On December 5, 2011, the Committee for Corporate Governance published a revised code of Corporate Governance (the Corporate Governance Code or Codice di Autodisciplina) for listed companies (the New Code)1.

The New Code updates the previous Corporate Governance Code published in March 2006, as partially amended in 2010 with the substitution of Article 7 with respect to the compensation of directors.

The New Code, informed by the experiences of other major economies, provides Italian listed companies (Issuers) with best practices on corporate governance. As in the previous edition, implementation of the New Code's recommendations is left to the discretion of the Issuers according to the principle of "comply or explain", in which Issuers that do not implement, or only partially implement, one or more of the provisions of the New Code must disclose their reasoning to their shareholders and the market. Such disclosure is provided in the annual report on corporate governance (the Report on Corporate Governance mandated by Article 123-bis of Legislative Decree No. 58 of February 24, 1998) (the Single Financial Act).

The New Code comprises 10 articles dedicated to:

  • the role of the Board of Directors (Article 1);
  • the composition of the Board of Directors (Article 2);
  • independent directors (Article 3);
  • the institution and functions of Board of Directors committees (Article 4);
  • procedures regarding the nomination of directors (Article 5);
  • compensation of directors (Article 6);
  • internal audit and risk management (Article 7);
  • statutory auditors (Article 8);
  • shareholder relations (Article 9); and
  • dual and singular management control systems (Article 10).

Articles 42 and 93 from the previous Corporate Governance Code, respectively, concerning the treatment of sensitive and privileged information and interested directors/related party transactions, have been eliminated.

Each Article of the New Code continues to be subdivided into principles (indicated with the letter P), applicable criteria (indicated with the letter C) and accompanying commentary. The applicable criteria denote the implementing measures that typically are required in order to achieve the respective principle while the commentary clarifies both the principles and the applicable criteria, providing additional detail and other advice concerning possible methods to achieve the goals and objectives, as the case may be, in the related principles and applicable criteria.

The changes introduced in the New Code reflect the numerous changes that have been introduced in the regulatory landscape in the last five years relating to corporate governance of Issuers. The New Code seeks to simplify and reinforce its role in guiding management, as informed by national and international best practices. The reforms of the Corporate Governance Code affect four areas in particular: (i) the composition of the Board of Directors; (ii) the role and function of the Board of Directors; (iii) the organization and composition of the internal committees of the Board of Directors; and (iv) internal systems of control and risk management.

This Alert discusses the principal changes introduced by the New Code.

Board of Directors Composition

The New Code recommends that Issuers provides appropriate disclosure in the Report on Corporate Governance on the composition of the Board of Directors, by indicating each member's status of executive, non-executive or independent director, its respective role within the Board of Directors, as well as the member's professional experience and duration of the office 4.

In addition, the New Code recommends that the Chairman of the Board of Directors set up and implement procedures to provide directors and statutory auditors with adequate knowledge of the business sector(s) in which the Issuer operates, market conditions and regulatory framework so that they can efficiently perform their functions5.

The New Code introduces specific recommendations addressed to Issuers included in the FTSE-Mib index, the benchmark stock market index for Borsa Italiana (the Italian Stock Exchange) consisting of the 40 most-traded stock classes. Benefitting such premium securities, the New Code recommends that FTSE-Mib Issuers undertake changes to their Boards of Directors such that at least one-third of their directors are independent directors6, whereas for all other Issuers, the New Code suggests at least two independent directors7.

With respect to the criteria to establish director independence, the New Code states that the appointment of an independent director of an Issuer who serves in a position in a company that controls the Issuer or is controlled8 by the Issuer does not automatically negate such director's independence. Rather, the New Code posits that it is a fact-based and case-by-case analysis which must be undertaken by the relevant Board of Directors, including, among other matters, a finding that the total compensation of the director in question is not such that it compromises such director's independence (commentary to Article 3). In addition, the New Code reinforces the role of the Lead Independent Director for FTSE-Mib Issuers. Lead Independent Directors are nominated and recommended to the Boards of Directors of such FTSE-Mib Issuers upon request of the relevant independent directors, unless the Board of Directors decides otherwise and indicates such decision in the Report on Corporate Governance9.

