I. Introduction
On 9 July 2015, the Corporate Governance Committee[1] (Comitato per la Corporate
Governance) of Italian listed companies approved several amendments to the
Corporate Governance Code (the “Code”). The Code constitutes the main source of
soft law in the area of corporate governance for the Italian listed companies
and has proved the inspiration of several legislative reforms of the Italian
corporate law. Adherence to the Code by Italian listed companies is voluntary
and based on the so called “comply or explain” principle.[2]
These amendments intend to reflect developing best practices in
corporate governance and cover different areas, including corporate social
responsibility, the risk profile of the company, the system of internal control
and risk management, the role of the Nomination Committee and the compensation
of the Statutory Auditors.
In the paragraphs, below we provide a summary of the most
significant amendments to the Code approved by the Corporate Governance
Committee in July 2015.
II. A New Focus on Sustainability Matters
The Corporate Governance Committee expands the role of the Board
of Directors with reference to the sustainability of the business. In
particular, the Code provides that the Board of Directors has to define the
risk profile of the issuer consistently with the issuer’s strategic objectives
considering also the risks that may be relevant for the sustainability of the
issuer’s business activities in the medium-long term.[3]
On the one hand, this provision stresses the importance for the
Board of Directors to adopt a medium – long term perspective and avoid any
short-termism. In this regard, this new provision expands the principle set out
in Article 1, whereby the Board of Directors has to pursue the overarching goal
of “creating value for the shareholders over a medium-long term period”.[4]
On the other hand, the new provision includes the principle of
sustainability among the interests that the Board should take care of,
consistently with the most recent European legislation.[5] This new provision seems also to
suggest that sustainability matters (such as environmental matters, social and
employee-related matters, human rights concerns, anticorruption and bribery
matters)[6] may have a relevant impact on the
business and should be considered in the definition of the risk profile and
strategic objectives of an issuer.
The Comment to Article 1 of the Code further develops this
concept, highlighting “the essential role of the Board of Directors in
evaluating the actual functioning of the internal control system and the
management of any risk that may affect the sustainability of the issuer’s
business in a medium-long term perspective”.
To further stress the importance of the sustainability matters
for a good corporate governance, the Corporate Governance Committee recommends
the most relevant issuers (i.e., issuers included in the FTSE-MIB index)[7] to consider “whether or not to
set-up a committee having the task to supervise sustainability issues related
to the relevant business and to its interactions with all the stakeholders”.[8]This recommendation is not binding and is
not subject to the “comply or explain” principle, as it is included in the
Comment section of the Code.[9]
III. The Strengthening of the System of Internal Control
and Risk Management
The Corporate Governance Committee passed changes on the system
of internal control and risk management, which significantly strengthen the
effectiveness of internal controls.
In particular, the revised Article 7 of the Code now clarifies
that an effective system of internal controls and risk management contributes
to the reliability of the information provided to the corporate bodies and not
only of the publicly disclosed financial information.[10] Notably, this provision includes
the reliability of the internal flow of information among the core tasks of an
effective system of internal control and risk management. As a consequence, the
Board should ensure the reliability and effectiveness of the internal flow of
information and take prompt actions in the event of any circumstances that may
hinder or question the reliability of the internal flow of information.
The reliability of the internal information channels and of the
information provided to the Board of Directors is crucial especially in
critical situations. In this respect, the Code now provides in the Comment to
Article 1 that “under relevant circumstances, the Board of Directors
acquires any necessary information and adopt any suitable measure to protect
the company and the information to the market”.
While the new wording in the Code is a mere explication of
principles already enshrined in Italian corporate law, it is a useful reminder
of the directors’ duty to act in an informed manner (i.e., to satisfy
themselves that they have all the information that is necessary to take action)
and to adopt appropriate remedial actions to protect the company and ensure
that the markets are adequately informed.
The Board may be assisted in this respect by the Control and
Risk Committee appointed within the Board. In fact, as provided in the new
Code, the Control and Risk Committee “supports, with adequate preliminary
activities, the Board of Directors’ assessments and resolutions on the
management of risks arising from detrimental facts that the Board may have been
become aware of”.[11]
This is an important development as, pursuant to the Code, the
Control and Risk Committee is composed by a majority, or exclusively, of
independent directors.[12] In practice the new provision means
that, in addressing circumstances having the potential to negatively impact the
company (the so-called “detrimental facts”), the Board of Directors will be
able to benefit from the support of a committee that can assess the
circumstances and the potential remedial actions with the highest degree of
independence.
