BUSINESS MANAGEMENT AND FINANCE

1st MODULE – MANAGEMENT BASICS

Prof. Francesco Maria Cianci
francescomaria.cianci@unicatt.it

Cremona, Academic Year 2021/2022

Corporate Governance

Part. 2

2
 Different Models of
Corporate Governance

Vietti’s Reform

CG

Traditional
Monistic Model Dualistic
Model Model
 Different Models of
Corporate Governance

TRADITIONAL MODEL
Chairman

Chief Executive
Officer

Board of Directors

Shareholder Meeting
 Different Models of
Corporate Governance

TRADITIONAL MODEL
management Board of Directors
or Sole Director
appoint

appoint Shareholder
Meeting
1 management Internal
+ accountant Audit
appoint
control
External
management body/Bord of
Statutary Auditors
2
External
accountant body/Supervisory
Board/ Auditing confer the appointment
firm
 Traditional Model:
Shareholder Meeting
• Duties are reduced, in accordance with the principle of
exclusive administrative body responsible for the management
activities
• The Shareholders Meeting has the task of:
– Approve the Annual Accounts and Financial Statements;
– Appoint and dismiss Directors;
– Appoint the auditor and the members of the Board of
Auditors;
– Resolve the liability of directors and auditors;
– Decide on other objects entrusted to the assembly by law;
– Approve the rules governing meetings.
 Traditional Model:
Board of Directors
• Directors are exclusively the company's management:
– They determine content and limits of powers;
– Assess the adequacy of organizational, administrative and
accounting structure;
– Examine the strategic and business plans;
– Assess the performance of operations on the basis of the
report of the managing bodies;
• The Directors may transfer a limited number of issues to the
relevant bodies, on the one hand; on the other hand they can be
invested with typical powers of Assembly, through the Statute;
• The Directors shall be liable for acts carried out (they can not
share the responsibility with shareholders).
 Traditional Model:
Executive Bodies

• Executive bodies have the task of ensuring that the

organizational structure is appropriate to the nature and size
of;
• The committees report to the Board of Directors on the
general performance of operations and the possible
evolution, on the main operations performed by the
company and its subsidiaries.

Strengthening the executive bodies with

the aim of increasing the flexibility of
management
 Traditional Model:
Auditing

• Separation of control over the administration and

accounting control
– Accounting control can only be exercised by an auditor.
• Subtracting the audit, it is for the Board of Auditors
– The legality;
– Supervising compliance with the principles of proper
administration and the adequacy of the organizational,
administrative and accounting structure adopted by the
Company and their proper operation;
– Powers of inspection and control;
– May call Shareholders Meeting.
 Traditional Model:
Final Considerations

• It clarifies the responsibilities of each organ, and it explicit

relations;
• It strengthens the role of the Board, solely responsible for
the management of the Company.

Unless stated otherwise in the Statute, the

traditional model is taken for granted!
 Different Models of
Corporate Governance

DUALISTIC MODEL
Chairman

Chief Executive
Officer

Management Board Intermediate body

between the Assembly
and Directors
Supervisory Board

Shareholder Meeting
 Different Models of
Corporate Governance

DUALISTIC MODEL
Management
Management
Board

appoint

Management/ Supervisory Shareholder

Accountant Body appoint Meeting

Control

External
Auditing body/Supervisory
Board/Auditing firm
Confer the appointment
 Dualistic Model:
Shareholder Meeting

• Some tasks, traditionally attributed to the Board of

Directors, are attributed to the Supervisory Board
• The Shareholders Meeting has the task of:
– Appoint and dismiss Supervisory Board members;
– Determine their remuneration;
– Resolve their responsibility;
– Approve the distribution of profits;
– Appoint the Auditor.
 Dualistic Model:
Supervisory Body
• Directors are exclusively the company's management:
– They determine content and limits of powers;
– Assess the adequacy of organizational, administrative
and accounting structure;
– Examine the strategic and business plans;
– Assess the performance of operations on the basis of
the report of the managing bodies;
• The Directors may transfer a limited number of issues to
the relevant bodies, on the one hand; on the other hand
they can be invested with typical powers of Assembly,
through the Statute;
• The Directors shall be liable for acts carried out (they can
not share the responsibility with shareholders).
 Dualistic Model:
Management Board

