All posts by Alberto Rittatore Vonwiller

About Alberto Rittatore Vonwiller

Email: [email protected] Tel: +39 02 65585 1
Alberto Rittatore Vonwiller is a partner in Carnelutti Studio Legale Associato. He is a member of the firm's corporate and M&A department, where his practice focuses on mergers and acquisitions and corporate finance work, including joint ventures, shareholder agreements, securitizations, loans, and commercial contracts in Italy and abroad.

Developments and Critical Issues of Corporate Governance in Italy

A summary of the most significant amendments to the Corporate Governance Code for Italian listed companies (the “Code”) approved on July 9, 2015 by the Corporate Governance Committee seated at the Italian Stock Exchange (the Committee)[1] is indicated herein.

Adherence to the Code (or any other corporate governance code) by Italian listed companies is voluntary and based on the so-called “comply or explain” principle[2]. For companies adhering to the Code, the changes (with the exclusion of changes regarding the statutory auditors, which listed companies are invited to apply since the first renewal of the Board of Statutory Auditors occurring after the fiscal year beginning in 2015) should be implemented by listed companies by the end of the fiscal year beginning in 2016, providing information about such implementation in the corporate governance report to be published in the following fiscal year.


The main amendments of the Code are indicated for each topic here below.

Role of the Board of Directors

The Committee extends the role of the Board of Directors in relation to the sustainability of the business. In particular, the Board of Directors has to define the risk profile of the company consistently with the company’s strategic objectives, considering the risks that may be relevant for the sustainability of the company’s business activities in the medium-long term[3].

The new provision expands the principle set out in Article 1 of the Code, whereby the Board of Directors has to pursue the overarching goal of “creating value for the shareholders over a medium-long term period[4].

On the other hand, the new provision includes, among the interests that the Board should take care of, the principle of sustainability, in compliance with the most recent European legislation[5]. This new provision also seems to suggest that sustainability matters (such as environmental matters, social and employee-related matters, human rights concerns, anticorruption and bribery matters)[6] may have a relevant impact on the business and should be considered in the definition of the risk profile and strategic objectives of a company.

Composition of the Board of Directors

The Committee recommends that the corporate governance report (to be prepared by listed companies’ directors jointly with the management report and the financial statement) should state the type and the organizational methods of any initiatives which occurred during the relevant fiscal year with regard to the induction sessions dedicated to directors and statutory auditors, which should be periodically organized by the chairman.

Independent Directors

The Committee expands and clarifies the recommendation according to which the independent directors meet at least once a year separately from the other directors (see Criterion 3.C.6. of the Code).

Establishment and Functioning of the Internal Committees of the Board of Directors

The Committee also adds two new recommendations within the general recommendations on the establishment, composition and functioning of the internal committees of the Board of Directors.

First, the recommendation that meetings of committees be recorded with specific minutes has been integrated with the recommendation that the chairman should provide information to the board of directors regarding aforementioned recording at the first available meeting (see Criterion 4.C.1. of the Code).

The second and more relevant amendment concerns the recommendation that the Boards of Directors of companies listed on the FTSE MIB index[7] evaluate the opportunity to establish a committee in charge of matters regarding the corporate social responsibility (see the Comment section of Article 4 of the Code). The sustainability issues related to the business activities of the company and its interaction dynamics with all its stakeholders would be supervised by this committee. As an alternative to the creation of a dedicated committee, the Board of Directors may choose whether to group or to assign the tasks above to the other established committees, most significantly the Internal Control and Risk Committee.

This second recommendation is not subject to the “comply or explain” principle, as it is included in the Comment section of the Code[8].  

Appointment of Directors

Under Italian law the Board of Directors of Italian listed companies governed by the so-called “traditional” governance mechanism is appointed by the shareholders, pursuant to a voting-list mechanism, which is intended to grant to the minority shareholders the right to designate their representatives on the Board. The voting-list mechanism, including the right to present a list of candidates, is regulated by each company’s by-laws.