An additional reform introduced in the New Code in order to prevent conflicts of interests is a recommendation against the proliferation of cross directorships. This bars the Chief Executive Officer of an Issuer from serving as a director of another Issuer not part of the same economic group and of which the relevant Chief Executive Officer is a director of the first Issuer10.

Furthermore, the New Code suggests that Issuers adopt, for some or all members of the Board of Directors, a staggered board or classified board in which only a fraction of the board members are elected each time. The New Code commentary suggests that this feature promotes such continuity and the efficiency of the management to the extent that such boards do not adversely affect shareholders11.

Role and Functioning of the Board of Directors

According to Principle 1.P.2 of the New Code, the role of the Board of Directors is to pursue the "priority target" of the creation of medium-to-long term value for shareholders, whereas in the previous version, while creating value for shareholders was always identified as a goal of the Board of Directors, the medium-to-long term horizon was not specified. As a result of this recommendation, the New Code establishes that certain issues should be the exclusive reserve to the Board of Directors which the Board of Directors should not delegate to management or any other body.

Among others, the New Code revises and strengthens the recommendation regarding self-evaluation of the Board of Director's performance and its internal committees, to be conducted at least annually. This self-evaluation includes an examination of their respective size and composition with respect to their ability to carry out their functions. In particular, the New Code recommends that the Board of Directors consider whether it has an adequate representation of the various Board of Directors' constituencies (executive, non-executive, independent) and of the different professional and managerial competences, including experience in international markets. The New Code highlights that certain advantages may flow from diverse Boards of Directors, in relation to gender, age and seniority of the office12.

The New Code has also introduced specific recommendations to guarantee timeliness and completeness of the information given to directors and statutory auditors prior to and during the Board of Directors meetings. With reference to the information provided to the members of the Board of Directors before each meeting, the New Code recommends that the Chairman of the Board take all necessary action to the agenda and other relevant documentation to the attention of the directors and statutory auditors before the meeting, while still observing any non-disclosure and data protection provisions.

In the case of documentation that is lengthy and complex, the members of the Board of Directors can be provided with summaries that synthesize the most relevant issues included in the items on the agenda, with the caveat that such summary cannot in any case substitute the complete documentation to be sent to the directors. Moreover, the New Code recommends that the Report on Corporate Governance provide information relating to timeliness and completeness of the pre-board information in order for shareholders to take cognizance that the Issuer's internal procedures are adequate. The Report on Corporate Governance will also indicate whether the particular notice period, as established in the internal rules of such Issuer, has generally been met13.

The New Code also recommends certain procedural changes for the conduct of Board of Directors meetings. The Chairperson of the Board, also on request of one or more Directors, may request to the Chief Executive Officers that managers and officers of the Issuer and those of the companies of the group, as applicable and according to their respective responsibilities, make themselves available to the Board of Directors to provide the appropriate and detailed explanations regarding the items on the agenda14.

Organization and Duties of the Board of Directors' Internal Committees

The New Code introduces certain significant changes relating to the composition and the functioning of the internal committees of the Board of Directors. The recommended internal committees are: internal audit and risk management, nomination and remuneration.

The New Code recommends that internal committees of Boards of Directors be composed of no fewer than three members, of which two should be independent. This applies to Issuers with Boards of Directors consisting of eight or fewer members, in lieu of the five provided for by the previous version of the code. The New Code further recommends that each internal committee appoint a Chairman to coordinate the activities of such committees15.

Despite a preference in the commentary for internal committees, the New Code includes provisions which would allow an Issuer to not institute internal committees by entrusting the entire Board of Directors with the duties of such committees, under the coordination of the Chairman. This exemption to the establishment of internal committees applies if:

  • the independent directors represent at least half of the Board of Directors (with rounding down when the Board of Directors is composed by an uneven number of people);
  • during each board meeting sufficient time is allocated to complete the functions assigned to the internal committees by the New Code; and
  • the Issuer is not controlled16 by another Issuer or subject to its direction and coordination17 (this last condition refers only to the internal audit and risk management committee).

