New legislation introduced in Italy following the spectacular collapse of Parmalat in 2003 could serve as a blueprint for other countries. At least this was the proposal of the European Corporate Governance Institute's (ECGI) annual lecture and general assembly, held at IESE's Barcelona campus on April 11.

Luigi Zingales, Robert C. McCormack professor of entrepreneurship and finance at the University of Chicago's Graduate School of Business gave the keynote presentation "Board Elections: Is Italy a model for the rest of us?" His presentation was followed by a panel discussion.

The assembly was held under the Chatham House Rule, whereby comments made by participants can be reported to the public, but not attributed to specific individuals.

The discovery of a ¿14 billion hole in the Italian family-owned dairy group's accounts led to a reform of the country's corporate governance laws. Two years later, a rule was introduced requiring that at least one board member of every listed company be appointed by minority shareholders.

Since the new system is just two years old, it is too early to assess its success but ECGI's members looked at its costs and benefits. So far, arguments that the move would paralyze boards have been disproved. "The board member representing the minority shareholder has to be a collaborative kind of person," one participant said. "Otherwise they would eventually get voted off." 

Participants highlighted that even if legislation to protect minority shareholders is in place, few know how to invoke it. One member noted that institutional investors have the right to present lists for the board member representing the minority shareholder in Italy, but few Anglo-American investors are aware of this. 

Another challenge is to give the minority board members visibility, as their main recourse for complaint is resignation. At Parmalat, the minority shareholders' representative on the group's internal audit committee resigned a few years before the meltdown because she could not access sufficient financial information. But the event went unnoticed by the press.
 
ECGI's members said that the country faced particular difficulties in improving the diversity of its boards. "In Italy, there are about 20 families that own shares in the major businesses so there are the same 100 directors turning up at all the AGMs," one member said.

Looking beyond Italy, participants highlighted some universal difficulties in improving corporate governance via minority shareholder board members. For example, members warned against "group think". Psychological studies show that if one is told that the majority believes something you tend to believe it.   

One participant suggested that the Frisians, an ethnic group of Germanic people living in coastal parts of The Netherlands and Germany, would make ideal board members. Their reputation for stubbornness and independent thinking would make them immune to pressures to conform.