One-Tier Model and List of Candidates from the Outgoing Board: Better Corporate Governance for Italian Market or Just Xenophilia?

Abstract

The superiority of the one-tier board model, over others, has recently been argued in Italy by a study published by the Research Center of Consob, the Italian Stock Exchange Authority by bringing forward two main arguments: i) the need to simplify and rationalize the system of internal controls for listed companies; and ii) the need to foster competitiveness of Italian listed companies in order to attract foreign capital by encouraging standardization and convergence, as the one-tier board model is the most common in the world. Some important Italian listed companies have recently switched their board model to the one-tier, in particular, by providing justification of a need to attract foreign investment since institutional investors prefer the one-tier board, being the model they know better.

Another recent trend in Italian corporate governance is the amendment of bylaws by certain companies, allocating power to the outgoing board to file its own list of candidates to renew the board of directors. This is actually the rule in many jurisdictions, but it has not been the case under Italian law, where the right to file one or more lists of candidates for in the event of board renewal, is expressly granted to shareholders. Also, in this case, some important Italian listed companies have recently amended their bylaws to introduce such power by explaining that this is common practice in other jurisdictions and therefore it is favored by foreign institutional investors.

Based on these two issues – that are at the core of the most recent Italian corporate governance debate and practice – the research questions of this paper are:

1. Do institutional investors really prefer the one-tier board in Italian investee companies?

2. Do institutional investors show preference with reference to the power to file a list of candidates?

After having examined the theoretical background, also under the legal perspective of both corporate governance set of rules, institutional investors’ actual preferences regarding structure of the board of directors and power to file a list of candidates in case of renewal of the board will be explored and final considerations will be drawn. Providing an answer to these questions seems particularly important in both academic and practitioner fields as some important Italian listed companies started to adopt or to think whether adopting one or both of the above-mentioned rules with general support in the public opinion. After the Introduction, Section 6.2 compares the traditional model and the other two models of corporate governance in Italy, and deals with the main features of the recent trends in Italian corporate governance. Subsequently, we review the applicable theory and main literature in section 6.3. We present our methodology in Section 6.4. Finally, we present the results of the analysis in section 6.5 and provide concluding discussions and comments in the last two sections.

Keywords: One-tier board - Two - tier vertical and horizontal board - efficiency - corporate governance - institutional investors - slate of directors from the outgoing board