The New Code also recommends that the Board of Directors provide analytical information in the Report on Corporate Governance relating to the choice to not institute one or more committees, with particular disclosure related to the choice to not institute the internal audit and risk management committee, in relation to the complexity of the Issuer's operational structures and its business operations18. Furthermore, the New Code recommends that the Board of Directors periodically evaluate such choices regarding internal committees19.

The New Code recommends, among other internal committees, a nomination committee, while in the previous edition of the code it was only recommended to evaluate the opportunity to establish such committee20. In addition, the New Code recommends the Board of Directors evaluate whether to formulate a plan for the succession of the executive directors. If the Board of Directors adopts such a plan, the New Code provides that the nomination committee (or to another internal committee commissioned to the task) examine succession of executive directors and disclose their findings in the Report on Corporate Governance21.

The System of Internal Audit and Risk Management

To reform the internal audit system in compliance with regulatory changes in the past five years that followed the release of the previous edition of the code, the New Code has redefined and rationalized the configuration and implementation of the internal audit system, now defined "internal audit and risk management system" in order to highlight the central role of risk management, which the New Code suggests is a prominent pillar of corporate governance. For this reason, the New Code confirms that the Board of Directors is the body tasked with defining "the nature and level of risk compatible with the strategic objectives of the Issuer" and evaluating the adequacy of the organizational, administrative and accounting structure of the Issuer and such subsidiaries that are deemed significant with reference to the internal audit and risk management system22.

The audit system designation in the New Code has been changed to "internal audit and risk management system" (sistema di controllo interno e di gestione dei rischi), in order to distinguish it from the internal audit and accounting review committee, provided for by the recent Legislative Decree no. 39/2010 which implemented EU Directive 2006/43/CE on legal accounting audit. This distinction is appropriate, since the tasks of the internal audit and accounting review committee are different from the tasks of the internal audit and risk management system, which is essentially called upon to support the Board of Directors in connection with decisions and evaluations relating to the audit system23.

The function of the internal audit and risk management committee has been clearly distinguished from the ones of the board of statutory auditors to which the New Code acknowledges a preventive and supervisory duty, which centers on ensuring that internal processes are followed. Statutory auditors are required to raise any relevant issues to the attention of the Board of Directors in order for it to implement the corrective measures that might be necessary (commentary to Article 8). In this respect, the New Code recommends that Issuers evaluate the granting to the Board of Statutory Auditors the functions of an oversight body pursuant to Legislative Decree 231/2001, in line with already provided for by Law No. 183 of the November 12, 2011 (the so-called 2012 Stability Law).

Finally, the New Code removes any reference to the Internal Audit Officer (Preposto al Controllo Interno), and this role has now been identified with the Head of the Internal Audit Function24, whose independence has been reinforced25 by recommending that the decisions relating to the appointment, the revocation and compensation of the head of the this function should be adopted by the Board of Directors with the favorable and mandatory advice of the internal audit and risk management committee and upon consultation with the Board of Statutory Auditors26.

Deadlines for the Implementation of the New Code

Issuers that comply with the New Code are requested to implement the new recommendations within the end of the 2012 fiscal year, and to provide disclosure to the market on such implementation with the Report on Corporate Governance to be published during the subsequent fiscal year. An exception is provided for the amendments that have effects on the composition of the Board of Directors and of the respective committees and, in particular, the ones relating to the nomination committee27, the composition of the remuneration committee28, the composition of the internal audit and risk management committee29,the lead independent director and cross directorship30, which the New Code requests to apply starting from the first renewal of the Board of Directors following the end of the fiscal year that began in 2011.

Moreover, the amendments relating to the composition of the Board of Directors of Issuers within the FTSE-Mib index are to be implemented beginning with the elections of the Board of Directors following the end of 2012 fiscal year. Issuers within the FTSE-Mib index are also requested to provide information relating to the possible adoption of a succession plan for the executive directors in the Report on Corporate Governance to be published during 2012.