• Management Board has exclusive control of the entity;

• Management Board consists of at least two components,
even non-members;
• Members of the Management Board are appointed by the
Supervisory Board;
• Management Board applies the same discipline of the
traditional model of the Board of Directors, when not
otherwise stated.
 Dualistic Model:
Board of Auditors

• Board of Statutory Auditors disappears; accounting control is

entrusted to Auditing Firms;
• The Supervisory Board shall exercise the functions conferred
on the Board of Auditors (of legality and supervision for
monitoring compliance with the principles of proper
management);
• Under no circumstances does the accounting control;
• Reports at least once a year to the Meeting on the
supervisory activities.
 Dualistic Model:
Final Considerations

• Resizes the Assembly's role;

• He realizes the dissociation between ownership and power of
members of the governing bodies.

Particularly suitable to companies in which the

management is entrusted to managers with little
interference from the members
 Different Models of
Corporate Governance

MONISTIC MODEL
Chairman

Chief Executive
Officer

Board of Controlling Body is not

Directors separate from Managing
Body
Controlling Body

Shareholders Meeting
 Different Models of
Corporate Governance

MONISTIC MODEL
Management Board of Directors
appoint

Appointment
inside

Management Shareholders
Management Meeting
Control
Committee
Control

External
Auditing body/Supervisory
Board/Auditing firm Confer the appointment
 Monistic Model:
Shareholder Meeting
• Duties are reduced, in accordance with the principle of
exclusive administrative body responsible for the
management activities;
• The Meeting has the task of:
q Approve the budget;
q Appoint and dismiss administrators;
q Appoint the auditors and the members of the External
Body;
q Resolve the liability of directors and auditors;
q Decide on other objects entrusted to the assembly from
the lodges;
q Approving the Regulation of the General Meeting.
 Monistic Model:
Control Commitee

• Monitoring body on the management;

• It is within the Board of Directors, without management
powers;
• Composed by Independent Directors.
 Monistic Model:
Board of Directors
• Board of Directors is the central body of management of
the company;
• Comprising at least one third of individuals who meet the
independence requirements established for auditors, or if
required by statute, the codes of conduct set by trade
association etc.;
• Among these independent directors, the Board chooses the
members of the Control Committee (which shall not
constitute the Executive Committee, be appointed to
positions or perform management functions);
• Apply all the rules laid down for the Board of Directors in
the traditional model.
 Monistic Model:
Auditing

• Control is exercised by the Committee for Internal Control

Management
qMonitors the adequacy of the organizational structure,
the internal control system and administrative and
accounting system;
qHandles relations with the persons responsible for
performing audits, possibly doing other tasks entrusted
by the Board of Directors.
 Monistic Model:
Final Considerations

• Inverts the hierarchy of control and management;

• The central body becomes the Board of Directors;
• Inside there is the controlling body

Particularly interesting model for listed companies,

which have already provided for among its members
an Audit Committee
 Examples of corporate
governance models

Since Parmalat returned to the stock market, managers have

worked hard to follow the general principles of good corporate
governance, and in particular the Italian Code of Corporate
Governance.
Parmalat has implemented stronger and more transparent
corporate governance and organizational structure. The group's
approach consists of a series of principles and rules that
include the Statute and the Code of Conduct. The Board of
Directors regularly examines these principles for the purpose of
implementing best practices.
 Examples of corporate
governance models

The corporate organization of Parmalat is based on the so-

called "traditional model", based on the following corporate
bodies: Shareholders' Meeting, Board of Directors (assisted by
advisory committees), board of auditors, auditing company.

