article 2391, and the shareholders involved in the
transaction are required to abstain from voting on the same or safeguard
measures to protect the interests of the company that allow the aforementioned
shareholders of take part in the vote on the transaction.
It is a matter, in hindsight, of profiles already
substantially regulated in the Regulation concerning transactions with related
parties, adopted by CONSOB with Resolution no. 17221 of 12.3.2010, as updated
with the changes made by resolution no. 19974 of 27 April 2017 (the "Consob
OPC Regulation"). In any case, any actual change in the regulations
relating to transactions with related parties currently in force must pass
through a modification of the Consob OPC Regulation, expected, as mentioned,
within 180 days of its entry into force.
The main novelty regarding related parties regards, for the
moment, the sanctioning profiles: the new art. 192-quinquies TUF introduced by
the Decree, in fact, provides a specific administrative sanction for violation
of the regulations in question. In particular, on one side there is a pecuniary
administrative sanction from ten thousand euros to one hundred and fifty
thousand euros towards the issuer.
On the other hand, unless the fact constitutes an offense, a
pecuniary administrative sanction is envisaged ranging from five thousand to
one hundred and fifty thousand euros against the persons who perform
administrative and managerial functions, provided that their conduct has
significantly affected the overall organization or on company risk profiles or
has produced a serious prejudice for the protection of investors or for the
transparency, integrity and proper functioning of the market (parameters
introduced for the reference to Article 190-bis, paragraph 1, lett. ), TUF).
Identification of shareholders.
The Decree amends the art. 83-duodecies of the TUF on the
subject of identifying shareholders, on the one hand limiting the right of
issuers to identify shareholders to those who hold shares in excess of the 0.5%
threshold of the share capital with voting rights, on the other on the other
hand by eliminating the possibility for shareholders not to be identified.
Moreover, this right can now be exercised by issuers regardless of the
provision in the articles of association (the statutory provision remains
instead for companies admitted to trading on multilateral trading systems).
In conclusion, the Decree also maintains the obligation for
the issuer to initiate the identification process at the request of the
shareholders representing at least half of the minimum shareholding established
for the presentation of the lists of candidates for directors, as well as the
obligation - in any case - information to the market in relation to the start
of the identification process.
The new rules on the identification of shareholders will
come into effect as of, and the implementation provisions will be adopted by
the date of application of the Implementing Regulation (EU) 2018/1212 of 3
September 2018: therefore, from 3 September 2020.
11.
Report on the Crporate Governance remuneration policy and remuneration paid.
Summarizing the Decree, in modifying the art. 123-ter of the
TUF, in particular:
- changes the formal name of the "remuneration
report" in "report on the remuneration policy and the remuneration paid";
- specifies that the first section of this report must
illustrate the remuneration policy "in a clear and understandable
way";
- extends the obligation to describe the remuneration policy
also with reference to the members of the supervisory bodies (without prejudice
to the provisions of Article 2402 of the Italian Civil Code);
- specifies that the remuneration policy "contributes
to the corporate strategy, the pursuit of long-term interests and the
sustainability of the company and illustrates the way in which it provides this
contribution";
- introduces the binding vote (instead of the advisory vote)
of the meeting on the remuneration policy referred to in the first section of
the report, also providing that the policy is subject to the vote of the meeting
at least every three years (instead of on an annual basis) . The vote of the
shareholders is also expressly provided for in the event of policy changes ();
- introduces the consultative vote on the second section of
the report (on the fees paid);
The Decree also introduces the obligation for the legal
auditing company to verify the preparation of the second section of the report.
We can conclude that the provisions apply to the reports on
the remuneration policy and on the compensation paid to be published at the
shareholders' meetings for the approval of the financial statements relating to
financial years starting from 1 January 2019. It should also be noted that no
option provided by the SHRD II for SMEs, to allow these companies to submit the
section of the report on the compensation paid for the discussion at the
meeting instead of the vote. The violation of the discipline of the
remuneration report is for the first time assisted by a sanctioning apparatus.
The Decree introduces, in fact, to listed companies for the violation of the
provisions of art. 123-ter of the Consolidated Law on Finance and the related
implementing provisions, as well as towards the persons who perform
administrative, management or control functions, if their conduct has contributed
to the violation of the aforementioned provisions by the company, the
application of the pecuniary administrative sanction from ten thousand euros to
one hundred and fifty thousand euros or the non-pecuniary administrative
sanctions provided for by paragraph 1 of article 192-bis, TUF. Furthermore, it
introduces the pecuniary administrative sanction from ten thousand euros to one
hundred thousand euros for the auditor who fails to verify the preparation of
the second section of the remuneration report.
