Earlier this month the Italian government modified a scheme that gave more power to long-term holders of shares in businesses listed in the country. This was an excellent idea, and ought to convince more foreign investors to put their money into the country. Although it might at first glance not seem so, it is also a victory for family ownership.
Italy has a big problem with foreign direct investment (FDI). Its levels are on average not wildly out of kilter with other Europeans countries – it received £16.5bn of FDI in 2013, which compares well to the far more powerful Germany’s £26.7bn. But investor confidence in Italy is fragile. In 2012, the year of the Euro crisis, FDI plummeted to just £93m.
So Italy must do all it can to convince foreign investors to invest. But one problem is that an awful lot of its businesses are privately owned – 90% are controlled either by families, the state or a holding company. This means: a) that minority shareholders have to deal with possibly capricious owners, but possibly worse; b) that lots of shares are tied up with majority shareholders rather than being on the open market.
And so Matteo Renzi’s reforming government came up with a “loyalty scheme”, whereby those who had held shares in a business for more than two years would get extra voting rights. The idea was that majority shareholders could sell shares without losing control, and foreign investors would be keen to buy those shares.
However, there was a problem. The new regulations said that 50% of shareholders had to agree to implement the scheme, but so many Italian firms are 50% owned by families that they could unilaterally implement a loyalty scheme and boost their own power even further.
Three firms – drinks business Campari, controlled by the Garavoglia family, engineering firm Astaldi, controlled by the family which gave its name to the business, and hearing aid company Amplifon, owned by Anna Formiggini, wife of the company’s late founder Charles Holland, all implemented loyalty schemes, to the horror of minority shareholders. The Garavoglias, for instance, saw their 51% of the shares converted into 68% of the voting rights – enough for them to trigger extraordinary shareholders’ meetings by themselves.
A group of 80 investors, which included Aviva, UBS and Fidelity, complained about this. As they are philosophically committed to the principle of one-share, one-vote and so would never take advantage of the offer, they were suddenly at a massive disadvantage to shareholders with no such scruples. The 80 asked for the threshold to trigger a loyalty scheme to be raised to two-thirds, and the government agreed to change the rules.
In the press this has been painted as a victory for institutional shareholders, which it is. But it is still extraordinary that in an environment where activist shareholders are energetically pressuring firms to end their dual-class share structures (for example in the Murdoch empire) Italy has been able to introduce one, and to robustly protect its culture of family ownership.
A cynic might say that what we have just seen is a classic political move: offer more than you really want, then when it proves unpalatable backtrack to what you really wanted in the first place. Perhaps the initial 50% level was designed with enough wiggle room that if it was weakened it would still be acceptable, and that what we have seen is clever politics – or excellent lobbying.