The gradual fragmentation and privatization of Italian law sources in corporate governance – Focus on small and medium sized companies

Italian company law is undergoing a gradual fragmentation process and diversification phenomenon of the legal sources. Some Authors call it the “privatization of law sources”. Notably, self-regulation codes in corporate governance matters, that are a form of private law, are progressively integrating the main sources of law.

The primary source for corporate governance regulation in Italy is the Italian Civil Code (ICC), which sets forth the main corporate governance rules for the two most common limited liability corporate vehicles in Italy: società per azioni (or S.p.A, i.e., a company limited by stocks) and società a responsabilità limitata (or S.r.l., i.e., a limited liability company). As a preliminary remark, it is worth mentioning that both these corporate structures entail a limited liability of the shareholders, a tendency to separation of ownership and managing powers and freely transferable shares. Trends show a well-established tendency to prefer S.r.l. corporate structures rather than S.p.A. ones, especially for mid-sized and smaller companies or for family-owned and closely-held companies.

Indeed, there is a trend for medium-sized enterprises and family owned companies to follow the corporate governance organization and structure of listed companies and companies having a widespread stock ownership, as ruled by the relevant self-regulation codes.

Although decree No. 58 of 24 February 1998 (the “Consolidated Financial Act”) is the main source of regulation for listed companies, the latter can voluntarily adopt the Self-Regulation Code issued by the Corporate Governance Committee of the Italian Stock Exchange in 2006 and most recently amended in July 2018 (the “Corporate Governance Code” or the “Code”).

The current configuration of the Italian Corporate Governance Committee was set up in June 2011 by issuers and investors associations (ABI, ANIA, Assonime, Confindustria and Assogestion), as well as the Italian Stock Exchange (Borsa Italiana S.p.A.). The Committee’s objective is to promote good corporate governance in the financial community by issuing and updating the Corporate Governance Code. The enforcement of the code is based on the “comply or explain” principle, meaning that each company is allowed to decide whether certain provisions are appropriate for it and, in case of non-compliance, it is required to explain the relevant reasons in an annual mandatory report (the so-called Corporate Governance Report). By the end of 2017, more than 90% of Italian companies listed on the Italian regulated market (MTA), which represented 99% of the market capitalization, formally declared to have adhered to the latest version of the Code. The choice not to join the Code is limited to a few cases and it is generally due to the reduced size of the company.

Notably, self-regulation codes have been published and proposed also to small and medium sized unlisted companies and they contain several provisions that are present in the Corporate Governance Code for listed companies. The self-regulation codes for unlisted companies are private contributions based on the importance of the corporate governance also in the context of small and medium companies.

In 2014 NEDCommunity, that is the Italian association of non-executive and independent directors, members of corporate governance and control bodies issued the “Corporate Governance Principles for unlisted companies” (the “NED Principles”).

In 2017 AIDAF (Family Business Network) and Università Bocconi published the self-regulation code for family owned non listed companies (the “AIDAF-Bocconi Code”). The adhesion by a family owned company to the Code is voluntary.

In 2018 the "Corporate Governance Framework" was issued by Elite – the growth and capital support platform of Italian Stock Exchange - in collaboration with Confindustria and Assonime and with the collaboration of Avv. Alessandro Chieffi. It a set of rules addressed to unlisted companies which are experiencing growth and aspire to access the capital market, and in particular to companies participating in the Elite project launched by the Italian Stock Exchange authority. The Corporate Governance Framework is aimed at offering support also to smaller companies and also to foreign companies operating in a legal and regulatory context different from the Italian one that intend to incorporate subsidiaries in Italy. The Corporate Governance Framework stands on a line of continuity with respect to the Code of Corporate Governance for listed companies, with which it shares some pillars, such as the centrality of the administrative body and the division of tasks within this body.

Italian Small and Medium sized companies ("SMEs") usually operate in anti-cyclical sectors with a strong and sustainable competitive position in their niche markets with a significant orientation to exports, especially outside the EU. According to the definition set forth by the Consolidated Financial Act  SMEs are  listed small and medium enterprises, whose sales, even prior to the admission of their own shares to trading, have a volume of less than Euro 300 million, or which have a market capitalization below Euro 500 million.

