It’s a sign of the times as Italian companies adjust to shifts in ownership and regulation: on December 4th, UniCredit S.p.A. will convene an extraordinary meeting to consider proposals intended to simplify its ownership structure and align its governance with international best practice principals.

If approved, the existing cap on the exercise of voting rights (currently set at 5% of share capital) will be removed, and outstanding “savings shares” (non-voting equity with preferential rights) will be subject to mandatory conversion into ordinary shares. In addition, the number of directors appointed from the “minority” list would be increased from one to two, and board of directors would be empowered to present its own list of candidates for the election of directors. Further, the company’s registered office will transfer from Rome to Milan, and steps will be taken to delist the company’s shares from the Warsaw Stock Exchange.

The changes would smooth out some of the more eccentric aspects of Italian governance, such as list-based director elections and complex share structures resulting from the use of savings shares. Moreover, that the changes were proposed voluntarily reflects the growing impact of foreign institutional investors in Italy. Their influence has resulted in a surge of opposition to advisory say on pay votes, unexpected outcomes at board elections, and a number of other activist initiatives, including campaigns to increase dividend payouts, derivative actions against directors, or public actions. The 2011 removal of the restriction regarding the post-record date transfer of shares, along with an enhanced regulatory framework regarding shareholder protection, have both notably encouraged institutional investors in making full use of their rights (for a full discussion, see Glass Lewis’ September 2017 special report, Shareholder Activism in Italy).

While the changing demographics have had an impact throughout the market, most Italian companies are somewhat insulated due to highly concentrated ownership structures. UniCredit, however, is not controlled; instead its share book is widely dispersed with the largest holders topping out at 5.072% of share capital, leaving the company particularly susceptible to shareholder action. At its 2015 annual meeting’s board election, the list submitted by institutional investors, comprised of a single candidate, won over the competing list presented by long-term shareholders (Allianz, Aabar, Fondazione Cassa di Risparmio di Torino and Carimonte Holding, Fincal and Cofimar), which included 17 nominees.

This type of ‘competing list’ election may seem unusual to non-Italian governance enthusiasts. Whereas in most markets, director candidates are determined and proposed by the board (with shareholders occasionally proposing their own candidate), in Italy the candidates are proposed by shareholders as a slate. When more than one list of candidates is proposed, most directors are taken from the list that received the most votes (the “majority list”), but at least one director is taken from the list that received the second-most votes (the “minority list”). A similar structure applies to electing the board of statutory auditors, and this mechanism is an important tool for ensuring minority shareholders’ representation on boards.

Since 2011, the number of companies with a second, competing list submitted by institutional investors has consistently increased. Where the major shareholder’s stake is lower than 30%, the list presented by minorities has in many cases received the majority of votes, or close to it. These outcomes are particularly notable given that institutional investors, being interested in securing representation but not control of the board, submitted lists with few candidates, usually not more than three. That is, they weren’t expected, or even intended, to win. In many cases, the surprise outcome caught companies unprepared, forcing an emergency second election to fill out the vacant board seats.

This was not the case at UniCredit in 2015. The bank had foreseen the possibility of a competing list winning a majority of votes, and previously instituted a bylaw allowing for most of the directors to be drawn from the slates that obtained the highest number of votes on minority lists, without the need for a follow-up election. While the process was relatively smooth, the resulting board nonetheless did not reflect shareholder voting, highlighting the need to adjust to new voting patterns and to increase the seats reserved to minorities. The trend was confirmed in 2016 at the renewal of the board of statutory auditors, when in order to ensure that the chair was elected from the list presented by a group of institutional investors, minority shareholders supported the slate of the long-term shareholders, which received 88% of votes.

The reforms proposed by UniCredit would address these issues with director elections in two ways:

  • by increasing the number of directors that will be taken from the “minority” (or second-place) list from one to two. It’s possible that greater minority representation will help to ensure stronger alignment to best corporate governance practice.
  • by allowing the board itself to propose a list of candidates. This would align with the approach taken in most other markets for determining director candidates, and may simplify voting for foreign investors who are more used to relying on the board’s recommendation, rather than considering competing lists proposed by different groups of shareholders.

Beyond election procedures, the other reforms serve to simplify the company’s share structure. Like many Italian issuers, UniCredit has a class of “savings shares”, intended for smaller, retail investors; these shares do not have ordinary voting rights, but carry special distribution rights. Historically, they have in practice served as a defence against takeover threats by allowing for additional capital while preventing the dilution of voting control. Recently, Italian companies have started to reconsider their capital structure, with many converting to a one-class structure in order to improve minority shareholders’ recognition. This in turn makes shares more attractive for foreign investors, increases liquidity and reduces costs imposed by the multiple class of shares. Under the proposals, the savings shares would be forcibly converted into ordinary shares (with savings shareholders receiving an additional cash adjustment), leaving the company with a single class of shares. Moreover, each of those shares will have voting power equivalent to its economic power: another proposal would remove the existing limit on exercise of voting rights, which currently means that even if a shareholder owns 7% of share capital, they can only vote shares worth up to 5%.

UniCredit’s proposals are in line with similar actions of other issuers, and follow a successful €13 million capital increase in February 2017, which itself served to further disperse the share structure. It seems that foreign investors are caring more about their voting rights and companies are starting to adjust. Speaking in April, UniCredit chair Giuseppe Vita, advocated the presence of foreign institutional investors: “the new share ownership is shaped as proper international public company that needs of a more open governance structure.”

Simona is an analyst covering the Italian market.