Pyramidal Groups and the Separation Between Ownership and Control in Italy

Abstract

The paper provides an overview of the Italian corporate governance system, focusing mainly on the ownership of Italian firms and on the legal and institutional framework. Like those of most other continental European countries, the Italian corporate governance system features a high concentration of direct ownership, for both unlisted and listed companies; at first glance this suggests a very limited degree of separation between ownership and control. The analysis of direct ownership and of the identity of owners reveals that a major role is played by families, coalitions, the State, and above all by other companies: the largest stake in listed and unlisted companies is held by other non-financial or holding companies. In fact, more than 50 percent of all Italian industrial companies belong to pyramidal groups. Taking the pyramidal structure into account, one can identify ultimate owners and evaluate the actual degree of separation between ownership and control. Measuring separation as the amount of capital controlled per unit of capital owned, we find that in 1996 the average figure was 2.4 for listed companies; it was higher for private non-banking groups (4.5) and lower for State-controlled groups (1.6); for the ten largest private groups, the ratio was approximately 5. In Italy, then, pyramidal groups headed by families, coalitions, or the State have supplanted other forms of separation, whereas financial institutions have played a very limited role in fostering separation. This structure, reinforced by cross-ownership, circular ownership, and interlocking directorates, has allowed stable control over both small and large companies, with few control changes, especially hostile takeovers. The paper first provides a brief description of the legal and institutional framework and in particular of the provisions affecting corporate governance mechanisms (shareholders' rights, directors' liability etc.), and of disclosure rules. Next comes a quantitative description for listed and unlisted companies: ownership structure, taking account of groups; the control structure; the diffusion of pyramidal groups; and an evaluation of the separation between ownership and control. This is followed by a discussion of changes and trends: the simplification of the pyramidal structure due to privatization and to the financial difficulties of private groups; the increasing role of financial institutions; the debate that has led to reform of some corporate governance mechanisms and to a new law for listed companies, in force since July 1998.