12.
Last analysis: The right to ask questions before the Administrative meeting.
Then the Decree maintains the current approach of the TUF -
which provides for two different terms for the right to ask questions before
the meeting -, however, increasing the terms available to issuers: the
presentation of applications by shareholders can, in fact, now take place: (i)
up to five trading days before the meeting - and in this case the company
provides a reply at the latest during the meeting -; or
(ii) up to the record date (and therefore seven market days
before the meeting), if the convocation notice provides for the company to
provide, before the meeting, a response to the questions received. In the
latter case the answers are always provided at least two days before the
meeting, even through publication in a specific section of the company's
website, but ownership of the right to vote can be attested even after the
dispatch of the questions, provided that they are received by the third day
following the record date.
The provision will apply to shareholders' meetings whose
convocation notice is published after 1 January 2020 defining that:
Transparency of institutional investors, asset managers and
voting consultants.
The Decree introduces in the CFA, in Chapter II of Title III
of Part IV, section I-ter (articles from 124-quater to 124-novies) on the
transparency of institutional investors, asset managers and voting consultants
, whose definitions are contained in art. 124-quater, of the TUF.
On the basis of the new provisions, the following is
concluded:
- institutional investors and asset managers are required to
adopt and communicate annually, based on the comply or explain principle, the
commitment policy that describes the methods with which they monitor investee
companies and communicate with them;
- the voting consultants must publish annually a report
whose minimal content includes the scope and nature of the dialogue, if
necessary entertained with the companies object of their research and
recommendations, the possible adhesion to a code of conduct or the reasons for
not adhering. On these subjects, CONSOB can exercise the powers provided for by
the articles 114 paragraphs 5 and 6 TUF (power to request information and
documents necessary for information to the public) as well as 115 paragraph 1,
lett. a), b), and c) (power to request the communication of news and documents,
to take information, to carry out inspections).
The new provisions regarding institutional investors, asset
managers and voting consultants, apply one year after the entry into force of
the Decree, and therefore from 10 June 2020.
Conclusions
Perhaps we should go back to the origin and as a note sir.
Adrian Cadbury (see the Cadbury Code of the 1990s) brought back the sense of
governance that at the time of Caucher Geoffrey meant sensibility and
responsibility.
In this logic, the Corpoate Governance should not be seen as
the set of rules and mechanisms that govern the management and control of
companies but, rather, as the process by which companies are made sensitive to
the rights of stakeholders.
As always, the issue is cultural and the spread of a
corporate culture aimed at protecting general interests is favored by the
existence of good rules and by the presence of efficient authorities that
monitor their compliance.
The future corporate governance will certainly be based on
the management models of companies that are able to ensure the following
aspects:
1. Business sustainability in the medium to long term
2. An attractive business climate
3. Respect for the rights of workers, the environment and
local communities
4. Corporate reputation
5. The stability of profits instead of high profits in the
short term.
Arturo Gulinelli
Francesco Di Tommaso
References
1.
(2004, May17) ‘Special report: corporate governance,
investors fight back’. Business Week.
https://www.sec.gov/Archives/edgar/data/1018724/000119312516530747/d78603ddef14a.htm
2.
IPSOA,
Amministrazione e Finanza (2019). Volume 10 , 5(4), 29-32.
https://doi.org/10.22495/jgr_v5_i4_p4
3.
Cabury, A. (Cadbury Code). Private communication.
Business in the Community.
4.
Republica Italiana, D. (2019, August 9). Legislative
Decree of 10 May 2019 n.49.
5.
Republica Italiana, D. (2000). CONSOB.
6.
Cadbury Committee (1992). Report of the Committee on
the Financial Aspects of Corporate Governance. Retrived from:
http://www.ecgi.org/
codes/documents/cadbury.pdf
7.
Republica Italiana, D. (2000). TUF.
8.
Collins, J., & Porras, J. (1994). Built to last.
New York: Harper Business.
Retrived from: https://www.amazon.com/Built-Last-Successful-Visionary-
Essentials/dp/0060516402
9.
Conference Board (2003). Commission on public trust
and private enterprise:
Findings and recommendations. Retrived from:
https://www.conference- board.org/pdf_free/SR-03-04-ES.pdf
10.
