Research in International Business and Finance 19 (2005) 27–52

The benefits and costs of controlling shareholders:

the rise and fall of Parmalat
Bonnie Buchanana,∗ , Tina Yangb,1
a Department of Finance, Faculty of Economics and Commerce, University of Melbourne,
Melbourne, Vic. 3010, Australia
b Department of Banking and Finance, Terry College of Business, University of Georgia,

Athens, GA 30602, USA

Accepted 23 October 2004

Available online 26 January 2005

Abstract

When Parmalat Finanziaria SpA filed for bankruptcy protection in late December 2003, it was
regarded as the biggest financial collapse in European corporate history and was quickly dubbed “Eu-
rope’s Enron”. The collapse of Parmalat provides an ideal opportunity to examine the Italian corporate
governance system. Parmalat also exhibits a particular agency problem that has received relatively
little attention in the literature, namely the conflicts of interest between a controlling shareholder
and minority shareholders. In the instance of Parmalat, the controlling shareholder also happens to
be the founder, Chairman and CEO of the company. This paper investigates the incentives facing
the controlling shareholders and the opportunistic behavior that resulted. Mismanagement, account-
ing irregularities and regulatory failure allowed this behavior to continue, and led to the company’s
bankruptcy.
© 2004 Elsevier B.V. All rights reserved.

Keywords: Corporate governance; Parmalat; Shareholder; Regulatory failure

∗ Corresponding author. Tel.: +3 8344 6866; fax: +3 8344 6914.

E-mail addresses: bonnieb@unimelb.edu.au (B. Buchanan), tyang@uga.edu (T. Yang).
1 Tel.: +1 706 542 3650; fax: +1 706 542 9434.

0275-5319/$ – see front matter © 2004 Elsevier B.V. All rights reserved.
doi:10.1016/j.ribaf.2004.10.002
28 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52

1. Introduction

When Parmalat Finanziaria SpA2 (hereafter called “Parmalat”) filed for bankruptcy
protection in late December 2003, it was regarded as the biggest financial collapse in
European corporate history and was quickly dubbed “Europe’s Enron”. The US Se-
curities and Exchange Commission called it “one of the largest and most brazen fi-
nancial frauds in history”. Parmalat played a crucial role in the Italian economy, be-
ing the country’s largest food company and employing 36,400 workers in 30 countries.
The collapse did not remain localized for long, quickly escalating into a global scan-
dal by implicating several leading accounting firms and several of the world’s largest
banks.
The fallout from the Parmalat collapse has been immense. Following the bankruptcy
filing, the Italian government quickly approved a law making bankruptcy proceed-
ings swifter and for large companies to restructure faster. As details of the Parmalat
fraud unraveled, the Italian government rushed through a series of new bills, which at-
tempt to reform bankruptcy proceedings, accounting standards, and the Italian finan-
cial system. How the Italian government has responded to the Parmalat scandal will
not only have a significant impact on how international investors perceive risks in Italy,
but also affect European Union efforts to install the Pan-European best governance
practices.
This paper analyses the corporate governance failures that led to the demise of Par-
malat. We trace the history of Parmalat, investigating the evolution of its ownership and
organizational structure and explore the seemingly puzzling financing and investing deci-
sions of this family-run dairy company, which had for the past 14 years undertaken more
than a hundred acquisitions worldwide and visited global bond markets more than forty
times. Special focus is placed on analyzing the costs and benefits of having a control-
ling family member in the firm. As Parmalat’s scandal unfolded amid a series of Italian
governance reforms, including auditor rotation and board independence, we also examine
the preventive ability of these measures in detecting and thwarting the kind of frauds like
Parmalat.
The Parmalat failure shares a number of common factors with recent U.S. corporate
scandals: lack of vigilance on the part of auditors and financial institutions, an ineffective
board of directors, a rapid series of acquisitions, related party transactions, complex use
of derivatives and aggressive and/or fraudulent accounting practices. What makes this case
even more complicated is that there are many interwoven subsidiaries, shell companies, tax
havens and offshore banks associated with the demise of Parmalat.
On the other hand, the breakdown of Parmalat seems especially puzzling consider-
ing the unique features of the firm. Even though it was quickly described as “Europe’s
Enron”, Parmalat also seems to be distinctly different from the recent U.S. scandals.

2 Parmalat Finanziaria SpA belongs to a pyramidal group controlled by the Tanzi family. La Coloniale SpA is

the family holding company, owning 51 percent of Parmalat Finanziaria SpA (the financing company). Parmalat
Finanziaria SpA, in turn, is the holding company for the Parmalat group, owning 100 percent of Parmalat SpA (the
operating company). We use Parmalat as the general reference of the Parmalat group, which includes Parmalat
Finanziaria SpA and Parmalat SpA.
 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52 29

Hi-tech firms like Enron, WorldCom, and Tyco were the archetypes of the “new econ-
omy”, whose complex business dealings created ample opportunities for creative book-
keeping. Their CEOs were driven by stock options to boost stock price and get higher
compensation. In contrast, Parmalat operated in a conservative, low-risk industry. Par-
malat’s management was run by its founder, major shareholder and CEO, Calisto Tanzi,
ranked by Forbes (2003) as 369th richest man in the world and hence should have no
incentive to mismanage his own company. The Parmalat collapse also draws further at-
tention to the Italian corporate governance system, which has been less documented than
the Anglo-American and German/Japanese systems. Historically, Italy has a reputation
of poor corporate governance, characterized by an inactive takeover market, weak ac-
counting standards, limited presence of institutional investors, and low legal protection for
investors.
Collectively, the unique characteristics of Parmalat and the institutional shortfalls that
confront the Italian governance system provide us with an exceptional opportunity to study
the net effects of having a founding family with majority ownership in the firm. The typical
assumption of atomistic shareholding and the absence of an interested entrepreneur has been
the focus of much of the research since Berle and Means (1932) but agency conflicts due
to concentrated ownership have received limited attention. Family businesses featured with
altruistic relationships and large ownership stakes, present the types of agency problems
that are distinctly different from the conventional model based on separation of ownership
and control.
This clinical study makes several important contributions to the literature. First, even in
developed countries, founding families own substantial stakes in a surprisingly large number
of public companies (Faccio and Lang, 2002; Anderson and Reeb, 2003). Yet, the question
of whether founding family ownership leads to cost-effective monitoring systems remains
unresolved both theoretically and empirically. This paper adds to the growing literature on
family businesses by asking the question whether Parmalat failed because of the structural
flaws of family firms, or because of the bad management of the Tanzi family. We show
that a founder’s desire to keep the business within the family led to distorted financing and
investment decisions and ultimately transformed Tanzi from an innovative entrepreneur to
a rent seeker.
Secondly, to date, most corporate governance scandals have involved the typical agency
problems where managers maximize perquisite consumptions at the expense of the owners.
Therefore, an analysis on Parmalat where the manager is the founder and controlling share-
holder provides important complementary evidence to existing studies of U.S. corporate
scandals (Gillan and Martin, 2002).
Finally, Italy has implemented several accounting and governance reforms since 1998
aimed at enhancing corporate accountability. Our analysis shows how Parmalat took advan-
tages of a flawed system and hid its fraudulent activities. We are therefore able to provide
some insights into the current global drive towards better governance.
The remainder of the paper is organized as follows: Section 2 presents a discussion of
the Italian corporate governance system. Section 3 details the firm specific factors that led
to the demise of Parmalat and Section 4 highlights the corporate governance failures that
led to the failure of Parmalat. Subsequent corporate governance reform in Italy is discussed
in Section 5 and Section 6 concludes.
30 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52

