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The Eurozone crisis and Italian corporate governance: the end of blockholding?
Abstract
This article explains the process of change in domestic corporate governance. An actor-centred coalitional approach is applied to the Italian case to show how the main features of domestic corporate governance are a product of behavioural patterns (i.e. informal institutions), rather than formal legislation. Leveraging their superior financial means, business elites act as institutional incumbents shaping these informal institutions according to their preferences. It is argued that a change in corporate practices is more likely to be triggered by a socio-economic crisis, which weakens the domestic elite's influence, rather than a legal reform. These findings call into question the excessively formalistic approach of many corporate governance scholars, and are confirmed by the Italian trajectory. After having resisted 20 years of liberalising legal reforms aimed at eroding their power, Italian blockholders are now being forced, as a consequence of the Eurozone sovereign debt crisis, to dismantle their cross-shareholding networks.
... However, instead of being weakened, the family blockholders exploited the reforms to further strengthen their position. Leveraging two main power resources-their large financial means, and the capacity to form shareholders' alliances-the blockholders took advantage of those liberalizing reforms expressly aimed at eroding their power (Bulfone, 2015). For instance, even though the privatizations were conducted through IPOs, in order to avoid blockholder domination, the families managed to gain control of the most profitable firms by forming shareholders' coalitions (De Cecco, 2007). ...
... Italy is the country where the crisis weakened corporate insiders the most. The large losses of the Milan stock exchange led to an erosion of the financial means of the main blockholding families and their allies in the financial sector (Bulfone, 2015). Lacking financial resources, family blockholders had to dissolve many shareholders' agreements, sell the stakes they held in the main domestic firms and dismantle their cross-shareholding networks. ...
... Lacking financial resources, family blockholders had to dissolve many shareholders' agreements, sell the stakes they held in the main domestic firms and dismantle their cross-shareholding networks. As a consequence, since 2011 foreign investors took over key firms like Telecom Italia, the air carrier Alitalia, the tyre-maker Pirelli and the cement producer Italcementi (Bulfone, 2015). Italian corporate insiders suffered more than French managers and Spanish banks and utilities from the downturn of their domestic economy because they had chosen a more inward-looking investment strategy. ...
This article explains the impact of liberalizing legal reforms on corporate practices. The cross-country comparison of five corporate governance indicators shows how the implementation of a similar set of liberalizing reforms had a puzzlingly divergent impact in France, Italy and Spain. An actor-centred coalitional approach is applied to demonstrate how such divergence was created by the same dynamic: the exploitation of liberalization by domestic corporate insiders. Leveraging their unparalleled power resources, corporate insiders mediate the effects of liberalizing legal reforms on corporate outcomes. Hence, liberalization, rather than favouring outsiders’ contention, further strengthened the insider nature of French, Italian and Spanish corporate governance. The validity of these claims is tested by looking at the impact of the Eurozone crisis on the power of corporate insiders.
The first part of this paper provides a n historical perspective on the evolution of the Italian system of corporate governance from the late nineteenth century to the present. It shows the importance of two banks --Banca Commerciale Italiana and Credito Italiano, both established in 1894 --t hat were behind all the most important entrepreneurial initiatives, including Fiat (automobiles), Montecatini (mining and chemicals), and Breda (locomotives), as well as development of the electricity and steel industries, in the first phase of industrialization before World War I. Standing behind the banks was the Italian State, which, with the aid of State entrepreneurs such as Beneduce of IRI and Mattei of ENI, played a central role in that nation's economic development throughout most of the twentieth century.
Italian capitalism has long been distinguished by the large size of the public enterprise sector and the power of large family firms, underpinned by powerful networks of inter-firm alliance orchestrated by the merchant bank, Mediobanca. This article seeks to analyse the extent to which the current programme of privatization is serving not only to shrink the size of, but to transform the structure of, power in the private sector. While some reformers have seen in privatization an instrument to encourage the adoption of Anglo-Saxon forms of corporate governance in Italy, it is argued here that the evidence of recent changes indicates the emergence of a more differentiated pattern of corporate governance rather than the triumph of any single model.
