WHO CARES ABOUT DIRECTOR INDEPENDENCE? PRESENTATION (PDF FORMAT)

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1 Bank of Italy From the SelectedWorks of Paolo Santella Winter April 20, 2007 WHO CARES ABOUT DIRECTOR INDEPENDENCE? PRESENTATION (PDF FORMAT) Paolo Santella Carlo Drago Giulia Paone Available at:

2 Politecnico di Milano: Prospettive del sistema finanziario italiano: corporate finance, banking, ownership, governance 20 april 2007 Who cares about director independence? : the case of Italy in 2003 P. Santella, C. Drago, G. Paone The paper is available free of charge on IDEAS: and SSRN:

3 Global rates by company Ns rates (yellow) Highest compliance and highest disclosure: 80 Fiat, Enel and Finmeccanica These companies are characterised by an higher level of compliance and disclosure (lower ns rates) but not always lower levels of not compliance No rates (red) Yes rates (blue) EC criteria: Companies that show higher compliance are Fiat, Enel, Finmeccanica. Such in companies Italy also show higher free floatp.santella, C.Drago, G.Paone 2

4 These two groups of companies are characterised by different data structures (higher compliance and disclosure versus lower not compliance and lower disclosure) by considering the median level (60%) as global compliance rates we can build two visual groups. The situation Independent does directors not change much for Preda criteria. Similar companies on top of the ranking (Enel, Fiat and ENI), for P.Santella, which we C.Drago, also observe G.Paone high 3 levels of not compliance but also high levels of disclosure

5 0.60 (0.27) Fineco Unicredito RCS 0.57 (0) Telecom Italia Milano Assicurazioni 0.74 (0.20) Capitalia 0.52 (0.17) Mediobanca 0.54 (0.20) RAS 0.61 (0.25) E-Biscom 0.71 (0) 0.60 (0.30) Fondiaria SAI Meliorbanca BPVN 0.47 (0.21) Cattolica Assicurazioni Pirelli 0.63 (0.29) Crossdirectorships: financial companies form the centre of the network; not financial companies are the periphery. Credito Bergamasco BNL 0.51 (0.09) Alleanza Assicurazioni 0.48 (0.22) MPS 0.60 (0.19) Banca Fideuram 0.57 (0) Tod's Banca Intesa 0.65 (0) Unipol Camfin San Paolo IMI Cassa di Risparmio di Firenze 0.40 (0.25) Banche popolari Unite 0.48 (0.10) Espresso 0.40 (0.17) Italcementi CIR 0.45 (0.17) In the box the EC compliance rate and in brackets the incidence of cross-directorships on total number of independent directors P.Santella, C.Drago, G.Paone 4

6 Pirelli 1 (0.14) Italcementi 2 (0.33) RAS 4 (0.33) E-Biscom 1 (0.50) Banche Popolari Unite 4 (0.20) Unicredito 5 (0.33) Enel 1 (0.17) Eni 3 (0.43) RCS 3 (1.00) Autogrill 1 (0.25) Mediobanca Telecom Italia 1 (0.20) Luxottica 1 (0.33) Autostrade 2 (0.50) Assicurazioni Generali 4 (0.31) 2 (0.40) Benetton 1 (0.33) Mondadori 1 (0.33) STML 1 (0.14) Banca Intesa 1 (0.14) Tim 1 (0.20) Dual directorships: Enlarged network size but similar structure Finmeccanica 1 (0.13) Fondiaria SAI 1 (0.10) Mediolanum 1 (0.33) Mediaset 1 (0.25) Alleanza Assicurazioni 1 (0.11) In the box the number of Banco Popolare Verona e directors involved and in Novara P.Santella, C.Drago, 1 (0.05) G.Paone brackets the incidence of dual 5 directorships on the total

7 Italcementi Banche Popolari Unite Assicurazioni Generali Milano Assicurazioni Fondiaria SAI Autogrilll Benetton 0.61 Unicredito Mediobanca Capitalia Meliorbanca Luxottica 0.46 Banco Popolare Verona e Novara Enel RAS Fineco Pirelli Camfin RCS 0.49 E-Biscom 0.66 Autostrade 0.71 Telecom Italia 0.66 STML 0.47 Tim Credito Bergamasco Cattolica Assicurazioni Finmeccanica 0.72 Eni 0.72 Mondadori Mediolanum Mediaset Alleanza Assicurazioni Cassa di Risparmio di Firenze CIR 0.40 Espresso Banca Fideuram San Paolo IMI 0.59 MPS Unipol Banca Intesa 0.63 Dual and cross directorships network: In the box the average company compliance for EC and Preda The position defines the quality of compliance. BNL Higher compliance for 0.44 P.Santella, C.Drago, peripherical G.Paone (and higher free float) companies Tod s 6

8 Similar expected data structure for the two sets of criteria (companies that perform better in EC tend to perform better also in Preda) Positive linear association between free float and compliance for not financial companies. The same data structure does not hold for financial companies Horizontal and vertical red lines indicate the median for compliance rates (y axis) and free float (x axis). The 1- labels represent the partecipation to a cross-directorship network. P.Santella, C.Drago, G.Paone 7

9 Higher disclosure for not financial companies (where characterised by higher free float); lower disclosure for not P.Santella, financial C.Drago, companies G.Paone part of the 8 networks.

10 Conclusions: company disclosure for 2003 A) General low level of compliance for both financial and not-financial companies. B) In particular, not-financial companies with more fragmented shareholder base show higher compliance rates (responsiveness to market pressure). C) Financial companies: - show an even lower level of compliance; - are connected through cross-directorship networks; - tend not to show higher compliance the more fragmented their shareholder base (poor responsiveness to market pressure) D) Financial and not-financial companies are connected through dualdirectorship networks. P.Santella, C.Drago, G.Paone 9