1. An Introductive Overview On Italian Corporate Governance

In order to increase the competitiveness of the Italian market, especially from an international perspective, the Italian corporate reform, enacted by the Legislative Decree 6/2003, provides for three management models for Italian corporations:

  • the traditional model, which allows shareholders to appoint a board of directors with responsibility for managing the company and a panel of statutory auditors with responsibility for auditing the accounts and ensuring compliance with the law;

  • the German model, comprising a Board of Directors and a Supervisory Panel; and

  • the Anglo-Saxon model, providing for a Board of Directors and an internal Audit Committee.

As clearly showed by a research conduced by the Association of Italian Chambers of Commerce and the Register of enterprises in March 2007, the traditional model is the most common and popular model adopted by Italian commercial entities. According to this research, in fact, only 143 limited companies had adopted the German model, compared with almost 25,000 which are organized according to the traditional model.

Its wide diffusion is simply explained by the fact that it was the only corporate management model available to Italian limited companies before the reform in 2004. In fact, leaving aside the strengths and weaknesses of the traditional model, its popularity is essentially a consequence of an ingrained familiarity in Italian commerce, because it is a model devised and developed in Italy with a set of very well-know rules.

Article 2409 octies of the Italian Civil Code demonstrates the leading role of the traditional model in the Italian corporate system. In fact, in absence of a provision to the contrary in a company's bylaws, the traditional model applies by default.

However, it remains to be seen whether either the German or the Anglo-Saxon model, both of which are relatively new to Italy, offers a viable alternative to the traditional model.

The present article identifies the strengths and the weaknesses of the German model and shows that it may be particular useful in a private equity context, enabling private equity funds to manage their Italian portfolio companies more efficiently.

2. Diffusion Of The German Model In Italy

As said in the precedent paragraph until march 2007 only 143 limited companies have adopted the German model. Otherwise, the financial and banking world have had strongly revaluated the German model. In fact, several large, high-profile corporations have recently adopted it, including Intesa San Paolo, the company formed by Italy's largest bank merger; Mediobanca, Italy's most prestigious merchant bank; Banche Popolari Unite/Banca Lombarda and Banca Popolare di Verona/ Banca Popolare Italiana.

Furthermore, outside the banking world, several listed companies have adopted the model, including Società Sportiva Lazio, The Serie A football club; Ergo Previdenza, an insurance company; M&A Management & Capitali and Monti Ascensori. Other prominent companies have either already adopted the model or are further investigating it.

3. Supervisory Panel

The main difference with the traditional model is the existence in the German model of a supervisory panel, while there is no difference between the traditional model and the German model in respect of the role, duties and liabilities of the board of directors.

On the one hand, in fact, the supervisory panel carries out essentially the same functions as the panel of the statutory auditors in the traditional model – that is reviewing the accounts and monitoring the corporation's compliance with: (i) the law and its bylaws, (ii) principles of sound management and (iii) standards of adequacy in the organizational, administrative and accounting structure of the corporation and its operation.

On the other hand the supervisory panel appoints the members of the board, a function otherwise preformed by the shareholders and it is characterised by several functions and powers that distinguish it from the panel of the statutory auditors of the traditional model.


The Supervisory Panel appoints the members of the board of directors, a function otherwise performed by the shareholders. This is one of the features which arguably make the three-tiered corporate governance structure of the German model more efficient than the traditional model.

The members of the supervisory panel are appointed by the shareholders. The code sets no maximum limit on the number of members of the supervisory panel while the panel of statutory auditors in the traditional model must be composed of either three of five members. This means that the supervisory panel may be constituted according to the company's needs and will reflect the number of shareholders, their respective equity stakes and the need to enforce supermajorities or quorums.

Furthermore, between the appointed members of the supervisory panel only one must be a registered statutory auditor. This is reasonable in light of the fact that a limited company which chooses the German model must entrust the accounting supervision and audit function to independent external auditors.

Some commentators have criticized the reduced independence and weakened position of the members of the supervisory panel, especially as the shareholders' meeting may remove them at will, whereas statutory auditors in the traditional model may be removed only with due cause.

