A Code of Corporate Governance sets out high standards for Corporate Governance, and good practices, which a company can adopt to improve its governance levels.
In 2020, Italy adopted a new Code, which became applicable from January 2021. The Code applies to all the listed companies on a voluntary basis, with companies who adopt it disclosing the same in their Corporate Governance reports. The Code has been revised with the aim of helping improve the long-term sustainability, transparency, and accountability of the organizational structure, and shareholder engagement activities, in order to enhance its attractiveness in international markets as well as among domestic and foreign investors.
The Code focuses on four essential objectives and principles. They are:
- Sustainability: The Code encourages Italian equity-listed companies to adopt strategies based on sustainability. It recommends that sustainable success should guide the actions of the Board, and it should create long-term value for shareholders, taking into account the interests of other stakeholders, relevant to the company. It requires the Board to integrate business plans, internal control and risk management systems, and remuneration policies, with the company’s sustainable success.
- Engagement: The Code recommends that listed companies should develop a dialogue with the market and with the investors, through specific engagement policies. It assigns a key role to the Chairperson, who in agreement with the CEO, is directed to prepare a policy to manage dialogue with the investors, which the Board will approve and monitor.
- Proportionality: The principles in the Code would apply to companies based on the size of the company and the ownership structure. It goes beyond large companies to better suit small-medium and/or family-owned industrial firms. Some recommendations are applicable to large listed companies, while other recommendations are applicable to companies with concentrated ownership, controlled by one or more shareholders.
- Simplification: The framework of the new Code has been simplified. Q&A, based on queries received from companies, would be published on a recurring basis.
India, in its efforts towards improving governance standards of companies, continually makes changes to law and regulations. Some principles given under the Italian Code of Corporate Governance, which India can consider are –
- Option of choosing between a single-tier and a two-tier Board structure.
- Explanation to be provided by the Board in case the Chair is entrusted with the position of CEO or with significant managerial powers.
- At least one-third of the Board should consist of members of the less represented gender.
- Appointment of Lead Independent Director, and defining his/ her role.
- A defined role of the Board, Chair, and CEO (to promote transparency).
- The Board of Directors should promote dialogue with shareholders and other stakeholders, in the most appropriate way.
- The Risk Committee should consist of a majority of Independent Directors and chaired by an Independent Director.
- Succession planning to be done by Nomination Committee for the CEO and other Executive Directors.
- Criteria for Board Evaluation should include the Board’s active involvement in the definition of the company’s strategy and in the monitoring of the management of the company’s business, as well as the appropriateness of the internal control and risk management system.
India can consider adopting some of these practices, keeping in mind the specificities of the Indian context.