List Voting’s Travels: The Importance of Being Independent in the Boardroom

In the field of shareholders’ voting rights, the protection of minority shareholders is an issue often raised with the need for corporate regulations to be inspired by democratic principles such as the one-share-one-vote principle and the related proportionality rule.

In a recent article, I offer a novel contribution to the assessment of ‘list voting’, a rule according to which minority shareholders can appoint at least one director, a fairly unique feature of Italian corporate governance that institutional investors have increasingly approved of.  

In Italy, the concept of ‘minority’ can be traced back to both the Code of Corporate Governance and the Consolidated Law on Finance; it is therefore not surprising that minority-appointed directors are now part of the complex picture of Italian corporate governance.

The OECD also highlighted the need for a democratic principle which, in spite of the rather unclear boundaries of the word ‘minority’, reflects how the appointment of directors mirrors different interests, which are complementary among them. The risk is that the representative of the minority will act as a symbol of specific interests and that this presence will become a ‘continuous mediation between different conceptions of what is the social interest’.

This paper aims to investigate whether the model of the Italian list voting really represents uniqueness in a comparative framework. The first part of the article describes Italian list voting, and the second part deals with foreign legal systems, stressing common elements shared with other legal systems.

In addition, the paper aims to determine the impact of list voting on corporate boards. A hand-selected dataset covering all Italian listed companies from 2005 to 2015 reveals a positive correlation between minority directors appointed to the board of directors and the amount of dividend payouts. The findings also uncover the practice of appointing independent directors on the grounds of lists presented by minority shareholders and provide evidence that list voting is effective, not only in companies with controlling shareholders but also on a worldwide scale, notwithstanding the earlier claims that list voting makes more sense within contexts of concentrated ownership. Although the empirical analysis primarily addresses the Italian case, the analysis of the effectiveness of list voting is beneficial for other jurisdictions too.

The role of minority-appointed directors is analysed through the study of the dividend policies issue. Managers can freely use (and abuse) cash flows for personal purposes through the manipulation of dividend distribution. This suggests that it would usually be extremely difficult for minority shareholders to be adequately protected against self-dealing without appointing independent directors. As my article investigates, it appears that the link between the presence of minority-appointed independent directors and the propensity to distribute dividends is strong. Contrary to what was expected, the findings indicate that a significant number of independent directors on the board (at least one third of them) could reduce the dividend payout ratio. The study reaffirms the value of independent minority directors who, if equal to at least 15% of the board of directors, affect dividend distribution policies.

At first glance, one might believe there is no need for enhanced-independent directors given the differences among directors (minority-appointed and majority-appointed ones). Upon a closer look, however, it is obvious that independent minority directors can influence the payment of dividends and raise the likelihood of distribution. The amount and the probability of their distribution improves in the presence of independent minority directors. This effect is not exclusively limited to concentrated ownership structures resembling the Italian context, although it is undeniable that independent minority directors have stronger value in such contexts.

Maria Lucia Passador is a Research Fellow at Bocconi University in Milan and is currently a Junior Academic Visitor at the University of Oxford.