The scandal that has engulfed Banca MPS in recent days, concerning the underwriting of derivatives by Nomura and Deutsche Bank, seems to have taken the entire Italian market by surprise – from the current management to the regulators, and from the press to the shareholders. Yet the problems facing the Siena-based bank have much deeper roots, dating back at least five years, to when the decision was taken to acquire Banca Antonveneta from Spain’s Banco Santander for €9 billion. Few voices were raised at the time to question why Italy’s third-largest banking group was paying more for a smaller bank than its own market capitalisation at the time, and a full €2.4 billion more than Antonveneta had been valued at by Santander just a few months earlier. The €5 billion capital increase, through which the shareholders partially financed the ill-fated acquisition, was approved by 98.99% of the voting shareholders. But was there really no sign whatsoever that something was amiss in Monte Paschi’s governance? Despite the widespread surprise we are seeing these days, ECGS and Frontis Governance had already expressed strong concerns in all assembly analysis reports produced in recent years.
Proxy advisors had repeatedly noted worrying shortcomings in the actual independence of the Sienese institution's management and supervisory bodies. Applying the governance principles and the evaluation system for CG Rating Report by Frontis Governance, the previous Board of Directors of MPS Bank would have scored just 30 out of 100 (compared to a FTSE MIB average of 55), while the Board of Statutory Auditors scored an equally worrying 42 (compared to the market average of 77).
The biggest cause for concern was the total Absence of strictly independent administrators, according to the principles of Frontis Governance and ECGS. This definition was in stark contrast to the internal assessments of the Bank's Board of Directors, which declared four directors as independent under the Corporate Governance Code. However, upon analysing the CVs of the four “independent” directors, it was discovered that: Massimiliano Capece Minutolo and Mario Delfini had strong ties to various companies owned by Ing. Caltagirone (who was at the time a significant shareholder and Vice Chairman of the Bank), while Graziano Costantini had been Deputy General of the MPS Foundation until 2009, and Carlo Querci had been a director of the Bank for 15 years, as well as having held various other positions within the Group over time. Of course, the adherence of the Board's assessments to the various codes is not being questioned here, but it cannot be denied that the definition of independence at MPS was, to say the least, peculiar (although a rather common “peculiarity” in the Italian market).
No directors from the Bank sat on the Board of Directors, which consequently held a role more oriented towards strategic direction and control. Precisely by virtue of this peculiarity, a strong presence of strictly independent directors would have been necessary, free from conflicts of interest and without any connection to significant shareholders. Even if, with great effort, the “independence” criteria adopted by the Board had been accepted, 4 “independents” out of 12 directors would still not have been sufficient to counterbalance the interests of the major shareholders.
Concerns had also been raised by Frontis Governance regarding the Composition of the Board of Statutory Auditors, the Bank's main internal oversight body. Precisely because of this extremely sensitive role, all Statutory Auditors should adhere to the strictest independence criteria, but significant doubts had arisen regarding the figure of the Chairman of the oversight body, Tommaso Di Tanno. In fact, in 2010, the firm Di Tanno & Associati was hired as an advisor for the structuring of the integration operation between Anima SGR and Prima SGR (the asset management company of the MPS Group), which led to the creation of Asset Management Holding. Although lesser, doubts also arose regarding the other two statutory auditors: Paola Serpi, a manager at affiliated companies Mens Sana Basket and S.S. Mens Sana 1871, and Marco Turchi, who held over 50 other positions, thereby posing a risk of not dedicating sufficient energy to the internal oversight of the third largest Italian banking group.
Naturally, recognising the limited independence of the management and supervisory bodies would not have protected against any mismanagement, but it would at least have contributed to sound the alarm on the validity of internal procedures.
Too often, corporate governance is confused with mere adherence to one article or another of the Code, and in any case, we do not wish to question the absolute formal correctness of the Bank's assessments and declarations here. However, rules are by their very nature generic and should only represent a starting point (essential, though). On this basis, internal systems of rules and, above all, the most appropriate actions for the specific reality on which they are to be applied should then be defined. In this sense, an accurate analysis of all fundamental aspects of corporate governance can genuinely facilitate The identification of long-term risk factors.
Following the renewal of the company's governing bodies, Monte Paschi has certainly made progress, although it hasn't resolved all governance concerns. According to Frontis Governance's rating system, the Bank's new Board now scores 42 (compared to the previous 30), while the Board of Statutory Auditors achieves a good 75, in line with Italian market averages. The situation for shareholders is decidedly worse. Due to potential capital increases (up to €1 billion approved in October 2012, the beneficiaries of which are still unknown, and up to €6.5 billion relating to the “Monti bonds” approved on 25 January), they risk seeing their property rights (to dividends) and voting rights further diminished.
Latest annotation: The notice of convocation concerning capital increases of €6.5 billion for the repayment of “Monti bonds” had been published more than a month before the meeting. From the tone of the news released in recent days, it would appear that many commentators and politicians have only just noticed the meeting's topics in the past few days. This further confirms the lack of attention paid to governance issues, for which it is always easier to criticise the results in hindsight, rather than identifying inadequate and risky behaviour beforehand.