2. Overview of Italy’s corporate governance systems

LaPorta et al. (2000) show that corporate governance systems are the strongest (or most
effective) in those countries offering the highest levels of legal protection to stockhold-
ers. This group of countries is known as the “Anglo-American” system and includes the
United States (US), the United Kingdom (UK) and Canada. The Anglo-American corpo-
rate governance system is characterized by strong external mechanisms and an open market
orientation. The intertwining of these two characteristics forms an active external market
for corporate control and a competitive managerial labor market.
The Anglo-American governance model also includes a single board of directors with
a mix of management (inside) and non-management (outside) members. The chief exec-
utive officer (CEO) almost always serves on the board—often as chairman.3 Audit and
compensation committees are comprised of outside directors. Finally, CEOs are generally
shareholders in their firms, but the levels of holdings vary greatly.
In contrast, the German and Japanese corporate governance systems are better described
as long-term relationship models. External control mechanisms are minimal, but sharehold-
ings are more concentrated and are often held by financial institutions with a major presence
on firms’ boards. In Germany the board structure is separated into a supervisory and manage-
ment board. This is somewhat similar to the Anglo-American board/management structure
but with notable exceptions. For example, the two boards are mutually exclusive. Thus,
the supervisory board, which oversees the management board, is a board of strictly outside
directors. CEOs in Germany also tend to have less absolute power over their corporations
than in the Anglo-American model.4
Italy’s corporate governance system is less well documented in the literature. It differs
from both the Anglo-American and German-Japanese models and in the LaPorta et al. liter-
ature, is classified as having its governance origins in the French civil law tradition. Italy’s
corporate governance system is characterized by underdeveloped capital markets, concen-
trated ownership via pyramidal structure, heavy family influence, weak legal protection of
minority shareholders, and a limited monitoring role for banks. In the following sections,
we discuss the key aspects of the Italian governance system, laying the foundation for later
analysis on the causes of Parmalat’s demise.

2.1. Italian capital markets

The Italian stock market has traditionally remained small and inactive due to frequent
government intervention in capital markets and poor protection for individual sharehold-
ers. During the 1980s, the value of market capitalization was less than 8 percent of gross
national product (GNP), and this figure grew to around 20 percent by 1995. In 2000, the
number of publicly traded firms is just over 4 percent of the total number of firms in Italy.
Although this figure grew to 70 percent in 2000, making it comparable to other devel-
oped countries, according to Aganin and Volpin (2003), this was largely due to the listing
of large corporations. Underdeveloped capital markets and few publicly-trade firms imply

3 Although the dual CEO/chairman role is becoming less frequent in these countries.
4 For further comparisons, see John and Senbet (1998).
 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52 31

a small pool of takeover targets and consequently almost non-existence of the external
control market.

2.2. Ownership structure

Due to its smaller capital markets, Italian firms are on average smaller than their counter-
parts in other industrialized economies. According to the European Commission database
Eurostat (1998), average firm size in Italy is approximately half the European average.
As the vast majority of Italian companies are privately held and financed by bank loans,
only limited separation of ownership and control exists in the Italian corporate governance
system. Faccio and Lang (2002) find that the average ultimate control stake of the largest
controlling shareholder in an Italian firm is 71 percent.
Concentrated ownership is usually accomplished through the use of pyramidal groups.
A typical pyramidal business group consists of a collection of legally independent firms,
controlled by an individual or a family through the hierarchical chain of ownership relations.
LaPorta et al. (1999) define a firm’s ownership structure as a pyramid if (1) the firm has
an ultimate owner and (2) there is at least one publicly traded company between it and
the ultimate owner in the chain of 20 percent voting rights. Bianchi et al., 1997 report that
99.19 percent of Italian firms (employing more than 1000 people) belong to a pyramid
group. Bianco et al. (1996) document that over 57 percent of manufacturing firms with
more than 200 employees have a hierarchical control structure.
Concentrated ownership and pyramidal control make hostile takeovers or undesired
changes in management nearly impossible. This control system also results in a much
higher voting premium in Italy than in other industrial countries. Zingales (1994) reports
that voting premium is 82 percent in Italy, compared with a premium of 10 percent in
the US and 13 percent in the UK. In a more recent study, Nenova (2000) find that the
voting premium is about 30 percent in Italy, compared to about 10 percent in the US
and UK.
Because of concentrated ownership, the conflict between large and small shareholders is
the primary agency problem in Italian firms. This problem is exacerbated by the poor legal
protection for minority shareholders and the lack of monitoring by institutional investors.
In turn, these characteristics nurture a culture that allows major shareholders to expropriate
rents at the expense of minority shareholders.

2.3. Family capitalism

Another distinct feature of the Italian governance regime is the important role of the
family ownership. In a sample of 3800 unlisted firms, Faccio and Lang (2002) find that
families own 99.4 percent of Italian firms, followed by the State (0.4 percent) and financial
institutions (0.2 percent). They also report that, of the 13 Western European nations in the
survey, Italy has the largest average number of firms controlled by a single family (1.46
firms per family). Italy also has a long-reigning tradition of a few great families controlling
large portions of the economy. One prominent case is the current Prime Minister Silvio
Berlusconi, who owns 50 percent of the media while his government owns the other half.
Aganin and Volpin (2003) report that two of the 10 largest corporations listed on the Milan
32 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52

Stock Exchange are family-controlled. The result is a business culture that is rooted in blood
ties, friendship, reciprocal favors, and sometimes, corruption.

2.4. Institutional investors and banks

Institutional investors hold a small fraction of the equity of Italian firms. For instance,
in 1997, mutual funds owned 6 percent of the market capitalization of firms listed on the
Milan Stock Exchange, insurance companies 5 percent, and pension funds 0.5 percent
(Banca d’Italia, 1998). In comparison, institutional investors owned 50–60 percent of the
equity of US firms in 1990s (Hamilton, 2000). Institutional investors in Italy are passive:
shareholder group GSC Proxitalia estimates that in 2003 Italian institutions registered only
28 percent of their shares to vote at annual meetings. A survey by investment research firm
Morningstar in March found that Italian funds were considered the least likely in Europe
to play an active corporate governance role (Reuters News, 4/22/2004).
As opposed to the bank-based systems in Germany and Japan, the role of banks in
Italian corporate governance is very limited. Historically, banks have had an arms’ length
relationship with their corporate customers and have not been involved in any significant
monitoring activity. The use of multiple loans is widely practiced by banks. Since banks
never really own a large share of a single firm, banks tend not to monitor corporate man-
agement. Bottasso and Sembenelli (2002) state that it is unusual for bankers to sit on the
boards of directors of manufacturing firms.

2.5. Italian regulatory environment

Italy has a multilayered regulatory system, with authority split among the securities
watchdog Consob, the bank-supervisor Bank of Italy, insurance regulator Isvap and pension-
fund regulator Covip. Many observers say that such a fragmented regulatory system permits
problems to readily occur. Consob, the chief securities and markets regulator, has a staff of
400 and is said to be short-staffed and over-whelmed (a similar criticism was leveled at the
US SEC in the wake of the Enron collapse). It also has very limited enforcement power.5
In recent years, Italy has taken a series of steps to change its image of poor legal protec-
tion for investors by taking a series of initiatives (such as the legislative decree of 1992 and
1998 and the Preda Code of 19996 ). However, the governance initiatives suffered significant
setback in 2002 when Prime Minister Silvio Berlusconi reduced the charge of false account-
ing by an unlisted company from a felony to a misdemeanor. Although false accounting
committed by a listed company is still a criminal offense, the maximum jail time was re-
duced from 5 to 4 years and the damage capped at 5 percent of pre-tax profits or 1 percent
of assets. In contrast, approved in the wake of the Enron scandal, the Sarbanes-Oxley Act

5 Consob has no authority to demand corporate documents, investigate insider trading, or even bring criminal

charges on its own. It cannot impose fines on companies and the maximum fine it can levy on corporate executives
is EUR100,000 (a figure set by the Italian parliament). In 2003, Consob challenged only four companies’ accounts.
6 The Italian government passed the legislative decree of 1992 and 1998 to improve protection of minority

shareholders. In 1999, the Milan Stock Exchange introduced a code of ethics (the Preda Code), which focuses on
promoting better corporate governance practices for the listing firms.
 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52 33

passed in the U.S. the same year increased prison sentences for false accounting to up to 20
years.

