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State Ownership and the Evolution of

Italian Corporate Governance
Sandro Trento
Industrial and Corporate Change

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Cont inuit y and Change in It alian Corporat e Governance: T he Inst it ut ional St abilit y of One Vari…
Sandro Trent o, Ugo Pagano

Fabrizio Barca, Kat suhit o Iwai

Ugo Pagano

Never Wast e a Good Crisis: An Hist orical Perspect ive on Comparat ive Corporat e Governance
Randall Morck
 State Ownership and the Evolution of
Italian Corporate Governance
FABRIZIO BARCA AND SANDRO T R E N T O
(Bank of Italy, Research Department, Via Nazionale 91, 00184 Roma, Italy)

State ownership, pyramidal groups, family trust and a minor role for banks and other
financial institutions in the corporate governance of both large and small enterprises are
the structural features of Italian capitalism today. This paper offers a critical analysis
of state ownership by analysing the evolution of Italian corporate governance since the
Second World War. It concludes that full or majority state ownership ofcorporations can
be effective in separating ownership and control during stages of powerfully accelerating
growth and when shifts in the sectoral balance are needed; that state-owned enterprises
must not be burdened with 'special social objectives'; and that the system is bound to
degenerate without a functioning political market to guarantee democratic changes of
parties and power and if the 'mission' culture ofpublic managers is eroded.

1. Introduction
In industrial, fast-developing and transitional countries there is growing
awareness that much of the competitiveness of the economy depends on its
'corporate governance environment', namely the rules and institutions that
g take care of financing and allocating control over firms. Growing capital
- mobility, offering competitive alternatives for the investment of national
'J savings, and the emergence of new technological paradigms, demanding
I changes in the allocation of control, help explain this trend. In each country
^ the devices of corporate governance implemented elsewhere are being
| thoroughly analysed and often their domestic adoption is called for. [For the
Downloaded from http://icc.oxfordjournals.org/ at Universita degli Studi di Trento on October 29, 2013

I US and Germany, see, for example, Roe (1994) and Sabel et al. (1993).]
fr In Italy, dissatisfaction with the state of corporate governance has increased
0 in recent years. One of the main pillars of the Italian model, the system of
1 state-owned enterprises, has come under particular attack, and in 1992 a
~ process of privatization was initiated. Major problems, however, have been
•5 encountered in replacing the old system with alternative devices.

3 C Oxford Univerjity Preo 1997

533
 State Ownership and the Evolution of Italian Corporate Governance

This paper addresses this issue by analysing the merits of the Italian system
of state ownership and its degeneration. The Italian experience may offer
some insights of general use, especially in analysing transitional economies.
First, full or majority state ownership of corporations, if coupled with the
relative independence of management from ministerial bureaucracies (a
serious problem when the latter are inefficient), can be an extraordinarily
effective tool in separating ownership and control during stages of powerfully
accelerating growth and when shifts in the sectoral balance are needed;
especially when a rapid generational turnover in management is also required.
Second, for this rqodel to work, state-owned enterprises must not be burdened
with 'special social objectives', such as worker participation or the rescue of
ailing companies: the public policy purposes of the model should be restricted
to the highly relevant one of assuring control to individuals lacking resources
to acquire control via ownership. Finally, if there is no functioning political
market to guarantee democratic changes of parties in power and if the
'mission' culture of public managers is eroded the system is bound to
degenerate: top managers and political overseers will inevitably 'capture' one
another.
Section 2 presents a conceptual framework, based on recent theoretical
contributions, to analyse the institutions created in various systems to resolve
the conflict of interest between investors and entrepreneurs. In Section 3 the
results of a broad research project conducted at the Bank of Italy are briefly
summarized: dualism between a sector of small and medium enterprises and
that of large firms; a very limited active role played by banks and other
financial institutions in the system of corporate governance; robust evidence
on the diffusion of pyramidal groups and an evaluation of the effects of the
existing ownership structure. The historical evolution of the Italian system of
corporate governance from the early stage of industrialization rill the post-war
era then is described in Sections 4, 5 and 6. The causes of the mounting
difficulties of the state-owned enterprises are analysed in Section 6.1, while
some remarks on the actual phase of reforms are proposed in the concluding
Section 7.

2. The Governance of Firms: Alternative Methods

In a world where contracts are incomplete,1 control over capital assets, i.e. the
right to make use of resources in any way not explicitly prevented by existing
1
In planning any economic activity and tnde, agents ate not capable of describing unambiguously and
in a manner verifiable by third parties all actions that each of them should take and the goods and services
that should be produced in each possible contingency
534
 State Ownership and the Evolution of Italian Corporate Governance

contracts, can be interpreted as a way of enhancing one's ability to benefit

from the returns of one's own irreversible investments.2 Entrepreneurs will
expend maximum effort in understanding what is best for the firm, enhancing
their own human capital and innovating, insofar as they know that they exert
control, i.e. that they can dispose of the specific assets for the use of which
they make the effort. The control of a firm is properly allocated if the
entrepreneur in control is the one who can contribute most substantially to
the firm, i.e. whose substitution is costliest and whose investments in
innovation are most productive.
Private ownership is a means to achieve such control. But relying solely on
this device would imply excluding from control anyone who lacks the financial
means to own all the assets that he or she can efficiently control. From the very
inception of industrialization in any country, be it the United States or Soviet
Union, devices have thus been developed to allow people to exercise control
even though they did not have financial means. To make up for the separation
between human and financial capital, corporate governance devices have been
developed to complement or fully supplant ownership as a means of exercising
control, by allowing entrepreneurs to raise debt capital or equity capital. In the
latter case separation between control and ownership arises.
For finance to be provided to entrepreneurs, devices of corporate
governance must protect investors—banks or agents holding equity capital—
from their failure to find the right entrepreneur and from the latter's capacity
to 'abuse' his power of control. In a world of incomplete information, in which
signals of mistakes and abuses are very confused, monitored entrepreneurs
may be punished (and lose control) even when no mistakes or abuses have
been committed, just as they may go free when intervention would have been
justified. A trade-off thus arises between certainty of control and the
protection of investors.3
Any governance environment can be interpreted as providing a solution to
this fundamental conflict of interest between investors and entrepreneurs, by
resorting to different mixes of the following seven devices (discussed in Barca,
1995): (i) corporate boards, (ii) specializedfinancialinstitutions (banks, merchant
banks, institutional investors), (iii) fiduciary duties, courts and law firms, (iv)
market for corporate control (exit), (v) state ownership, (vi) implicit rules (based on
trust), (vii) contracts (agreements among shareholders, statutory provisions,
pyramidal groups).
1
See H u t and Moore (1990). In what fbllowt, the iuue of corporate goremance a tackled by making
use of their theory of control allocation, the theory of coordination in Milgrom and Roberts (1988), and
the theory of labour and financiil coordination in Aoki (1990, 1994a,b).
J
This trade-off is suggested in Barca (1994, 1995a,b), who extends a classical result by Jensen and
Medding (1976).
535
 State Ownership and the Evolution of Italian Corporate Governance

