Good Governance Codes and IFRS Adoption Observing the

Good Governance Codes and IFRS Adoption Observing the Italian experience Conference at Fundación Ramón Areces Madrid - February 28, 2017 u. Roberto Di Pietra (University of Siena – Department of Business and Law – E-mail: dipietra@unisi. it)

Issues Ø Good Corporate Governance codes and practices and IFRS adoption Ø Ø Ø 2 CG Codes in Europe CG in Italy: main characteristics Importing CG Codes and their adoption Research methods (SNA) Governance and Accounting: IFRS adoption

Questions Ø Are the CG codes able to open the market? And make it more efficient? Ø Have the CG codes stimulated a more efficient financial information? And what about the IFRS adoption? 3

CG Codes in Europe Ø Corporate Governance Codes Ø Since 1998 in UK (based on the Cadbury code 1992) Ø Adopted throughout EU (among others: Belgium, France, Finland, Germany, Italy, Luxemburg, Netherland, Spain, Sweden) Ø Revised several times (AMF, 2016) 4

CG Codes in Europe Ø Corporate Governance Codes Ø EU Countries have adopted CG Codes mainly issued by the Supervisory Authorities on the Capital markets ØSome on a voluntary basis (France, Italy, and Spain) ØSome on a mandatory basis (Belgium, Finland, Germany, Luxembourg, Netherlands, Sweden, UK) Ø Large variety of rules: ØPrinciples (B, I, Lu, NL), Provisions (B, UK), Comments (I), Guidelines (B, Lu), Criteria (I), Recommendations (G, S, Fin, Fr, Lu), Suggestions (G), Best practices (UK) ØMainly based on the Comply or Explain principle 5

CG Codes in Europe Ø Corporate Governance Codes Ø Large variety of solutions within Europe ØDuality (separation of the roles of CEO and Chair of Bo. D) ØMandatory (G, NL, S), Recommended (B, Fin, Lu, UK), Voluntary (F, I, S) ØBoard Gender Diversity ØQuotas: Yes (B, F, G, I, NL, S, UK), No (Lu, Fin, S: it is a self-regulation) ØLevel of the Quota: 30% (B, G, NL), 33% (I), 40% (F, S) 6

CG Codes in Europe Ø Corporate Governance Codes Ø The overall situation on the issuing and implementation of CG Codes is grounded on the Governance characteristics of each specific country ØModels of Capitalism (role of the State; role of the banking industry; role of the family business) ØGovernance structure (corporate governance regime, ownership structure; investor protection, legal enforcement) 7

CG in Italy Main characteristics Ø Corporate Governance in Italy Ø Italian CG regime ØLow legal protection for investors ØPoor legal enforcement ØUnderdeveloped equity markets ØPyramidal groups ØHigh ownership concentration ØLa Porta el. (1997, 1998); Aganin, Visintin (2005) 8

CG in Italy Main characteristics Ø Corporate Governance in Italy Ø Historically the Italian stock market ØPyramidal groups and the separation of ownership were more widespread in the 80’s than in the other periods ØDirect intervention of the State partially replaces the role of the private sector in the accumulation of capital and this had effect on the need to protect investors ØThe majority of Italian firms stayed away from the stock market ØLa Porta el. (1997, 1998); Aganin, Visintin (2005) 9

CG in Italy Main characteristics Ø Corporate Governance in Italy Ø Recently the Italian stock market ØHigh ownership concentration is persisting (some little change starts to emerge) Ø 83% of the companies are controlled by a single shareholder holding more than a half of shares or playing a dominant role or belonging to a group of shareholders organized in a coalition ØSince 2011 coalition control structures have experienced a decline ØOwnership concentration is showing a smooth decline ØIdentity of controlling person: ØFamilies play the major role (27. 7% of total market capitalisation) ØState and Local authorities are relevant in largest firms and in the services industry ØCONSOB (2015) 10

Research methods Ø Social Networks as a proxy to depict CG practices Ø SNA as a methodology to describe and measure “distances” between Bo. D members ØTrend to cumulate appointments (inside and outside the capital market) ØCollective dynamics of small world networks (Watts, Strogatz 1998; Scott, 2000; Carrington, Scott, Wasserman, 2005) ØSoftwares: Netdraw and Uci-net Ø Survey of the literature on the IFRS Adoption and its relationship with CG 11