The governance model is completed by the set of powers and

proxies, by the procedures for internal control, by the code of
conduct, by the code of conduct and by the code of conduct
for internal dealing, to which all company members must
adhere: Directors, Statutory Auditors and employees.
 Examples of corporate
governance models

Role of the Board of Directors in Parmalat

In the corporate governance system adopted by Parmalat S.p.A.,
the Board of Directors plays a central function. The Board of
Directors has the power and the obligation to manage the
Company’s businesses, with the primary objectives of creating
value for the shareholders and carrying out the Group’s
mission. In pursuit of these goals, the Board exercises an
oversight function that finds its concrete expression not only in
the meetings that the Board is required to hold on a regular
basis, but also in the personal contribution that each Director
brings to each Board meeting and to the meetings of any of the
Committees that the Board may have established.
PRINCIPAL ACTORS
IN A CORPORATE
GOVERNANCE
SYSTEM
 Focus on Board of Directors:
Composition
The corporate governance framework should ensure the strategic
guidance of the company, the effective monitoring of management
by the board, and the board’s accountability to the company and the
shareholders
Thus the Board is expected to provide two main functions:
• advisory function, according to which the board consults with
management regarding the strategic and operational direction of
the company. Attention is paid to decisions that balance risk and
reward. Board members are selected based on the skill and expertise
they offer for this purpose
• oversight function, as the board the board is expected to monitor
management and ensure that it is acting diligently in the interests of
shareholders
The Board’s primary duties are embodied in the broad principle of
fiduciary duty, which includes the duties of care, loyalty and candor.

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 Focus on Board of Directors:
Composition

Types of directors:
• executive directors
• non-executive directors
• independent directors

Executive directors can be defined as those that also hold an

executive position in the company (namely that of the General
Director or an Executive Board member).

Non-executive directors are Supervisory Board members that do

not hold an executive position in the company.

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 Focus on Board of Directors:
Composition
Independent (outside) directors
To be effective in an advisory and oversight capacity, board members
are expected to exhibit independence, i.e. the degree to which a
director is free from conflicts of interest that might compromise the
ability to act solely in the interest of the firm (regulatory standpoint).

Notwithstanding regulatory requirements, directors may well form

ties that will challenge a truly independent perspective. Independence
may also be compromised by individual factors, such as a board
member’s background, education, experience, values, and personal
relation to management.

In order to ensure the Board members’ independence regulatory

bodies may request independent audit, compensation, nominating
and governance committees.
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 Focus on Board of Directors:
Composition
In this respect, an independent director is defined as an individual
who has not been in any of the following positions at the time of the
approval of a business transaction, or before the approval of such a
transaction:
• the General Director, the External Manager, an Executive Board
member or a member of the governing bodies (Supervisory Board,
General Director and Executive Board) of the External Manager;
• a person whose spouse, parents, children, brothers, and sisters by
one or both parents are the External Manager or hold a position in
the governing bodies of the External Manager;
• a person whose adoptive parents or adopted children are the
External Manager or hold a position in the governing bodies or the
External Manager;
• an affiliated person other than a director of the company.

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 Focus on Board of Directors:
Composition
Thus, an independent director must always act in a manner independent
of management and never be conflicted by any relationship to
management (i.e., financial, familial, or social). Independence
measurements include:
• relatedness of the Director (employee, professional advisor, executive
of any affiliated company, other income from company, kinship or
social ties;
• interlocks with other Directors;
• number of Boards on which Director serves.
In conflict situations, an Independent Director shall be guided by the
principles of increasing shareholder value and an equitable approach to
the interests of all shareholder groups, encouraging the parties involved
in the decision to adhere to the same principles.
An Independent Director shall not abuse his/her position to the
detriment of the company or its shareholders or for the purpose of
gaining direct or indirect personal advantage or advantage for any other
associated person.
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 Focun on Board of Directors:
Composition
Observance of the independence requirement is the most
important aspect of the activity of an Independent Director.
• An Independent Director shall refrain from any actions that
could lead to a loss of his/her independence. Where
circumstances arise which make an Independent Director lose
his/her independence, the Independent Director must
immediately notify the shareholders, the management and the
Association accordingly.
• An Independent Director shall be prepared to provide
arguments in support of his/her position if he/she disagrees
with the majority of members of the Board of Directors, its
chairman, the president of the company, or its managing
director.