To these tools one should add state ownership. In the continuum of devices
available to cope with the separation between ownership and control, state
ownership can be interpreted as a model in which the state raises capital
directly through taxation and finances entrepreneurs—the top management
of state-owned companies—by entrusting political authorities (either
parliament or government) with the power to safeguard the interest of
investors—i.e. the citizenry at large.
Each of these devices provides a 'second best' compromise between the
controlling interest of entrepreneurs and the monitoring interest of investors.
Depending on how it is implemented, each device can be tilted towards either
of the two interests: hostile takeovers can be facilitated by specific public-offer
rules or discouraged by anti-takeover statutes; the extent of monitoring by
boards depends on regulation and self-regulation; the extent of activism by
institutional investors depends on their own corporate governance and on the
means they are provided with in shareholders' meetings and so on. Almost
any point along the trade-off between certainty of control and the protection
of investors can be achieved by different combinations of the seven devices.
The comparison between different capitalist system presents us with a great
variety of solutions. Which mix is adopted by which country depends very
much on historical evolution and accident, on the corporate culture, and on
other institutions, such as those governing the labour market. 4 This high
degree of path-dependency and of institutional interdependence as well as the
second-best nature of those institutions, makes it extremely hard to compare
corporate governance across national boundaries, to judge relative effective-
ness. For the same reason, any attempt to reform the existing system of
corporate governance is bound to pose major challenges.
Equipped with this theoretical framework and with these caveats, we can
now turn to the specific mix of devices adopted in the Italian economy.

3. Italian Capitalism: A Sketch?

3.1 Facts
Italian capitalism presents us with a very pronounced dichotomy between a
small business sector or S-sector—small and medium size industrial firms
(5-200 employees), producing for domestic and foreign markets—and a large
* On the issues of path-dependency and institutional complementarity, see in particular Aoki (199)) and
Gdion (1995).
9
This section draws on Barca (1995b).

536
 State Ownership and the Evolution of Italian Corporate Governance

business sector or L-sector—both industrial and service large firms (>200

employees), producing for domestic and foreign markets. Compared to other
countries, Italy has a disproportionately large S-sector: most of these firms
produce complex yet traditional products, employ a large share of relatively
skilled labour with aflexibleorganization and have attained over the years a
stabler and more successful performance than large firms; they are also often
linked in groups by various forms of coordination, especially when they form
part of industrial districts.6
The major difference in corporate governance between Italy and other
industrial countries consists in the lack of financial institutions exercising,
interim and ex-post monitoring via share or debt capital or via financial
services.
Banks in Italy hold virtually no stake in non-financial companies. This is
the result of the separation between banking and industry introduced by a
law promulgated in 19367 and backed since then by a wide consensus. Ever
since joint-stock companies had been established in the 19th century, the lack
of rules protecting minority shareholders had been matched by the
increasingly influential role of major banks in the running of industrial
enterprises. At the same time, industrial firms themselves had acquired a
growing share of these banks, giving rise to major conflicts of interests. The
Great Crash brought this vicious intertwining to an end: banks were
prevented and discouraged from resuming their role as controllers; the state
took these companies as well as banks directly into its hands, and thus played
a central role in the financial system and in corporate governance.
No other financial institutions have taken over the role of banks in the
ownership structure of Italian companies, partly due to the absence of pension
funds as a consequence of the country's broad-coverage, pay-as-you-go public
pension system. Lack of activism can also be seen for banks in their role as
creditors. Banks have generally preferred an arm's-length relationship with
their customers rather thanrelationalfinancing.Italy's particular bankruptcy
law plays an important role in explaining this behaviour. Interviews with
entrepreneurs in the S-sector have shown that banks play a relevant role in
bringing about transfers of control when a company is in financial distress
(one out of three cases), but do not monitor entrepreneurs' long-term
strategies, nor do they appear particularly active in soliciting or backing the
adjustment of companies' ownership structures. No satisfactory provisions
'See Brusco (1982), Sabel (1982) and Piorc and Sabel (1984). Some of these features u e similar to the
organizational mode called 'Horizontal Hierarchy' by Aoki (1995).
7
Most long-term credit institutions were not in fact formally prerented (see rVsaresi, 1994), as a
demonstrated by the portfolio held by one of them, Mediobanca.

537
 State Ownership and the Evolution of Italian Corporate Governance

exist to allow active entrepreneurs an interim period of monitored control,

while a procedure does exist whereby creditors can liquidate the company
without much care being taken for the efficient reallocation of the distressed
company.
This picture of bank behaviour has some notable exceptions, however: a few
small and medium-size local banks operating in the S-sector and one large
bank—Mediobanca8—operating in the L-sector. Theformerexception might
have played some role in complementing the corporate governance of firms
in the S-section. Similarly, the latter has complemented the mix of family,
coalition and group control of large private firms (see below). The initial lack
of competition, self-perpetuating via reputation and the slackness of
state-owned banks,9 created a strong incentive for Mediobanca to invest in
monitoring, but it has also made it slow to step in when signals of distress
arise. It has also biased the bank's function towards preserving and
consolidating the implicit rules (see below) that hold together the existing
ownership and control structures, rather than broadening those structures.
The exit device (such as a well-developed market for corporate control) has
also been unavailable. The failure of financial and non-financial institutions
to act as advisers or intermediaries and the high concentration of ownership,
as well as the lack of rules concerning public offers, have prevented this
development.
Company law, securities law and investment regulation do not provide a
framework for institutional investors to play much of a role in corporate
governance. Minority shareholders in general are not guaranteed by the
intervention of courts. The information available to shareholders is also
inadequate. Finally, no independent monitoring has been exercised by
corporate bodies. The board of directors in Italian companies is generally fully
identified with controlling shareholders. The board of auditors, whose
members are chosen by the majority shareholders, also lacks adequate
enforcing power.
In the absence of financial institutions, fiduciary duties and the market for
corporate control, the corporate governance of Italian companies hasreliedon
the state, both as an owner and a source ofresourcesfor the private sector, on
pyramidal groups and on family and coalition control (see Table 1).
The state has directly controlled a major stake—about 50%—of
medium-size and large companies. It has held about one-sixth of the entire
• On the original purposes of Mediobanca see bekrw, section note 51. See tlio De Cecco ind Ferri (1994).
u created immediately after the m i . It has been run under strong managerial control
thanks to * pooling agreement among the three main state-owned banks (holding the majority of shares)
and pcnrate non-financial corporate shareholders.

