A reliable corporate governance is pivotal in order to guarantee value creation for a company in the long term. Such a statement has often been said, read or heard. However, establishing a relationship between governance quality and company performance remains particularly problematic: company performance depends on multiple factors (industry, geographical markets, product/service quality, etc.) and governance is only one, as relevant as it may be. Indeed, literature on the subject provides different and conflicting evidence on the link between governance quality and company performance.
Thus, the question is: why should a company invest time and money to improve its own corporate governance? Institutional investors (pension funds, asset management companies, etc.) attribute paramount importance to governance system quality in their investment decisions; fundamental analysis and management quality are other important aspects. These results emerged from the survey led by the ‘Osservatorio sull’Eccellenza dei Sistemi di Governo in Italia’ of The European House – Ambrosetti. Institutional investors have become progressively important following the introduction of the ‘record date’ that encouraged significantly their activism.
Main investment criteria of institutional investors (minimum = 1; maximum = 10). Results of the survey led by ‘Osservatorio sull’Eccellenza dei Sistemi di Governo in Italia’ of The European House – Ambrosetti
In order to guarantee data reliability, the survey has been conducted on a significant sample. The assets managed by institutional, national and international investors that participated to the survey have been equal to 4,318 billion Euro (2.8 times Italian GDP in 2012): 10.3% of the world’s assets under management.
The most considered governance aspects by institutional investors are the Board and its Committees’ composition, Board functioning, disclosure and quality of corporate reporting. It comes to no surprise that legislation and companies self-regulation focused on such topics in the last years.
Board composition, members’ expertise and the presence of independent members are pivotal aspects in the opinion of institutional investors. The most capitalised Italian companies are improving on these aspects: Board members’ have a richer background and a more international experience; moreover, the independent members represent 50% of total in 2012 (in 2011 the percentage was 43%).
As for disclosure and corporate reporting, the institutional investors consider relevant the remuneration policy for Board members and key managers. In Italy, the introduction of the Remuneration Report has significantly increased disclosure on the rules. More specifically, institutional investors pay particular attention to disclosure levels on: performance parameters for bonus achievement and relative weights; terms of agreement for severance and discretional payments.
Analysing the Remuneration Reports of FTSE MIB companies, the ‘Osservatorio’ has concluded that Italian companies present adequate standards in terms of transparency but they could provide further evidence on the link between performance and bonus as well as on the terms of agreement for severance payments. In 2013 these two drawbacks implied a negative vote by 40% of institutional investors in 185 shareholders’ meetings.
Considering the lack of economic growth and pro-business culture in Italy, the improvement of corporate governance is not sufficient to guarantee attractiveness: it does represent, however, a necessary condition.
In order to align to France and Germany in terms of shares held by institutional investors, FTSE MIB companies require additional 86 billion Euro by foreign investors. To attract this capital amount, the Italian companies must continue to improve their corporate governance. If sound governance does not necessarily imply better performances of Italian companies, undoubtedly it does make them more attractive.
With Marco Visani.