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ITALY: Grapples With the Parmalat Effect

by Tony Barber and Fred Kapner Financial Times
May 7th, 2004

Italian companies, their image stung by the Parmalat scandal, are scrambling to improve transparency and corporate governance during this month's round of annual shareholder meetings.

"Parmalat highlighted the requirement to use best practice and even to go beyond it," said Marco Tronchetti Provera, chairman of Telecom Italia. "There is more attention today because of Parmalat, but what we're doing we would have done in any case."

Telecom Italia's shareholders yesterday approved a new board of directors, which, for the first time in the group's history, has a majority of independent directors.

The phone company, long a target of irate institutional investors, during the past year has won over most critics with governance changes and a streamlined ownership structure.

One appeased fund manager said: "Like all the largest companies in Italy, Telecom has to play by international rules in order to tap international markets."

Shareholders at Enel, Fiat and UniCredito Italiano have been bombarded with information about directors, auditing rules and shareholder rights that not long ago was hard to obtain.

According to Assonime, the association of Italian quoted companies, all 30 companies within the MIB30 stock market index this year, for the first time, will give biographical detail of their directors and, in some cases, their boardroom attendence record.

The effort comes as a parliamentary commission, spurred into action by massive fraud at Parmalat, struggles to piece together governance legislation that often mirrors the two-year-old Sarbanes-Oxley Act in the US.

A crucial part of the bill involves reorganising the country's archaic and opaque regulatory agencies, notably stock market regulator Consob and the Bank of Italy. The framework for improvements in corporate governance was erected in 1998, when the government passed the so-called Draghi law that required more transparent corporate reporting and greater protection for minority shareholders. One year later, companies were asked to apply a list of corporate governance rules, dubbed the Preda code.

The application of the Preda code, however, is voluntary. Until 2002, it was also very patchy.

Three-quarters of Italian companies are controlled by one shareholder or a syndicate of investors who jealously guard their interests and boardroom secrecy. Only in the wake of the Enron and WorldCom scandals did majority shareholders begin to heed the rules.

Italy's largest companies, too, needed to comply with the 2002 Sarbanes-Oxley legislation in the US because many, like Telecom Italia, have shares quoted in the US.

Tougher international accounting standards, and a European Commission initiative to enforce them rapidly, also have led to Italian companies establishing far greater, and more transparent, internal controls.

Still, the changeover is not always smooth and old habits remain. Two weeks ago, core shareholders of Assicurazioni Generali served up new boardroom nominations - including several people unknown to most investors - on the day of the annual meeting. Compared with previous years, however, when investment bank and core shareholder Mediobanca often forced out management, the meeting was tame.

Mediobanca, once a secretive institution, in the past year has installed a new, young management team and is implementing best- practice governance rules.

That is not yet the case at one of its biggest clients. Jonella Ligresti, the chair of rival insurer Fondiaria-SAI, sought a seat, unsuccessfully, on Generali's board on the grounds that Fondiaria owns 2.4 per cent.

Later, Ms Ligresti, who has little experience in the insurance business but is the daughter of SAI's main shareholder, s a i d she should have a seat on the board of RCS Media Group, owner of Italy's largest newspaper, because her family owns 5 per cent.

Even modernisers such as Mr Tronchetti Provera still are in the process of cleaning up their own house. Pirelli, the tyremaker he controls and which indirectly controls Telecom Italia, has substantially upgraded its governance rules.

Its board, however, has 22 directors - a reflection of old Italian corporate habits of seating as many friends and interlocking interests as possible.






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