Eppure, non si muove: Legal change, institutional stability and Italian corporate governance

Abstract

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.

Notes

1. Systems of finance refer to the primary ways in which companies acquire capital (e.g. through equity markets or banks). Corporate governance refers to the set of rules that determine the ability of shareholders to exert control over management. The two concepts are, as a political construction, closely intertwined.

2. Vivien Schmidt (2002: 141), a prominent defender of state capitalism as a distinct analytical ideal type, demonstrates the unease of political scientists when tasked with assigning Italy to a category: ‘[Classifying] Italy is a harder call, since it may very well have moved from failed state capitalism toward competitive managed capitalism.’

3. For real-world examples of the intricate pyramidal links maintained by large companies in Italy, see Bianchi et al. (2001) and Melis (2005).

4. LLSV developed an index of minority shareholder protection, and they showed that countries based on French civil law had much lower shareholder protection and higher ownership concentration than those countries with other legal systems (La Porta et al. 1998; 1999).

5. Roe uses ‘social democracy’ as an inexact shorthand for countries in which ‘employee pressures are strong … Those nations in which the pressure on the firm for low-risk expansion is high, the pressure to avoid risky organizational change is substantial, and the tools that would induce managers to work in favour of invested capital – such as high incentive compensation, hostile takeovers, transparent accounting, and acculturation to shareholder-wealth maximization norms – is weak’ (Roe 2003: 24).

Political scientists have demonstrated that Roe's conflation of social democracy with the more general political context favouring employee protection is empirically inaccurate (Gourevitch and Shinn 2005). Roe's argument, though, is about a particular way in which capitalist polities constrain market forces, and his reduction of those forces to ‘social democracy’ actually does a disservice to the importance of his more general argument.

6. This is consistent with the broader set of neo-liberal ideas that united civil servants in these two influential state institutions during the 1990s (Quaglia 2005).

7. The law was named after Mario Draghi, at that time the Director General of the Treasury, who led the commission that drafted the law. The discussion of the Draghi Law in this paragraph draws on Deeg (2005), Melis (2006), and Bianchi and Enriques (2001).

8. The main corporate governance issue not addressed in the Draghi Law – the structure and pay of company boards of directors – was addressed through a voluntary code, the Preda Code, which was issued in 1999 and revised in 2002 (Melis 2006: 55–62).

9. Ownership concentration is not a perfect metric of patient capital only because some countries have developed patterns of stable shareholding that do not depend on concentrated shareholdings, but rather on networks of cross-shareholding (Japan) or special takeover defences that empower management to block a hostile takeover (Netherlands) (Gourevitch and Shinn 2005). In these cases, patient capital may exist in the absence of ownership concentration. In the Italian case, though, patient capital has traditionally been exercised through highly concentrated ownership (cf. Pagano and Trento 2002).

10. This problem is not limited to political scientists, although they have been particularly prone to emphasise the role of partisanship and coalitions in legal change. In a piece published in the American Economic Review, for example, Pagano and Volpin (2005) have modelled the politics of change in the economy by equating changes in legal protections for minority investors (as in the Draghi law) with the real protection of minority investors. Similarly, the very existence of the LLSV index of minority shareholder protection assumes that coding laws give a reliable cross-national measure of the degree of minority shareholder protection (La Porta et al. 1999).

11. Yet as the institution of the shareholder pact increases in importance (Melis 2006), this issue has the potential to acquire a coordinative aspect, because this becomes a question about how several actors perceive both the value of an existing institution, and how they think the other major shareholders also value it (cf. Culpepper 2005).

12. The problem of conflict of interest, they claim, stems from the fact that banks offer multiple services, and so may avoid using their mutual fund role to exercise strong oversight over owned companies to avoid alienating those companies who are also their clients. Though product market competition could attenuate these effects, they argue that there is very low product market competition in this area among Italian financial companies (Bianchi and Enriques 2001: 23–4).