Faculty of law blogs / UNIVERSITY OF OXFORD

Corporate Governance of Italian Listed Companies: a Focus on Non-Financial Reporting


Angela Ciavarella
Nadia Linciano
Rossella Signoretti

The latest issue of the CONSOB report on corporate governance of Italian-listed companies focuses on non-financial reporting, in addition to the usual survey of the main characteristics of Italian listed firms, including ownership, board composition, shareholders’ meetings and related party transactions.

In recent times, attention to non-financial information has grown significantly, due to the inability of traditional financial reporting to fulfil the growing needs of investors and other stakeholders for additional insights on companies’ value and their model of value creation. In addition, institutional investors with long-term investment horizons have progressively come to recognize the importance of environmental, social and governance risk management in security selection and portfolio construction.

In 2014, the European Commission adopted Directive 2014/95/EU, which requires certain large undertakings to prepare a non-financial statement containing information relating to at least environmental, human rights, anti-corruption and bribery, and social and employee-related matters. This statement should include a description of the policies, outcomes and risks related to such matters. Pursuant to this Directive, in 2018 European-listed companies will be required to publish a non-financial statement for the first time.

Given these important developments, the CONSOB Report assesses how the largest Italian-listed companies (i.e., FTSE MIB firms) are progressing with respect to non-financial reporting.

First, the Report gathered evidence on the number of firms that voluntarily disseminated non-financial information in 2016. Data were also collected on whether non-financial disclosure rested on a materiality analysis, which is the core of non-financial reporting, allowing organizations to obtain a clear view of the areas that matter most to them and to their stakeholders, in order to prioritize and take the right actions to improve their performance in those areas. According to the Global Reporting Initiative (GRI), “material aspects are those that reflect the organization’s significant economic, environmental and social impacts; or that substantively influence the assessments and decisions of stakeholders”. Following this standard, material aspects are identified by analysing their relevance to both the firm and its stakeholders. The final output is the materiality matrix, which ranks each matter under consideration both by the importance to the organization itself and by the relevance to the organization's stakeholders, such as customers, employees, NGO’s and suppliers. Issues are material when they are relevant to both firms and stakeholders.

The majority of FTSE MIB companies (26 out of 33) published a report on non-financial issues relating to the 2016 fiscal year, i.e. either a sustainability report (18 cases), an integrated report (4 cases), or both. Almost all companies (24 out of 26) conducted a materiality analysis. Moreover, they all described the process underlying the analysis itself, even if they offered different levels of detail. In order to explore the way companies appraised the relevance of the identified non-financial issues, the Report looked at whether they carried out both an internal and an external analysis (i.e., from their own perspective and from the perspective of stakeholders).

With regard to the internal assessment, in 21 cases, companies identified the most relevant matters through discussion with top management, while the remaining companies did not provide any explanation. Eleven firms out of 21 disclosed the way managers were involved in the process, mainly through interviews and questionnaires, while the remaining companies did not give any explanation. With reference to the external assessment, 19 firms stated that stakeholders had been directly involved in the process, one firm did not provide any information, while the remaining four companies seem to have accounted for stakeholders’ points of view by relying only on internal bodies rather than engaging stakeholders themselves. Some firms also mention the tools used to involve stakeholders (surveys and questionnaires, multi-stakeholder fora, focus groups and workshops).

The second part of the analysis reported in the CONSOB Report ascertained whether firms take into account directors’ non-financial skills and competences when dealing with board composition and functioning. This is key to institutional investors, who increasingly ask boards to oversee non-financial matters, while Italian directors do not yet seem fully aware of the relevance of non-financial matters.

This feature was explored by reference to various actions and documents mandated by the Italian Corporate Governance Code. First, the analysis focused on the board evaluation process performed over the year. Second, it reviewed the guidelines issued by the board with regard to directors’ appointment. Finally, it checked whether the induction sessions organized by the firm for corporate boards in the light of the Code also covered non-financial issues.

Among the 26 firms analysed, 11 did not mention non-financial matters in any of these documents. In the remaining cases, non-financial matters were mentioned mostly in the board guidelines (10 cases) and less so in the induction sessions (7 cases). However, the companies considering non-financial topics referred mainly to “conventional” topics, such as corporate governance and remuneration (16 quotes), while there was an explicit reference to sustainability issues and digital innovation in only 8 and 5 cases, respectively.

Overall, the analysis suggests that the majority of FTSE MIB Italian firms disclosed non-financial information through corporate documents, before mandatory rules came into force. However, directors do not seem much involved in non-financial matters, as only a few firms pay attention to them at the board level. Hopefully, the enactment of mandated non-financial disclosure will enhance companies’ consideration of these matters given that ‘the board’s engagement in developing long-term strategies is essential because an engaged board and a long-term approach are valuable indicators of a company’s ability to create long-term value for shareholders’ (see Larry Fink’s annual letter to CEOs).

Angela Ciavarella is a member of the Economic Research Unit, CONSOB.

Nadia Linciano is Head of the Economic Research Unit, CONSOB.

Rossella Signoretti is a member of the Corporate Governance Department, CONSOB.

Opinions expressed in this paper are exclusively the authors’ and do not necessarily reflect those of CONSOB.



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