Italy overhauls its corporate and financial laws

A reform billed as making Italy’s capital markets more attractive is instead unnerving investors, with Monte dei Paschi di Siena becoming the first company to test new board-nomination rules that critics say are opaque and destabilising. The test case will come on April 15, when bailed-out lender Monte dei Paschi (MPS) becomes the first Italian company to appoint a new board and chief executive under provisions dictating how outgoing directors can propose successors. Instead of providing clarity, the criteria have heightened investor uncertainty in a vote that pits the MPS board against CEO Luigi Lovaglio, who is seeking a new term against a board-backed rival candidate, according to Reuters.

The legislation, which became fully effective in October, allows outgoing boards to propose an entire slate of directors for shareholders to vote on as a group. That bundled-voting system sets Italy apart from countries like Britain and the United States, where investors vote on each board appointment individually.

However, approval of the board’s slate in the first vote is not final, and each candidate must then be ratified in a second, individual ballot. “Italy already had some of the world’s most complex rules for selecting board members,” said Lukas Plattner, a partner at law firm Advant NTCM.

“Now there is the added absurdity of regulating how an outgoing board presents its own slate – a mechanism investors, especially foreign ones, find almost impossible to understand.”

That second vote, he said, encourages “punitive, disruptive behaviour, turning a governance tool into an instrument of institutional paralysis.”

Proxy adviser Institutional Shareholder Services (ISS) underlined the complexity by backing MPS’ board list while urging investors to reject individual candidates, including the chairman and appointments committee head, over “poor succession planning.”

Italy’s Treasury did not respond to a request for comment. The government has said the rules aim to avoid directors being reappointed indefinitely, without shareholder oversight. The board-slate provision is part of a sweeping reform of Italy’s corporate and financial law, rolled out from 2024 and now nearing completion. The changes have drawn criticism from investor groups such as the International Corporate Governance Network (ICGN), which represents investors with more than $90 trillion of assets and warns the rules risk denting market confidence.

Rome moved in March to placate investors by amending a provision on enhanced voting rights, but ignored calls to change the board-slate system, which governance experts have labelled an “aberration” at academic conferences.

While it is too early to gauge the broader impact of the reforms on Italy’s capital markets, the vote at MPS will offer an early indication of the distortions the system can produce. The resulting confusion was apparent among investors at a London conference last month, when a fund manager asked the MPS CEO to explain “to a non-Italian” the chain of events surrounding the bank. Governance experts warn the rules risks producing more fractured and lower-quality boards. Headhunters say a requirement to nominate one-third more candidates than available seats would deter candidates, potentially narrowing the pool of experienced professionals as they would be unwilling to risk public rejection. Simulations run by Cattolica University’s corporate governance research centre, FINGOV, show that the rules can lead to situations where a slate with fewer votes than the board’s list ends up securing more seats.

“The board’s slate system is a global outlier and can produce unpredictable outcomes,” FINGOV director Massimo Belcredi said, noting that governance experts had not expected any company to make use of it. “What happens now at MPS is anyone’s guess.”