538
 TABLE 1. Models of Control of Italian Companies (1993)

Models of Industrial companies with
control' 20-500 employees (300
selected companies)
According to models
employed in each giuridical
company
Industrial companies with
> 5 0 employees (stratified
random sample)
According to models
employed in the head of
group (if any)
Medium and large 'companies belonging to listed groups'*
According to moddi According to models employed in the head
employed in each giuridical of group (if any)
company No. of companies

Unweighted Weighted Unweighted Weighted1" Unweighted Weighted No. of groups Unweighted Weighted
(*) (*) (%) (%) (absolute no.) (*) (%)

Absolute control 18.5 19.9 13.8 8.8 14.0 4.4 45 20.0 8.0
NO Family control 53.5 60.1 32.1 16.6 2.4 2.3 47 40.7 22.1
Coalition control 10.5 14.0 13-9 10.1 2.4 4.9 53 18.8 13.4
State ownership 2.1 2.1 6.9 15.9 15.2 50.2 13 15.2 535
Group control 14.7 - 33.3 49.0 64.7 32.0
Foreign control - - 20 5.3 3.0
Not identified - 3.2
Total 100.0 100.0 100.0 100.0 100.0 100.0 178 100.0 100.0

Stwrn: Barca 1 si. (1994), Asxttipnpmuri i mtrattt (UU mprta. Pnfruti, mJtlii di tmtnllo t rUlltanum ntU* impnst imdustrUU itslutm, Val. I, Bologna, II Mulino and Barca
(t ML (1994), Assatipnprituri i tmaat Mk impna. Gnpfn, pnpritti t amtnlU milt imprtst iulumi mdio-gntmti, \bl. LI, Bologna, II Mulino.
*See the text for definitions. Absolute control refers to cases where control is held by a person holding majority ownership.
Companies are weighted with their employment,
"•
'lilte d groups' refer to all groups with at least one listed company.
Companies are weighted with a parameter including capital and employment
 State Ownership and the Evolution of Italian Corporate Governance

non-agricultural sector, as against about one-eighth in France (after the

beginning of privatization), less than one-tenth in Germany and one-
sixteenth in the UK (after privatization). De facto, it has held about 80% of
the commercial banking system's deposits and an even larger stake of
long-term lending banks.
As noted above, state ownership is potentially a very powerful device, since
it can ensure full separation between ownership and control. For this model
to work efficiently, however, the political authorities must neither interfere
excessively in management by frequently shifting their goals (Laffont and
Tirole, 1993), nor collude with management. In order to avoid such collusion,
the public must have the opportunity to sanction the political authorities, i.e.
the market for corporate control replaced by the political market. We will
consider later what came of these conditions in Italy.
As well as acting as an owner, the Italian state has constantly made up for
failures in the governance environment of private companies by providing
them with a steady flow of resources. It has transferred substantial funds to
entrepreneurs to overcome situations of financial distress, has bought out
mismanaged companies, has provided subsidies to realize delayed restruc-
turing, and has granted subsidized credit.
Together with state ownership, Italian corporate governance has relied on
implicit rules embroidered in the pyramidal group system. Pyramidal group
control occurs when a set of companies (the number may range from two to
several hundred) are controlled by the same entrepreneur via a chain of
proprietary and control relations.10 By spreading the voting rights of minority
shareholders out over a large number of firms and concentrating those of the
entrepreneur in the company at the top of the pyramid, this model allows the
latter 'to obtain control over the greatest possible amount of other people's
capital with the smallest possible amount of his own' (Hilferding, 1910). This
way of achieving separation puts the interests of minority shareholders in all
the subsidiaries of the group at particular risk. These interests might in fact
systematically diverge from those of the entrepreneur, whose interests are
linked to the performance of the group as a whole. Monitoring devices,
specifically designed for pyramidal groups, are then called in. In Italy, the
extraordinarily broad diffusion of this model of control—almost all large
industrial companies are part of a group; and for companies with > 100
employees, between 60 and 85% are—has gone hand in hand with the total
absence of specific regulations.
Companies at the top of pyramidal groups, if private, have in their turn
"'For • distinction between different kinds of groups see Daems (1980) ind Brioschi, Buzzacchi and
Colombo (1990).
540
 State Ownership and the Evolution of Italian Corporate Governance

been governed by 'family controt—an ownership structure in which the

non-controlling owners belong to the same family as the entrepreneur
(22% of total capital)—and 'coalition control"—where the entrepreneur and
the non-controlling owners share a common value and/or are linked through
contracts (13 per cent). Family and coalition control are also employed to run
medium-seized and small enterprises at the other end of the size range.
Implicit rules are often complemented by laws restricting the transfer of
shares.

3.2 Effects

The effects of any given mix of corporate governance devices can be evaluated
on two different grounds: static efficiency, i.e. the ability to bring about an
allocation of control as close as possible, given the technology and the skills of
all agents, to efficiency (i.e. maximizing innovation and human capital
investments); and dynamic efficiency, i.e. the ability to guarantee a degree of
control mobility that creates enough of an incentive for people to improve
their skills, given their endowment of talents. Allowance must, in fact, be
made for the fact that investments in human capital not only make people
more productive in performing a specific task, given their skills, but also
increase these skills: any allocation of control, then, feeds back into the
allocation of skills among individuals and might have negative, dynamic,
effects on the development of these skills (see Pagano, 1991a,b; Barca, 1994,
1995a). Negative effects on dynamic efficiency might well explain social
disapproval of the lack of control mobility.''
To assess the static efficiency of Italian corporate governance, reference can
be made to two specific stages in a company's life when corporate governance
is especially important: 'fast' growth (and entry) and crises.
As regards fast growth and entry, by putting forced saving at the disposal
of managers, state ownership mobilizes finance for fast development, while
family and coalition control allow accumulated saving to be channelled to
investment, since formal institutions are lacking. But these devices are
inadequate to govern the growth of both small and large companies when
there are shortages of capital, which should be matched by long-term debt or
by private risk capital. The preponderance of short-term debt and the wide
use of collateral are particularly unsuitable for financing fast growth,
especially when firms do not have much of a record. Similarly, both family and
coalition control tend to prevent the raising of new 'outside' risk capital. For
11
For « historical example of fuch popular disapproval see Roe (1994) on the United States.

541
 State Ownership and the Evolution of Italian Corporate Governance

an entrepreneur to attract funds to finance his projects, requisites that most

people do not possess may be demanded: family ties or political and social
links with well-off members of society. Growth tends to be limited by the
capital of incumbent families and coalitions. Several facts seem to corroborate
this evaluation: the limited diffusion and high concentration of ownership; the
very small size of the stock exchange; the lack of medium-sized firms.
When "crises' occurr, all three models—family, coalition and state
control—tend to reduce the risk that signals of bad performance might too
easily unsettle an allocation of control, even where there is no mis allocation.
This is possibly one of the main advantages of the Italian governance
environment. On the other hand, due to the lack of continuous monitoring,
these models may increase the risk of the opposite error: that a misallocation
of control, though signalled by bad performance, does not lead quickly
enough to a transfer of control.
While an a priori judgement of the static efficiency of Italian corporate
governance is therefore ambivalent, there seems to be no doubt about the
negative dynamic efficiency of the system. Several factors played a role in
impeding turnover within the entrepreneurial establishment: the financial
obstacles to entrepreneurs, particularly new entrants, who lack the 'right
connections'; the stickiness of the model of family control; the strong
collusion between the top managers of state-owned companies and top
politicians, who have helped each other to stay in power. People's oppor-
tunities to use their abilities in order to develop new skills have very likely
been reduced. There have doubtless been adverse effects both on long-term
growth and on equity.
It is probably the case that persistent dynamic inefficiencies, and the related
consequent inequality of opportunity for upward social mobility, explain
much of the consensus at the beginning of the 1990s for a reform of the entire
system of corporate governance centred on a reduced role of state ownership.
But the consensus for reform must also be attributed to the perception that
on the grounds of static efficiency the disadvantages by then largely out-
weighed the advantages. This was not always the case in the postwar period.
To appreciate fully the fitness of Italian corporate governance, one needs a
historical perspective. This is what the following sections provide.