SNA on the Italian listed companies 31/12/2005 31/12/2007 31/12/2010 31/12/2016 278 287 264 214 201 (72. 3%) 204 (71. 1%) 183 (69. 3%) 134 (62. 6%) Tot. Board Members positions 2778 2904 2732 2123 Tot. Board Members 2251 2413 2287 1879 Positions in average 1. 234 1. 203 1. 194 1. 129 Board Size (max-min) 24 -3 33 – 3 34 -3 23 -2 10 10 10 687 (1) 858 (13) 730 (12) 590 (24) Tot. of Board Members Non. Executive (Independent) 1950 (1119) 2039 (1094) 1914 (929) 1533 (966) Tot. of Board Members (Independent) 2778 (1120) 2904 (1107) 2732 (941) 2123 (990) Listed companies (data available) Companies with nodes Average Board size Tot. of Board Members Executive (Independent) 12

SNA on the Italian listed companies 31/12/2005 31/12/2007 31/12/2010 31/12/2016 BM with 1 position 1915 2095 1978 1684 BM with 2, 3, 4 positions 316 304 297 191 BM with 5 positions 20 14 12 4 De Benedetti (7) Tamburi (6) Ligresti (6) De Benedetti (6) Berretti (6) Pirelli (37) Pirelli (32) Pirelli (29) Atlantia (12) Average distance between 2 nodes 3. 506 3. 848 3. 880 4. 547 % of companies with ≤ 4 nodes 81. 8% 70% 69. 5% 50. 5% % of Financial institution with ≤ 4 nodes 62. 5% 90, 2% 86. 2% No relevant connections BM with more than 5 positions Company with more links 13

SNA on the Italian listed companies Ø Clouds of 2005, 2007, 2010, 2016 (links/nodes) Ø 2005 7 Non financial Financial Carlo De Benedetti 201/278 14

SNA on the Italian listed companies Ø Clouds of 2005, 2007, 2010, 2016 (links/nodes) Ø 2007 5 Non financial Financial Carlo De Benedetti 204/287 7 Giovanni Tamburi

SNA on the Italian listed companies Ø Clouds of 2005, 2007, 2010, 2016 (links/nodes) Ø 2010 Carlo De Benedetti 3 Non financial Financial Marco De Benedetti 183/264 2 Rodolfo De Benedetti 4 6 Jonella Ligresti

SNA on the Italian listed companies Ø Clouds of 2005, 2007, 2010, 2016 (links/nodes) Ø 2016 134/214

SNA on the Italian listed companies Ø Pirelli Cloud: 2005 (37); 2007 (32); 2010 (29); 2016 () 2005 Marco Tronchetti Provera

SNA on the Italian listed companies Ø Pirelli Cloud: 2005 (37); 2007 (32); 2010 (29); 2016 () 2007

SNA on the Italian listed companies Ø Pirelli Cloud: 2005 (37); 2007 (32); 2010 (29); 2016 (acquired by Chem. China and delisted) 2010 Arrested in 2013 Condemned in 2016 6 Jonella Ligresti 1 4 Salvatore Ligresti 3 Paolo Ligresti Giulia Ligresti 20

SNA on the Italian listed companies Ø Atlantia: 2016 (13) (Holding of Autostrade and Aeroporti di Roma) 2016 3 6 Carlo De Benedetti Gilberto Benetton

SNA on the Italian listed companies n Financial Institutions: 2005 (32 + isolated companies); 2007 (28 + isolated companies); 2010 (19 + 9=28 + isolated companies); 2016 2005

SNA on the Italian listed companies n Financial Institutions: 2005 (32 + isolated companies); 2007 (28 + isolated companies); 2010 (19+9=28 + isolated companies); 2016 2007

SNA on the Italian listed companies n Financial Institutions: 2005 (32 + isolated companies); 2007 (28 + isolated companies); 2010 (19+9=28 + isolated companies); 2016 2010 M. Tronchetti L. Maramotti J. Ligresti D. Rampl G. Benetton