SMEs and family businesses are the backbone of the Italian economy. The latest edition of the AUB Observatory, promoted by AIDAF, UniCredit, the "AIDAF Chair - EY of Family Business Strategy" and the Milan Chamber of Commerce, depicts the Italian economic system as one in which family businesses with a turnover of more than 20 million euros represent 65% of the total of Italian companies, consolidating a total turnover of over 730 billion euros and employing around 2.4 million workers. Expanding the view to companies with a turnover of less than 20 million euros, it is estimated that the percentage increases around 85% of all the Italian companies.

It is quite common for medium-sized enterprises and in particular family owned companies to prefer the appointment of simple corporate governance structures, by way of example preferring the appointment of a sole director rather than a board of directors. Listed companies or companies having a widespread stock ownership usually appoint a board of directors, in compliance with market practice and self-discipline codes. However this is not mandatory according to the Italian Civil Code, although recommended by self-regulation codes.

According to the AIDAF Code, the board of directors should be made up of at least three members and up to nine members, depending on the size of the company. At least one of the board members should be independent, meaning that he/she must not have, directly or indirectly or on behalf of third parties, nor have recently had any business relationships with the company, or any persons linked to the same, such as to influence his/her autonomous judgement. 

With regard to the responsibilities, independent directors are expected to always provide an independent, unbiased judgement on the proposed resolutions, since they are not directly involved in the executive management of the company. They are responsible for monitoring the performance of the executive management, especially with regard to the progress made towards company strategies and objectives.

All directors have a responsibility to carry out their duties without conflict; however, a special responsibility is placed on independent directors to ensure that all decisions are taken in the best interests of the shareholders.

The board of directors of small and medium sized companies are entitled to appoint, depending on the specific needs and size of the Company, one or more committees dealing with particularly significant topics, having exclusively consultative as well as proponent functions, and whose decisions are in any case not binding.

The AIDAF-Bocconi Code sets forth several criteria relating to the appointment and the operation of the advisory committees established inside the board of directors, especially when the shareholders structure is complex. Notably, the committees carry out the tasks listed in the resolution through which they were appointed, although such tasks can be revoked or modified by a subsequent corporate resolution. They are made up of at least two members, one of which should be independent, unrelated to the family owning the company.

A chairman, who it is advisable to appoint among the independent members, coordinates the activities of the relevant committee. A budget for each committee should be resolved upon by the board of directors, to be used in case the committee needs external consultancy.

The committee is allowed to access the corporate information necessary for the carrying out of its own functions and it should report on the activities carried out on a periodical basis to the board of directors. Each meeting of the committee members should be recorded in minutes by the chairman.

Committees inside the board of directors may deal with different topics.

The committee for the appointment of the directors is required to advise on the balanced composition of the board of directors and it expresses opinions on professionals whose skills and competencies it may be appropriate to have within the board or as managers. It proposes candidates in case of the need to replace any resigning director or manager. It carries out inquiries in relation to succession of directors.

The committee for the remuneration of the directors is required to evaluate periodically the adequacy, coherence and effective application of the remuneration policy of the directors and offices with strategic functions. Attendance to the remuneration committees’ meetings is prohibited to those directors whose remuneration is under discussion at that meeting.

The committee for the controls and risks should be made up of directors with adequate accounting, financial and risks management experience.

The committee for the succession plan is required to coordinate, program and implement succession plans. In case of family owned companies, such committees should be made up of directors representing the various branches of the family and at last one independent director, the latter to ensure a better balance of interests.

The corporate governance rules pursuant to the self-regulation codes constitute a benchmark in Italy and a model to be taken into consideration not only by listed companies, but also by small and medium enterprises, with the necessary appropriate adjustments.

The adoption of an evolved corporate governance model such as the one proposed by self-regulatory codes should characterize a modern concept of healthy and responsible entrepreneurship