Italy's star needs to shine

AN embarrassing question was posed by Italian

Tommaso Padoa-Schioppa to his countrymen at a meeting in Milan last week.

Speaking at the launch of a new market segment for the Italian stock exchange, the economics professor - one of six executive directors of the European Central Bank - wondered why it was that the Borsa Italiana felt it necessary to try to raise the reporting, transparency and corporate governance standards of the 150 medium- sized companies on the market but not to demand the 90 or so bigger international, quoted businesses meet the same minimum listing requirements.

Just before a General Election, Padoa-Schioppa was too discreet to name names. But he could, for example, have cited some of the interests of none other than Silvio Berlusconi, the media magnate whose operations are conducted through a labyrinthine web of holding companies, only some of which are listed.

Berlusconi will, in all probability, be the next Prime Minister following the May poll and, in theory at least, will occupy a position from which he could really set about shaking-up Italian corporate governance, starting - if he wanted to - with his own business interests.

However, nobody in Italy who follows the corporate sector closely is holding their breath. Instead, they expect to find Italy with a Prime Minister who controls three of the country's most watched television channels through a corporate web which no mere investment analyst could hope to comprehend.

Massimo Capuano, chief executive of the Italian exchange, says, diplomatically, that most of the 90 larger, quoted companies already meet the disclosure standards demanded by big international investors.

Launching the new STAR market - in English, the High Standard Mid- Cap Market - will not only help to make the shares of the 150 or so eligible components more attractive to domestic and international institutional investors, but will also encourage unquoted companies to come to the market. Members of the new set-up have market capitalisation of less than e 800 million (500 million).

Antonio d'Amato, the President of Confindustria, the Italian equivalent of the Confederation of British Industry, says there is a paradox at the heart of Italian business.

"We have a high level of entrepreneurship but the lowest number of big multinational companies of any of the leading European countries. Switzerland has more big companies than Italy."

Part of the explanation for this is the still powerful tradition of family ownership.

Exchange chief Capuano estimates there are perhaps 2000 mid-sized Italian firms which could in theory float on STAR.

Rather than try to lure them into floating by lowering listing standards, the exchange, he says, is adopting a policy of raising standards, thus trying to make the Italian market more attractive to domestic and international investors.

"Italian companies have been very successful commercially, but have not learnt to use financial instruments well. Without now employing the tools of corporate finance, Italian companies will lose out competitively," he maintains. The family-based business model which dominates the Italian economy (and has played such a prominent role in Germany's past economic success) is ill-suited to the new world of global or pan-European capitalism.

Growth based primarily on family ownership, coupled with a strong position in a national or regional market and financed by retained earnings and bank debt, is no match for the new (to Continental Europe) business model of the financially engineered expansion strategy utilising equity raised externally as well as a mixture of bank and securitised debt and corporate takeovers.

Just how difficult it is to wean Italian business away from its traditional (tax advantageous) private company model on to a more Anglo-Saxon style of publicly quoted corporate structure can be seen from the fact that, so far, only 20 of the 150 quoted mid-cap stocks have signed up for STAR with its requirements for quarterly reporting in Italian and English based on Italian General Accounting Principles.

Capuano says further tax breaks could help the process.

And, as Professor Padoapointed out last week, it is more than just the companies themselves that need to change. The banking sector is reluctant to embrace the far-reaching changes that are needed to facilitate a more financially sophisticated corporate strategy. In Italy, it is the financial markets, not only the labour markets, which are an obstacle to reform.

As one top executive attending last week's STAR launch commented privately, it is not just the fact so few Italian bankers speak English which testifies to their narrow vision.

Monte Paschi di Siena, Italy's oldest bank and, since a year ago, a quoted institution with a significant international presence, is not unique in having as its chairman the mayor of the city.

Copyright 2001
Provided by ProQuest Information and Learning Company. All rights Reserved.