3. Parmalat background

3.1. The takeoff years: 1960s–late 1970s

Parmalat was founded in 1961 by Calisto Tanzi, using the proceeds from the sale of
a family-owned factory. In 1966, Tanzi came across a Swedish pasteurizing technology
called UHT (or ultra-high temperature). UHT milk was promoted as tasting the same as
refrigerated milk, but could last up to 6 months on the shelf. UHT milk formed the basis of
Parmalat’s operations around the world.
The food industry is characteristically stable with little growth and hence acquisition is the
usual route to achieve growth. Until 1970, Italian anti-trust legislation hindered Parmalat’s
expansion plans. Changes in legislation during the 1970s brought consolidation to the Italian
milk market and allowed the spread of Parmalat’s products into other Italian provinces. It was
at this time that Parmalat formed its long-term business policy: purchase firms (sometimes
distressed companies) at a low price and rapidly integrate them into the group by putting all
acquired products under the Parmalat brand name. This strategy worked well for Parmalat.
As it invested heavily in new technology and advertising, Parmalat was able to charge a
premium due to the quality and prestige of its products. Its market share grew quickly.
Seeking to realize greater growth and larger economies of scale, Parmalat made its first
foreign purchase in 1973, a Brazilian yogurt firm. Eventually, Brazil became Parmalat’s
second biggest market. Soon afterwards, Parmalat became an international conglomerate
through a series of rapid and aggressive acquisitions. Over the next 30 years, Parmalat’s
global expansion continued into Australia, Asia, Africa and the Americas. Fig. 1 summarizes
Parmalat’s acquisition history.

3.2. Crisis then recovery then crisis: 1980s–1990

By the end of the 1970s, Parmalat had transformed itself from a dairy concern to a general
food company. By the late 1980s, it had become Italy’s eighth largest food company. It was
the undisputed leader in the UHT market with nearly 25 percent market share; the second
largest competitor held only a 5 percent market share. Parmalat seemed to have achieved
something quite insurmountable: turning a low-margin, low-growth milk business into a
high-growth one, associated with prestige and brand image.
However, as the 1980s drew to close, Parmalat was in crisis. Despite rapid expansion,
Parmalat had remained closely held and relied solely on bank loans for funding. Chronic
undercapitalization had eroded profit and burdened the firm with heavy debt. By the end of
1989, liabilities amounted to approximately L520 billion (US$400 million), of which L220
billion (US$169 million) was short term debt. Furthermore, some diversification made by
the company in the 1980s started to sour.
Takeover threats emerged, including, in 1988 a L700 billion offer by Kraft Foods Inc.
to buy all, or part of, Parmalat. At the time however, the takeover of large Italian firms by
34 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52

Fig. 1. Parmalat’s acquisition history (1961–2003). Only completed acquisitions are included in the graph, which
amounts to 118 in total for the period. We obtained the acquisition information from SDC, Mergent, Zephyr, and
Factiva. Data collected include dates (date announced and date effective), deal value, target name, target industry,
target’s country, percentage of target acquired, the Parmalat’s unit that conducted the acquisition and other relevant
information. Exchange rate for the currency conversion is obtained from Datastream.

foreign multinational corporations was a politically sensitive issue after Nestle acquired
another major Italian food company in March 1988. A domestic solution to Parmalat’s
crisis became desirable to people in political and Parmalat family circles in light of the
government’s forthcoming privatization program. Parmalat rejected Kraft’s bid one day
before the deadline.
In June 1989, Tanzi secured a L120 billion loan from seven banks headed by Centro-
finanziaria, a merchant bank deeply intertwined with political and regional interests.7 The
financing enabled Parmalat to undertake an elaborate recapitalization and restructuring pro-
gram which would last 5 years. In September 1989, the family holding company, Coloniale
SpA, paid L58 billion for a controlling stake (51 percent) in a listing firm, Finanziaria Cen-
tro Nord (FCN), thereby gaining access to the capital markets. In November 1989, FCN
paid L89 billion ($64 million) for a 20 percent stake in Parmalat. In 1990, FCN launched
a rights issue of L583 billion ($446 million) increasing its capital from L100 billion to
L680 billion. FCN subsequently used L283 billion ($218 million) of the L583 billion raised
to buy a 35 percent stake in Parmalat SpA, adding to the 20 percent already purchased.
Next, Parmalat SpA would launch another rights issue of nearly L30 billion ($23 million),
which was to be solely taken up by FCN. Upon completion of the operation, Parmalat
SpA received L300 billion ($230 million) in fresh funds and FCN controlled 70 percent of
Parmalat SpA.
The 1990s capital raising campaign represented a milestone in Parmalat’s history for
several reasons. First, it helped establish the ownership and organizational structure that the
Parmalat group had until its collapse. Using the proceeds from the sales of Parmalat SpA to
FCN, Tanzi subscribed to 50 percent of the L583 billion capital raised and became the 51
percent majority shareholder of Parmalat Finanziaria SpA. The second largest shareholder

7 Centrofinanziaria was the last of the state banks to be privatized.

 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52 35

would hold a 5 percent stake. On October 30, 1990, FCN changed the name to Parmalat
Finanziaria SpA and became the financial arm of the Parmalat group. In the next few years,
Parmalat Finanziaria SpA would gradually increase its Parmalat holding to 100 percent
ownership. Secondly, it opened the door for Parmalat to obtain external financing and,
particularly, to tap the international bond markets. Half of the capital raised was placed on
the Italian and international markets by Centrofinanziaria and Morgan Stanley, respectively.
Over the next decade or so, Parmalat would visit the bond markets more than 40 times.
Thirdly, the freshly raised capital provided Parmalat with funds for a global acquisition
drive. Between 1990 and 2003, Parmalat would purchase more than 100 companies, making
it one of the world’s largest food companies.

3.3. Global expansion continues: 1990–1999

Three years after its initial public offering in 1990, Parmalat appeared to have fully recov-
ered from its financial woes and emerged as a rapidly growing, aggressive food company.
Between 1990 and 1992, Parmalat acquired over 13 Italian food companies, increasing its
market share in the UHT market to nearly 40 percent, or about 50 percent of the total milk
market, even though UHT milk cost 15–20 percent more than pasteurized milk.
In 1993, Parmalat Finanziaria SpA launched a L427 billion rights issue to acquire the
remaining shares in Parmalat SpA and to fund further expansion. However, by 1993, further
acquisitions in Italy would have brought Parmalat up against anti-trust regulations; hence,
the group increasingly turned to overseas markets for acquisition targets. In 1993 alone,
Parmalat grew as much in 1 year as it had in the previous 30 years, completing 20 acquisitions
of which 80 percent were foreign companies.
During the next 10 years, Parmalat would make more than 70 acquisitions. Throughout
this period Parmalat remained under family control and avoided public scrutiny by tapping
the bond markets rather than by issuing more equity. Between 1994 and 2003, Parmalat
visited the international bond market 40 times. In contrast, during this period it undertook
only one rights issue. Fig. 2 provides more details on these acquisitions and mode of
financing.
The aggressive acquisition program most likely served two very important purposes for
Parmalat. First, it transformed Parmalat into an international power house. By the end of
2002, Parmalat had become Italy’s biggest food company and eighth largest industrial com-
pany and one of the world’s largest independent milk and dairy producers. Parmalat became
a complex conglomerate with 136 subsidiaries or 120 factories in more than 30 countries
and over 36,000 employees. Secondly, the numerous acquisitions made it increasingly dif-
ficult to assess Parmalat’s true earnings. Although investors had long been concerned about
Parmalat’s opaque financial statements, poor disclosure, and high level of debt, the com-
pany’s uncanny ability to rapidly grow profit and revenue via acquisitions appears to have
placated investors.

