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Good Governance Codes and IFRS Adoption Observing the Italian experience

This conference explores the impact of good corporate governance codes and practices on IFRS adoption, focusing on the characteristics of CG in Italy and the importation and adoption of CG codes. The research methods involve social network analysis (SNA) to analyze the relationships between board members. The conference also examines the effectiveness of CG codes in opening the market and stimulating efficient financial information.

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Good Governance Codes and IFRS Adoption Observing the Italian experience

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  1. Good Governance Codes and IFRS AdoptionObserving the Italian experience Conference at Fundación Ramón Areces Madrid - February 28, 2017 Roberto Di Pietra (University of Siena – Department of Business and Law– E-mail: dipietra@unisi.it)

  2. Issues • Good Corporate Governance codes and practices and IFRSadoption • CG Codes in Europe • CG in Italy: main characteristics • Importing CG Codes and their adoption • Research methods (SNA) • Governance and Accounting: IFRS adoption 2

  3. Questions • Are the CG codes able to openthe market? And make it more efficient? • Have the CG codes stimulated a more efficient financial information? And what about the IFRS adoption? 3

  4. CG Codes in Europe • Corporate GovernanceCodes • Since 1998 in UK (based on the Cadbury code 1992) • Adopted throughout EU(among others: Belgium, France, Finland, Germany, Italy, Luxemburg, Netherland, Spain, Sweden) • Revised several times (AMF, 2016)

  5. CG Codes in Europe • Corporate GovernanceCodes • EU Countries have adopted CG Codes mainly issued by the Supervisory Authorities on the Capital markets • Some on a voluntary basis (France, Italy, and Spain) • Some on a mandatory basis (Belgium, Finland, Germany, Luxembourg, Netherlands, Sweden, UK) • Large variety of rules: • Principles (B, I, Lu, NL), Provisions (B, UK), Comments (I), Guidelines (B, Lu), Criteria (I), Recommendations (G, S, Fin, Fr, Lu), Suggestions (G), Best practices (UK) • Mainly based on the Comply or Explain principle

  6. CG Codes in Europe • Corporate GovernanceCodes • Large variety of solutions within Europe • Duality (separation of the roles of CEO and Chair of BoD) • Mandatory (G, NL, S), Recommended (B, Fin, Lu, UK), Voluntary (F, I, S) • Board Gender Diversity • Quotas: Yes (B, F, G, I, NL, S, UK), No (Lu, Fin, S: it is a self-regulation) • Level of the Quota: 30% (B, G, NL), 33% (I), 40% (F, S)

  7. CG Codes in Europe • Corporate GovernanceCodes • The overall situation on the issuing and implementation of CG Codes is grounded on the Governance characteristics of each specific country • Models of Capitalism (role of the State; role of the banking industry; role of the family business) • Governance structure (corporate governance regime, ownership structure; investor protection, legal enforcement)

  8. CG in Italy Main characteristics • Corporate Governance in Italy • Italian CG regime • Low legal protection for investors • Poor legal enforcement • Underdeveloped equity markets • Pyramidal groups • High ownership concentration • La Porta el. (1997, 1998); Aganin, Visintin (2005)

  9. CG in Italy Main characteristics • Corporate Governance in Italy • Historically the Italian stock market • Pyramidal groups and the separation of ownership were more widespread in the 80’s than in the other periods • Direct intervention of the State partially replaces the role of the private sector in the accumulation of capital and this has had effect on the need to protect investors • The majority of Italian firms stayed away from the stock market • La Porta el. (1997, 1998); Aganin, Visintin (2005)

  10. CG in Italy Main characteristics • Corporate Governance in Italy • Recently the Italian stock market • High ownership concentration is persisting (some little change starts to emerge) • 83% of the companies are controlled by a single shareholder holding more than a half of shares or playing a dominant role or belonging to a group of shareholders organized in a coalition • Since 2011 coalition control structures have experienced a decline • Ownership concentration is showing a smooth decline • Identity of controlling person: • Families play the major role (27.7% of total market capitalisation) • State and Local authorities are relevant in largest firms and in the services industry • CONSOB (2015)

  11. Research methods • Social Networks as a proxy to depict CG practices • SNAas a methodology to describe and measure “distances” between BoDmembers • Trend to cumulate appointments (inside and outside the capital market) • Collective dynamics of small world networks (Watts, Strogatz1998; Scott, 2000; Carrington, Scott, Wasserman, 2005) • Softwares: Netdraw and Uci-net • Survey of the literature on the IFRS Adoption and its relationship with CG