4. A Historical Perspective: First Comers, Late Joiners and

Corporate Governance
The mixes of corporate governance that emerged in different countries
naturally depended on the timing and nature of their industrialization, on
542
 State Ownership and the Evolution of Italian Corporate Governance

their historical development. In the first comer par excellence, England,

industry grew up almost exclusively thanks to the private accumulation of
capital, and in a context in which property rights are thought to have
generally been better defined and better safeguarded than elsewhere (North,
1981). Britain's path-breaking industrialization was marked by the minimal
role played by the state. At the same time, the entire industrial takeoff was
characterized by the prevalence of light industry (textiles, pottery, paper),
which did not need to be large in scale. In this start-up era firms were basically
financed by the entrepreneurs' family capital and in an informal capital
market consisting of loans from relatives, friends and acquaintances.
Financing on the formal capital market, i.e. venture capital, debt capital and
insurance company capital, was less significant. Even following the industrial
takeoff, British banks rarely made medium- or long-term loans; for the most
part they offered commercial credits or simple current account overdrafts
(Mokyr, 1985, p. 36).
The industrialization of the second-wave countries took a different course.
Gerschenkron's fundamental study highlights the salient features of economic
development in the late-joining countries, which had to resort to substitutes
for the market:

. . . in a relatively backward country capital is scarce and diffused, the

distrust of industrial activities is considerable, and, finally, there is
greater pressure for bigness because of the scope of the industrialization
movement, the larger average size of plant, and the concentration of
industrialization processes on branches of relatively high ratios of capital
to output. To these should be added the scarcity of entrepreneurial talent
in the backward country. (Gerschenkron, 1962, p. 14)

When there is 'no sufficient previous long-term accumulation of wealth in

appropriate hands which at a propitious moment can be made available to
industrial entrepreneurs' (Gerschenkron, 1962, p. 116, emphasis added) the
informal capital market of the early industrializers no longer suffices. A
backward country (like Italy, Germany or Russia) is bound to find some
substitute for original accumulation: either the state or some financial
• institution or both.
In Germany, a particular kind of bank, the universal bank, was established
which became the dominant form of banking in many backward countries. It
combined the role of investment banking with the short-term activities of
traditional commercial banks. In many cases universal banks played a direct
supervisory role in industrial activities, substituting for scarce entre-
543
 State Ownership and the Evolution of Italian Corporate Governance

preneurship, favouring processes of cartelization and 'regulated' competition

in several industries.
In the United States, too, the acceleration of industrialization at the end of
the 19th century prompted the emergence of a few big investment banks,
which played a major role in channelling finance to formerly family-owned
corporations and monitored them through their boards and through their
shareholder meetings. When at the beginning of this century the huge
concentration of power in the hands of few financial institutions brought
about a strong and vociferous political opposition, the activities of investment
and commercial banking were separated, and what emerged from the surgery
slowly became the core of a market-oriented financial system (Roe, 1994).
In Italy, the early attempt to base a late industrialization process around
banks failed at the end of the 1920s and opened the way for the peculiar
system of corporate governance that we face today. Let us consider this
evolution in some detail.

5. The Historical Roots of Italian Corporate Governance

Italy is a typical late-comer, industrializing only at the end of the 19th
century, and in a form such that the process was protracted and not put on
truly solid foundations until after the Second World War.
The country was traditionally marked by shortage of capital (absence of
primitive accumulation), scarcity of raw materials and the lack of a large
market (due to the historical division into small, independent states). In the
words of Antonio Gramsci:

the Italian economy was very weak (and) there was no large and
powerful economic bourgeoisie; instead there was a great number of
intellectuals and petty bourgeois, etc. The problem was not so much to
free already developed economic forces from antiquated legal and
political fetters as to bring into being the general conditions for these
economic forces to arise and develop along the same lines as in other
countries. (Gramsci, 1975a, p. 57)

The model of development that emerged in the closing decades of the 19th
century centred on heavy industries, sustained by public procurement and
protected by high tariff barriers. Protectionism, public procurement and tax
incentives were instruments used by a number of late-comer countries at the
time to foster the rise of modern industry. But as Gerschenkron noted, and as
has been confirmed by more recent studies (see Federico and Toniolo, 1991),
protectionism was misdirected, favouring wheat production and basic
544
 State Ownership and the Evolution of Italian Corporate Governance

industries with strong lobbying powers but poor long-term prospects.

Moreover, Italy lacked a 'specific industrialization ideology' (Gerschenkron,
1962, p. 11)—be it the French myth of the firm or the ideal of building a new
society as in Soviet Union, to forge a mass consensus for the industrialization
drive.
In the absence of these factors, during the first phase of industrialization
beginning in 1895, the substitutes were the mixed banks, some founded with
German capital (e.g. Banca Commerciale Italiana and Credito Italiano). These
financial institutions operated through a mix of credit relations and equity
subscription. In the framework proposed by Gerschenkron, in Italy the mixed
bank acted at first as a substitute agent to overcome the scanty primitive
accumulation of capital, and later as the channel by which diffuse, fragmented
savings that the holders had no intention of putting into non-liquid form
could be funnelled into equity that would have had a great deal of difficulty
finding buyers on the stock exchange.
This thesis has not been undermined by subsequent studies emphasizing
the limits of the 'German-type bank' experience (Confalonieri, 1974).
However, the institutional arrangements forged by the advent of these banks
were incapable of fully compensating for the other shortcomings of the
industrialization process; nor were they stable enough to withstand the first
major economic crisis. Thus Italy's growth rate during its 'great leap',
from the 1896 to 1908, was lower than those of other economies at a
comparable stage of development or even of economies not experiencing
takeoff.12
Most notably, however, it was during the 1920s that this bank-based
corporate governance degenerated due to a progressive erasure of the
separation of interests between banks and large industrial corporations,
combined with the weakness of the 'rear echelons', i.e. the lack of a credible
reserve of small and medium-sized businesses. On the eve of the First World
War, both Banca Commerciale Italiana and Credito Italiano had significant
equity stakes in a number of major nascent enterprises. In addition to
sustaining growth, then, the large banks also acted as coordinators, seeing to
the placement of new share issues (frequently with the usual small circle of
customers). Corporate crises were regularly dealt with and resolved by the
banks themselves; if a crisis was too large to be handled by a single bank, a
large rescue consortium would be formed (see Zamagni, 1990).
The natural corollary to the prevalence of debt capital was the failure of the
12
Italy's per capita national income (measured u US dollin of 1970) increased by 17.6% between 1890
and 1910 while, in the tame period, France'» and Britain'i increased by 32.2 and 13.2%, Austria's by 21,
Germany's by 31-4 and Russia's by 44.2% (Federico and Tbniolo, 1991, p. 199).
545
 State Ownership and the Evolution of Italian Corporate Governance

