It used to be that IR in Italy could only have been a liaison d’amour between a shareholder and broker. Corporate communications, particularly those of a financial nature, were few and far between. Management teams, including those of blue chips, saw their companies as their own private fiefdoms and rarely justified their strategies or decisions to shareholders.
Indeed, there weren’t that many investors to respond to because up to the early 1990s institutions focused on government bonds and neglected equities. But these have gradually become less attractive and investors large and small have begun looking for alternatives.
A series of privatizations from 1992 onwards have since brought many investors into contact with equities for the first time. Such was the impact, according to Antonio Fazio, governor of the Bank of Italy, that ‘the capitalization of the Italian stock market rose from 18 percent of GDP in 1994 to 50 percent in 1999.’
Birth of the Italian IRO
As the base of shareowners broadened, so did investors’ appetite for information. The Draghi Act of 1998 was the first legislation to provide a clear definition of what constitutes price-sensitive information, and to require its timely disclosure to the markets. Draghi was followed by the Preda Code in 1999, which laid down corporate governance guidelines. ‘Today, analysts and fund managers have come to expect complete, truthful and transparent information,’ says Franco Papa, president of AIAF, the Italian association of financial analysts.
It was the creation of the Star segment in 2001 by the Borsa Italiana that decisively put IR on the Italian corporate map. Though designed for small to medium-sized companies, Star requires its companies to have an IRO and demands timely communication of all price-sensitive information in English and Italian, both via a company’s web site and press releases.
‘There have been great improvements in Italian IR over the last three to four years,’ comments Michele Bertacco, managing director of Italian IR web site investor-relations.it. ‘IR has grown as a professional body even though the figure of the IRO was not universally recognized here until 1999. And the success of Star, with 38 companies listing since its institution, has raised the IRO’s profile.’
Luca Savio has been IRO and finance director at clothing company Stefanel, which trades on Star segment, for the last three years. ‘Analysts and investors are now paying more attention to what IROs are saying,’ he affirms. Moreover, the quality of financial communications required from Star companies has led many investors to raise their expectations for other, larger companies. ‘Being part of the Star segment imposes a much heavier workload on IROs than is currently the case for companies in the major indexes,’ observes Savio.
Nonetheless, in spite of sound corporate governance and transparency requirements, Star companies still have trouble attracting investors. ‘One of the problems of small caps is liquidity, which is generally too low,’ admits Savio. ‘Larger investors, both in Italy and abroad, need time which they often can’t afford if they want to build a worthwhile position in the company, and even more time if they want to liquidate their position without causing the share price to collapse.’ As a result, most large shareholders tend to focus on Mib-30 companies.
Liquidity is also a problem on the Nuovo Mercato growth market nowadays, according to Florence Delmas, communications and finance manager at Nuovo Mercato-listed Datamat. ‘There has been a general retreat of institutional investors from the Nuovo Mercato,’ she reveals. ‘Our retail investors have become very important since they ensure liquidity, albeit reduced, in the market. But they are more emotive, and this makes the market more volatile.’
‘Most Italian funds don’t want to buy into some companies with low liquidity,’ notes Bertacco. ‘They prefer to leave the way open for a quick exit.’ So although more stringent disclosure rules are applied to small-cap companies listing on these markets, institutional investors remain more focused on large-cap companies.
Governance hiccups
Although Draghi and Preda have led to much progress in IR and governance, problems remain. For example, according to Bertacco, ‘Cross-directorships still create a problem for true independence at board level.’ This in spite of recent attempts by the Borsa and others to clarify the definition of ‘independence’. However, Camilla Pedraglio from the exchange points out that more than 50 percent of board members at Star companies would be considered ‘independent’ under new guidelines. Investors including the fund managers’ association, Assogestioni, are also pushing for a greater and more verifiable level of board independence. ‘Investors do now ask about individual directors – whether they are independent and if there are any potential conflicts of interest,’ confirms Datamat’s Delmas.
Share blocking, which ensures that only current shareholders are allowed to vote, often serves only to impede some investors from voting at the annual meeting. Once those shareholders wishing to vote receive their voting cards, their shares are blocked (meaning they can’t sell them) until the AGM, which is normally five days. But this can be much longer if voting cards are sent to overseas investors via a global custodian.
This is one reason why even unpopular proposals are usually passed. Opposing shareholders often prefer to sell their shares, or maintain the right to sell them, rather than voice their opposition. Fabio Galli, secretary general of Assogestioni, believes that an end to share blocking could lead to greater shareholder participation.
‘Removing share blocking would be a good way to encourage foreign ownership,’ Bertacco opines. ‘There is a general sense of the need for more foreign shareholders in Italy. They are generally more active and they want companies to listen to them.’
Mutinous minorities
Complex and secretive cross-shareownership often hurts minority shareholders. This year the power struggle between various credit institutions with shares in Generali, Europe’s biggest insurer, has pitted Mediobanca, Italy’s first investment bank, against Unicredito and its allies. Generali’s shares were bid up as various institutions increased their stakes. That was good for the already well rewarded Generali shareholders, but investors in the other institutions are questioning out loud how such machinations could possibly serve their best interests.
So-called Chinese boxes are another cause for concern. Pirelli supremo Marco Tronchetti Provera has proposed merging his company with its holding company, Pirelli & Cie, and combining Olivetti, indirectly controlled by Pirelli, with 54 percent-owned Telecom Italia in order to shorten the ‘chain of command’ in response to shareholder requests for transparency.
But the Olivetti-TI proposal faces a minority shareholder revolt led by hedge fund Liverpool Limited Partnership, a TI shareholder. Gordon Singer, a portfolio manager at Liverpool, says the merger would transfer E11 bn from TI shareholders to the debt-ridden Olivetti, and notes that TI minority shareholders have already twice staved off value-destroying proposals which would have favored the controlling company. ‘I am heartened that TI minority and savings shareholders have responded quickly and cohesively to this threat by joining the group,’ says Singer, who is coordinating the opposition to the proposal.
It is interesting that it is Liverpool, a UK and US-based fund, that is coordinating the opposition. Assogestioni’s Galli notes that non-domestic shareholders are often more active in engaging with companies than domestic ones. Indeed, companies themselves would be well advised not to tread on non-domestic shareholders’ toes, at least if they want to continue to attract foreign capital. As Delmas notes, ‘Companies with more international shareholders have greater visibility abroad. This brings operational benefits and reinforces credibility, as well as lowering the cost of capital.’
Here to stay
Papa points to a combination of situations – the bursting of the stock market bubble, a poor economy, corporate scandals, and more recently the war – that have severely damaged the faith of investors in company management, the board, investment banks and analysts. ‘Companies can only preserve their access to capital if they maintain a regular and open dialogue with potential shareholders,’ he asserts.
‘In these last years corporate communications has evolved markedly and rapidly,’ agrees Galli. ‘But there is still a long way to go. The job of investment funds, which have already worked hard to promote a culture of corporate governance and transparency, is an important one.’
In spite of some recurring problems, the secrecy which once shrouded corporate Italy’s most important families and companies is being lifted, and the process is irreversible. ‘I don’t expect levels of transparency to revert to the poor state of prior years,’ predicts AIAF’s Papa. But what about when the downturn ends, and institutional and retail capital begins to flow back into the market? ‘Even in the next rising market, companies will be competing for capital on their transparency and their corporate governance systems, as well as on their fundamentals,’ replies Papa. ‘And the IRO will continue to be a key figure in all these areas.’
