MANAGING THE CORPORATION & COMPOSITION OF THE BOD

Managing the corporation

- Corporate governance
o “Corporate Governance" concerns the powers, rights, and duties of the different
corporate bodies and deals with the internal organizational structure of the
corporation and its functioning

o In a broader sense corporate governance can include all rules that have an effect on
the governing bodies of the corporation including, for example, rules concerning
the financial structure of the corporation, or shareholders' agreements
o Corporate governance models
 The one-tier or Anglo-Saxon model (UK, USA, former British colonies): the
shareholders’ meeting appoints a BoD

 The two-tier or German model: the shareholders’ meeting appoints a board

of supervisors and the board of supervisors, in turn, appoints (and might
revoke) a managing board.
 The traditional Latin model: the shareholders appoint both the board of
directors and a separate body entrusted with controlling functions, e.g. the
“collegio sindacale” in Italy
o In all three models, there is usually also an external and independent auditor which
audits the financial statements
- Corporate governance
o Corporations with more than 2,000 employees must have a supervisory board in
which half of the members are appointed by the shareholders and half by the
employees
 The chairman of the supervisory board, appointed by a two-thirds majority
of the members of the board, has a casting vote
o All corporations with more than 500 employees must have a supervisory board in
which one third of board members are appointed by the employees
o From a functional point of view, it lowers the corporation’s contracting costs by
reducing asymmetries between firms and the labor unions with whom they
negotiate
 This function is relevant where firms are confronted with labor unions and
where wages are in fact determined by collective bargaining agreements
o Codetermination offers some protection against bullying employees and more in
general to respect employees’ rights, which is a problem more present in countries
where employees cannot be terminated without cause
- The choices between various models
o Several countries have made available different governance models to their
corporations: a corporation can, in its bylaws, opt for one of two or sometimes even
three models
o This gives the shareholders to decide which model better satisfy their needs
o Possible reasons of the choice:
 Costs
 Business combinations
 Managing generation transitions
  Subsidiary of foreign companies
 To make hostile takeovers more difficult
 Inertia or path-dependency

Composition of the BoD

- Categories of directors

o Chairperson or President of the Board: calls the meetings, sets the agenda,
conducts the discussion and the voting procedures, etc…
 Ensures procedural fairness and circulation of information among board
members
o Executive directors: are executives of the corporation (incl. Chief Executive Officer
and other delegated members)
o Non-executive (outside) directors sit on the Board (and may be committee
members) but:
 No other roles within the organization especially as managers
 Not involved in the day-to-day activity
 Compensation not or less strongly correlated with the economic
performance of the corporation
o Independent directors:
 Are non-executive
 Do not have (or have had in the recent past) any significant personal,
financial, or professional relationship with the corporation (in addition to
their directorship)
 Independent directors in the Italian regulation of listed companies

 The law prescribes the presence of independent directors and

dictates a definition of independence, but it says that also the
Corporate Governance Code definition applies
- Board composition in Italian listed companies

- Directors appointed by minority shareholders in listed companies

o The majority rule to appoint the board gives to the controlling group complete
control over the composition of the managing body
 o Especially in legal systems in which the ownership structure of listed corporations is
more concentrated, there is a need to protect the interests of the companies from
the controlling shareholders
o Mandating a system to represent minority shareholders on the board might protect
the interests of small and institutional investors
o In large public companies there is a risk that directors might be able to self
perpetuate themselves: minority-appointed directors can mitigate the “incestuous"
relationship between managers and board members

Powers of the directors VS the shareholders

- The power to manage the corporation is vested in the board of directors, which delegates
it, in great part, to some executive directors, and to the managers (which are not board
members) of the corporation
- Shareholders' meeting has some competences when extraordinary transactions (such as a
merger or a sale of all the corporation's assets) are concerned
- The shareholders have the power to amend the governing documents of the corporation,
but, especially in the common law US, directors have also significant powers in such topics
- Regarding the distribution of dividends, in some countries (common law U.S.), directors
have the power to decide while in others (civil law France, Italy) directors can only make a
proposal to the shareholders, but the shareholders' meeting ultimately decides
- The corporation purpose as a limit to the BoD

o In theory the corporate purposes, as stated in the charter and bylaws, represents a
general limitation to directors' powers - less so in practice, in fact:
 In many legal systems — typically in common law jurisdictions — the
corporate purpose can be defined in extremely broad terms
 In other systems, the corporate purpose must be defined somehow more
precisely, but then a general clause adds “all other activities directly or
indirectly related or necessary to carry on the corporate purpose, including,
but not limited to, financial transactions...“
 When directors exceed the corporate purpose (act "ultra vires”), they might
be liable towards the corporation, but the contracts are still binding towards
third parties, at least if they did not intentionally take advantage of the ultra
vires act being aware of the irregularity