Normally, the lists of candidates are presented by the shareholders. However, Comment to Article 5 of the Code provides that the Committee highlights the importance of an engagement of the nomination committee (appointed internally to the Board and composed in majority of independent directors) “in case the Board itself, as far as it is consistent with applicable law, submits a slate for the renewal of the Board[9].

Furthermore, the Committee also recommends that, if the listed company has adopted a plan for the executive directors’ succession, the plan’s procedure should clearly outline the plan’s scope, instruments and timeline.

Internal Control and Risk Management System

The Committee also passed changes regarding the system of internal control and risk management, which significantly strengthen the effectiveness of internal controls.

In particular, the revised Article 7 of the Code now explains that an effective system of internal controls and risk management contributes to the reliability of the information provided to the corporate bodies and not only of the publicly disclosed financial information[10]. Particularly, this provision includes the reliability of the internal flow of information among the core tasks of an effective system of internal control and risk management.

In this regards, in the Comment to Article 1, the Code provides the following: “under relevant circumstances, the Board of Directors acquires any necessary information and adopt any suitable measure to protect the company and the information to the market”.

The Control and Risk Committee[11] appointed within the Board may assist the Board in this respect. In fact, the Control and Risk Committee “supports, with adequate preliminary activities, the Board of Directors’ assessments and resolutions on the management of risks arising from detrimental facts that the Board may have been become aware of[12].

The aforementioned amendment represents an important development as, pursuant to the Code, the Control and Risk Committee is composed by a majority, or exclusively, of independent directors[13].

According to the provisions of the Code, each company should provide for the coordination of the corporate bodies and functions with specific tasks in the context of the system of internal control and risk management “in order to enhance the efficiency of the internal control and risk management system and reduce activities overlapping”. In order to reinforce this provision, the Code now requires each company to describe in its annual Corporate Governance Report the instruments adopted to ensure the coordination among the corporate bodies and functions responsible for the system of internal control and risk management[14].

In the Comment to Article 7, the Code provides that an adequate internal control and risk management system – at least in the most significant companies (i.e., companies included in the FTSE-MIB index) – should include a so-called “whistleblowing” system, consistently with domestic and international best practices and ensuring “a specific and confidential communication channel as well as the anonymity of the reporting person”.

Statutory Auditors

The last amendments to the Code approved by the Committee concern the recommendations applicable to statutory auditors.

Pursuant to the “traditional” governance structure of Italian joint stock corporations, the shareholders appoint a Board of Statutory Auditors, vested with wide monitoring responsibilities within the supervisory system of a company.

According to the amendments passed by the Committee, the results of the verification of the independence requirements of the statutory auditors, to be performed after their appointment and subsequently on an annual basis, shall be submitted to the Board of Directors. The Board will then disclose such results through a press release to the market relating to the first verification conducted after the first appointment and in the relevant corporate governance report with reference to the annual verification (Criterion 8.C.1. of the Code).

Moreover, the Code now provides a new remuneration criteria, since the compensation of the member of the Board of Statutory Auditors was not proportionate to their wide spectrum of responsibilities and potential liabilities (Criterion 8.C.3. of the Code).

[1] The Committee, with seat at Borsa Italiana S.p.A., Milan, Piazza Affari 6 (the Italian Stock Exchange), was set up, in its current composition, in June 2011 on the initiative of the main Italian associations representing corporations and institutional investors (ABI, ANIA, Assonime, Confindustria, Assogestioni) and Borsa Italiana S.p.A. and it is composed of representatives of the promoters above and Italian listed companies.

The Committee is in charge of promoting good corporate governance of Italian listed companies, pursued by a constant alignment of the Code with best practices and through initiatives which would enhance the credibility of the Code.

