The importance of the UA dimension and its implications on the corporate governance system have been also confirmed by Licht (2001). In his work, The Mother of all Path Dependencies, the author finds that a high score on the PDT dimension is positively related to concentrated shareholdings, a characteristic found in 90% of Italian companies (Lubetsky, 2008). Interestingly, Italy finds itself in the middle in this regard, as it scored 50% for the PDT dimension. Moreover, Jong and Semenov (2006) state that such characteristic is also positively related to high UA and low M, the last one not being confirmed for Italy. Besides, mergers are generally of a friendly nature (low M and IND, not confirmed for Italy), stakeholders are not usually involved with management’s decisions (high PDT, again not confirmed), an open accounting disclosure system is used (low UA, not confirmed for Italy) and executives receive only a small percentage of their salary as stock options (in the view of Buck and Shahrim it is consistent with high UA but low IND). Salter and Niswander (1995) also suggest that a high score on IND is positively related to open disclosure of financial data. In the view of Hofstede et al. (2002), it is also consistent with a preference over short-term profits, although it is not possible to confirm such assumption as a data for the last dimension added, long-term orientation, is not available for Italy. Finally, Mooij (2001) and Semenov (2000) found that a high UA score is found in countries with few laws protecting minority shareholders, which in turn prevents investors from buying stakes in the company, as they are aware that their interests will not be fully safeguarded. Thus, small investors should mainly depend on managerial incentives and the market for corporate control (Moerland, 1995).
Italian Institutions
As to what concerns Italian institutions, it is very rare for banks, insurance companies or investment funds to hold a consistent amount of shares in a company, mainly because of the presence of a blockholder. Italian companies are in fact characterised by a limited degree of separation between ownership and control, with “pyramidal groups” led by families, the State or coalitions owing the majority of the company’s stakes (Bianchi et al., 2001). The existence of pyramidal groups has been proved to strengthen blockholders’ power (Kruse, 2007), explaining the low development of the Italian stock market (Bianco and Nicodano, 2006). This is what has enabled strong shareholders to maintain the control of the firm, in particular successfully avoiding hostile takeovers. However, one must not forget that this measure prevents minority shareholders’ interests to be safeguarded.
In the light of this situation, over the last years more specific legislations have come into force.
Hence, two main laws have been launched (Melis, 2006a), with a particular focus on the protection of minority shareholders and on the role, structure and functioning of the board of directors. These are, respectively, the Draghi Law (1998) and the Preda Code of Conduct (1999, 2002).
On the one hand, with the Draghi Law, minority shareholders have been given the right to elect and be represented by at least one or two board members, depending on whether the board is made up of 3 or more than 3 members. 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). As Harris and Muller (1999) argue, this may be due to a willingness of improving disclosure to shareholders.
So far, we have seen the major role played by the law in shaping the corporate governance system. However, a few words should also be dedicated to the influence of the labour market, the market for corporate control and the capital market.
The strong disparity between the North and the South of Italy is a main issue in Italian economy and the main responsible for the high unemployment rate, partly also due to the wide presence of the hidden market in the South. The feeling of working together “like a family” is by now almost lost, with everyone trying to do their best to achieve its personal rather than the company’s goals. Here comes an explanation of the high IND Italy scored referring back again to Hofstede’s cultural dimensions.
As to the labour itself, employees do not generally receive stakes as part of their salary, but are more often spurred into buying shares on the financial market. According to Melis (1998), trade unions are quite strong on the side of defending the rights of employees, but quite weak when there is to fight for their involvement in the strategic-decision making process. The Preda Code of Conduct finally allowed them to have representatives in the management board and to start to be considered as stakeholders of the company. Despite this, their involvement in managerial decisions is still kept very informal.
Additionally, the Italian blockholder model is the main reason for which a Market for Corporate Control has never really played a significant role in Italy (Bianchi et al.,2001). The majority of the firms listed in the Milan Stock Exchange are controlled by mainly one subject, with shareholders’ agreements and corporate charter controlling the rest. It is not then difficult to see why takeovers are very rare.