Doyle, J. L.,
Colley, J., Stettinius, W., & Logan, G. (2005). What Is Corporate
Governance? New York: McGraw-Hill
11.
El Nashar, T.
(2016). The probable effect of integrated reporting on audit quality. Journal
of Governance and Regulation, 5(2), 50-58. http://doi.org/
10.22495/jgr_v5_i2_p6
12.
Eun, C. S., Resnick,
B. G., & Sabherwal, S. (2004). International Finance. Wall Street Journal.
Aril 9, 1996. https://link.springer.com/content/pdf/bbm%3A978-3-030-02792-6%2F1.pdf.
13.
Ferri Di Fabrizio,
L. (2017). The pattern of fraudulent accounting: Ethics, external auditing and
internal whistle-blowing process. Journal of Governance and Regulation, 6(1),
12-25. http://doi.org/10.22495/jgr_v6_i1_p2
14.
Feten, A., &
Salma, D.-A. (2015). The use of international standards in ethics education in
the Tunisian audit context. Journal of Governance and Regulation, 4(4-4),
499-506. http://doi.org/10.22495/jgr_v4_i4_c4_p7
15.
Gimbel, F. (2004,
April 19). US activist launches hedge fund (for corporate governance). FT Fund
Management. http://nylawyer.nylj.com/adgifs/decisions/120607hedgefund1.pdf
16.
Gompers, P., Ishii,
J., & Metrick, A. (2001). Corporate governance and equity prices (NBER
Working Paper No. 8449).
17.
Habbash, M. (2012).
Earnings management, audit committee effectiveness and the role of blockholders
ownership: Evidence from UK large firms. Journal of Governance and Regulation,
1(4-1), 100-116. http://doi.org/ 10.22495/jgr_v1_i4_c1_p1
18.
ICGN (2002). Cross
border proxy voting, case studies from the 2002 proxy voting season.London:
International Corporate Governance Network.
19.
IF AC (2003).
Rebuilding public confidence in financial reporting: An international
perspective. New York: International Federation of Accountants.
20.
IFAC (2004).
Enterprise governance: Getting the balance right. New York: International
Federation of Accountants.
21.
Kandemir, H. K.
(2016). Auditing versus consultancy: a critique of the EU law reforms on the
new form of auditing. Journal of Governance and Regulation, 5(3), 90-97.
http://doi.org/10.22495/jgr_v5_i3_p8
22.
Krauß, P., &
Zülch, H. (2013). The relation of auditor tenure to audit quality: Empirical
evidence from the German audit market. Journal of Governance and Regulation,
2(3), 27-43. http://doi.org/10.22495/jgr_v2_i3_p2
23.
Larcker, D.,
Richardson, S., & Tuna, I. (2005, May 2). Ratings add fire to the
governance debate. FT Mastering Corporate Governance https://aaapubs.org/doi/pdf/10.2308/accr.2007.82.4.963
24.
Ledimo, O., &
Martins, N. (2014). An audit of employee commitment to enable leaders to manage
organizational talent. Journal of Governance and Regulation, 3(3-1), 128-133.
http://doi.org/10.22495/jgr_v3_i3_c1_p6
25.
Los Angeles Times
(2004, April 3). Ex-exec tells of Adelphia fraud’. https://www.jstor.org/stable/29789727?seq=1#page_scan_tab_contents
26.
McKinsey &
Company (2002). Global investor opinion survey on corporate governance, London,
McKinsey & Company.Standard & Poor's Governance Services (2002).
Corporate Governance Scores: Criteria, Methodology and Definitions, New York,
Standard and Poor's. https://www.mckinsey.com/client_service/corporate_finance/latest_thinking/mckinsey_on_finance/~/media/DD152F22B7CC4B099913E114AC5558FB.ashx
27.
Monks, R. A. G.,
& Minow, N. (2015). Corporate Governance (5thed.). Chichester, The UK: John
Wiley & Sons Ltd. http://doi.org/10.1002/ 9781119207238
28.
Murase, H., Numata,
S., & Takeda, F. (2013). [Conference issue]. Journal of Governance and
Regulation, 2(3), 7-23. http://doi.org/10.22495/jgr_v2_i3_p1
29.
Tayan, B. &
Larcker, D. F. (2015). Corporate governance matters: A closer look at
organizational choices (2nd ed.). New Jersey: Pearson Education. Retrieved
from: https://www.amazon.com/Corporate-Governance-Matters-
Organizational-Consequences/dp/0134031563
30.