3.4. The downfall: 1999–2003

In 1999, investors started to question the rationale for Parmalat’s seemingly insatiable
desire for issuing bonds while simultaneously having a cash surplus. During the first 9
36 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52

Fig. 2. Parmalat’s financing and acquisition history (1990–2003). For tractability, debt financing includes only
bonds placed on the international market, excluding domestic borrowing. In our graph below, there are 44 Euro
bonds (EUR11 billion), including 38 bonds (EUR10 billion) still outstanding when Parmalat entered into admin-
istration in December 2003. Equity financing describes the four capital increases (EUR919 million) that Parmalat
undertook since it went public in 1990 and before its default in 2003. The left y-axis depicts the amount raised in
millions of euros. The right y-axis depicts the number of acquisitions that Parmalat made during the same period.
We obtained equity raising data from Factiva and bond issuance data from Factiva, SDC, Mergent, and Zephyr.
Information collected on bond issues include the announcement date, the amount, the maturity date, the leading
underwriters and the Parmalat unit that issued the bond. Exchange rate for the currency conversion is obtained
from Datastream.

months of 2003, Parmalat issued additional EUR1 billion bonds, raising the total debt
amount to about EUR6 billion, despite a cash position of more than EUR4 billion. In-
vestors fear was confirmed when Parmalat revealed on December 8, 2003 that it had
failed to liquidate EUR500 million invested in Epicurum and have trouble making a regu-
lar bond payment of EUR150 million. (Epicurum was a little known mutual fund, reg-
istered in the Cayman Islands, and had never issued any financial statements.) Within
2 days Standard and Poors, which had maintained an investment grade rating on Par-
malat until November 11, slashed the company’s credit rating by 10 notches to junk
status.
Bank of America announced on December 19, 2003 that a document, which purportedly
certified that a Cayman Islands-based unit of Parmalat (Bonlat) had EUR3.9 billion in cash
at the end of 2002, was a fake. Parmalat’s collapse was swift. Parmalat Finanziaria SpA filed
for bankruptcy protection on December 24, 2003, followed by the family holding company
(La Coloniale) on January 20, 2004.
On January 26, 2004, a second opinion by PricewaterhouseCoopers LLP reported that
Parmalat had net debt of EUR14 billion ($18 billion) on September 30, 2003, includ-
ing nearly EUR13 billion ($16 billion) that it had not disclosed before. Erico Bondi, the
new CEO appointed by the government, claimed that Parmalat was technically insolvent
as far back as 1998. In his testimony, Luciano Del Soldato, Parmalat’s last CFO, sug-
gested that Parmalat may have begun manipulating financial statements as far back as
1984.
 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52 37

Fig. 3. Panel A illustrates Parmalat’s stock price history between 8/17/1987 and 1/09/2004. Stock prices and
currency rate are obtained from Datastream. Panel B illustrates the history of Parmalat’s stock price (PRF) against
the Milan Stock Index (MIB) between its listing on the Milan Stock exchange (10/12/1994) and Parmalat’s collapse
(12/23/2003). The data is indexed with an initial index set equal to 100.

A chronology of key events at Parmalat is presented in Appendix A. Fig. 3 displays the

Parmalat share price for the period 1993–2003 (that is, between its Milan Stock Exchange
listing and its collapse). Data for the Milan Stock Exchange Index are also contained in Fig. 3.

4. Corporate governance issues

Corporate failures can arise for various reasons. One reason is exogenous factors that
negatively impact the firm—for example, changing technology doomed most messenger
systems. Another reason is bad choices made by management. Additionally, failure can
arise from poor governance, even fraud.
38 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52

Parmalat was not known for good governance practices. In July 2003, GovernanceMetrics
International (GMI), a corporate governance research and rating agency, gave Parmalat an
overall rating of 4 out of 10 and just 2.5 for board accountability. According to GMI, anything
under 5.5 was considered below average and below 3.5 well below average. Another rating
agency, Institutional Shareholder Services (ISS), put Parmalat at the bottom of the 69 Italian
companies it ranked and in the lowest 3% of some 1800 European, Asian and Far East
companies. Both agencies cited a lack of strong governance policies, disclosure and board
independence as reasons for Parmalat’s low rating.
In this section, we discuss those corporate governance factors that we believe are most
relevant in explaining Parmalat’s demise. First, we examine Parmalat itself—its ownership
structure, its management team and board of directors. We also study the effect of the
external contracting environment on Parmalat including the auditors and the regulatory
environment. This analysis is especially important given the current call for global-wide
governance reform. We examine evidence on the question: could a tougher legal environment
or governance legislature have prevented Parmalat’s collapse?

4.1. Entrepreneurial opportunism and entrenchment

Since the seminal work of Smith (1776/1937) and Berle and Means (1932), scholars have
examined the agency conflicts between professional managers and atomistic shareholders.
Parmalat exhibits another type of agency problem that has received relatively little attention
in the literature—the conflicts of interest between controlling shareholders and minority
shareholders.
The Tanzi family controlled the Parmalat group even after Parmalat Finanziaria SpA
went public. In 1990, to solve a financial crisis Tanzi was forced to issue equity to outsiders.
Instead of listing his milk business (Parmalat SpA) Tanzi created a financial holding com-
pany, Parmalat Finanziaria SpA, and used the latter to issue shares and raise the necessary
capital. Although he subscribed to only half of the issue, Tanzi was able to maintain a firm
control over his company via a pyramidal structure. Even this minor concession of power
was temporary. After two additional right issues, Parmalat Finanziaria SpA bought out 100
percent of Parmalat SpA’s stake by 1994. Parmalat’s ownership structure is illustrated in
Fig. 4.
In addition to the pyramidal structure, the Tanzi family also carefully sought dispersed
ownership for the floated shares in order to avoid oversight by any potential outside share-
holders. Parmalat Finanziaria SpA conducted four right issues in total (in 1990, 1993,
1994, and 1996, respectively). On each occasion, no single blockholder accumulated a
large enough holding to challenge Tanzi’s control. The second largest shareholder in Par-
malat Finanziaria SpA had historically held a mere 5 percent, which was considerably
lower than the 7–10 percent stake held by comparable shareholders in other listed Italian
firms (Melis, 2000). Tanzi’s behavior is consistent with the predictions of Pagano and Roell
(1998), whose theoretical model shows that an entrepreneur optimally distributes ownership
to dispersed shareholders in order to avoid power sharing with and monitoring by outsiders.
The ownership structure of the Parmalat group created an environment for entrepreneurial
opportunism and entrenchment, a factor which contributed to the ultimate demise of the
company. Agency theory predicts that firms with concentrated shareholdings have the po-
 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52 39

Fig. 4. Ownership structure of Parmalat as of December 2003. (Parmalat Finanziaria SpA declared bankruptcy
on December 24, 2003.) For clarity and to conserve space, we only present a simplified version of the ownership
structure for the Parmalat group. We obtain the information from Factiva, which was then cross referenced with
Orbis from Bureau van Dijk.

