Massimo Belcredi Professor of Corporate Finance, Università Cattolica del S.Cuore,

1. The revised Corporate Governance Code Massimo Belcredi Professor of Corporate Finance, Università Cattolica del S.Cuore, Consultant to Assonime London, June 26th 2003 This presentation is solely for the use of the attendees to this event. No part of it may be circulated, quoted, or reproduced for distribution without prior written approval from Assonime. This material was used by Assonime during an oral presentation and it is not a complete record of the discussion.

2. The role of self-regulation in Italy Main features of the Italian Code Conclusions Content

3. The role of self-regulation in Italy Main features of the Italian Code Conclusions Contents

4. Self-regulation has an important role to play even in a civil law country. It may: fill voids in regulation (it is a complement to corporate law) create incentives for market participants (through a reputation mechanism) Full adoption generally requires some years Though self-regulation cannot modify the regulatory framework, what is today best practice may over time: become the minimum standard be embedded in the law The role of the Italian CG Code

5. Though slowly converging, European CGCodes still show major differences Omissions/differences usually justified by a different legal and institutional framework: appointments to Board (shouldn’t directors “submit for re-election at regular intervals”? Mandated by law) role of audit committees (Board of Statutory Auditors, mandated by law) “number and calibre” of non-executive and independent directors (requirements differ from country to country, according to prevailing ownership structure and other institutional arrangements, e.g. codetermination) The role of the Italian CG Code

6. Issued (1999) by a Committee for the CG of Listed Companies Chaired by the former Chairman of Borsa (Prof. Preda) Composed by representatives of issuers (Assonime) and the financial community (Borsa, associations of banking and mutual fund industry) intended to monitor adoption and formulate revision proposals (revision effective as of July 2002) Borsa Italiana recommends the adoption of CG principles on a “comply or disclose” basis (first non-UK example in the EU) Listed companies are required to provide information annually to shareholders on the occasion of the AGM The Italian CG Code

7. STAR (Stock Market Segment with High Requirements) segment Nuovo Mercato (hi-tech, innovative SMEs) Requirements similar to - though not identical to - the Code (BoD and committee composition, internal control, directors’ remuneration, etc.) Borsa Italiana: monitors compliance, may require additional information evaluates situations of non-compliance may impose sanctions (e.g. exclusion from the Star segment) Additional requirements

8. The role of self-regulation in Italy Main features of the Italian Code Conclusions Contents

9. “Core” provisions of the Code (BoD): Composition (non exec./independent directors) Functioning (delegated powers; information flows; significant transactions; transactions with related parties) Structure: Committees and their functions (Nomination, Remuneration, Audit) Main features of the Italian Code

10. Chairman Audit Firm Internal Control System Executive Directors Non Executive/Independent Directors Board of Statutory Auditors Investor Relations Board of Directors/Sole Director Shareholders’ Meeting Internal Procedures for Confidential Information Committee for Appointment of Directors Committee on Remuneration and Stock Option Internal Control Committee Traditional corporate governance model

11. According to Italian corporate law, the Board has the ultimate responsibility for strategic and organisational guidance It may delegate (and revoke) powers to managing directors and/or an executive committee some matters are reserved to the Board by law (e.g. approval of financial statements, issue of new capital, capital reduction) or by the company by-laws the Code recommends (art.1.2., comment) that delegated powers do not cover the most important transactions (including unusual ones and transactions with related parties) Managing directors/executive committee shall regularly report to the Board on the exercise of delegated powers The Code Governance Model

12. 1) examine and approve strategic, operational and financial plans and corporate structure 2) delegate (revoke) powers to managing directors and executive committee; specify the limits of delegated powers 3) determine remuneration of managing directors 4) supervise company performance 5) examine and approve transactions having a significant impact on the company’s profitability, assets and liabilities or financial position, with special reference to transactions involving related parties 6) check adequacy of organisational structure 7) report to shareholders 8) pursue value creation 9) devote sufficient time to their duties (information on positions held in other listed companies, banks, etc. to be disclosed in financial statements)(new) The role of the Board (art.1.2.)

