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CG and its links with culture and institutions - Italian company analysed

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Student ID: A814717 BSP 033 INTERNATIONAL BUSINESS ENVIRONMENT Module leader: Trevor Buck Title of the assignment: In 2009, does an international firm's home country culture and institutions still have any implications for corporate governance? Illustrate your answer with ANY ONE international firm and ONE home country of your choice. Are your conclusions expected to apply to all firms from that country? Date of submission: 01/05/2009 Word count: 2,869 (excluding Cover Page, Table of Contents and References) Table of Contents 1. Introduction 3 2. Enel Background 3 3. Italian national culture dimensions 3 4. Italian Institutions 4 5. Enel Corporate Governance 6 5.1 Board of directors 6 5.2 Share Ownership 6 5.3 Executive pay 6 5.4 Takeovers 6 6. Conclusion 7 7. References 8 1. Introduction According to the Cadbury report (1992), corporate governance can be defined as "the system by which companies are directed and controlled". Although books regarding issues of corporate governance date back to even the 18th century (Smith, 1776), it is only in the 1990s that its importance has started to be felt by all people holding a stake in the business world (Melis, 1998). This paper focuses on the corporate governance system adopted by an Italian power company, Enel Spa, considering issues such as share ownership, executive pay, board structure, and the nature of takeovers. The role played by national culture and institutions in shaping the corporate governance system is also examined. However, in order to do so, theories about the relationship between culture and institutions should be discussed. In the view of Hofstede (1991: 19), "Institutions follow mental programs, and in the way they function they adapt to local culture". Similarly, Schwartz (1999) argues that the functioning and goals of societal institutions are expressed by cultural value priorities.


The right to vote by mail has also been accepted. On the other hand, thanks to the Preda Code of Conduct, disclosure information has become mandatory since 2001 for listed companies, which from now on have to state clearly whether they comply with such code and state the reasons of non-compliance in the opposite case. Such information must be present in the annual corporate governance report and made available to shareholders before the general meeting and to the public, together with being published on the Stock Exchange website. Specific summary tables must also be published in the report, resuming the areas of adherence and non-adherence. With regard to the main amendments to the board of directors, a statement regarding the eligibility of independent directors to classify as such has become mandatory, in order to ensure that any amongst them is in any form involved with the management or control of the company. On the side of shareholders, the law also establishes that any shareholder holding at least 5% of the stakes is entitled to fire directors for damages and that only shareholders with at least 10% shares of the company can call for meetings. However, Bianchi et al. (2001) argue that although efforts to implement a shareholder's capitalism are evident, their success is quite questionable due to the blockholder's presence and the "special powers" that this last one is given. The compliance for Italian companies to the International Financial Reporting Standards (IFRSs) is another issue taken into consideration by Italian law. The Enel company follows IAS to elaborate its consolidated financial statements, although the firm is not listed on the New York Stock exchange and the law does not oblige it to do so (Ortiz, 2005).


Moreover, according to literature defining stakeholder capitalism and shareholder capitalism (Buck and Shahrim, 2005), the Enel company shares characteristics belonging to both models, but mainly to the second one (see Table 1 below), while for Italy the first model has been found to be the prevailing one (Molteni, 1997). On the one side, the conclusion might be different if it was found that weak accounting rules for open outside information disclosure or close accounting procedures were used, although it should be said that countries are often found to share features of both models. On the other side, the shareholders' model adopted by Italian companies could be seen as the result of globalization, which has put lot of pressure on firms to adapt their governance system by raising risk capital so that standards of international investors are finally met. Therefore, in the light of this, a change in the ownership structure may be predictable, in order to entitle shareholders with greater powers (Davies, 1999). Table 1: a stakeholder capitalism? * two-tier boards (X); * friendly mergers (V) * few laws protecting minority shareholders (V)* * closed, internal information disclosure (X)** * weak accounting rules for open outside information disclosure (X) * a small proportion of a firm's stock in "free float" (X) * a small proportion of share-based pay for executives (V) *According to Bianchi et al. (2001), although measures have been taken to find a solution to the problem, the great powers to which the blockholder is entitled in Italian companies still prevent minority shareholders' rights to be fully safeguarded. **According to E.U. regulations, the transparency of transactions regarding the Company's shares and financial instruments related to them and carried out by the largest shareholders and any persons closely connected with them is ensured. 7.

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