This case study analyses how the Italian 'core executive' operated in the negotiation of the Maastricht Treaty provisions on Economic and Monetary Union. The record of the Italian negotiators on EMU is examined in the framework of a 'two-level' bargaining game. It argues that policy was largely driven by a small technocratic elite, with limited ministerial involvement. The overarching foreign policy imperatives were to maintain Italian participation at the heart of the European integration process and to reduce the asymmetry of monetary power with Germany. Domestically, however, the technocratic elite shared a belief in the need for externally-imposed economic discipline (a vincolo esterno - external constraint), to overcome the problems posed by the partitocrazia - the domination of government by parties. EMU was used to effect domestic reform by redistributing power. In the process they unleashed powerful transformative effects on the Italian state. The domestic effects of EMU were thus much more far-reaching than the Italian impact at the European level on the final EMU agreement.
The article has two objectives. First, it explores whether the Italian model of capitalism has been transformed in recent decades. This involves trying to place the Italian case in the framework established by the varieties of capitalism literature. It argues that while Italian capitalism has undergone significant changes, it has not become a form of either market or co-ordinated capitalism. As a form of 'dysfunctional' state capitalism, it has adopted and mimicked elements of both without becoming either. This is because many of the political and economic factors that were at the heart of the model in the post-war era remain in place. Second, it will argue that the role of European integration in this process of change has been, at best, indirect and that broader global and economic pressures may be responsible for change.
This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common law countries generally have the best, and French civil law countries the worst, legal protections of investors, with German and Scandinavian civil law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.
Manuscript Type: Empirical.
Research Question/Issue: This paper describes the logic that guides the implementation of corporate governance reforms and investigates the extent to which the logic leads to an increase in investor protection. We use the example of Italy, where major governance reforms were passed in 1998 to protect minority shareholders from the risk of expropriation.
Research Findings/Insights: Our two-stage mixed-methods longitudinal study (1995–2005) reveals that the reforms were only modestly effective in improving governance practices. On the one hand, we document a greater alignment of cash flow rights and voting rights of ultimate owners after 1998, suggesting that minority shareholders face lower risk of expropriation. Yet, on the other hand, we find that the percentage of firms where control is fully contestable continues to remain low. Our qualitative analysis reveals both facilitators such as institutional investor activism and mandatory provisions, and impediments such as discretionary provisions, weak enforcement, and an ingrained culture of high control.
Theoretical/Academic Implications: This study elaborates extant theory on the effectiveness of reforms by adopting a longitudinal design that describes both their underlying logic and their actual effects on business practices. It also offers conceptual clarity to this literature by bringing attention to factors that act as facilitators and impediments to reform efforts.
Practitioner/Policy Implications: This study prompts lawmakers in countries endeavoring reforms to encourage participation of institutional investors, as also urges them to consider mandatory provisions, especially those which enhance disclosure and representation.
A striking paradox underlies corporate governance reform during the past fifteen years: center-left political parties have pushed for pro-shareholder corporate governance reforms, while the historically pro-business right has generally resisted them to protect established forms of organized capitalism, concentrated corporate stock ownership, and managerialism. Case studies of Germany, France, Italy, and the United States reveal that center-left parties used corporate governance reform to attack the legitimacy of existing political economic elites, present themselves as pro-growth and pro-modernization, strike political alliances with segments of the financial sector, and appeal to middle-class voters. Conservative parties’ established alliances with managers constrained them from endorsing corporate governance reform.
