The New Italian Corporate Governance Code

Summary

On December 5, 2011, the Committee for Corporate Governance published a revised code of Corporate Governance (the Corporate Governance Code or Codice di Autodisciplina) for listed companies (the New Code)1.

The New Code updates the previous Corporate Governance Code published in March 2006, as partially amended in 2010 with the substitution of Article 7 with respect to the compensation of directors.

The New Code, informed by the experiences of other major economies, provides Italian listed companies (Issuers) with best practices on corporate governance. As in the previous edition, implementation of the New Code's recommendations is left to the discretion of the Issuers according to the principle of "comply or explain", in which Issuers that do not implement, or only partially implement, one or more of the provisions of the New Code must disclose their reasoning to their shareholders and the market. Such disclosure is provided in the annual report on corporate governance (the Report on Corporate Governance mandated by Article 123-bis of Legislative Decree No. 58 of February 24, 1998) (the Single Financial Act).

The New Code comprises 10 articles dedicated to:

the role of the Board of Directors (Article 1); the composition of the Board of Directors (Article 2); independent directors (Article 3); the institution and functions of Board of Directors committees (Article 4); procedures regarding the nomination of directors (Article 5); compensation of directors (Article 6); internal audit and risk management (Article 7); statutory auditors (Article 8); shareholder relations (Article 9); and dual and singular management control systems (Article 10). Articles 42 and 93 from the previous Corporate Governance Code, respectively, concerning the treatment of sensitive and privileged information and interested directors/related party transactions, have been eliminated.

Each Article of the New Code continues to be subdivided into principles (indicated with the letter P), applicable criteria (indicated with the letter C) and accompanying commentary. The applicable criteria denote the implementing measures that typically are required in order to achieve the respective principle while the commentary clarifies both the principles and the applicable criteria, providing additional detail and other advice concerning possible methods to achieve the goals and objectives, as the case may be, in the related principles and applicable criteria.

The changes introduced in the New Code reflect the numerous changes that have been introduced in the regulatory landscape in the last five years relating to corporate governance of Issuers. The New Code seeks to simplify and reinforce its role in guiding management, as informed by national and international best practices. The reforms of the Corporate Governance Code affect four areas in particular: (i) the composition of the Board of Directors; (ii) the role and function of the Board of Directors; (iii) the organization and composition of the internal committees of the Board of Directors; and (iv) internal systems of control and risk management.

This Alert discusses the principal changes introduced by the New Code.

Board of Directors Composition

The New Code recommends that Issuers provides appropriate disclosure in the Report on Corporate Governance on the composition of the Board of Directors, by indicating each member's status of executive, non-executive or independent director, its respective role within the Board of Directors, as well as the member's professional experience and duration of the office 4.

In addition, the New Code recommends that the Chairman of the Board of Directors set up and implement procedures to provide directors and statutory auditors with adequate knowledge of the business sector(s) in which the Issuer operates, market conditions and regulatory framework so that they can efficiently perform their functions5.

The New Code introduces specific recommendations addressed to Issuers included in the FTSE-Mib index, the benchmark stock market index for Borsa Italiana (the Italian Stock Exchange) consisting of the 40 most-traded stock classes. Benefitting such premium securities, the New Code recommends that FTSE-Mib Issuers undertake changes to their Boards of Directors such that at least one-third of their directors are independent directors6, whereas for all other Issuers, the New Code suggests at least two independent directors7.

With respect to the criteria to establish director independence, the New Code states that the appointment of an independent director of an Issuer who serves in a position in a company that controls the Issuer or is...