1 The Committee for Corporate Governance is promoted by the main Italian associations related with the industry and business sectors (ABI – Italian Banking Association, ANIA – national association of the insurance enterprises, Assonime – association of the Italian joint stock companies – società per azioni, Assogestioni – the Italian association of asset management companies, Borsa Italiana – the Italian Stock Exchange, and Confindustria – the Italian organization representing manufacturing and service companies).

2 The recommendations contained in that article have been maintained in a simplified form among the board of directors functions (applicable criteria 1.C.2), in which it is included the one to adopt, upon the proposal of the chief executive officer or of the chairman of the board of directors, a procedure for the treatment and disclosure of the corporate information, with particular reference to the privileged information.

3 By eliminating Article 9, the New Code avoids any overlaps and inconsistencies between the recommendations contained in that article and the more general rules on related parties' transactions as set out in the regulation adopted by CONSOB (the Italian authority responsible for regulating the Italian securities market) with resolution no. 17221 of March 12, 2010 as amended from time to time.

4 See applicable Criteria 1.C.1, letter i).

5 See applicable Criteria 2.C.2.

6 In this respect it is clarified that if to this portion corresponds a whole number, it is rounded down.

7 See applicable Criteria 3.C.3.

8 Pursuant to Article 93 of Legislative Decree no. 58 of February 24, 1998, "control" means either having the majority of the votes that can be exercised in the shareholder's meeting of a company (direct control), or having a sufficient number of votes – also by virtue of shareholders' agreements – in order to perform a dominant influence in the ordinary shareholder's meeting (de facto control), or having a dominant influence by virtue of certain commercial agreements or by-laws provisions.

9 See applicable Criteria 2.C.3.

10 See applicable Criteria 2.C.5.

11 See commentary to Article 2.

12 See applicable Criteria 1.C.1, letter g) and accompanying commentary.

13 See applicable Criteria 1.C.5 and accompanying commentary.

14 See applicable Criteria 1.C.6 and accompanying commentary.

15 See applicable Criteria 4.C.1, letter a).

16 See the definition of control as provided in footnote no.8 above.

17 Direction and coordination activity by a company over another company is regulated (but not defined) under article 2497 and following of the Italian Civil Code. Judicial precedents and authors have identified the existence of a relevant direction activity whenever a group of companies is managed as a whole, under a unitary operational direction, and a constant flow of instructions is provided to downstream entities concerning, by way of example, corporate management, strategies, financial and accounting policies and business choices, for the purpose of a more effective achievement of the group goals. Accordingly, coordination is regarded as a specific means of implementing the above direction by creating a network between the management of all the group entities. The concept of direction and coordination does not simply match with that of control: while the absence of control does not preclude the existence of directing and coordinating activities, pursuant to Article 2497-sexies of the Italian Civil Code a direction and coordination activity is legally presumed – unless evidence to the contrary is provided – to be exercised by legal entities which either (i) control other companies, or (ii) are required to consolidate other companies financial statements.

18 The New Code, among the factors to be taken into particular consideration, points out the following: the nature of the business activity and the belonging to a regulated sector, the turnover or the budget surplus, the number of employees, the market capitalization, the number and location of the participated or controlled entities, the presence of the business in regions or states which feature risk factors, the number of the members of the board of directors, their professional features and their time availability.

19 See applicable Criteria 4.C.2.

20 See Principle 5.P.1.

21 See applicable Criteria 5.C.2. In the accompanying commentary to Article 5 it is stated that the Report on Corporate Governance should describe, if provided in the succession plan, the adequate mechanisms in case of advanced replacement with respect to the ordinary term of the office, the corporate bodies and the subjects involved in the preparation of the plan, and the time and manner with which the plan is subject to review if possible.

22 See applicable Criteria 1.C.1, letter b) and c).

23 See Principle 7.P.3 and applicable Criteria 7.C.2.

24 See Principle 7.P.3.

25 See applicable criteria 7.C.5.

26 See Principle 7.P.3.

27 See Principle 5.P.1.

28 See Principle 6.P.3.

29 See Principle 7.P.4.

30 See applicable Criteria 2.C.3 and 2.C.5.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.