Maximum Separation Between Owners And Management

In addition to the traditional audit and compliance functions, the supervisory panel plays a role in the shareholders' meeting. It normally approves the financial statements and appoints and removes directors (and, if necessary, proposes resolutions to bring liability suits against them). Furthermore, if the bylaws so provide, it approves the business plan and budget submitted by the board of directors; it may also have the authority to propose resolutions on other matters, such as approving an intra-group merger (termed a "simplified merger" in the code).

A supervisory having the authority to approve the company's business plan and budget, enable it to exercise influence over the management of the company and reject financial and managerial plans of which it disapproves, although it cannot be involved in the development of drafting of the business plan. Furthermore, the supervisory panel may remove the directors at will, which further strengthens its monitoring power. Thus, unlike the shareholders' meeting, the supervisory panel may be able to set the strategic direction to be taken by the company.

Thus, there is greater distance between the shareholders and the directors and their activities, although the shareholders may exercise some of the powers delegated to the supervisory panel, (eg, bringing liability suits against directors). The shareholders retain only indirect control over the directors through the supervisory panel, which effectively acts as a filter between the two bodies.

If they wish to remain adequately informed and ensure that the company's management is monitored appropriately, shareholders must appoint trusted individuals to the supervisory panel. The supervisory panel has fewer formalities and call requirements than the shareholders' meeting, not least because its members sit in their personal capacity, not as formal representatives of the appointing shareholders.

In practice, shareholders in the traditional more are at least as removed from the management of the company as in the German model. The link between the shareholders and the executive directors, which is necessary to determine the company's strategic direction and to monitor its executive functions, is maintained by appointing individuals trusted by the shareholders to sit on the board of directors as non-executive directors. This blurs the distinction between owners and mangers to the detriment of both parties. For the owners, arrangement means bearing the same responsibility as the managers in certain cases; for the managers, it means less authority and possibly too close a scrutiny of their activities.

However, the German model acknowledges the relatively remote role of the shareholders and therefore grants much greater power and involvement to the representatives. The separation of the shareholders' appointees in a separate body with different function makes for a clearer distinction between the role and functions of the executive directors sitting on the board and those of the shareholders' representatives.

Approval Of Financial Statements

The supervisory panel approves the company's financial statements. The shareholders' meeting retains its authority to approve the financial statements in certain cases (eg, if a certain number of shareholders so request). However, vague legislative drafting and poor cross-referencing between the relevant articles mean that the rules in the code on the approval of financial statements by the supervisory panel are unclear. Therefore, a company which adopts the German model must address all inconsistencies and gaps left by the code.


As showed in the previous paragraph, the German model offers the following advantages:

  • The respective roles of the executive directors and the members of the supervisory panel are clearer;

  • Executive directors' liability will not automatically "spill over" and affect the members of the supervisory panel – on the contrary, this is more likely in the case of executive and non-executive directors in the traditional model; and

  • The supervisory panel is a less formal, more flexible and cost efficient forum in which to discuss strategies and high-level operational issues.

  • the German model potentially allows for a clearer allocation of responsibilities between individuals and corporate bodies, and could move Italy's corporate culture towards a more modern and transparent system of corporate management.

Furthermore, the features of the German model make it a viable option especially for the private equity industry in Italy. In fact, A private equity fund can appoint individuals to the supervisory board who will monitor the managers of the company closely without becoming involved in management itself. The same is true if there are shareholders in addition to private equity fund, in which case the other shareholders may be granted a seat on the supervisory panel. However, by the nature of the supervisory panel, they will have no direct managerial power. As the private equity sector is typically more dynamic and less averse to change than other commercial sectors, the German model may well blossom in this field.

At the same time, the main disadvantages of the German model pertain to the body of law regulating it. In fact its regulation is fragmented, poorly drafted and unsupported by case law. Therefore, professional advisers and their clients must invest considerable time in order to ensure that all needs and requirements are regulated in the bylaws, and that all gaps left by legislation are adequately filled. However, the legislative vacuum may allow clients and professional advisers to tailor bylaws more closely to the needs of the company, particularly in complex management scenarios which involve a plurality of interests and roles (eg, where the shareholders include individual investors, minority shareholders and managers, while the directors include executive directors, directors appointed by the investors and independent directors).

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.