tential to outperform firms with dispersed ownership, because the controlling shareholders
have substantial economic incentive to closely monitor the management and seek the long-
term survival of the firm (Jensen and Meckling, 1976; Demsetz and Lehn, 1985). However,
concentrated ownership also creates another set of agency problems, including the expro-
priation of minority shareholders by the majority shareholders (Shleifer and Vishny, 1997).
The pyramidal structure facilitated diversion of private rents. Wolfenzon (1999) shows
theoretically that an entrepreneur would choose a pyramidal structure instead of a horizontal
one when private rents accruing to him are large. Tanzi’s family holding company, La Colo-
niale, controlled a cascade of companies, including 51% ownership in Parmalat SpA and
100% of Parmatour and Parma AC. Parmatour was an unlisted tourism company managed
by Tanzi’s daughter, while Parma AC was a private football club operated by Tanzi’s son.
Under questioning, Mr. Tanzi admitted that between 1990 and 2002 Parmalat fed EUR500
million ($640 million) to Parmatour and more money was believed to have been funneled
to Parma AC (Wall Street Journal, January 27, 2004).
As there was no strong, independent blockholder to challenge Tanzi’s control and
decision-making, tunneling was also easier and less wasteful in Parmalat, thereby perpetu-
ating expropriation. Akros (with 5 percent ownership of Parmalat) was the second largest
shareholder in Parmalat Finanziaria SpA between 1990 and 1995 and Deutsche Bank with
5.15 percent between 1996 and 2003. Akros orchestrated the recapitalization program in
1990, while Deutsche Bank underwrote the last rights issue for Parmalat in 1996. Therefore,
the ownership stakes of both Akros and Deutsche Bank were outcomes of financial dealings
rather than by investment design. Furthermore, La Coloniale, Tanzi’s family holding com-
40 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52

pany, held a 3 percent stake in Akros when the latter was the second largest blockholder in
Parmalat. Meanwhile, Deutsche Bank had maintained a long-term close lending relationship
with the Parmalat group, and made some controversial personal loans to Tanzi. Therefore,
neither Akros nor Deutsche Bank qualified for the kind of outside blockholders that minority
shareholders need to vigilantly monitor the majority shareholders at arm-length.

4.2. Founder mentality and the “me syndrome”

Key limitations of the organizational form of founding-family businesses include risk

avoidance, capital constraints, and restricted managerial talents (Fama and Jensen, 1983;
Morck and Yeung, 2004). In this section, we explore another potential deficiency associated
with family firms: founder mentality. We argue that the framework within which Tanzi
made decisions had a pervasive and significant effect on Parmalat’s corporate strategies
and performance. Although quite common in the field of investment, the application of
behavioral theory is still quite new to corporate finance. Therefore, a clinical exploration
of the behavioral limitations of founding-family firms could provide some valuable insight
not found in the traditional approach.
As Fama and Jensen (1983) argue, because of their undiversified personal wealth and
human capital, the controlling family members have incentives to borrow less in order to
reduce the risk of bankruptcy. Empirical studies of US public firms have usually found
evidence that supports this view. Agrawal and Nagarajan (1990) show that all-equity firms
are more likely to have family involvement. Anderson and Reeb (2003) report that family
ownership has no effect on firm leverage. Using the same set of firms, Anderson et al.
(2003) find that family firms enjoy a lower cost of debt than their non-family counterparts.
Therefore, taken together, these two studies imply that if family firms do not obviously
borrow less than their non-family counterparts they do not seem to have any inclination for
leverage either, as they do not take advantage of lower costs of debt to lever up. Therefore,
it is striking that Tanzi seems to have had a penchant for debt and excessive risk-taking. As
shown in Fig. 5, between 1990 and 2003 Parmalat visited the international bond market 44
times, raising EUR11 billion in total.
Tanzi’s appetite for debt becomes puzzling, when one realizes that Parmalat was nearly
dismantled in the late 1980s due to heavy borrowing. Furthermore, over-leveraging does not
make good business sense for a milk company. Despite being an international conglomerate,
milk and diary products are still the cornerstone for Parmalat, accounting for more than half
of its global revenue. The dairy industry is traditionally a low-margin and low growth
industry and excessive borrowing would strain operations and damage profitability. Indeed,
Parmalat’s profit margin had traditionally been low, less than 3 percent, compared to the
industry norm of 11 percent (Source: Bondi’s recovery plan, Financial Times, July 27,
2004).
We contend that the argument of founder mentality provides some compelling expla-
nations for Tanzi’s seemingly irrational financing decisions. Tanzi had always thought of
Parmalat as belonging to the family rather than to the shareholders even after the company
was sold to the public in 1990. Thus, Tanzi’s objective was not to establish an optimal
capital structure that promotes shareholder welfare, but to keep Parmalat a family business
and retain control. The solution was to borrow rather than to issue equity even though it
 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52 41

Fig. 5. Parmlat’s bond issuance history (1990–2003). During this period, Parmalat visited the international bond
market 44 times, raising EUR11 billion in total. The left y-axis depicts the amount of debt borrowed in millions of
euros. The right y-axis depicts the number times that Parmalat visited the international board market. We obtained
the information on debt issuance from Factiva.

could be detrimental to firm-value maximization. According to Bondi’s report to the Italian

industry ministry in July, of the missing EUR14.2 billion, EUR6.5 billion was spent on
interest payments and fees related to debt (Wall Street Journal, 7/23/2004).
The “me syndrome” could also be one of the major causes of the fraudulent activities
in Parmalat. Tanzi’s lawyer said that his client did not think he was doing anything out of
the ordinary when he shifted hundreds of millions of Euros from Parmalat’s accounts to his
other firms (Los Angeles Times, January 14, 2004). During questioning, Fausto Tonna said
that the fraud began in 1992 as a way to cover up the absence of funds diverted into the
travel company, Parmatour. Based on Bondi’s July report, EUR2.3 billion was siphoned off
from Parmalat during the past 13 years.
Lastly, we argue that the “me syndrome” may have caused Parmalat to stay in operation
well after it should have been liquidated. As Bondi reported, Parmalat was insolvent in 1998.
However, Tanzi may have refrained from declaring Parmalat bankrupt because he would lose
control of the company under the Italian bankruptcy laws at the time. Unlike US bankruptcy
codes, Italian bankruptcy laws did not give distressed companies time and opportunities to
reorganize and possibly later re-emerge. Companies that declared bankruptcy were usually
sold rapidly to pay off the creditors.8 Anderson and Reeb (2003) note that firm survival is a
concern of paramount importance to family firms. Tanzi may have been motivated to keep
Parmalat in operation at all costs.
In summary, we argued that a founder’s willingness to sacrifice the firm’s economic
well-being for independence and control may have ultimately transformed Tanzi from an
entrepreneur to a rent-seeker.

8 After the Parmalat’ collapse, the Italian government rushed out a revised bankruptcy law which is tailor-made

for Parmalat to allow it to continue function even as it sought bankruptcy protection. In other words, Parmalat is
the first company that use the new “Italy’s Chapter 11” bankruptcy law.
42 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52