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 Focus on Board of Directors:
Composition
Shareholders should receive sufficient information to determine the
ability of Supervisory Board nominees to fulfill their duties. Some
useful items of information include:
• the identity of the candidate and the identity of the shareholder (or
the group of shareholders) that nominated the candidate;
• the age and educational background of the candidate;
• the positions held by the candidate during the past years and at the
moment of his nomination;
• the nature of the relationship the candidate has with the company;
• other Supervisory Board memberships or official positions held by
the candidate;
• The candidate’s relationship with affiliated persons of the company
and with major business partners of the company;
• Information related to the financial status of the candidate, and
other circumstances that may affect his/her the duties and
independence.
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 Focus on Board of Directors:
Compensation

As board members take a leadership role by overseeing the

appointment and assessment of officers, helping implement strategy,
representing shareholders, and seeing that the company fulfills its
public responsibilities, a well-structured compensation could improve
their effectiveness.
Another motivating factor is director stock ownership, as it aligns
directors’ interests more closely with those of shareholders.

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 Focus on Board of Directors:
Compensation
Internal Committees:
• Remuneration Committee
• Risk Management Committee
• Board Appointments Committee
• Auditing Committee

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 Focus on Internal Audit
Committee
The main responsibilities of the internal auditing committee are:
• to monitor the integrity of the financial statements
• to review the company’s internal financial controls, internal control and
risk management systems.
• to monitor/review the effectiveness of the internal audit function.
• to make recommendations to the board on the appointment/removal
of the external auditor
• to monitor/review the external auditor’s independence/objectivity and
the effectiveness of the audit process.
• to develop/implement policy on the engagement of the external
auditor to supply non-audit services
• to review arrangements by which staff may raise concerns about
possible improprieties (‘whistleblowing’)
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 Managerial Concentration
and Compensation
Equity ownership by managers must balance convergence or
alignment of interests versus entrenchment considerations: at lower
levels of management ownership, increased equity holdings improve
convergence of interests with shareholders, enhancing firm value,
while at higher levels it decreases the firm value, as takeovers become
more costly.
• Expropriation of minority shareholders by majority shareholders:
private benefits of control
• Link between managerial ownership and bond returns
The conflict of interest between owners and managers would be
substantially reduced if executive compensation plans more tightly
related pay to performance.
• Performance assessment based on accounting-based vs market-
based measures
• focus on short-term highs with destructive long-term consequences.
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 Focus on External Control
Mechamisms

• Top management changes

• Institutional investors

• Proxy contests

• Market for corporate control

• Disclosure

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 External Control
Mechamisms
Internal External

Roles and responsibilities Regulatory requirements

of directors Post-GFC reforms

Board

Board evaluation processes Investor engagement

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 Corporate Governance:
Risks and Benefits
Weak corporate governance may lead to:
• accounting risk, the risk that a company’s financial statement recognition
and related disclosures are incomplete, misleading, or materially
misstated;
• asset risk, the risk that the firm’s assets may be misappropriated by
managers or directors;
• liability risk, the risk that management will enter into excessive
obligations that destroy the value of shareholders’ equity;
• strategic policy risk, the risk that managers may enter into transactions or
incur other business risks that are self-serving and may not be in the best
long-term interest of shareholders.
While:
• companies with strong governance had greater investment performance.
• companies with strong shareholders’ rights outperformed those with
weak protections
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