[2] As provided pursuant to Directive 2013/34/EU and Article 123-bis of the Consolidated Law on Finance (i.e., Legislative Decree No. 58 of 24 February 1998, as subsequently amended), each listed company is required to include a “corporate governance statement” in its annual management report, indicating “the corporate governance code which the undertaking may have voluntarily decided to apply”. In case a listed company decides to depart from any provision of the corporate governance code to which it voluntarily adhered, it should provide a clear and exhaustive explanation thereof. A listed company should also adequately explain its decision not to adhere to any corporate governance code (see Article 20 of EU Directive 2013/34/EU; see also the Commission Recommendation of April 9, 2014 “on the quality of corporate governance reporting (“comply or explain”)”.

[3] Criterion 1.C.1, letter b), of the Code.

[4] Principle 1.P.2 of the Code.

[5] Reference is especially made to Directive 2014/95/EU of 22 October 2014, providing new disclosure obligations for larger undertakings on “non-financial information” – and in particular on environmental, social and employee matters, respect of human rights, anti-corruption and bribery matters – and information on diversity policies.

[6] See Whereas 6 of Directive 2014/95/EU of 22 October 2014.

[7] The FTSE-MIB is the primary benchmark index for the Italian equity markets, comprising 40 shares listed on the Italian Stock Exchange and capturing approximately 80% of the domestic market capitalization. The Index is comprised of highly liquid, leading companies in Italy.

[8] However, since the sustainability matters should be included in the definition of the risk profile of each company pursuant to the new Criterion 1.C.1, letter b), of the Code, the Board of each company should reasonably supervise such sustainability matters (if appropriate, with the support of the Control and Risk Committee).

[9] Consider that under Italian law do not exist specific provisions on the subjects entitled to the formation of the lists of candidates to be voted by the shareholders and that, according to some scholars, the Board of Directors in office may decide to present such a list of candidates. The Code seems to support this interpretative position.

[10] Principle 7.P.2 of the Code.

[11] According to Principle 7.P.3. letter (ii) of the Code, the Board of Directors shall identify within the Board “a control and risk committee […] to be charged with the task of supporting, on the basis of an adequate control process, the evaluations and decisions to be made by the Board of Directors in relation to the internal control and risk management system, as well as to the approval of the periodical financial reports”.

[12] Criterion 1.C.2, letter g) of the Code.

[13] Pursuant to principle 7.P.4 of the Code, “The Control and Risk Committee is made up of independent directors. Alternatively, the committee can be composed of non-executive directors, the majority of which being independent; in this latter case, the chairman of the committee is selected among the independent directors. If an issuer is controlled by another listed company or is subject to the direction and coordination activity of another company, the committee shall be made up exclusively of independent directors”.

[14] Criterion 7.C.1, letter d) of the Code.

Providing for valid hold harmless covenants in favor of directors in Italy.

In doing business are commonly set up hold harmless (or indemnity) covenants to protect directors against actions initiated by the company managed by them, company’s shareholders or any third party, in relation to the activities carried out by directors in their office. Such covenants are entered into at the beginning, in the meanwhile or at the end of a corporate management office or in connection with extraordinary operations (such as, by way of example, M&A transactions) as well. It is, therefore, of importance to examine the constituent elements and the extent of the validity of hold harmless covenants.

Under Italian law such covenants are not specifically envisaged in the Civil Code, nor in any other law or regulation, whilst they are qualified atypical guarantees to be considered valid in case interests worthy of protection are pursued pursuant to articles 1322 (Freedom of contract), 1343 (Unlawful consideration) and 1418 (Causes of nullity of the contract) of the Italian Civil Code.

Therefore, in the Italian system, it is firstly necessary to ascertain if limits of public policy exist to the eligibility of atypical guarantees (or atypical contracts / hold harmless covenants). To this regards, it is commonly accepted that it is contrary to the public policy only the covenant to indemnify a party from damages deriving from its willful misconduct (or damages related to intentional abuse). As a consequence, a valid hold harmless covenant may be entered into in all cases in which a guarantor assumes damages or liabilities arising from negligent or grossly negligent actions of the guaranteed towards third parties.