4.3. Board structure

In 1999, the Milan Stock Exchange, where Parmalat was traded, introduced the Preda
Code.9 This best-practice code deviates from the Anglo-American model in terms of the
composition and workings of the board. Rather than explicitly mandating the number of
independent directors on the board and the audit committee, it calls for an ‘adequate’
number of independent directors on the board and an ‘appropriate’ number of independent
members on the audit committee.10 Neither does it call for splitting the two titles of CEO
and Chairman as recommended by the UK Cadbury Report, nor does it specify that directors
should hold certain qualifications, as required by the US Sarbanes-Oxley Bill. Furthermore,
the Preda Code follows a “comply or explain” formula, which allowed Parmalat to ignore
the board independence recommendation if it explained its decision to the public. Parmalat
took advantage of this provision, saying in one instance that “given the existing shareholder
structure, we do not believe it necessary” to abide by the code (Los Angeles Time, January
14, 2004). As reported in the 2003 financial statements, of Parmalat’s 13-member board,
there are four family members, four company executives, two of Tanzi’s school friends, one
long-term business associate, one lawyer, and one accountant. Therefore, the ratio of the
number of independent directors to the total board members is only 15%. (For more details,
refer to Panel A, Table 1. Panel B shows director share transactions.)
Parmalat’s audit committee consisted of Luciano Silingardi, Fausto Tonna and Francesco
Giuffredi. As documented in Panel A, Table 1, both Silingardi and Giuffredi are former
school friends of Tanzi, while Tonna served as CFO for Parmalat for more than 15 years.
Although none of the audit committee members can be considered as truly independent of
Tanzi, Parmalat complied with the Preda Code which defines independent directors as non-
executive directors who ‘do not entertain business relationships’ with the company or hold
significant shares (Report & Code of Conduct, page 37). Tanzi also attended six meetings
of the audit committee in 2002 (twice the number he attended in 2001).
As Panel A of Table 1 reports, Parmalat’s remuneration committee consisted of three
members: Domenico Barili, Enrico Barachini, and Paolo Sciume. Only Barili is an ex-
employee of Parmalat. Both Barachini and Sciume were independent directors. Therefore,
in terms of the remuneration committee, Parmalat also complied with the Preda Code.
Parmalat did not have a nominating committee, which is not mandated by the Preda code.
In summary, the above analysis shows that, despite the regulatory push for better gov-
ernance practices, Parmalat failed to install an independent board of directors that could
effectively and objectively monitor Tanzi’s actions. The literature has long recognized that
boards of directors provide the ultimate balance and check of the management team (Fama
and Jensen, 1983). Using a sample of large US firms, Anderson and Reeb (2004) find that
independent boards serve as a powerful internal control to mitigate the risk of expropriation
of minority shareholders in family firms. Brunello et al. (2003) report that family-controlled
firms in Italy have a very low turnover of board members or CEOs and that there is a statisti-
cally significant and negative relationship between CEO and firm performance. Thus, their

9 Report & Code of Conduct, Committee for the Corporate Governance of Listed Companies, October 1999.
10 The Code only requires the compensation committee and the nominating committee (if formed voluntarily by
the listing firms) be comprised with a majority of independent directors.
Table 1
Board of Director composition and structure for Parmalat
Title/relationship to Parmalat Independent Audit Remuneration Executive Fees for positions held Other fees
committee committee committee (th. of euros) (th. euros)

B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52

Panel A
Calisto Tanzi Founder/CEO/Chair, resigned on 12/16/2003 Yes 37.5 1030.3
Giovanni Tanzi Calisto Tanzi’s brother, resigned on 12/16/2003 Yes 22.5 512.0
Stefano Tanzi Calisto Tanzi’s son Yes 22.5 365.8
Paola Visconti Calisto Tanzi’s niece 15.0 256.2
Domenico Barili Parmalat’s former director general who has worked with Cal- Yes Yes 26.0 322.7
isto Tanzi since 1963
Fausto Tonna Former CFO (1987–12/11/2003) replaced by Alberto Ferraris Yes Yes 40.5 483.2
Alberto Ferraris Former CFO (Mar. 2003–Nov. 2003) a former Citibank ex- 15.0 230.2
ecutive before joining Parmalat in 1997 replaced by Luciano
Del Soldato
Luciano Del Soldato Former CFO (Nov. 2003–Dec. 2003) employee of Parmalat
for 20 years
Francesco Giuffredi School friend of Calisto Tanzi Yes Yes 42.5 293.0
Luciano Silingardi School friend of Calisto Tanzi resigned on 12/11/2003 Yes 42.0 0
Piero Mistrangelo His Sexta company managed Odean TV a ‘close colleague’ of 15.0 200.0
Calisto Tanzi as far back as to 1992 (Il Sole 24 Ore, 7/23/1992)
Enrico Barachini Accountant in Pisa Yes Yes 20.0 0
Paolo Sciume A lawyer Italian food group Cremonini’s Vice President Yes Yes 18.5 51.6

Director name Parmalat’s unit No. of shares held at the No. of shares No. of shares sold No. of shares held as of
end of 2001 acquired Dec 31, 2002
Panel B
Domenico Barili Parmalat France 15 0 0 15
Alberto Ferraris Parmalat Finanziaria 39000 0 39000 0
Francesco Giuffredi Parmalat Finanziaria 6500 0 0 6500
Calisto Tanzi Parmalat Finanziaria 1780207 0 1248507 531700
Calisto Tanzi Eli Air 229 0 229 0
Calisto Tanzi Parmalat Paraguay 99 0 0 99
Calisto Tanzi Geslat 338000 0 338000 0
Calisto Tanzi Boschi Luighi e Fugli 1874800 471600 0 2346400
Calisto Tanzi Contal 500 0 500 0
Stefano Tanzi Parmalat Finanziaria 20800 0 0 20800
Fausto Tonna Parmalat International 1 0 0 1

Panel A describes Parmalat’s board of directors for the fiscal year ended December 31, 2003. Director names and the committees that they are on are collected from
Parmalat’s annual reports, www.parmalat.com. The rest of the information is from Factiva. Panel B details share transactions made by Parmalat directors in 2002.

43
44 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52

results indicate that Italian family firms would potentially benefit from stronger corporate
governance made possible by having independent boards. It is unfortunate, therefore, that
the cozy relationship between management and board is the norm rather than the exception
in Italy. In a survey of 500 Italian firms, Crisci and Tarizzo (1995) report that in most in-
stances board members have strong previous ties with the firm: 64 percent of directors are
former managers or consultants of the firm; 26 percent of directors are shareholders or rela-
tives of shareholders; only 6 percent of the directors did not have any previous relationship
with the firm.

4.4. Accounting issues

4.4.1. Parmalat’s reasoning for falsifying accounts and its “Buconero”

Tentative evidence indicates that Parmalat falsified its accounts to cover up losses in
subsidiaries and other affiliates. Tanzi admitted to prosecutors that “adjustments to the
balance sheet” were made in order to “overcome a crisis situation” that began in 1998
and in 2001 was worsened by currency crises in the South American markets. Brazil was
forced to devalue its currency in January 1999, and Argentina was shaken by a protracted
financial crisis that started in late 2001. When the economic turbulence in Latin America
had subsided, Parmalat had closed or sold eight of its 16 food plants in Brazil and the
value of its investment in that continent had halved (Reuters News, 10/29/2003; Wall Street
Journal, 1/29/2004). Additionally, Parmatour, the tourism company managed by Tanzi’s
daughter, was negatively affected by the global tourism slowdown after the September 11,
2001 attacks. The 20 percent appreciation of the euro against the dollar in 2003 also took a
heavy toll on the profits of the Parmalat group.
We argue that these events made Parmalat especially vulnerable to mismanagement
and/or fraudulent activities because the internal and external governance constraints on
Parmalat were weak. As we discuss here and in the following sections, Parmalat’s executives
took advantage of lax Italian accounting standards and used a web of complex financing
relationships and offshore accounts to fabricate assets and revenues.
The use of derivatives featured prominently in the Parmalat scandal as a means to boost
Parmalat’s waning fortunes. In 1999, using a financial product called a “credit-linked note”,
Parmalat in effect gambled on its own creditworthiness. The transaction, arranged by Merrill
Lynch & Co., highlights the way in which financial engineering can give a misleading picture
of corporate health to outside investors. (After the collapse of Parmalat, Morgan Stanley
disclosed that it entered into interest rate and currency derivative transactions with Parmalat
from 2001 to 2003.)
In 1999, Parmalat also entered into a complex financing relationship with Citigroup Inc.
The arrangement effectively allowed Parmalat to take on debt financing (a $140 million
credit line) from Citigroup that was classified on its books as an investment. Citigroup
apparently channeled the money through a vehicle called Buconero LLC (which, in Ital-
ian, means “black hole”). According to a Citigroup SEC filing in March 2003, Buconero
remained a Citigroup subsidiary throughout 2002. In February 2003, as concerns about its
debts mounted, Parmalat had to cancel a new bond offering of more than $400 million. In
mid-November, Deloitte said it was “unable to confirm” a $135 million transaction listed
in Parmalat’s earnings. Parmalat’s stock tumbled. Yet, Citigroup’s Smith Barney research
 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52 45

unit in London issued a buy recommendation on the company’s stock 5 days after Deloitte’s
statement, touting “attractive fundamentals”.