  12. SNA on the Italian listed companies 12

  13. SNA on the Italian listed companies 13

  14. SNA on the Italian listed companies • Clouds of 2005, 2007, 2010, 2016 (links/nodes) • 2005 7 Non financial Financial Carlo De Benedetti 201/278

  15. SNA on the Italian listed companies • Clouds of 2005, 2007, 2010, 2016 (links/nodes) • 2007 5 Non financial Financial Carlo De Benedetti 204/287 7 Giovanni Tamburi

  16. SNA on the Italian listed companies • Clouds of 2005, 2007, 2010, 2016 (links/nodes) • 2010 Carlo De Benedetti 3 Non financial Financial Marco De Benedetti 2 183/264 Rodolfo De Benedetti 4 6 Jonella Ligresti

  17. SNA on the Italian listed companies • Clouds of 2005, 2007, 2010, 2016 (links/nodes) • 2016 134/214

  18. SNA on the Italian listed companies • Pirelli Cloud: 2005 (37); 2007 (32); 2010 (29); 2016 () 2005 Marco Tronchetti Provera

  19. SNA on the Italian listed companies • Pirelli Cloud: 2005 (37); 2007 (32); 2010 (29); 2016 () 2007

  20. SNA on the Italian listed companies • Pirelli Cloud: 2005 (37); 2007 (32); 2010 (29); 2016 (acquired by ChemChina and delisted) 2010 6 Arrested in 2013 Condemned in 2016 Jonella Ligresti 1 4 3 Salvatore Ligresti Paolo Ligresti Giulia Ligresti

  21. SNA on the Italian listed companies • Atlantia: 2016 (13) (Holding of Autostrade and Aeroporti di Roma) 2016 3 Gilberto Benetton 6 Carlo De Benedetti

  22. SNA on the Italian listed companies • Financial Institutions: 2005 (32 + isolated companies); 2007 (28 + isolated companies); 2010 (19 + 9=28 + isolated companies); 2016 2005

  23. SNA on the Italian listed companies • Financial Institutions: 2005 (32 + isolated companies); 2007 (28 + isolated companies); 2010 (19+9=28 + isolated companies); 2016 2007

  24. SNA on the Italian listed companies • Financial Institutions: 2005 (32 + isolated companies); 2007 (28 + isolated companies); 2010 (19+9=28 + isolated companies); 2016 2010 M. Tronchetti L. Maramotti J. Ligresti D. Rampl G. Benetton

  25. SNA on the Italian listed companies • Financial Institutions: 2005 (32 + isolated companies); 2007 (28 + isolated companies); 2010 (19+9=28 + isolated companies); 2016 (2+2+2+2+2+3=13 + isolated companies 2016

  26. SNA on the Italian listed companies • SNA • Useful methodology to “depict” the Italian listed companies system of relationships • 2008 – Financial Crisis (de-listing and M&A phenomena) • Two phases • First (before 2008) • Second (after 2008) 26

  27. SNA on the Italian listed companies • First phase • An almost stable, quite closed and strongly integrated net of social relations • Syndrome of small and ancient world where ED are interested to limit the impact of changes • No interest to show the Economic value of companies or groups • Impact of IFRS: Lower than the expectations after the IFRS adoption in 2005; Increased impact in 2007 and in 2010 on Consolidated FS (Larger impact on Profit than Equity; Lower impact for Minority shareholders) • The Italian preparers of Consolidated FS have adopted IFRS following an evaluation approach consistent with the interest to preserve the existent Ownership • Clear evidences of conflicts of interest (companies operating in the same industry; e.g.: financial institutions) – Consistent with the Italian Antitrust Authority analysis (Dec. 23, 2008; Jun. 21, 2010; Mar. 31, 2016) 27

  28. SNA on the Italian listed companies • Second phase • Clear evidences of disaggregation in the system of social relations • Increased level of distance • Decreased numbers of nodes within the listing companies as an effects of the decreased number of board positions • Clear signals that the world is go to be much more opened (in the banking industry; the Olivetti node dissolved; new and foreign actors “playing the game”) • Despite these changes the level of ownership concentration and the role played by the family business and the State owned companies are encouraging a limited evidence of the Economic value in the Financial statements • Persistence of “conflicts of interest” the Italian Antitrust Authority analysis (Mar. 31, 2016) 28