The borrowing through the capital market is also quite uncommon, like the use of stock options, and banks and self-financing are the main resources (Barca et al., 1995). By such method, dangerous stakeholders are kept aside and takeovers avoided once again.
The mutual influence of culture on institutions and institutions on culture has come here to the surface and the influence that institutions have on the corporate governance system been demonstrated, as well as the link that exists between culture and institutions that, more accordingly to the theory proposed by Lewin et al. (1999), co-evolve in shaping a company’s corporate system.
Enel Corporate Governance
Board of directors
Enel’s board structure is the typical one found in many other Italian companies defined as “the traditional model”, in which the Board of Directors is placed beside a board of Statutory Auditors (Melis, 2006b).
The board is made up of nine members, of which seven are non-executive and all independent, which is quite uncommon for listed Italian companies as provides a better protection for minority shareholders (Cavallari et al., 2003). The members are appointed by an Ordinary Shareholders’ Meeting. The minority shareholders are entitled to nominate three-ninth of the board members. The criteria that classify them as independent are respected following the Preda Code of Conduct and according to the Self-Regulation Code. The other two members are represented by the Chairman, Piero Gnudi, and the CEO and General Manager, Fulvio Conti.
Share Ownership
The Enel company holds 6.2 billion outstanding shares, all ordinary ones and exclusively registered on the Milan Stock Exchange at a par value of €1 each.
The Ministry of Economy and Finance is the major shareholder of the company, holding 21.10% of the total shares, followed by the Cassa Depositi e Prestiti (a joint-owned company owned by the aforesaid Ministry) which holds 10.15% of the shares, Barclays Global Investors, UK, Holdings (2.23%) and other shareholders (holding less than 2%). The free-float is of about 66.8% (Enel2 Website), a quite high percentage consistent with high IND but low UA. The principle of “one share, one vote” is adopted, a measure to block strong shareholders and to protect the minority ones (Melis, 2000). Nevertheless, none of the independent directors seems to hold shares, which could motivate them less to act in the interests of the shareholders.
Executive pay
According to the Business Week1 Website, as of fiscal year 2008, Fulvio Conti, in the capacity of both CEO and General Manager, received €600,000 fixed pay, up to €600,000 bonus and €2,3m stock options compensations, for a total equalling to €3.2m. The highest second executive director, Piero Gnudi, the Chairman, received €700,000 fixed salary, up to €210,000 bonus and €13,348 stock options, to the overall figure of €923,348. Such fair difference (considering the difference of $25m at Johnson and Johnson in the US) is thus confirmed by the quite balanced Italian PD dimension. The use of LTIPs is proved to not be very common, while pension funds are starting to control larger amounts of capital.
Takeovers
In the history of the company, a majority of the Enel transactions (about 80%) are represented by mergers (Business Week2 Website), especially in 2008 and 2009. However, none of these can be regarded as hostile takeovers, mainly due to the presence of a blockholder, the reason for which Italy has only seen few cases in its history of hostile takeovers. 8% of Enel transactions also corresponds to buyouts, an indicator of UA, in the sense that outstanding shares are reduced and competitors hindered from buying them (Ferrier and Folta, 1999).
Conclusion
In the light of the research carried out, I can conclude that Enel Corporate Governance do reflect both Italian institutions and culture. As in fact demonstrated, the company adopts open accounting disclosure and few laws are in place to protect minority shareholders, all factors related to high UA. Also, the concentrated ownership structure has been identified as the main responsible for the medium PD score as well as for a low development of the Market for Corporate Control and of the Stock Market.
As to the links between some Italian corporate governance features and Italian M and IND scores for which no confirmation was found, Hofstede (1991 : 140) noted that “Of the four dimensions of national culture, power distance and uncertainty avoidance in particular affect our thinking about organizations”. These two dimensions are in fact the most relevant to get an understanding about who is in charge of taking decisions and the procedures which will be adopted to reach the goals initially set.
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 (√)
- few laws protecting minority shareholders (√)*
- 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 (√)
*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.
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