Tricker, P. I.
(2017). Corporate governance: principles, policies, and practices. Oxford, the
UK: Oxford University Press. Retrieved from:
https://global.oup.com/ukhe/product/corporate-governance-9780198702757?
cc=ua&lang=en&
31.
UNCTAD (2003). Case
study on corporate governance disclosures in the United States of America
(Report No. TD/B/Com.2/ISAR/19/). Retrieved from:
https://unctad.org/en/docs/c2isar19_en.pdf
32.
UNCTAD (2005). 2005
Review of the implementation status of corporate governance disclosures (Report
No. TD/B/COM.2/ISAR/CRP.1).
33.
Velte, P. &
Stiglbauer, M. (2012). Impact of auditor and audit firm rotation on accounting
and audit quality: A critical analysis of the EC regulation draft. Journal of
Governance and Regulation, 1(3), 7-13. http://doi.org/ 10.22495/jgr_v1_i3_p1
34.
Velte, P., &
Eulerich, M. (2014). Increased auditor independence by external rotation and
separating audit and non-audit duties? - A note on the European audit
regulation. Journal of Governance and Regulation, 3(2), 53-62. http://doi.org/10.22495/jgr_v3_i2_p5
35.
Webley, S., &
More, E. (2003). Does business ethics pay: Ethics and financial performance.
London: Institute of Business Ethics. Retrieved from:
https://www.ibe.org.uk/userfiles/doesbusethicpaysumm.pdf
36.
Wilkinson, N., &
Coetzee, P. (2015). Internal audit assurance or consulting services rendered on
governance: How does one decide? Journal of Governance and Regulation, 4(1-2),
186-200. http://doi.org/10.22495/ jgr_v4_i1_c2_p3
37.
Relazione Assonime “La Corporate Governance in Italia: autodisciplina, remunerazioni e comply-or-explain (anno 2017) del Febbraio
2018;
http://www.assonime.it/attivita-editoriale/studi/Pagine/note-e-studi-2-2018.aspx
38.
2017 CSR RepTrak - How to use data to connect CSR and
Reputation and be relevant for the business;
https://www.reputationinstitute.com/sites/default/files/pdfs/2017-Italy-CSR-RepTrak.pdf
39.
Report on corporate governance of Italian listed companies 2017 – fonte
Consob; http://www.consob.it/web/consob-and-its-activities/rcg2017
40.
ZAMAGNI S., «Responsabilità sociale delle
imprese e “Democratic Stakeholding”», Forlì, Aiccon, WorkingPaper n. 28, 2006;
http://www.consob.it/web/consob-and-its-activities/rcg2017
41.
Milton Friedman
- “The Social Responsibility of Business
is to Increase its Profits” New York Times Magazine 1970;
https://www.duo.uio.no/bitstream/handle/10852/38408/Mertens_Filsosofi_Master.pdf?sequence=
42.
Tarantola A., 2011, Il ruolo del risk
management per un efficace presidio dei rischi: le lezioni della crisi,
Intervento alla CommunityCib – SDA Bocconi, Milano, 10 novembre;
http://umich.edu/~thecore/doc/Friedman.pdf
43.
Amartya K. Sen Etica ed Economia Editori
Laterza 1988;
https://archiviomarini.sp.unipi.it//541/1/Amartya%20Sen,%20la%20filosofia%20politica%20(S_%20Caruso)
44.
Andrew Haldane – The
costs of short-termism BOE 2016; https://www.bis.org/review/r171013f.pdf
45.
Il codice della crisi di impresa schema di Dlgs
del 10/1/2019 https://www.altalex.com/documents/news/2018/11/28/codice-crisi-impresa-e-insolvenza
46. Ahmad, M., & Alshbiel, S. (2016). Women in Jordanian banks and
performance: Financial accounting measurement.[Special issue]. Risk
governance & control: financial markets & institutions, 6(3-1), 7-17. http://dx.doi.org/10.22495/rcgv6i3c1art1
47. Puntillo, P. (2012). An empirical analysis of fiscal federalism
implementation and of cost accounting in Italian public administrations. Risk
Governance and Control: Financial Markets & Institutions, 2(3), 64-75. http://dx.doi.org/10.22495/rgcv2i3art5