  29. Governance and Accounting: IFRS adoption • Governance and Accounting • CG variablesversus FS disclosure • e.g.: Broberg, Tagesson, Collin (2010); Collett, Hrasky (2005); … • CG rulesversus market reactions • e.g.: Gotti, Mastrolia (2010); Seidl, Sanderson, Roberts (2012); Di Pietra., Grambovas, Raonic, Riccaboni (2008); • CG practicesversus FS rules’ adoption • e.g.: Di Pietra (2011); Marra, Mazzola (2014); …

  30. Governance and Accounting: IFRS adoption • Governance and Accounting 30

  31. Governance and Accounting: IFRS adoption • Governance and Accounting 31

  32. Conclusions (or not!) • CG and Accounting • Several arguments are supporting the idea that CG mechanisms (as a result of the CG codes adoption) could contribute to drive the stock market • Towards a more efficient situation? Maybe yes or maybe not! • Good corporate practices have opened the market • However, there are some forces preserving the original characteristics and based on human behaviours (not fully rational!) • This is reflected on the quality of the financial information and despite the IFRS adoption • Not all the changes and resistance to changes are based on rationality

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  34. Good Governance Codes and IFRS Adoption:Observing the Italian experience • Many thanks for your attention!!!! • Roberto Di Pietra (University of Siena – Department of Business and Law – E-mail: dipietra@unisi.it) 34

  35. References • Aganin, Visintin (2005), The History of Corporate Ownership in Italy (2005), in A history of Corporate Governance around the World (Morck), University fo Chicago Press • Aguilera, Cuervo (2009), Codes of Good Governance, CG, n. 3 • Broberg, Tagesson, Collin (2010), What explains variation in voluntary disclosure?, A study of the annual reports of corporations listed on the Stockholm Stock Exchange, JMG, n. 4 • Cameran, Campa, Pettinicchio(2014), IFRS Adoption among private companies: impact on earnings quality, Journal of Accounting, Auditing & Finance, Vol. 29, no. 3 • Carrington, Scott, Wasserman (2005), Models and Methods in Social Network Analysis, Cambridge University Press, Cambridge (MA) • Chabi, Maati (2006), The Small World of the CAC 40, Banque & Marchés, n. 82 • Collett, Hrasky (2005), Voluntary disclosure of corporate governance practices by listed Australian companies, CG, n. 2 • CONSOB (2015), 2015 Report on corporate governance of Italian listed companies, Rome, December • Corbella, Florio, Rossignoli(2013), IFRS Adoption in Italy: which effects on accounting figures and subjectivitiy?, Accounting and Finance Research, Vol. 2, no. 4 • Di Pietra (2011), Analysis of changing institutional environments, New Accounting Policies, and Corporate Governance Practices in Italy, in Law, Corporate Governance and Accounting, Ed. Krivogorsky, Routledge 35

  36. References • Faleye(2007), Does one hat fit all?, JMG, n. 3 • Fox (2009), The myth of the rational market, Harper Collins, New York • Gotti, Mastrolia (2010), Regulatory intervention and the effect of changes in corporate governance on firm decisions and market reactions, JMG, n. 4 • La Porta, López-de-Silanes, Shleifer, Vishny (1997), Legal determinants of external finance. Journal of Finance 52:1131–50. • La Porta, López-de-Silanes, Shleifer, Vishny (1998), Law and finance, Journal of Political Economy, 106:1113–55 • Magnan, Markarian (2011), Accounting, Governance and the Crisis: Is Risk the Missing Link?, EAR, n. 2 • Marra, Mazzola (2014), Is Corporate Board more effective under IFRS or “it’s Just an Illusion”?, Journal of Accounting, Auditing and Finance, Vol. 29, n. 1. • Scott (2000), Social Network Analysis. A Handbook, London, Sage. • Seidl, Sanderson, Roberts (2012), Applying the ‘comply-or-explain’ principle: discursive legitimacy tactics with regards to codes of corporate governance. • Watts, Strogatz(1998), Collective dynamics of “small-worlds networks”, Nature, 393(6684) • Zattoni, Cuomo (2008), Why Adopt Codes of Good Governance?, CG, n. 1 36

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