stock market to take off.13 Until the reform of 1913 the primary source of law
governing Italian stock exchanges was the French commercial code
promulgated by Napoleon in 1807. Following the turn of the century it was
the mixed banks themselves that sponsored the development of the stock
market, with a view to making their equity shares more liquid and more easily
disposable. The years 1903-1907 saw the most intensive growth for the share
market, albeit under the firm dominance of the two leading mixed banks.
There was a substantial flow of capital into enterprises, principally through
new share issues. The stock market collapse of 1907 brought this happy
interlude for the Italian securities market to an end and ushered in a long era
in which the market served solely speculative purposes.
With an inadequate stock market and stable, non-competitive relations
between banks and industry, between 1900 and 1913 the groundwork was
laid for an intensive concentration of control and the formation of corporate
groups. However, it was only following the enormous profits deriving from
military production (in steel, shipbuilding, mechanical engineering and
chemicals) that the relationship between banks and enterprises degenerated
irretrievably. Public procurement orders and massive profits restored
corporate finances to health and powerfully spurred further concentration,
especially by mergers and buyouts. In these years, the power relations
between banks and industrial corporations were inverted, and industrial
pyramidal groups now made takeover bids—albeit unsuccessfully—for the
leading banks.
The stock market crash of 1929 thus hit the Italian financial system in a
moment of pronounced industrial and financial concentration. The inter-
mingling of credit and industrial capital and the underdevelopment of the
stock market, but above all the creation of corporate groups based on cross-
shareholding, made the crisis particularly acute, hindering adjustment and
fostering the domino effect. The crisis struck the huge industrial-banking
colossi, and the organization into pyramidal groups amplified the reper-
cussions of the plunge in share prices.
The leading banks found it impossible to liquidate their assets, which
consisted primarily in equity holdings in the crisis-torn industrial groups. This
paved the way for the until-now most sweeping reallocation of ownership in
11
The stock exchange, conceived of as the centre for directing savings into industrial and commercial
activities, was a Napoleonic concept, introduced when Italy was in the French sphere of influence in the
first decade of the 19th century. Bourses were founded in a number of Italian cities between 1802 and
1808, but this forcible innovation, not borne of any commercial necessity, was greeted with indifference if
not outright hostility. The Italian exchanges were not structured as free associations of participants, on the
English model, but were imposed from above, on the state-controlled pattern of the 'Bourse du Rof
(Aleotti, 1990, p. 29).

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 State Ownership and the Evolution of Italian Corporate Governance

the history of Italy, and above all for the state to assume the central
function within Italian capitalism that it had refused at the turn of the
century.
The government decided to refinance the troubled banks by buying out
their industrial holdings and transferring them to a new agency created
especially for this purpose in 1933: the Institute for Industrial Reconstruction
(IRI). Constituted as a holding company and as a corporation under private
law, the IRI took over the entire equity capital of the mixed banks, hence
>21% of all the equity capital of limited companies existing in Italy at the
time: 100% of Italy's defence-related steel industry and coal mining, 90% of
its shipbuilding, 80% of maritime shipping, 80% of locomotive manufacture,
40% of the non-military steel industry, 30% of electricity generation, 20% of
the output of rayon and 13% of the cotton output (Castronovo, 1995). In
addition, the IRI owned a number of mechanical engineering firms, controlled
the three largest commercial banks and the telephone service in central and
northern Italy, and possessed very extensive real estate holdings.
Meanwhile, industrial concentration had increased notably, and in 1936
< 1% of all Italian limited companies accounted for half the total share capital
(Aleotti, 1990). Long-term industrial finance was the job of the Italian
Industrial Credit Institute (IMI), founded with public capital in 1931.
The creation of the IRI was accompanied by the fundamental Banking Law
of 1936, which prohibited banks from holding equity participations in
industrial companies and required maturity specialization in their credit
business, assigning short-term credit business to ordinary banks and medium
and long-term credit to special credit institutions. Thus the German-style
mixed bank vanished from the scene. But the Italian solution was not
intended to relaunch the stock market as a means for attaining a broader
ownership base and more diffuse corporate control; the dominant logic
continued to see the banks as the linchpin of industrialfinance.This was quite
different from the path followed in the United States, where financial
rehabilitation and the separation between banking and industry were founded
upon the recovery of the stock market, with the formation of the SEC, the
regulation of mutual funds and deposit protection legislation.
The IRI had been conceived as a transient corporation that would dispose
of its industrial holdings within a few years at most. Instead, on 6 May 1937
it was transformed into a permanent institution. The decision not to
reprivatize the companies acquired was due in part to the fascist regime's
desire to use public corporations as an instrument of industrial policy, but
primarily it was due to difficulty in finding private buyers for so many public
firms (Cianci, 1977). In short, unlike the situation found in other countries,
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 State Ownership and the Evolution of Italian Corporate Governance

the system of Italian public enterprise was not the result of a deliberate policy
of nationalization but the by-product of a corporate salvage operation.
For the Italian economy, the crisis of the 1930s thus represents a truly
structural divide, with an outright transformation of the model of corporate
governance taking place between 1930 and 1936. With the direct, massive
intervention of the state, Italy moved from an ownership pattern based on the
corporate group and mixed banks (similar in some ways to the German
model) to one centred on the corporate group but subdivided into public and
private groups. A characteristic feature of the Anglo-American model of
corporate control was introduced, namely separation of banking and industry.
The bank as controller, mandated to oversee the rehabilitation and
restructuring of firms in crisis, disappeared. The resulting vacuum was partly
filled by the state holding company, which was repeatedly required to take
over companies in financial distress.
In its first few years IRI concentrated mainly on restructuring the
companies acquired and restoring them to financial health. At that time,
oversight of the Institute was the responsibility of the Ministry of Finance,
but from the outset the IRI was managed by a group of technicians (Alberto
Beneduce, Donato Menichella, Pasquale Saraceno and Francesco Giordani,
among others) who were not part of the fascist regime and whose background
and training, in many cases, was rooted in the liberal Italy of the pre-fascist
era. The IRI's independence from the government was considerable, at least
until the outbreak of the Second World War, when all the public enterprises
were called to contribute to the war effort.