SNA on the Italian listed companies n Financial Institutions: 2005 (32 + isolated companies); 2007 (28 + isolated companies); 2010 (19+9=28 + isolated companies); 2016 (2+2+2+3=13 + isolated companies 2016

SNA on the Italian listed companies Ø SNA ØUseful methodology to “depict” the Italian listed companies system of relationships Ø 2008 – Financial Crisis (de-listing and M&A phenomena) Ø Two phases ØFirst (before 2008) ØSecond (after 2008) 26

SNA on the Italian listed companies Ø First phase ØAn almost stable, quite closed and strongly integrated net of social relations Ø Syndrome of small and ancient world where ED are interested to limit the impact of changes Ø No interest to show the Economic value of companies or groups Ø Impact of IFRS: Lower than the expectations after the IFRS adoption in 2005; Increased impact in 2007 and in 2010 on Consolidated FS (Larger impact on Profit than Equity; Lower impact for Minority shareholders) Ø The Italian preparers of Consolidated FS have adopted IFRS following an evaluation approach consistent with the interest to preserve the existent Ownership Ø Clear evidences of conflicts of interest (companies operating in the same industry; e. g. : financial institutions) – Consistent with the Italian Antitrust Authority analysis (Dec. 23, 2008; Jun. 21, 2010; Mar. 31, 2016) 27

SNA on the Italian listed companies Ø Second phase ØClear evidences of disaggregation in the system of social relations Ø Increased level of distance Ø Decreased numbers of nodes within the listing companies as an effects of the decreased number of board positions Ø Clear signals that the world is go to be much more opened (in the banking industry; the Olivetti node dissolved; new and foreign actors “playing the game”) Ø Despite these changes the level of ownership concentration and the role played by the family business and the State owned companies are encouraging a limited evidence of the Economic value in the Financial statements Ø Persistence of “conflicts of interest” the Italian Antitrust Authority analysis (Mar. 31, 2016) 28

Governance and Accounting: IFRS adoption Ø Governance and Accounting Ø CG variables versus FS disclosure Ø e. g. : Broberg, Tagesson, Collin (2010); Collett, Hrasky (2005); … Ø CG rules versus market reactions Ø e. g. : Gotti, Mastrolia (2010); Seidl, Sanderson, Roberts (2012); Di Pietra. , Grambovas, Raonic, Riccaboni (2008); Ø CG practices versus FS rules’ adoption e. g. : Di Pietra (2011); Marra, Mazzola (2014); … 29

Governance and Accounting: IFRS adoption Ø Governance and Accounting 1 2005 Branciari et al. 12 Italian listed groups (Analysis on the quarterly reports) The impact of IAS has determined in average an Equity decrease of -4. 30% and an income decrease of -1. 64% 2 2006 Caponera et al. 40 Italian banking groups. Total Assets increased of 10%. The impact of IAS 32 and 39 adoption means a ROE variation of 0. 8% 3 2006 Di Pietra 30 Italian listed groups. Impact of IFRS adoption on the Consolidated IS (the Adoption of IFRS has determined an increased profit in 20 cases - 30. 72% - and an increased loss in 9 cases -17. 90% - in 1 case there was any variation. Impact on the Consolidated BS(in 5 cases the variation was less than 1%; on Equities the IAS FTA has determined an average variation of 5. 51%) 4 2006 Nigro et al. First 9 Italian Banking groups (7 have adopted the FVO). The impact on equity was negative (with a decreasing rate included between 10 -16%) 5 2007 Azzali (Ed. ) 181 Italian listed groups. Profits: increased in 75. 70%; decreased in 24. 31% (for minority shareholders: 42. 46% increased, and 38. 35% decreased). Equity: increased in 66. 30%; decreased in 33. 70% (for minority shareholders: 43. 15% increased; 37. 67% decreased). Very Heterogeneous impact (larger on Profits than on Equity; less favourable on minority shareholders) 30 30