4.4.2. Parmalat’s auditors and Italy’s accounting standards

Traditionally, Italy is acknowledged as having weak accounting standards. For example,
audits of listed companies and government organizations have only been required during
the last 25 years in Italy. It is only since early 2004 that unlisted companies have faced
mandatory external audits in certain circumstances.
Grant Thornton became Parmalat’s main auditor in 1990 but in 1999, Parmalat was
forced to hire Deloitte & Touche as the lead auditor when Italy passed new laws requiring
companies to change accountants every 9 years. However, Grant Thornton continued to
audit some of the company’s subsidiaries and Parmalat had the discretion to decide which
units would be handled by Grant Thornton and which units would be handled by Deloitte.
Before July 2003, Italy’s accounting laws allowed the main auditor to rely on a sec-
ondary auditor’s work. Thus, Deloitte was not required to check Grant Thorton’s work
and consequently was not responsible for its accuracy. This joint-audit structure created
opportunities for abuse. A prime example is the creation of the Bonlat account and the
Epicurum Fund—two of Parmalat’s offshore entities that figured most prominently in the
scandal.
Starting in 1999, Parmalat put more falsified transactions through Bonlat’s books and
assigned more assets and revenue to Grant Thornton to audit. Between 1999 and 2002, Grant
Thornton’s share of the auditing process rose from 22 to 49 percent, even though it audited
just 17 of Parmalat’s 137 units. Based on Grant Thorton’s work and without independent
verification, Deloitte certified the group accounts as fair between 1999 and 2002.
In July 2003, Italy introduced the rules equivalent to the international auditing standards
on chief and secondary auditors. Those rules require chief auditors to consider the significant
findings of secondary auditors. On November 11, 2003, Deloitte raised concerns about
Epicurum and other Parmalat accounts.
The Parmalat scandal highlights several important lessons on accounting issues. First,
strict but fragmented regulations do not thwart fraud. The Italian legislation on auditor
rotation is ostensibly tougher than the 2002 Sarbanes-Oxley Act, which requires rotation
of only audit partners, rather than audit firms. However, this measure did not prevent fraud
at Parmalat because it allowed the firm to keep the previous main auditor as the secondary
auditor and did not require the subsequent lead auditor to take full responsibility for all
aspects of the group accounts.
Secondly, prohibiting the firm’s auditor from providing consulting services does not
guarantee auditor independence. Under Italian accounting laws, an accounting firm cannot
provide both audit and non-audit services to a client (an initiative also incorporated in the
2002 Sarbanes-Oxley Act to prevent potential conflict of interests). Hence, as required by
law, Grant Thorton was solely Parmalat’s auditor not consultant. However, in practice this
restriction did not ensure Grant Thornton’s objectivity. If a policy of mandatory auditor
rotation is to be effective, it must require complete severance of ties between the firm and
its long-term auditor.
Thirdly, it is crucial for auditors to practice accounting based on an international
standard especially given the increasingly global nature of the businesses. The Par-
46 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52

malat case illustrates that it is hard to detect organized fraud carried out by an multi-
national corporation without the observation and enforcement of the global auditing
standards.

5. Aftermath of Parmalat

After it entered bankruptcy administration, Parmalat quickly faced several lawsuits. As

part of a settlement with the Securities and Exchange Commission, Parmalat agreed to
adopt corporate governance changes, including the creation of a shareholder-elected board.
A majority of the board members had to be independent. The company also agreed to adopt a
code of ethics, which placed strict controls on insider dealings to prevent officers, directors
and employees from self-enriching trading. Additionally, the positions of chairman and
chief executive officer had to be held by two separate individuals.
The Vietti Reform was introduced in early 2004. Under this reform, after January 2004,
Italian companies may choose between three different board models, including the tradi-
tional Italian model which will be the default. Under the first new option, there is a two-tier
board structure following the German model with a management board and a supervisory
board. A one tier structure that ties in the Anglo Saxon model would be the second option.
Under this particular option, it calls for the board to be composed at least of one third
independent directors and for a control committee exclusively composed of independent
directors.
On February 17, 2004 a draft law was submitted to the Italian parliament to reform
governing savings, protect investors and supervise markets/banking. On May 5, 2004, the
consolidated text of this law was finally approved, and is a basis for further proceedings.
The most important provisions in the draft are the introduction of new corporate governance
rules for Italian joint stock companies, the reform of Italian supervisory authorities, more
stringent restrictions on securities circulation and a reform of criminal sanctions.
Taking over certain powers from the Bank of Italy, the Italian Stock Exchange Com-
mission (Commissione Nazionale per la societa e la Borsa) will become the Autorita per i
mercati finanziari (AMEF). The AMEF’s responsibilities include the supervision of trans-
parency and diligence of authorised intermediaries and issuers of listed securities. It also has
general regulatory powers to be exercised in the interest of Italian funds and investors. An
automatic indemnification system and connected guarantee fund to the benefit of investors
has also been proposed for AMEF.
The Bank of Italy will have exclusive responsibility for monitoring the stability of the
Italian financial markets and banking system. The appointment term of the Bank’s governor
will be reduced to 8 years and is non-renewable.
ISVAP (the authority in charge of supervising insurance companies) and COVIP (the au-
thority in charge of supervising pension funds) will be abolished under the new consolidated
draft law. The Italian Exchange Office (UIC) will also be abolished and the Bank of Italy
will assume its tasks. The Italian Antitrust Authority will now have regulatory powers over
banking competition instead of the Bank of Italy. Recently, there have also been new pro-
visions set forth aimed at ensuring co-operation between domestic and foreign authorities,
which should ease the control over offshore companies.
 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52 47

One responsibility not transferred to AMEF is the authorisation of non-listed bond is-
sues in Italy. Institutional subscribers who make secondary offers of bonds to Italian retail
investors, will be required to guarantee the solvency of the relevant issuer for a period of
12 months after the bond is sold.
The new draft legislation aims to increase protection of minority shareholders. The
AMEF will be granted additional regulatory power to ensure that at least one member
of a company’s board of statutory auditors is elected by the minority shareholders. New
rules have also been proposed that are intended to strengthen the independence, technical
background and self-awareness of auditors. It has also been proposed that the auditing firm

Table 2
Corporate Governance Reform in the US, UK and Italy—a comparison
United States Sarbanes-Oxley
Act (July 2002)
• Obliges CEO and CFOs to
verify public filings
personally
• A new private board to
oversee auditors’ activities
• There are revised auditor
independence rules; these
include further restrictions
on the level of non-audit
services that can be
provided by an audit firm
• Companies are required to
disclose codes of ethics
that apply to their key
executives (or explain why
a code has not been
adopted)
• Material fines and prison
terms (up to 20 years)
apply for various corporate
frauds; individuals can also
be barred from serving as a
director or officer
United Kingdom Higgs Report
(January 2003)
• Strengthen the role of independent
directors
• At least half a company’s board
should be independent
• The role of Chief Executive and
Chairman should be separate
• Directors should not chair more
than one company
• Non-executive directors should
meet once a year independently of
Chairman and executive directors
• A senior independent director
should be available to shareholders if
the Chairman or Chief Executive do
not resolve their concerns
• There should be an audit,
remuneration and nomination
committee and no one director
should be on all three committees at
the same time
Italy
• Italian companies will have the
choice between three different board
models
• The AMEF will be responsible for
supervising the transparency and
diligence of authorized
intermediaries and issuers of listed
securities
• Bank of Italy governor’s term of
appointment will be reduced to 8
years
• ISVAP, COVIP and the Italian
exchange Office will be abolished
• The proposed legislation also
ensures at least one member of a
company’s board of statutory
auditors will be elected by the
minority shareholders
• Proposed draft laws have been set
forth for the prevention of conflicts
of interest
48 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52

of a controlling entity should also be responsible for the audit of all other companies in the
group. Criminal sanctions have been proposed that will punish false statements relating to
the application of the rules contained in the internal conduct of business codes that each
listed company must adopt.
The proposed draft law also includes new rules to prevent conflicts of interest. The
current rules governing banks’ directors and managers will be extended to the directors and
managers of banks’ subsidiaries. In addition, joint stock companies will be required to have
independent directors and statutory auditors. Finally, it has been proposed that related party
transactions exceeding the value of 100,000 Euros must be specifically authorised by the
company’s board of directors.
For a comparison of various corporate governance reforms in Italy, US and UK, refer to
Table 2.

