The Curious Case of Italian Interlocking Directorates

Italy is so far the only EU Member State to have introduced, in 2011, a specific anti-interlocking provision targeting personal ties among competing banking, insurance, and financial firms and groups. This should not come as a surprise. Interlocking directorates have been an egregious feature of Italian capitalism at least since the 1920s and an endemic and persisting phenomenon especially within the financial sector. For instance, before the reform, the Mediobanca-Generali conglomerate was at the center of a galaxy of interlocking directorates and ownership ties which directly or indirectly connected a vast number of listed companies, including many competing financial firms. According to several commentators, this situation, and the ensuing lack of competition, contributed to worsen the effects of the 2007-2008 financial crisis in Italy.

Generally speaking, personal ties among competitors pose serious antitrust concerns. The fact that the same person serves on the boards of two competing firms facilitates exchanges of information among them, enabling each firm to easily monitor the other’s behavior. This, by itself, might favor collusion and/or the establishment of a quiet life equilibrium among competitors. If one firm deviates from the agreed upon behavior, the other firm will most likely immediately know. Moreover, even when there is no anticompetitive agreement in place, the decisions or votes of the interlocked directors may be influenced by the information they learned by holding office in the competing firm. They may also be constrained by the fact that, owing fiduciary duties to both firms, they may try to maximize the joint profits of the competing companies by pushing these companies to forego competition. The goal of the 2011 reform was, therefore, to address this problem and enhance competition in the financial sector.

Our paper, forthcoming in a book edited by Marco Corradi and Julian Nowag, after providing an overview of the Italian legislation on interlocking directorates and discussing their potential anticompetitive effects, questions whether the Italian statutory ban has met its goal. 

Using the banking sector as a case study, we gathered data on the number of interlocking directorates that persist among major Italian banks and banking groups at the end of 2019.  More specifically, we focused on the first 22 Italian banking groups, which collectively own roughly 73% of the bank branches in the country. The size of the banks and groups involved makes it fair to assume that they compete in at least some geographic or product markets and that, as a result, they have been affected by the interlocking ban. For each bank, we identified the members of the board of directors, the members of the internal control body, and the general manager, since these are the main corporate positions and offices to which the statutory ban on interlocking directorates applies. In the case of banks controlled by other firms, we have done the same exercise for the parent company. Previous studies claimed that the unclear wording of the anti-interlocking provision, the ineffective sanctioning regime, and lack of enforcement contributed to the persistence of interlocking directorates, despite the ban. The result of our study is instead that interlocking directorates among major Italian banks and banking groups seem to have entirely disappeared: on our reference date (December 31, 2019) we could not find a single interlocking directorate among the firms considered.

Assessing whether the interlocking ban has actually had the effect to enhance competition in the banking sector is way more complex. As a general matter, it is, in fact, extremely difficult to find evidence of a causal relationship between the interlocking ban and the prices charged or the quantities exchanged in the financial sector. However, a very recent empirical study, which uses a difference-in-differences framework, seems to have overcome the obstacle. It shows that, in the period following the entry into force of the interlocking ban, bank lending rates—applied in credit relationships between a firm and a bank previously interlocked with another bank that also granted credit to the same firm—fell, indicating more vigorous competition. It also provides some (limited) evidence of an increase in the quantity of credit for the same banking relationships.

We also tried to assess whether the interlocking ban has had any effect on the ownership structure of the relevant market players, for instance contributing to the disposal of minority and cross-shareholdings directly or indirectly held by competing companies. In fact, ownership ties also provide powerful incentives not to compete (see, for instance, OECD, 2008; Elhauge, 2016) and may help explain or justify the existence of personal links among competitors. Empirical studies (see, eg, Drago, Manestra and Santella, 2011, and Bertoni and Randone, 2006) based on data collected before the 2011 statutory ban on interlocking directorates show, for example, that the ownership ties of large Italian listed companies, including major financial firms, closely resembled the interlocking directorates among them. One can thus expect that an interlocking ban, which severs an important communication channel among competitors, would also lead to a reduction in ownership connections. 

Unfortunately, to our knowledge, there are no studies that have performed similar analyses with data collected after the enforcement of the interlocking ban. It is therefore not possible to determine whether any observed reduction in ownership links is causally related to the interlocking ban. However, data provided by Consob, the Italian financial markets authority, in its 2019 report on the corporate governance of Italian listed companies show that, while the mean stake held by Italian banks and insurance firms in Italian listed companies has remained more or less stable between 2010 and 2018, their total number of shareholdings has sharply decreased. This provides at least some indication that changes in ownership patterns have been observed precisely with respect to the same financial firms to which the interlocking prohibition applies.

Finally, our paper questions whether the interlocking ban has had the unintended effect of reducing the competence and expertise of financial firms’ governing bodies by preventing them from selecting competent and talented professionals that were already employed in competing firms. While this may be impossible to investigate in practice, since many different provisions have over time affected the corporate governance of financial firms in Italy, we show that the claim that interlockings between competitors should be preserved because they enable financial firms to acquire and share rare talent and competence has no empirical support and should be rejected at a theoretical level. By contrast, several studies, including some that employ artificial intelligence, demonstrate that diversity in board composition is the right way to go.

Federico Ghezzi is a Full Professor at the Department of Law at Bocconi University, Milan.

Chiara Picciau is an Academic Fellow at Bocconi University, Milan.