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Global investors have warned that Italy’s new capital markets rules could undermine the country’s corporate governance standards and damage its competitiveness just as Rome seeks to lure wealthy individuals and businesses.
The International Corporate Governance Network, a group of asset managers with $77tn of assets under management, last month wrote to Treasury under-secretary Federico Freni criticising the rules, which introduces sweeping changes to shareholder voting rights.
Italy is changing the way board of directors are elected in a bid to curb outgoing managements’ power and give companies the option to hold shareholders meetings behind closed doors.
The rules, passed in March, were part of a push by Italy’s right-wing government to simplify the country’s corporate regulations, boost its capital market and prevent companies delisting from the Milan stock exchange. Italy has also offered generous tax incentives since 2016 to attract the super wealthy and reverse the country’s long-term brain drain.
But the rules on shareholder voting rights have proved highly controversial in parliament and among some of the world’s largest fund managers.
ICGN, whose members include Axa Investment Management, Amundi, BlackRock and Franklin Templeton, called on the government to “rethink” certain aspects of the new rules.
The letter, previously unreported, said the new rules “may undermine the Italian market’s competitiveness and reduce its attractiveness for institutional investors”. Freni was not immediately available for comment.
The network took aim in particular at Italy’s planned new system for appointing corporate boards, which takes place every three years. The new law seeks to replace a system which overseas investors had grown used to, even though critics said it was complex and too often meant little turnover of board members.
Under the changes, an outgoing board must present a list of candidates that is broader by a third than the board seats available. The list must be presented at an earlier date compared to other potential slates presented by other investors and it will be a two-stage voting process.
But ICGN warned: “It is hard to understand how this system will work in practice.”
They warned that the new standards, paired with the possibility to hold shareholders meetings behind closed doors, would leave overseas shareholders disadvantaged. “How will foreign investors, for instance, be able to participate in the second vote, if the company holds a ‘closed-doors’ AGM?” it said.
Italy permitted annual meetings to be held behind closed doors during the pandemic, in which a designated representative could participate in the meeting. However, several listed companies have since found the system more cost-efficient and time-saving than in-person meetings.
“The AGM is a key mechanism by which accountability is upheld,” said the ICGN.
It warned that making a “closed doors” AGM permanent features of Italian corporate governance “significantly limits the ability of shareholders, especially minority shareholders, to interact with boards and management (particularly on contentious proposals), view materials presented at the meeting, ask unmoderated questions, and make statements from the floor”.
The ICGN called on the Italian government to adopt a hybrid system, instead.
It also said the introduction of multiple voting rights which give larger investors more votes than their actual shares was “problematic”.
The provision was introduced after a few large Italian companies moved their legal headquarters and listing from Milan to the Netherlands including the billionaire Agnelli family’s holding company Exor. Experts had cautioned the Dutch regime, which offers companies the option to envisage multiple voting rights in its bylaws, was more attractive than the Italian one for family-controlled listed companies.
“According to corporate governance best practices, when a shareholder holds one share, they get one vote. Their influence on the company’s decision-making is proportionate to their economic exposure.”