Governance and Accounting: IFRS adoption Ø Governance and Accounting 6 2008 Cordazzo 194 Italian listed groups. In average Profits, Equity have increased after the transition (larger impact on Profits 25. 34% than on Equity 4. 78% 7 2010 Callao, Jarne In 8 on 11 countries studies (Belgium, Finland, France, Germany, Greece, Spain, Sweden, UK), there is a higher discontinuity under IFRS than under local standards, which entails a higher level of manipulation. In Contrast, for Italy, the Netherlands and Portugal, discontinuity is lower 8 2013 Corbella, Florio, Rossignoli Analysis of the degree of subjectivity in the accounting figures after the adoption of IFRS: 152 listed companies (non financial). Despite the increase of subjectivity (related to 19 different accounting treatments) the impact on accounting values does not appear to be significant and is limited to some specific items. 9 2014 Marra, Mazzola 197 Italian listed companies were examined (970 observations in total). The corporate boards effectiveness in not able to constraint permanently the earning management after the adoption of IFRS. The highest level of monitoring effectiveness is associated with 2005 and after this year decreases in a sort of inverted U-part curve. 31 31

Conclusions (or not!) Ø CG and Accounting Ø Several arguments are supporting the idea that CG mechanisms (as a result of the CG codes adoption) could contribute to drive the stock market ØTowards a more efficient situation? Maybe yes or maybe not! ØGood corporate practices have opened the market ØHowever, there are some forces preserving the original characteristics and based on human behaviours (not fully rational!) ØThis is reflected on the quality of the financial information and despite the IFRS adoption ØNot all the changes and resistance to changes are based on rationality 32

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Good Governance Codes and IFRS Adoption: Observing the Italian experience Ø Many thanks for your attention!!!! u 34 Roberto Di Pietra (University of Siena – Department of Business and Law – E-mail: dipietra@unisi. it)

References Aganin, Visintin (2005), The History of Corporate Ownership in Italy (2005), in A history of Corporate Governance around the World (Morck), University fo Chicago Press Aguilera, Cuervo (2009), Codes of Good Governance, CG, n. 3 Broberg, Tagesson, Collin (2010), What explains variation in voluntary disclosure? , A study of the annual reports of corporations listed on the Stockholm Stock Exchange, JMG, n. 4 Cameran, Campa, Pettinicchio (2014), IFRS Adoption among private companies: impact on earnings quality, Journal of Accounting, Auditing & Finance, Vol. 29, no. 3 Carrington, Scott, Wasserman (2005), Models and Methods in Social Network Analysis, Cambridge University Press, Cambridge (MA) Chabi, Maati (2006), The Small World of the CAC 40, Banque & Marchés, n. 82 Collett, Hrasky (2005), Voluntary disclosure of corporate governance practices by listed Australian companies, CG, n. 2 CONSOB (2015), 2015 Report on corporate governance of Italian listed companies, Rome, December Corbella, Florio, Rossignoli (2013), IFRS Adoption in Italy: which effects on accounting figures and subjectivitiy? , Accounting and Finance Research, Vol. 2, no. 4 Di Pietra (2011), Analysis of changing institutional environments, New Accounting Policies, and Corporate Governance Practices in Italy, in Law, Corporate Governance and Accounting, Ed. Krivogorsky, Routledge • • • 35

References • • • Faleye (2007), Does one hat fit all? , JMG, n. 3 Fox (2009), The myth of the rational market, Harper Collins, New York Gotti, Mastrolia (2010), Regulatory intervention and the effect of changes in corporate governance on firm decisions and market reactions, JMG, n. 4 La Porta, López-de-Silanes, Shleifer, Vishny (1997), Legal determinants of external finance. Journal of Finance 52: 1131– 50. La Porta, López-de-Silanes, Shleifer, Vishny (1998), Law and finance, Journal of Political Economy, 106: 1113– 55 Magnan, Markarian (2011), Accounting, Governance and the Crisis: Is Risk the Missing Link? , EAR, n. 2 Marra, Mazzola (2014), Is Corporate Board more effective under IFRS or “it’s Just an Illusion”? , Journal of Accounting, Auditing and Finance, Vol. 29, n. 1. Scott (2000), Social Network Analysis. A Handbook, London, Sage. Seidl, Sanderson, Roberts (2012), Applying the ‘comply-or-explain’ principle: discursive legitimacy tactics with regards to codes of corporate governance. Watts, Strogatz (1998), Collective dynamics of “small-worlds networks”, Nature, 393(6684) Zattoni, Cuomo (2008), Why Adopt Codes of Good Governance? , CG, n. 1 36