Why does corporate governance--front page news with the collapse of Enron, WorldCom, and Parmalat--vary so dramatically around the world? This book explains how politics shapes corporate governance--how managers, shareholders, and workers jockey for advantage in setting the rules by which companies are run, and for whom they are run. It combines a clear theoretical model on this political interaction, with statistical evidence from thirty-nine countries of Europe, Asia, Africa, and North and South America and detailed narratives of country cases. This book differs sharply from most treatments by explaining differences in minority shareholder protections and ownership concentration among countries in terms of the interaction of economic preferences and political institutions. It explores in particular the crucial role of pension plans and financial intermediaries in shaping political preferences for different rules of corporate governance. The countries examined sort into two distinct groups: diffuse shareholding by external investors who pick a board that monitors the managers, and concentrated blockholding by insiders who monitor managers directly. Examining the political coalitions that form among or across management, owners, and workers, the authors find that certain coalitions encourage policies that promote diffuse shareholding, while other coalitions yield blockholding-oriented policies. Political institutions influence the probability of one coalition defeating another.
The fundamental problem of corporate governance in the United States is to alleviate the conflict of interest between dispersed small shareowners and powerful controlling managers. The fundamental corporate governance in continental Europe and in most of the rest of the world is different. There, few listed companies are widely held. Instead, the typical firm in stock exchanges around the world has a dominant shareholder, usually an individual or a family, who controls the majority of the votes. In this essay, we begin by describing the differences in the ownership structure of companies in the three main economies of continental Europe—Germany, France, and Italy—with comparisons to the United States and the United Kingdom. We next summarize the corporate governance issues that arise in firms with a dominant shareholder. We take a look at a major European corporate scandal, Parmalat, as an extreme example of investor expropriation in a family-controlled corporation. We outline the legal tools that can be used to tackle abuses by controlling shareholders. Finally, we describe the corporate governance reforms enacted by France, Germany, and Italy between 1991 and 2005 and assess the way in which investor protection in the three countries has changed.
Does democracy control business, or does business control democracy? This study of how companies are bought and sold in four countries – France, Germany, Japan, and the Netherlands – explores this fundamental question. It does so by examining variation in the rules of corporate control – specifically, whether hostile takeovers are allowed. Takeovers have high political stakes: they result in corporate reorganizations, layoffs, and the unraveling of compromises between workers and managers. But the public rarely pays attention to issues of corporate control. As a result, political parties and legislatures are largely absent from this domain. Instead, organized managers get to make the rules, quietly drawing on their superior lobbying capacity and the deference of legislators. These tools, not campaign donations, are the true founts of managerial political influence.
Prevailing theories in political economy hold that a coalition or political party, acting through parliament, can break down institutions of stable shareholding. In spite of extremely favourable conditions in the late 1990s - the election and durable rule of a leftist government supported by a transparency coalition, a bureaucratic elite that favoured institutional change, and substantial state shareholdings which the government could privatise in pursuit of its objectives - these reforms failed to affect the concentration of shareholdings among the largest private companies in Italy. This disjuncture between legal change and actual practice in Italian corporate governance suggests that current theories of institutional change in corporate governance systems are incomplete. The focus of inquiry needs to turn to the political resources of those who support the existing system: managers and large shareholders.
Italy is firmly in the grip of an austerity programme mandated by the European Union institutions, and executed by an unelected technocrat. This state of affairs is at once the result of the acute and unexpected crisis of the financial and economic integration of the eurozone, and an expression of the failures of the Italian political class. Although the euro crisis has been mishandled by European elites, Italy's long-term economic decline, and the inability of Italian party politicians to generate a sustainable coalition to address Italy's economic problems, hinders an exit from the crisis.
This article addresses the issue of how to explain institutional change in national political economies. Within an actor-centred institutionalist theoretical framework, it explores the utility of a coalitional explanation for changes in the financial and corporate governance systems of Italy. Finance and corporate governance are useful foci for understanding change and the evolutionary direction of national political economies as a whole because, first, national and European reformers have focused a great deal of their energy on transforming financial market structures and corporate governance and, second, the regulation of finance and corporate governance is increasingly important as a means for states to exert influence over their economies. The paper finds considerable change in Italian capitalism as a result of successful elite reformers, party system changes, and the emergence of a reform coalition. However, change is limited and Italy retains a distinctive model of capitalism.
