The List of Others

THE POSSIBILITY FOR AN OUTGOING BOARD TO PROPOSE CANDIDATES FOR THE INCOMING ONE COULD BE VIEWED WITH SUSPICION. FOR THIS REASON, IN ORDER TO ACHIEVE SHAREHOLDER DEMOCRACY, THE ITALIAN STOCK MARKET REGULATOR WILL NEED TO INTERVENE TO PROVIDE CERTAINTY TO RULES

by Marco Ventoruzzo, full professor at Department of legal studies

Is it desirable that the members of the Board of Directors in Italy’s major listed companies be chosen (proposed) by the executives themselves in office, or should the choice of the members of the company’s governing body be left to shareholders alone? The first solution presents evident risks and equally apparent advantages. On the one hand, it can cause CEOs to be self-referential and pay less attention to shareholders' preferences; on the other hand, it can allow those who best know the needs of management to contribute to the selection of a competent and effective team, plus ensuring greater independence and autonomy of the top executives.
This debate, which exists in all countries having advanced corporate governance systems, has seen recent developments in Italy, which are followed with great interest by companies, investors, scholars, and policy makers.
For a number of economic, historical and legal reasons, starting with the prevalence of diffuse ownership structures, for some time in the United States it has been the CEOs who get to nominate who will sit on the board. The practice has attracted criticism because it allows those who should be "controlled", i.e., the chief executives themselves, to choose those who should do the "controlling already”, i.e., the other board members. A few years ago, the US federal legislator thus introduced rules aimed at facilitating proposals for candidates coming directly from partners.

In Italy, where ownership structures are more concentrated, the main agency problem concerns not so much the relationship between managers and shareholders, but rather the relation between a few powerful shareholders and small investors. With simple majority rules, controlling shareholders are often able to unilaterally elect the entire Board of Administration. Thus, to give shareholding minorities a greater voice, in 2007 the Italian legislature (by extending a rule already applicable to the board of statutory auditors) introduced the so-called list vote. It is a relatively simple and innovative system that adds a proportional corrective to the election of the board. All shareholders who meet the minimum threshold of shares can present a list of candidates, which will be voted on at the shareholders' meeting. A certain number of seats on the Board must then be reserved for the candidates the list that comes second. For example, to elect a board of 9 people, the controlling shareholder presents list of names, but also an investment fund or a collection of funds may propose their own candidates. If the former list receives 55% of the votes, and the second list 7%, at least one board member will be drawn from the latter.
In recent years, also due to the growing fragmentation of stock ownership, the statutes of numerous listed companies have also empowered the outgoing board to also propose its own list, which can therefore compete with the lists presented by shareholders. The choice is certainly legitimate, but there are fears that lists of the board may win seats at the expense of shareholders' candidates. Another concern is that they may actually be the expression, behind the scenes, of a few powerful shareholders who want to retain influence in the board.

These risks can be contained with statutory clauses which in certain cases give priority to candidates proposed by the shareholders and ensure autonomy in the selection of the candidates for the board, for example by having them chosen by independent administrators, as many statutes already provide for. In this way, the list presented by the board can facilitate the formation of consensus decisions and contribute to a more managerial approach in selecting the Board of Administrations. The next few years will allow us to assess whether this objective is achieved, but an intervention by CONSOB (the Italian stock market regulator) that gives certainty and balance to the rules could reconcile the role of the board with shareholder democracy.