48. Agriyanto, R., Rohman, A., Ratmono, D., & Ghozali, I. (2016).
Accrual based accounting implementation: An approach for modelling major
decisions. Risk governance & control: financial markets &
institutions, 6(4-special issue), 531-539. http://dx.doi.org/10.22495/rgcv6i4siart12
49. Rasyid, A., Sugiarto D., E., & Kosasih, W. (2017). Management
accounting techniques and corporate performance of manufacturing
industries. Risk governance & control: financial markets &
institutions, 7(2), 116-122. http://dx.doi.org/10.22495/rgcv7i2art11
50. Alrabba, H. M., & Ahmad, M. A. (2017). The role of enterprise
resource planning (ERP) system in advancing the country of Jordan towards
international standard accounting practices and accounting mechanisms. Risk
governance & control: financial markets & institutions, 7(2), 76-94. http://dx.doi.org/10.22495/rgcv7i2art8
51. Baatwah, S. (2016). Audit tenure and financial reporting in Oman:
Does rotation affect the quality? [Special issue]. Risk governance
& control: financial markets & institutions, 6(3-1), 18-29. http://dx.doi.org/10.22495/rcgv6i3c1art2
52. Alhadab, M. (2016). Auditor report and earnings management:
Evidence from FTSE 350 companies in the UK. Risk governance &
control: financial markets & institutions, 6(4-2), 334-344. http://dx.doi.org/10.22495/rgcv6i4c2art11
53. Kusumastuti, R., Ghozali, I., Fuad (2016). Auditor professional
commitment and performance: An ethical issue role. Risk governance
& control: financial markets & institutions, 6(4-special issue),
540-548. http://dx.doi.org/10.22495/rgcv6i4siart13
54. Mynhardt, RH., Plastun, A., & Makarenko, I. (2017).
Competitiveness of the Ukrainian audit market. Risk governance &
control: financial markets & institutions, 7(2-1), 177-193. http://dx.doi.org/10.22495/rgcv7i2c1p6
55. Drogalas, G., & Siopi, S. (2017). Risk management and internal
audit: Evidence from Greece. Risk governance & control: financial
markets & institutions, 7(3), 104-110. http://doi.org/10.22495/rgcv7i3p10
56. van der Nest, D.P., Smidt, L., & Lubbe, D. (2017). The use of
generalised audit software by internal audit functions in a developing country:
A maturity level assessment. Risk Governance and Control: Financial
Markets & Institutions, 7(4-2), 189-202. http://doi.org/10.22495/rgc7i4с2art2
57. Lemonakis, C., Ballas, P., Balla, V., & Garefalakis, A.
(2018). Audit fees and pricing strategy: Do restatements of internal control
reports and earnings matter? Risk Governance and Control: Financial
Markets & Institutions, 8(2), 63-73. http://doi.org/10.22495/rgcv8i2p4
58. El-Halaby, S., Hussainey, K., Marie, M., & Mohsen, H. (2018).
The determinants of financial, social and Sharia disclosure accountability for
Islamic banks. Risk Governance and Control: Financial Markets &
Institutions, 8(3), 21-42. http://doi.org/10.22495/rgcv8i3p2
59. Eltweri, A., Altarawnah, M., Al-Hajaya K., & Al-Karaki, W.
(2018). Auditing profession regulation: Lesson learned from code and common law
countries regulatory approaches. Risk Governance and Control: Financial
Markets & Institutions, 8(3), 80-101. http://doi.org/10.22495/rgcv8i3p6
60. Ferreira, J. V. (2018). The role of the external auditor in
corporate governance: The case of companies listed in the NYSE Euronext
Lisbon. Risk Governance and Control: Financial Markets &
Institutions, 8(4), 38-51. http://doi.org/10.22495/rgcv8i4p5
·
Tutino, M., & Merlo, M. (2019). Accounting
fraud: A literature review. Risk Governance and Control: Financial
Markets & Institutions, 9(1), 8-25. http://doi.org/10.22495/rgcv9i1p1
Amira, H., & Nuha, B. Q. (2019). The impact of conditional conservatism on creative accounting: A suggested framework. Risk Governance and Control: Financial Markets & Institutions, 9(1), 33-44. http://doi.org/10.22495/rgcv9i1p3
Amira, H., & Nuha, B. Q. (2019). The impact of conditional conservatism on creative accounting: A suggested framework. Risk Governance and Control: Financial Markets & Institutions, 9(1), 33-44. http://doi.org/10.22495/rgcv9i1p3
Nessun commento:
Posta un commento