6. The Evolution of State-owned Enterprises in Italy in the

Postwar Period
The end of the war and the liberation of the nation from fascism by the Allied
forces and by Italian partisan units made up of communists, liberals and
Catholics, the end of the monarchy and the institution of a republican form of
government, the drafting of the democratic constitution and the formation of
a coalition government involving all the forces that had taken part in the
Resistance did little to alter the institutional structure of Italian capitalism.
Most of the negative aspects of the Italian corporate governance were
perceived by the Economic Committee of the Constitutional Assembly, but no
significant reforms were implemented (Barca, 1994, chapter VIII).
It could be argued, though, that the return to democracy with the rise of a
new governing class formed largely in the opposition to fascism and the
decisive option for European integration and for free trade permitted the full
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 State Ownership and the Evolution of Italian Corporate Governance

unfolding of the development potential inherent in the model of corporate

governance installed between 1933 and 1936. These same factors, together
with the resurgence of locally based civic and political identity, constituted
the premises for the unleashing of small-scale, local entrepreneurial energies.
Through the informal financing channels described in Section 3.1, later on,
at the end of the 1960s, this triggered the extraordinary and unplanned
development of small industrial businesses.
But one could go further than that. It can be argued that in the first 10-15
years after the end of the war some features of the governance framework, in
the contingent economic and cultural context, suited very rapid development.
State control gave a new generation of managers, broadly untainted by
involvement with the previous fascist regime (and in some cases, known
opponents of it), the chance to acquire control of large, emerging enterprises:
a sense of mission linked to the postwar reconstruction climate helped make
up for the monitoring failures of the model, while many of the relevant
strategic choices were rather clear-cut (providing the country with an
adequate and stable supply of energy, developing and modernizing the steel
industry to suit the needs of the engineering sector, building a highway
system, etc.). At the same time, low wages due to an excess of labour allowed
rapid growth in small and large family-controlled firms to be fuelled by
abnormally high self-financing.
Let us consider the evolution of state-owned enterprises in some detail,
from success to failure.

6.1 Success

In the immediate aftermath of the war there was intense debate over the
function of IRI, which at the end of 1945 controlled 216 companies with
> 135,000 employees. Some political parties (liberals and communists,
though for different reasons), maintained that these public enterprises should
be eliminated as a holdover from the fascist regime; according to others, the
persistent backwardness of the economy made the privatization of an
enormous group like the IRI simply impracticable. For two years the IRI's
activity was totally stymied. Representatives of the US government had also
questioned the wisdom of retaining a public group created under fascism. In
July 1944 Donato Menichella, one of the designers of the IRI back in 1933,
had addressed a report to Captain Andrew Kamark, the representative for the
IRI on the Finance Sub-commission of the Allied Control Commission.
Menichella had argued that the public ownership of banks and industries did
not reflect the fascist regime's bent for planning but had stemmed from the
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 State Oumersbip and the Evolution of Italian Corporate Governance

rescue of the banks, whose purpose was primarily to protect savers and
depositors and safeguard the stability of the banking system as a whole. He
offered a severe judgement of Italian financiers as a group:

Italy has never had a class offinancierswho loved banking for banking's
sake; that is, who were disposed to invest their money in bank shares and
to operate banks with the sole aim of earning the largest possible
dividends from those shares. Only industrial groups have manifested any
interest, at various times, in acquiring stakes in the leading banks.
(Menichella, 1944, pp. 127-128)

The impossibility of finding capable hands to run the IRI's banks and
industrial firms through private ownership, Menichella maintained, had
compelled the government to transform the Institute into a permanent
structure. This position belonged to a long-standing line of thought according
to which Italian capitalism had always been fragile, bereft of legitimacy in the
country and lacking a far-sighted bourgeoisie (Gramsci, 1975b, p. 56).
Over and above this historical judgement, the position that won the day, in
the late 1940s, was that public enterprises were good tools for speeding up
reconstruction (Bottiglieri, 1984). In February 1948 a decree law restored the
IRI to operational status and above all strengthened its independence from
the government. The structure of corporate governance ultimately resembled
the theoretical model described above in Section 2, in which management
exercises the power of control (i.e. of strategic design). The arrangement
differed from the theory in that during this initial phase the oversight
exercised by the political power structure was not stringent.
The IRI was formally subject to the control of a Committee of Ministers
mandated to set general strategy, decide any increase in endowment funds and
elect the group's chairman, deputy chairman and director-general. The
purchase or sale of equity participation above a defined ceiling no longer
required the authorization of the Finance Ministry. The group's financial
statement had to be approved by the government and then communicated to
parliament, but the latter had no power to intervene in operations. The
13-member board of directors included representatives of several ministries
(Treasury, Finance, Industry), the Bank of Italy and the Accountant General.
The IRI's statute specified no purposes or objectives, but in practice during
these yean the Institute acted as a technical advisory body on economic policy.
Memos produced by IRI bureaux reveal top management's clear awareness
of a definite set of investment priorities for national reconstruction, stressing
basic industry, capital goods and infrastructural projects (La Bella, 1983, p.
36). The 'residual right of control' seems to have been tightly in the hands of
management. It was management, not the political tutors, that made the
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 Statt Ownership and the Evolution of Italian Corporate Governance

choice to focus the accumulation effort on rebuilding a modern industrial

apparatus in steel, shipbuilding and engineering, and on major infrastructure
(highways, the telephone network, etc.). In particular, at the turn of the
decade, Oscar Sinigaglia, head of the steel division, drafted and implemented
a plan for the construction of three full-cycle steel plants comparable in size
and technology to the most up-to-date foreign facilities. Until then the Italian
steel industry had been modest and antiquated, mainly reprocessing scrap
metal. Sinigaglia argued that without a modern steel industry Italy
would never have a true engineering or motor vehicle industry (La Bella,
1983, p. 53).
In 1953 a new public holding company was created, the National
Hydrocarbon Agency or ENI, for the oil, petrochemical and later the chemical
sector. This decision, a controversial one, represented the success of the new
entrepreneurialforcesthat had grown up in the opposition to fascism and the
defeat of therepresentativesand bureaucrats of the old regime.
With the support of Ezio Vanoni and other Catholic leaders now influential
within the Christian Democratic party (DC), Enrico Mattei (a self-made
businessman and a commander of Catholic partisan units in the Resistance),
who was first commissioner and then vice-president of AGIP, led the battle to
retain AGIP's extraction rights to the oil and gas deposits discovered under
fascism and to combine those activities with those of refining and distribution
(as yet non-existent) in a state-owned but independently managed
corporation. Mattei's programme was strongly opposed by private industry
and by the major international oil companies (mostly American), which were
interested in exploiting Italy's energy resources. The motivation behind
Mattei's strategy was not dissimilar to Sinigaglia's reasoning: Italian
industrial growth required a solid energy foundation. The earnings from the
exploitation of natural resources could be devoted to establishing these
foundations if they were managed not by small, private businessmen with
narrow interests or by government bureaucrats (as would have been the case
under a regime of state-regulated concessions to private firms) but by
technicians at the helm of 'state-owned public companies'.
This institutional solution was all the more necessary in that in the absence
of other models of corporate governance there were really no alternative
source of risk capital available to finance such a project. Mattei's arguments
won the day, ENI was constituted, and despite the very modest size of the oil
and gas deposits discovered, in just a few years it gave Italy a modern refinery
and distribution network that enhanced independent economic development.
A case can then be made to argue that in the 10—15 years after war the
state-owned enterprises provided an opportunity, for a new elite to emerge
551
 State Ownership and the Evolution of Italian Corporate Governance

