Italy looks at tougher oversights

ROME -- The bankruptcy of the Parmalat dairy giant has put a sharp edge on questions about corporate regulation in Italy, where traditions of weak independent oversight have long combined with a tendency for even big business to be family affairs dominated by insiders.

The government has proposed strengthening its toothless securities watchdog to better police the behavior of public companies. But the Parmalat scandal -- with allegations of crudely forged bank documents and losses hidden offshore in Cayman Islands accounts -- is a sign, some say, that Italy's family capitalism needs even tougher

controls.

"In my view, what happened at Parmalat would not have happened if there were even one or two outside directors," said Francesco Giavazzi, an economist at Bocconi University in Milan. "There was no one sitting at the table who was truly independent of the family."

"The family" is the Tanzis, who controlled 51 percent of the listed company. Calisto Tanzi, who built Parmalat from a small salami and preserves company to a global powerhouse with $7.1 billion in 2002 sales, now sits in a Milan prison after being questioned by prosecutors trying to sort out where the money went.

Two auditors also have been detained.

The company went into bankruptcy protection after it was revealed that a subsidiary in the offshore financial refuge of the Cayman Islands did not have the $5 billion in the bank that it claimed.

Tanzi has admitted that $10 billion is missing from Parmalat's balance sheet, including hundreds of millions of dollars diverted to other family businesses.

Minority investors relying on company earnings statements had no clue, and the company had a reputation as a well-run enterprise.

The Parmalat case raises comparisons with the collapse of Enron, which also used related companies to inflate its earnings.

The case comes on top of last year's spectacular default on $1.4 billion in bonds by canned food holding company Cirio. Founder Sergio Cragnotti resigned and the company went bankrupt.

The Parmalat case has given new impetus to attempts by Economy Minister Giulio Tremonti to get parliament to strengthen Consob, the country's securities watchdog analogous to the U.S. Securities and Exchange Commission. Consob currently cannot impose fines, investigate insider trading or bring criminal charges on its own.

However, the prospects for deeper change are dim. The government instead has partly decriminalized false accounting and cut the statute of limitations on it from 4 1/2 years to three.

Supporters of Prime Minister Silvio Berlusconi -- himself a business magnate who controls Mediaset, the country's No. 1 private broadcaster, and publishing house Mondadori -- passed the law after he was accused of the offense, helping win his acquittal in 2002.

Specialists in corporate governance -- the rules defining and enforcing the responsibilities of a company's managers to shareholders -- say the government should consider more drastic changes, such as requiring that boards of directors have true outsiders.

Another problem is that minority shareholders cannot sue unless they hold 5 percent of a company -- a huge stake in most cases.

"I think Italy has a problem of culture," said Luca Enriques, a corporate law professor at the University of Bologna who has written extensively on governance issues. The biggest blue chip companies usually are well-run "but outside this circle of blue chips there is not a culture of respect for minority shareholders."

One indication of that is the case of Emilio Gnutti, Italy's first major executive convicted of insider trading. While he was free appealing an eight-month sentence last year, he was named chief executive of Olimpia, a holding company with a major stake in listed Telecom Italia SpA.

For years after World War II, the Italian economy was dominated by twin pillars of state-owned companies and large family businesses such as automaker Fiat, with the Agnelli family still owning 30 percent.

Other examples include clothing firm Benetton, 70 percent family owned; the Pirelli tire, communications cable and telecom group; Berlusconi's Mediaset and its Fininvest holding; and the Falck steel, energy and airport group.

The government instigated a major shake-up in the 1990s, selling off many state companies and laying the foundations of an economy relying more on mass ownership of firms through stock markets.

But family capitalism not only survived, in some cases it entrenched itself deeper when family companies bought privatized assets. For example, the Benetton and Pirelli families bought stakes in the company controlling privatized Telecom Italia.

Privatization opened up the old, clubby system, but also removed traditional restraints imposed on family moguls, such as informal policing by their bankers. However, no new corporate controls were created, said Ugo Pagano, an economist at the University of Siena.<

For example, Mediobanca, a powerful private bank that held strategic shares in companies, was able to force Fiat to accept an outside manager to stave off bankruptcy in 1980.

"We have really just gone halfway," Pagano said. "We have not created the institutions that are complementary for the new type of capitalism. To move to a new system we need new institutions."

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