How Independent are Independent Directors? The Case of Italy

Abstract

In this paper we analyse and quantify the extent to which corporate disclosure for the financial year 2003 allows for verification of the independence of directors formally identified as independent by the 40 Italian blue chips. In order to do this, we used as a benchmark the voluntary independence requirements of the Italian Corporate Governance Code (Preda Code, 2002) and the voluntary independence requirements of the EC Recommendation (2005) on non-executive and supervisory directors (a proxy for international best practice). This is a new methodology that can be applied equally to any other country: to our knowledge so far nobody has systematically verified whether listed companies in fact apply the independence standards they declare that they follow. We find that, for the two key independence requirements of not having business relationships with the company and not having too many concurrent commitments outside the company, the level of compliance is dramatically low: 4% and 16% respectively. Overall, it is possible to verify compliance with all the Italian independence standards for only 5 out of the 284 directors formally identified as independent by their companies, and for only 4 directors with respect to the EC standards. The results of this study bring into question the effectiveness of securities market monitoring and call for further quantitative analysis of corporate governance.

Keywords: Independent directors, Corporate governance

JEL Classification: G3, K, K2, K22