Italians are advanced in age, short in education, carry a heavy financial burden, and the road ahead is uphill. Although this picture is distorted (for the worse) by the ongoing underdevelopment of the south, the fact remains that since the 1970s Italy's elites have failed to meet the challenges of economic adjustment and political development, leaving the country's economy insufficiently prepared to meet the future. Against a background of declining total factor productivity growth, the decline of large industrial companies, their replacement in Italian production by small and medium-sized firms, and a diminishing share of world exports, the country's economy is responding poorly to the post-devaluation era of euro-zone membership.
The paper revolves around the figure of Enrico Cuccia, the patron of Mediobanca for half a century, whose activities represented for bad and good how the Italian economic system was organized before the privatizations of the 1990s. It was Cuccia who ‘substituted’ an absentee State in strengthening the Italian big business sector.
What happens when the unstoppable force of liberalization collides with the immovable object of national financial institutions in the advanced industrial democracies? To answer this question and evaluate alternative mechanisms to explain institutional change, this article examines the cases of the three large European economies with concentrated share ownership—France, Germany, and Italy. In the formal legal mechanism, interest coalitions adopt new laws, leading actors to deviate from formerly stable patterns of behavior in shareholding. In the joint belief shift mechanism, collective actors use a triggering event to jointly reevaluate their views of how the world works and thus how their interests can best be pursued. Using the metric of patient capital, this article shows that institutional change took place in France but not in Germany or Italy, despite the fact that Germany and Italy experienced significant regulatory change in the area of corporate governance while France did not. This evidence fits joint belief shift and is inconsistent with the formal legal mechanism. It is likely that the importance of the two mechanisms of institutional change depends on the degree of strategic interdependence among institutional actors: where it is high, the joint belief shift mechanism is likely to precipitate change; and where it is low, the formal legal mechanism is likely to precipitate change.
Mainstream comparative research on political institutions focuses
primarily on formal rules. Yet in many contexts, informal institutions,
ranging from bureaucratic and legislative norms to clientelism and
patrimonialism, shape even more strongly political behavior and
outcomes. Scholars who fail to consider these informal rules of the
game risk missing many of the most important incentives and constraints
that underlie political behavior. In this article we develop a
framework for studying informal institutions and integrating them into
comparative institutional analysis. The framework is based on a
typology of four patterns of formal-informal institutional interaction:
complementary, accommodating, competing, and substitutive. We then
explore two issues largely ignored in the literature on this subject:
the reasons and mechanisms behind the emergence of informal
institutions, and the nature of their stability and change. Finally, we
consider challenges in research on informal institutions, including
issues of identification, measurement, and comparison. a
This paper describes the privatization program in Italy during the 1990s and puts that policy in the context of macroeconomic adjustment, general market deregulation, and promotion of private investment in the provision of public infrastructure. The wave of state divestitures reached Italy later than other OECD countries. A deep-rooted tradition of state intervention, coupled with the use of public enterprises as a source of employment and political support, hindered the timid attempts at privatization of the 1980s, delaying until 1992 the start of largescale privatizations. These were imposed on Italian politicians and electorate by a host of factors: the financial crisis affecting both the general government and, sometimes irreversibly, state-owned enterprises (SOEs); the increasing aversion of the European Commission towards state aid to ailing firms; and the discredit thrown on public enterprises by their involvement in corruption scandals. An evaluation of its results in manufacturing, performed on the basis of a set of operative and restructuring performance indicators for a representative sample of privatized firms, indicates the lack of statistically significant improvements in efficiency scores. The analysis of the consequences of privatization on corporate governance show that, notwithstanding considerable changes in the structure of ownership and a sizeable contribution to capitalization and liquidity growth, the market for corporate control remains insufficiently transparent. These results appear to relect multiple factors -- the preference accorded to quantitative targets in the context of EMU convergence, the weakness of the executive and its dependence on shaky parliamentary majorities in the Italian political system, and finally the resistance of politicians to relinquish control over SOEs. In the broader framework of fiscal decentralization, this last factor seems if anything reinforced by recent normative changes and proposals.
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