The “voto di lista” mechanism has been compulsory for Italian listed companies since 2007 and requires shareholders to vote on slates of nominees submitted by both controlling shareholders and minorities. The worthy objective of this mechanism is to ensure minority representation on corporate boards, by stipulating that at least one director must be elected from the slate submitted by minority shareholders.
Where the major shareholders still control more than 90% of the votes cast at general meetings, the “voto di lista” is the only way to ensure a minimum level of independence on boards, but is it still valid when control is much more diluted and minority shareholders account for more than 30% of the quorum at general meetings?
The analysis of three AGMs called in 2012 provides us with good examples of the main risks of the “voto di lista” (list voting), as it is defined by law and by almost all corporate by-laws: to increase the representative powers of major shareholders above their real ownership and, in many cases, to render the shareholders’ vote itself useless.
Three meetings are analysed below, but dozens of similar cases can be counted among 2012 Italian meetings.
Fiat and Fiat Industrial
The two companies are part of the same group and their major shareholder is the holding company Exor, which in both cases submitted a slate comprising a number of nominees equal to the number of directors to be elected minus one: 8 nominees out of 9 directors at Fiat and 10 out of 11 at Fiat Industrial. Both sets of Articles of Association stipulate that all directors, minus one, must be elected from the majority list, but the composition of the two slates was risky: if no minority lists had been submitted, another meeting would have been convened to complete the Board. Furthermore, both slates included only one woman, with a gender quota of 12.5% at Fiat and 10% at Fiat Industrial. The new Italian law stipulates that, from the next renewal onwards, both genders must account for at least 20% of the Board members.
Presumably, the people at Exor were confident that at least one minority slate would be submitted, and they were also comfortable that such a slate would include the woman needed to meet (in advance) the regulatory gender quotas. A group of institutional shareholders (the same in both companies) did indeed submit slates with these characteristics: a woman nominated in Fiat and a woman in Fiat Industrial. Both nominees have outstanding professional profiles, and both will improve the independence and diversity rates within the boards. But were two slates really necessary? At the end of the day, regardless of the votes received, all nominees would have necessarily been appointed.
The “minority” slates obtained 29% of votes in Fiat and 37% in Fiat Industrial. Under a basic principle of proportionality, minority shareholders would have been entitled to appoint 3 directors in both cases; however, under the “voto di lista” mechanism, as defined by Fiat’s Articles of Association, 30% of votes entitles the holder to only 10% of directors.
UniCredit
The UniCredit AGM, scheduled for May 11th The process of appointing the new directors presents almost the same scenario: two lists of nominees have been submitted and, in this case too, the only nominee put forward by the group of institutional shareholders is a woman. Whatever the outcome of the vote, all of UniCredit’s directors have already been appointed. Furthermore, in this instance too, the minority shareholders’ nominee will enable the company to meet the regulatory gender quota of 20% ahead of schedule (by chance?).
UniCredit’s major shareholders collectively hold approximately 20% of the share capital, a percentage which does not guarantee a majority of votes. Nevertheless, thanks to the “voto di lista” mechanism as defined in UniCredit’s Articles of Association, they will elect all board members except one.
Both the UniCredit and Fiat Group cases are clear examples of one of the distortions caused by the “voto di lista”: the power of major shareholders is further strengthened, thanks to the exclusion of the proportionality principle. Nevertheless, the By-laws’ provision of only one director elected by the minorities is understandable (even if not justifiable) in such cases: majority shareholders took advantage of the law, by allowing the lowest possible representation to minorities.
What happens when there are no major shareholders? The case of Prysmian, the only large Italian public company, makes even clearer the paradoxes created by an incorrect definition of the “list vote” mechanism.
Prysmian
The company recently modified its By-laws by enabling the Board of Directors itself to submit a slate of nominees. As no shareholders control the company, such provision aims at ensuring that at least one slate is submitted and also at guaranteeing a continuity of the company’s management. The paradox arises because the election mechanism has not been changed accordingly: 9 directors out of 11 are still elected from the slate of nominees that obtains the majority of votes. As there is no majority shareholder, what happens in case a slate of 11 nominees is submitted by an activist investor? In that case, almost the entire Board would change, drastically affecting the management of the company.
Fortunately for Prysmian’s current management, no “minority” slates comprising 11 nominees were submitted at the 2012 AGM: the Board’s slate comprised 11 nominees, the major shareholder Clubtre (holding 6% of the share capital) put forward only 3 nominees, and the slate submitted by the usual group of institutional shareholders (representing 1.8%) included only 2 nominees.
Here is the paradox: the Board’s nominees did not have a predefined number of votes, whilst the other slates had 6% and 2% of the share capital respectively; however, none of the “minority” lists included a sufficient number of nominees to fill the Board. If, for instance, Clubtre had obtained the majority of votes, only 5 out of 11 directors would have been elected (three from Clubtre’s list and two from the “minority” lists). A new meeting would have had to be convened to complete the Board, to the detriment of the company’s management. In such a scenario, voting shareholders faced a choice between voting for the slate submitted by the Board or putting the continuity of the company’s management at risk.
At the AGM, held on April 18th, the Board’s nominees received 83% of the votes, but this very high level of approval is also due to the responsible voting behaviour of the shareholders, who had no real choice.
Such a paradox could have been easily avoided by amending the election mechanism provided for in the By-laws. It is probable that the only large Italian public company is still tied to the old culture of the controlling shareholder (who no longer exists).
The reported cases (only a few among dozens) are clear signals that the voting mechanism needs to be changed. A regulatory amendment, forcing the application of the real “voto di lista” mechanism, would allow for greater proportionality: the votes obtained by each list shall be divided by the integers from one to the number of directors to be elected; the resulting quotients are then allocated, one each, to the nominees on that list, in accordance with the order in which their names appear there; all the nominees on all the lists (including the majority one) are then arranged in descending order of their individual quotients.