13. No mandated separation Chairman-CEO Disclosure of powers delegated to Chairman (art.4.3.) Non-executive Directors: their views should “carry significant weight” (art.2.1.) An “adequate number” of independent Directors (art.3.1.): do not entertain, directly or indirectly, nor have recently entertained, business relationships with the company, its subsidiaries, executive directors, controlling shareholders or shareholders exercising a “considerable influence” do not own a control (nor a “considerable influence”) shareholding are not immediate family members or executive directors of the company or of the subjects above mentioned Board Composition

14. companies controlled by another listed company: “audit committee made up exclusively of independent directors” (art.3.2., comment) issuers controlled by a (listed or unlisted) company operating, directly or indirectly, in the same industry: board composition should “ensure adequate conditions of management autonomy and hence the maximisation of the issuer’s own economic and financial objectives” (ibidem) Star and Nuovo Mercato (revised, March 2003) N. of independent directors related to boad size Numerical criteria to identify independent directors (e.g income from professional relationships with the firm not exceeding 5% of the director’s total income) Board Composition

15. Ex ante information (art.4.1.): The Chairman shall take steps to ensure directors are provided with documentation and information reasonably in advance of Board Meetings Ex post information (art.5.): Managing directors shall provide the Board with adequate information on: the activities performed in the exercise of their delegated powers transactions which are “atypical, unusual, or with related parties”, whose examination and approval are not reserved to the Board Information flows to the Board

16. Transactions with related parties (as defined by Consob) shall comply with criteria of substantial and procedural fairness directors shall disclose any direct and indirect interest they may have in a transaction they shall abandon the meeting when the issue is being discussed the Board shall take appropriate decisions when this would result in there no longer being the necessary quorum Where necessary, the Board may require the assistance of independent experts for the valuation of assets for financial, legal or technical advice Transactions with related parties (art.11.)

17. In accordance to a transparent procedure (art.7.1., comment) Detailed Information on Candidates’ personal traits and professional qualifications (with an indication of their eligibility to qualify as independent directors) shall be deposited at least 10 days before GM (art.7.1.) Nomination Committee (art.7.2.) Declaredly a “possibility”, especially useful where “it is difficult for shareholders to make proposals, as may be the case in listed companies with a broad shareholder base” A majority of non-executive directors Appointment of Directors

18. As a general rule, part of managing directors’ remuneration shall be linked (art.8.2.): to the company’s profitability possibly, to the achievement of specific objectives Remuneration Committee (art.8.1.) Shall submit proposals (in the absence of persons directly concerned) for the remuneration of: Managing Directors Directors appointed to particular positions (e.g. Chairman, Vice President) for the criteria to be used in the remuneration of the main company officers (on a proposal from the managing director) A majority of non-executive directors Directors’ Remuneration

19. Explicit reference to the CoSO Report (art.9.4., comment) The board shall (art.9.2.): lay down guidelines periodically check that the system is adequate and properly working verify that the main risks are identified and managed appropriately Managing directors shall (art.9.3.): identify the main risks and submit them to Board implement the guidelines laid down by the Board appoint an audit supervisor (not placed hierarchically under persons responsible for operations: art.9.4.) provide him with adequate resources Internal Control

20. The Internal Control (i.e. Audit) committee shall (art.10.2.): assess the work programme prepared by audit supervisors (and receive their periodic reports) assess proposals by auditing firms assess appropriateness of accounting standards Audit Committee composition (art.10.1.): made up entirely of non-executive directors a majority of independent directors (recall special cases: companies belonging to groups) Internal Control

21. The role of self-regulation in Italy Main features of the Italian Code Conclusions The revised Corporate Governance Code

22. The Italian CG Code: Is in line with international best practice Is adopted on a “comply or disclose” basis (compliance monitored by Borsa Italiana) Is periodically revised The interplay with Corporate Law The Code has a leading role, increasingly regnized by corporate law new art.2387 C.C.: by-laws may establish special requisites of “reputation, competence and independence” for directors (possibly referring to self-regulatory Codes issued by professional associations or by the Stock Exchange) Some principles subsequently embedded in the law (e.g. new discipline on conflict of interest) Conclusions