Nevertheless, it has to be considered that in case the indemnity covenant refers to the liability of the guaranteed for acts committed by itself against the guarantor such indemnity cannot cover grossly negligent actions, because the exemption in advance between creditor (guarantor) and debtor (guaranteed) from responsibility for grossly negligent actions (or for willful misconduct) is forbidden pursuant to article 1229 of the Italian Civil Code.

Given the above, it is necessary to check whether the above considerations may also apply as regards the hold harmless covenant to cover the consequences of criminal or administrative illegal actions.

Regarding the violation of criminal laws, the above criteria apply, for which the indemnity is invalid only if the responsibility of the person indemnified was caused by his/her willful misconduct. To this regards it is worthy to mention that it is not admissible a hold harmless covenant to protect the directors who committed the crime of false accounting as envisaged by article 2621 of the Italian Civil Code, which is by nature a fraudulent offense (see article 2621 of the Italian Civil Code, as amended by Law May 27, 2015, no. 69; see also Court of Cassation on June 16, 2015, no. 33774).

With respect, however, to the breach of administrative provisions of law, it has to be noted that, in application of secondary legislation that regulates the insurance sector, it is not valid any form of indemnity to cover risks relating to the imposition of administrative fines. This is because such an indemnity agreement would deprive the power of reaction of the State towards the administrative offenses provided for by provisions for the protection of the public interest. Nevertheless, an exception to this principle is made by fiscal rules, by which for cases of infringement carried out without fraud or gross negligence, the individual, the company, the association or the entity may assume the debt of the person (director) responsible of the infringement (usually, the CEO or the director charged with the responsibility of Tax compliance) (see Article 11, section 6 of the legislative Decree December 18, 1997, no. 472, as subsequently amended).

An important aspect for the purposes of setting up a valid hold harmless covenant is represented by providing for a determined or determinable object. In fact, it could be argued that a wide hold harmless covenant – with no indication of a specific event or behavior from which future liability might arise – may be held invalid for conflict with Article 1346 of the Italian Civil Code, by which the object of the contract has to be possible, lawful, determined or determinable.

A valid and enforceable indemnity, therefore, requires that the facts from which the liability (or the debt or the damage) can arise are indicated and well-specified so that the potential extent of the risk can be defined economically. These facts can be represented by any act, fact or circumstance, to the extent they are determined or determinable: such as behaviors that are related to the duties of the person to be indemnified or activities carried out by the latter, breaches of any nature, facts or acts concerning specific sectors, provided they are not committed with fraudulent behavior (nor with gross negligence, in case the acts covered by the indemnity covenant are committed by the guaranteed towards the guarantor).

An additional element to be necessary for the validity of the hold harmless covenant – except the cases (difficult to implement concretely) in which the liability or debt positions are well-specified and well-limited – is represented, then, by the determination or determinability of a maximum amount for the assumption of debt.

To this regards, it is however necessary to keep in mind that, if responsibility, damages or debt positions could not be determined to certain economic extents, the provision of a cap that defines the boundaries of the economic value of the indemnity is to be considered necessary on the basis of the application of the principle of public policy, imperative, envisaged by Article 1938 of the Italian Civil Code on the guarantee related to future or conditional obligations, according to which if the object of the contract (indemnity) is a future obligation, it is necessary that a maximum amount is set up (see A. Franchi, Il contratto di manleva e la manleva verso gli amministratori, in Contratto e Impresa, 2006, page 187; A. Franchi, La responsabilità degli amministratori di S.p.A. e gli strumenti di esonero da responsabilità, Milan, 2014; Court of Rome on December 18, 2002; Court of Cassation on January 26, 2010, no. 1520; Court of Cassation on September 23, 2015, no. 18777).

In this regard, it is clear that this principle also applies to the hold harmless covenant, due that by entering into such a type of contract (atypical guarantee) the guarantor, as we have seen, is to take on future liabilities that may be unknown or unpredictable.

Moreover, it should, then, be noted that it is in the interest of the guarantor to set a cap, in order, on the one hand, of being able to determine with certainty the possible future economic expenditure and, on the other hand, also resorting to the possible insurance coverage of risks arising from the agreed hold harmless covenant.