and run large economic concerns, a new generation of men who had been
little involved in the fascist regime—and in a number of cases had opposed
it—and seemed to have the skills to do the job. It can also be argued that the
ample operational independence of the IRI and ENI group companies, which
some observers viewed as a clanger, enabled them to pursue that objective
with production and organizational techniques in no way different from those
of the private sector. This thesis should obviously be put to more demanding
tests, but available information seems to be fully coherent with it (see in
particular Osti, 1993).
During these years, state-owned enterprises coexisted with a set of large
private enterprises still under family and coalition control, thanks also to the
intervention of the investment bank—Mediobanca—originally formed as an
emanation of the public banks but soon gaining full independence.14 It can
be argued that the private and public poles counterbalanced each other in
terms of strategic power, prompting a degree of competition in several sectors
such as engineering, chemical and oil.
At the end of the 1950s, however, major innovations affected the degree of
independence and the strategic constraints on the system of state-owned
enterprises, highlighting its potential shortcomings.
Between 1950 and 1953, in a series of conferences and studies by leaders
of the CISL, the Catholic trade union linked with the Christian Democratic
party, it had been argued forcefully that the IRI should withdraw from the
Italian industrialists' confederation, Confindustria, the better to promote 'new
industrial relations' with greater workers' involvement. It had been
maintained that Italy's public enterprises should also serve the purpose of
promoting the economic development of the most backward regions of
southern Italy (Bottiglieri, 1981). Later the Christian Democratic left
sponsored a reform of the state holding companies that resulted, in 1956, in
the creation of a Ministry for State Shareholding to exercise political oversight
of the IRI and the ENI. In 1957 the state corporations left Confindustria for
two specially created employer associations, one for the IRI and one for the
ENI group companies. From then on these two associations engaged in
14
The 1936 reform had produced i banking system in which commercial banks were prohibited from
medium- and long-term lending. In 1944 tnd 1943 RafTaele Mactioli, chairman of Btnca Commerciale
Italian*, sponsored the formation of i new industrial credit institute mandated ro offer five-year credit to
firms. Originally, the plan called for dose linlci between the new institute and the Banca Commerciale,
virtually replicating the 'universal hank', with the Banca Commerciale specializing in ordinary credit and
the new institution financing longer-term industrial investment projects. Eventually, in 1946, this project
led to the creation of a new medium-term credit institution, Mediobanca, whose equity capital was mostly
subscribed by three IRI banks: Banca Commerciale, Credito Italiano and Banco di Roma. Originally
intended in part to sustain the development of small firms, over the yean Mediobanca was transformed
into a true investment bank for Italy's leading private enterprises (see above).

552
 State Ownership and the Evolution of Italian Corporate Governance

collective bargaining with the trade unions separately from the private firms
represented by Confindustria. It was not until the turn of the new decade,
however, that the system began to alter radically.

6.2 Failure

As the political situation evolved towards a split in the left opposition and the
eventual alliance of the Socialists (PSI) with the Christian Democrats, once
again energy policy became a focus of the impending change.
In 1958 the new Christian Democratic Prime Minister, Amintore Fanfani,
had made part of the government's programme the concentration of all
energy activities—including electricity generation, at the time in the hands
of private utilities—in a single state-owned corporation (a sort of enlarged
ENI). The purpose was to regulate prices, assist southern development and
'enable workers to share in the benefits of productivity increases'.
The plan had remained a dead letter. It had been opposed by liberals and
also by the Communist Party, whose leader, Palmiro Togliatti, worried about
'the risk of an elephantine state and para-state apparatus'. But the main
reason for its failure had been the opposition of the Socialists, with whom the
Christian Democrats sought to ally. What they opposed, however, was not the
new strategic constraints to be imposed on the public corporations but the
excessive independence of their management (see Colitti, 1979).
With the birth of the new coalition government it became official policy
that the objectives of the IRI and the ENI should be extended from
reconstruction and modernization to contesting monopoly, promoting new
industrial relations, sustaining employment and fostering the economic
development of the south. Against the opposition of Communists, the Liberal
Party and Mattei himself, the DC—PSI coalition government nationalized the
electric power industry with the formation of a directly state-run agency, the
National Electricity Authority (ENEL). New public groups were formed: after
EGAM and EAGAT in 1958, EFIM was created in 1962, controlling mining,
engineering and railway firms.
In 1967 the Inter-ministerial Committee for Economic Planning was
formed. One of its purposes was to lay down strategic guidelines for public
corporations. The system of state-owned enterprises was now complicated in
the extreme. The supreme policy-making body was the Inter-ministerial
Committee, on which sat the Prime Minister, the Minister for Budget, the
Minister of the Treasury, the Minister for State Shareholdings, and 11 other
ministers, mandated to set economic and social objectives and determine
investment policy for the public companies; below it was the Ministry for
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 State Ownership and the Evolution of Italian Corporate Governance

State Shareholdings, assigned to transpose these strategic guidelines into

operational objectives, oversee the management of the public corporations
and propose changes in the management to the government; next came the
public holding companies, IRI, ENI, EFIM and EGAM, regular financial
holding companies that in turn controlled a set of sub-holding companies
(Finsider, Finmeccanica, STET, AGIP, SNAM, BREDA, etc.); at the base of
the pyramid were operational companies. This intricate corporate structure
hampered supervision and furthered the establishment of individual links and
loyalties between politicians and top managers.
Furthermore, law 675/1957 obliged the ENI and the IRI to invest 40% of
resources in southern Italy. To meet this requirement the ENI, which had no
possibility of expanding its extraction or petrochemical capacity, moved into
the general chemical industry, a choice that would wreak enormous financial
and industrial damage whose effects persist to this day.
The eventual crisis that struck the model of public ownership involved both
die aspects discussed in Section 3: unstable strategic objectives and the failure
of political oversight.
The deceleration of economic growth, the persistent backwardness of the
south and the problems caused in the economic structure by abrupt changes
in relative prices (in both wages and raw materials) tilted the guidelines for
state-owned companies from long-term objectives to more volatile, short-
term ones, such as sustaining employment and rescuing ailing private firms.
The complicated hierarchical structure resulted in a vague definition of the
official statutory 'mission' of the public groups at their founding and
throughout their activities.
The various founding laws bound the groups to 'economic' management, a
highly vague concept subject to any number of interpretations. Each public
company, on its creation, was given an endowment fund, but the state
received no interest or dividend payment in return. Periodically, these
endowment funds would be increased or replenished. This would happen, for
instance, when a state-owned group was asked to build a new steel plant in
an economically underdeveloped region of the country. However, the
endowment fund could not act as a dt facto ceiling on the costs of the social
objectives assigned to the public groups. Instead, the state's ownership itself
constituted a guarantee on the financial market and enabled the public
corporations to borrow freely; in other words, these companies were subject
to a soft budget constraint. As debt and losses mounted, it was hard to
apportion them between the costs of the social objectives imposed by the
government and those of simple mismanagement.
This shortcoming is intertwined with the degeneration of political oversight
554
 State Ownership and the Evolution of Italian Corporate Governance

