With the so-called “Investment Compact” Decree-Law, approved on 20 January, the Italian Government intends to reform the system of Italian cooperative banks, or at least the largest ones. According to the new rules, all cooperative banks with assets exceeding 8 billion euros will have to abandon their cooperative society structure and transform into joint-stock companies. The transformation must take place within 18 months, through a resolution of the extraordinary general meeting, and will involve a veritable revolution in the governance of some of the main Italian banking groups.
The Decree was presented amidst strong objections from the world of cooperative banks, naturally, but also from political and trade union circles. Given that Parliament will have to convert it into law within 60 days of its publication, it is very likely that may undergo significant changes, but the path to overcoming the anomaly of listed Italian popular banks seems to have been laid out.
Among the institutions involved in the measure are the listed companies Banca Popolare dell’Emilia Romagna, Banca Popolare dell’Etruria e del Lazio, Banca Popolare di Milano, Banca Popolare di Sondrio, Banco Popolare, Credito Valtellinese and UBI Banca.
What changes for listed cooperative banks
First of all, it will wane limit on share ownership, which the Consolidated Banking Act sets at 1% of capital for cooperative banks (subject to the possibility, provided for in the articles of association, of reducing it further, down to 0.5%). Listed cooperative banks will therefore also be vulnerable to takeover bids, as they can rely on value creation as their main – if not sole – defence against any hostile takeovers.
Another revolution will concern the assembly voting mechanism. Only shareholders registered for at least 90 days (defined as “members” to differentiate them from other shareholders) are entitled to participate in the general meetings of listed cooperative banks. Each member then has the right to only one vote, regardless of the number of shares held, and therefore of the financial commitment in the company. By transforming into a joint-stock company (SpA), popular banks will also have to adopt the “one share – one vote” principle, and therefore guarantee all shareholders equal treatment and rights (without prejudice to new possibility offered by the Italian legislator to attribute the increased, which, however, will hardly be applicable to the new “popular” joint-stock companies, given the at least initially extremely fragmented shareholding).
Overcoming an anomaly
The reform therefore aims to overcome an anomaly that is not found in other markets, and which has contributed to making Italy's large cooperative banks a hybrid entity, halfway between a large universal bank and a mutual organisation with strong territorial roots. The issue of listed Italian cooperative banks has been addressed several times on this blog, highlighting how such a structure puts at risk both the pursuit of the primary objective of any listed company, namely the creation of value for its shareholders, and the typical mutualistic aims of a cooperative.
The co-operative banking system, to which the *popolari* banks belong, was established in the latter half of the 19th century in Germany, where it also found its greatest prevalence. It was precisely the German system that was taken as a benchmark by many opponents of the transformation into public limited companies, as a model of efficiency for mutual finance. The anomaly of the Italian system, however, lies precisely in allowing co-operatives to be listed on the stock exchange, something that does not happen for eingetragene Genossenschaft (or registered cooperative societies) in Germany.
As already highlighted in previous posts, the listing of shares in cooperative banks not only significantly influences their governance but also even conflicts with the mutualistic aims that such institutions should pursue. The objectives of a listed company, which inevitably has to compete in international markets, can only be incompatible with the strong focus on supporting the local territory that should characterise cooperative banks and co-operatives.
Conversely, the complete exclusion of independent shareholders (and therefore the market) from company life carries the risk that interests that are not always compatible with long-term value creation may prevail. Thanks to the differentiation between “member” and unregistered shareholder, in fact, the vast majority of voters at the assemblies of Italian popular banks are employees, whose interests do not always coincide with those of the majority of shareholders. Consider, for example, the’interference in the corporate management of the shareholders' association of Banca Popolare di Milano, the “Friends of BPM”, a trade union-backed group that was forced to disband in 2012 following sanctions imposed by Consob, inspections by the Bank of Italy and investigations by the Public Prosecutor’s Office. Furthermore, decisions of fundamental importance to the company’s operations are taken by a minimal, if not insignificant, proportion of the share capital. On average, only 11% of the share capital was represented at the general meetings of the four largest cooperative banks in 2014, and the 2013 financial statements were approved, on average, by only 6.5% of the share capital (barely 0.38% at Banca Popolare di Milano). It is undeniable that such a system cannot be compatible with the protection of the interests of all shareholders, a fundamental principle of good governance for any listed company. The remuneration policy, for example, is in effect approved by employees who may find themselves in a clear conflict of interest, as they are directly affected by those policies.
A necessary intervention, but one that also presents challenges.
The reform is therefore excellent news, long awaited by the “non-member” shareholders of cooperative banks, who will finally be able to enjoy the same rights as their “member” counterparts and shareholders of other organisations, both banking and non-banking. Furthermore, the long-awaited opening up of cooperative banks to competition has already had an impact on the markets, with analysts raising their target prices for the main listed banks by an average of 25%-30%.
Despite strong market appreciation, as already reported, the Decree has also been strongly contested by many political and trade union circles. This is not surprising, given the strong vested interests in the governance of popular banks. Indeed, it is important to consider that the territorial nature of popular banks can also catalyse strong political interests, especially concerning the creation of consensus through the financing of local productive activities.
Indeed, as defined by the Government, the forced transformation of the largest popular banks can give rise to some perplexities. The main element of risk, which in several cases has distorted the very objectives of the popular banks, is not so much their size as the fact that they are listed on the stock markets. As we have seen, none of the German popular banks are listed, but the system works excellently and has been able to overcome the financial crisis better than private banking institutions. However, nothing prevents Volksbank to maintain the cooperative structure despite its large size (the largest German cooperative bank is Berliner Volksbank eG, which had over €10 billion in total assets at the end of 2013).
Precisely because of their mutualistic purposes, and because they do not always have to pursue the maximisation of shareholders' returns, popular banks can play a fundamental role in local economies, and represent a real parachute in situations of generalised financial crises. It is no coincidence that one Industrial association studio Unimpresa it was found that in the three-year period 2010-2013, Italian cooperative banks increased their credit disbursement by 6.3 billion euros, compared to a general contraction of 52 billion euros in the rest of the banking sector.
As it is limited to institutions with over 8 billion euros in assets, the transformation will affect a very small number of cooperative banks (10 out of 70), and will not affect any of the 400 cooperative credit banks, other mutual purpose financial institutions, whose system will remain safeguarded. The reform is also driven by the need for greater harmonisation of the governance systems of large European banks, which have been under the direct supervision of the European Central Bank since November 2014.
The same objective that the Decree aims for could, however, have been achieved, perhaps more effectively, through a simple rule preventing the listing of shares issued by cooperative societies. All currently listed cooperatives, including popular banks, would thus have had the opportunity to choose whether to continue pursuing mutualistic aims or to align themselves with other listed banks, perhaps leaving less room for political and trade union disputes. Furthermore, through the simple ban on listing, the anomaly of the one-share-one-vote system would have been definitively resolved for all cooperative societies, not just banks.