6. Conclusion

This clinical paper examines factors contributing to the collapse of Parmalat Finanziaria
SpA. While Italy’s corporate governance system differs from the Anglo-American and
German-Japanese models, we illustrate how the Parmalat failure is inextricably linked to
governance failures, regardless of the corporate governance system in place. A particu-
larly important factor in the Parmalat case is the conflict of interest between the control-
ling shareholder and the minority shareholders. The controlling shareholder in this case
also happened to be the founder, CEO and Chairman. The Parmalat bankruptcy was the
result of failed proper corporate governance, not inevitable business decline. This case il-
lustrates in a setting outside the US how weaknesses in corporate governance can occur,
which in turn undermine the confidence of investors and the integrity of the accounting
system.

Appendix A. Chronology of events at Parmalat (source: Factiva and Orbis

Database)

1961 Calisto Tanzi forms Parmalat after inheriting a modest prosciutto and tomato
paste factory, Calisto Tanzi & Sons
1963 Parmalat excels in the use of the increasingly functional and appealing
packaging like the Zopak
1964 Parmalat released new brands of milk, such as Parmalat Vita C (pasteurized
milk enriched with Vitamin C
1966 Pure Pak introduced Parmalat’s new logo Parmalat starts production and sale
of UHT milk
1970 Milk legislation favours Parmalat; whole milk (both fresh and UHT) can be
freely sold in every grocery and not just in specialised milk shops
 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52 49

Appendix A (Continued )

1973 Luxembourg court of Justice declares the monopoly of Centrali del Latte
(municipal milk distribution centres) in Italy illegal, thus removing sales
limits that Parmalat had been facing in most Italian cities
1974 Parmalat takes the first step towards internationalisation. It opens operations
in Brazil
1975 Parmalat sponsors the ski world cup final, becoming one of the first European
companies to exploit sports marketing (it would start to sponsor Formula One
Racing in 1976 and soccer in 1977)
By the end of the 1970s, Parmalat expands into Germany (1977) and France (1979),
has 242 agents with warehouses, 1000 vehicles, 1500 sales people and 150,000
served points of sale
1987 Parmalat has eight factories and at least six brands: Parmalat, chef, Grisbi,
Mister Day, Santal and Pomi
1988 Kraft Foods offers to buy all, or part of, Parmalat
1989 Holding company, Finanziaria Cenro Nord, acquires Parmalat
1990 A complex bailout leads to the Tanzi family giving up 49% of its control in
Parmalat; company changes its name to Parmalat Finanziaria; Parmalat lists
on the Milan Stock Exchange; Parmalat establishes Parmalat Netherlands BV;
according to the prosecutors, the central feature of Parmalat’s fraud was an
offshore system of companies set up first in the Netherlands Antilles and then,
in 1999, at Bonlat in the Cayman Islands
1992 Formation of European Union provides Parmalat with cheaper and easier
access to international funding; Parmalat makes 14 acquisitions and expands
to Argentina, Hungary, and the United States
1993 Parmalat undertakes 17 acquisitions during the year, including four in Italy,
six in Brazil, four in the US and the rest in Argentina, Uruguay and Hungary
1994 Parmalat’s expansion continues into China, Chile, Columbia, Mexico,
Paraguay, and Venezuela
1995 Parmalat enters Austria, Mexico, and Venezuela markets
1997 Parmalat expands into Cananda and India; Parmalat established Parmalat
Finance Corporation BV, its most significant Cayman company; Parmalat
Finance Corporation is the parent of Bonlat and becomes the main
bond-issuing vehicle for the Italian group
1998 Parmalat paid $2 billion to buy seven dairy businesses in the US, Brazil, South
Africa, Russia and Australia
1999 Milan Stock Exchange introduces the Preda Code; Parmalat sets up subsidiary
Bonlat in the Cayman Islands (Bonlat was supposed to have an account worth
EUR4 billion at Bank of America; exposure of this account as fake
precipitated Parmalat’s collapse)
50 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52

Appendix A (Continued )

At the end of 1990s and the beginning of 2000s, a series of international financial
crises, which first started in Asia, then Russia, and finally landed in Latin America,
took a heavy toll on Parmalat’s operations. In 2003, the Euro rises 20% against the
dollar, which also has an adverse effect on Parmalat’s profits
2001 Nov Parmalat announces the reorganization of its US and Canadian operations,
forming Parmalat North America
2002
Sept Parmalat set up Epicurum in the Cayman Islands, an investment fund that
specializes in “leisure and pleasure” industries; Bonlat owns a 10 percent
stake in the Epicurum fund
Nov Parmalat invests EUR496 million ($617 million) in Epicurum
Dec 31 Bonlat authorizes Grant Thornton, Parmalat’s chief auditor at the time, to
verify its account with Bank of America
2003
Feb 27 Citing unfavourable market conditions, Parmalat withdraws the sale of
EUR500 million bonds
Mar 6 Parmalat company executives are asked by Italian fund managers to discuss
accounts
Mar 28 Parmalat’s CFO, Fausto Tonna, resigns and is replaced by Alberto Ferraris
Sept 12 Parmalat abandons planned sale of EUR300 million debt
Nov 12 Parmalat says it will liquidate its Epicurum investment to make regular debt
payments
Nov 14 Mr. Ferraris resigns and is replaced by Luciano Del Soldato
Dec 9 Parmalat misses a $150 million bond payment. Mr. Del Soldato resigns and
Enrico Bondi is called in as a consultant to help turn the company around
Dec 10 S&P cites “clear” risk that Parmalat will default on a $187 million bond
Dec 15 Calisto Tanzi resigns as Chairman and CEO of Parmalat and is later replaced
by Enrico Bondi, the government-appointed turnaround specialist
Dec 19 Bank of America claims a Parmalat document showing EUR3.9 billion in a
Cayman Island bank account is forged
Dec 20 Prime Minister Berlusconi initiates a fraud investigation of Parmalat
Dec 24 Parmalat files for bankruptcy protection
Dec 27 Calisto Tanzi is arrested; an Italian court declares Parmalat insolvent
Dec 29 Calisto Tanzi admits to being involved in the alleged fraud at Parmalat,
according to two people present at his interrogation
Dec 30 Fresh details emerge suggesting Calisto Tanzi tried to sell Parmalat to U.S.
investment firm Blackstone Group in early December
 B. Buchanan, T. Yang / Research in International Business and Finance 19 (2005) 27–52 51

Appendix A (Continued )

2004
Jan 23 Coloniale and Parmatour file for bankruptcy
Jan 26 A second opinion audit by PricewaterhouseCoopers LLP reports that Parmalat
had net debt of $18 billion on Sept 30, including nearly $16 billion that it
hadn’t disclosed before

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and the aversion to debt, Entrepreneurship Theory and Practice (Summer), pp. 53–64.