due to the failure of political control. From 1945 to 1992 the government was
uninterruptedly controlled by a series of alliances among an unchanging
group of parries. In the first 10-15 years a form of 'benign neglect' charac-
terized the attitude of governing parties towards the top management of
state-owned enterprises; but since the end of the 1950s top managers came
to be chosen or to promote themselves mostly through their political links; a
system of loyalty developed based on the exchange of monetary and non-
monetary benefits (see for example Osti, 1993, esp. pp. 219-230 and
279-286). Nor did the opposition perform its function as watchdog over
public enterprises; indeed there was often collusion between majority and
opposition in this regard. For instance, most of the measures on behalf of
the public enterprises, including subsidies, were approved unanimously in
parliament (Maraffi, 1990). The main opposition party, the Communists
(PCI), abandoned its initial critical position to become a firm supporter of the
IRI, at least in principle. For example, the party's platform for the 1968
elections called for public corporations to double their investment (Amoroso
and Olsen, 1978, p. 29).
The crisis that these two factors provoked in state-owned corporations also
had repercussions in the private sector; it upset the equilibrium of the overall
system of corporate governance in large enterprises.
Relations between public and private enterprises, which were competitive
in the 1950s, also became collusive, in that the government would rush to
rescue private companies that threatened to fail. The shortcomings of Italy's
system of private corporate governance, emerging with the end of the
exceptional period of low wages, were increasingly dealt with by reallocating
to the state the ownership of ailing companies. This 'controller of last resort'
function would take on added importance in the course of the crisis of the
1970s. It resulted in an expansion of the total payroll of state-owned groups
from 200,000 employees in the mid-1960s to 600,000 in the 1980s.
Was this degeneration of the state-owned corporate system inevitable?
More research is needed to answer this question. However, the Italian
experience allows us to draw al least three conclusions.
First, the institution of full or majority state ownership of corporations,
avoiding the subjection of management to ministerial bureaucracies (a serious
problem when, as in Italy, the bureaucracies themself are burdened with
inefficiencies), can be an extraordinarily effective tool during stages of
powerfully accelerating growth and when shifts in the sectoral balance are
called for; this is especially the case when a rapid generational turnover in the
management of industry is strongly needed. Second, for this model to work,
state-owned enterprises must not be burdened with 'special social objectives',
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 State Ownership and tbt Evolution of Italian Corporate Governance

such as worker participation or the rescue of ailing companies: the public

policy purposes of the model should be restricted to one of assuring control
to persons who lack the resources for corporate ownership. Finally, if there is
no functioning political market to guarantee democratic changes of parties in
power and if the 'mission' culture of public managers is eroded, the system is
bound to degenerate; top managers and political overseers will inevitably
'capture' one another.

7. The Current Phase of Reform: Whither Italy?

The crisis of Italy's state-owned companies dragged on for more than 20
years, though not without a few moments of recovery, when managerial skill
combined with some opening in the political situation. On the whole, through
the 1970s and 1980s, static and dynamic inefficiencies increasingly hampered
both large private and state-owned companies. The former went through a
'stop and go" process, in which long-delayed adjustments would be effected
abruptly: costs, both in long-term strategies and investment and in workers'
conditions, were high. Many state-owned companies came to a virtual
standstill. Both presented their shareholders and the general public with
dramatic examples of abuses of control and—with a few notable exceptions—
largely failed to develop multinational strategies. The S-sector partly made
up for these swings and for dynamic inefficiencies by growing steadily
throughout the two decades. But too many of its results have come at the
unquantified cost of tax evasion, aided by the fact that personal and company
interests are often inextricably linked, particularly in the model of family
control; and too many opportunities for growth—to go 'big'—have been
missed due to failures of corporate governance.
By the beginning of the 1990s, increasing pressure stemming from these
failures, together with stricter constraints on state funding coming from the
European Community, the liberalization of capital mobility and an upheaval
in the political market,15 led authorities to take some steps.
In particular, privatization of the state-owned enterprises gradually gathered
support in parliament and among the public. In 1992, following the EC
currency crisis and the devaluation of the lira, the government finally passed a
strong privatization plan, calling for the sale of all the productive enterprises

" A series of electoral reforms resulted in * British-style, firsc-past-the-post dectonl system. At the
same rime judicial inquiries into political corruption overturned the political equilibrium that had prevailed
for the entire postwar period, with the disintegration of the two leading government parties, the DC and
the PSI. This transition is still under way, with intensive debate over the new constitutional rules that
should be adopted.

556
 State Ownership and the Evolution of Italian Corporate Governance

controlled by the state. The reasoning behind the strategy was twofold: on the
one hand, the need to curb the rise of a huge and mounting public debt; on the
other, the desire to improve the competitiveness of the Italian industrial
apparatus, bringing more small savers into the financial market. An important
role was played by the widespread feeling that the sphere of social life controlled
by the political parties had to be drastically circumscribed.
The privatization process, which began its operational phase in 1993, has
not yet been accompanied by any substantial reform of the regulatory and
institutional framework needed to offer some alternatives to the corporate
governance system that is being dismantled.16 The legislative framework for
tender offers and the laws safeguarding the rights of minority shareholders
proved to be inadequate.
The other essential condition for a new system of corporate governance to
supplant the obsolete devices still in place is the emergence of control-
oriented, activist financial institutions. Changes are slow to take place. The
old Banking Law (1936) has been transformed. Maturity specialization
between ordinary banks and special credit institutions has been abrogated.
The opportunity to develop universal banking has been reinforced, with
banks now being allowed (subject to restrictions) to acquire equity interests
in non-financial companies. For the corporate culture of the banks to change,
however the legal framework is inadequate. Banks need to have a strong
incentive to undertake a new role, and this requires their privatization. In
1993, the first wave of privatization involved two IRI banks (Credito Italiano
and Banca Commerciale Italiana), the leading public insurance company and
IMI, the industrial credit institute. However these privatization have not yet
produced relevant changes in companies' behaviour.
It is therefore becoming increasingly clear that for Italy truly to dispose of
the device of state control, a policy is required to create the requisites for other
devices of corporate governance to operate. And that an attempt should
be made to reform the system of state-owned enterprises, as they will be
retained, at least for some time to came, in some sectors of the economy.

References
AJeotti, A. (1990), Btru t imduarU. 1861-1989: oauo tni Ji rappcrti diffhM. Edhkmi di Comunita: MQ*no.
Amoroso, B. and O. J. OUen (1978), La Suto mpnaJiten. Laterza: Ban.

" The option of • market relying on broad-based popular shareholding and on the market for corporate
control requires modification of the civil code to safeguard the rights of minority shareholders and
guarantee greater transparency in corporate management. It also requires more effective oversight of the
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557
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