The Code requires each issuer to provide for the coordination of
the corporate bodies and functions with specific tasks in the context of the
system of internal control and risk management “in order to enhance the
efficiency of the internal control and risk management system and reduce
activities overlapping”. To fully understand the importance of this
provision we have to keep in mind that the Italian legislator has passed in the
last years several reforms on internal corporate controls, which have resulted
in a poorly coordinated and occasionally inconsistent set of rules. In order to
reinforce this provision (which had largely been unheeded by issuers), the Code
now requires each issuer to describe in its annual Corporate Governance Report
the instruments adopted to ensure the coordination among the corporate bodies
and functions responsible for the system of internal control and risk
management.[13] Among these corporate functions the
Code in the Comment to Article 7 now mentions the legal and compliance
functions, “with particular regard to the management of legal and
non-compliance risks, including the risk that crimes are committed against, or
in the interest of, the company”. It is noteworthy that the Code explicitly
mentions the legal and compliance risks, which thus each issuer should consider
in the context of its risk profile.
This provision is noteworthy also because, by referring to
crimes potentially committed against (as opposed in) the interest of the
company, it clearly signals that legal and non-compliance risks go beyond the
crimes for which the company can be held liable under Legislative Decree No.231
of 2001 on thequasi-criminal liability of corporations.
The Code provides in the Comment to Article 7 that an adequate
internal control and risk management system - at least in the most significant
issuers (i.e., issuers included in the FTSE-MIB index) – should include
a so-called “whistleblowing” system, consistently with domestic and
international best practices and ensuring “a specific and confidential
communication channel as well as the anonymity of the reporting person”.
This provision is not included in the mandatory part of the Code (since it is
included in a Comment). However, this provision is presented as a reasonable
interpretation of the flexible concept of “adequate” system of internal control
and risk management, which may influence the interpretation of Italian courts
on this regard. In fact, under Italian law the executive directors have a duty
to assess the adequacy of the organizational, administrative and audit system
of the company, which include also the system of internal control and risk
management.
IV. Role of the Nomination Committee
Under Italian law, the Board of Directors of Italian listed
joint stock corporations governed by the so called “traditional” governance
mechanism (i.e., 97% of the Italian listed companies)[14] is appointed by the shareholders
pursuant to a voting-list mechanism, which is intended to grant the minority
shareholder at least a representative on the Board. Each issuer’s bylaws have
to discipline the voting-list mechanism, including the right to present a list
of candidates.
Ordinarily, the lists of candidates are presented by the shareholders.
However, according to some commentators the incumbent Board of Directors may
decide to present a list of candidates to be voted by the shareholders.[15] Indeed, the right to present a list
by the incumbent Board may help ease the coordination problems of minority
shareholders in companies with a dispersed ownership.
The Code does not explicitly support this interpretative
position. However, in the Comment to Article 5 it highlights the importance of
an engagement of the Nomination Committee “in case the Board itself, as far
as it is consistent with applicable law, submits a slate for the renewal of the
Board”.
The same Comment to Article 5 provides a clarification on the
succession plans of executive directors. The Code does not require issuers to
provide succession plans, but only to evaluate such possibility.[16]Succession plans are regarded by many
commentators as important governance tools to ensure a smooth and rapid
transition in any event of termination of an executive director’s appointment.[17] In order to provide more precise
indications, the Code now specifies that succession plans should “clearly
define their scope, instruments and timing, providing both for the involvement
of the Board of Directors and for a clear allocation of tasks, also with regard
to the preliminary stage of the procedure”.
V. Remuneration of Statutory Auditors
Pursuant to the “traditional” governance structure of Italian
joint stock corporations, the shareholders appoint a Board of Statutory
Auditors (collegio sindacale).
The Board of Statutory Auditors has wide monitoring
responsibilities and play a “central role in the supervisory system of an
issuer”.[18] Quite often the compensation of the
members of the Board of Statutory Auditors is not proportionate to their wide
spectrum of responsibilities and potential liabilities. In consideration of
this, the Code now stresses that “the remuneration of statutory auditors
should be proportionate to the commitment required from each of them, to the importance
of his/her role as well as to the size and business sector of the company”.[19]
VI. Conclusions
Issuers adhering to the Code have to implement its new
provisions by the end of the financial year starting in 2016[20].
The new provisions, besides providing some helpful guidance and
clarifications on various points, mainly focus on the area of risks, with an
emphasis on the risks that can affect the sustainability of an issuer.
The Code will help directors in understanding how to address key
risks, structure internal controls, and ensure that markets are adequately
informed.
Markets will benefit from the increased focus on risks
(including legal and compliance risks, particularly relevant in Italy) and
internal controls, and the associated disclosure obligations.
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-Lexology
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