Communication n. DEM/11012984 of 24 February 2011

RE: "Requests of disclosure pursuant to Article 114, paragraph 5 of Italian Legislative Decree no. 58 of 24 February 1998 on indemnities in the case of early termination - Recommendations on succession planning and disclosure of remuneration as established by Art. 78 of Regulation no. 11971 of 14 May 1999 and subsequent amendments".

INDEX

1. Introduction

The supervisory activities of recent years and the observation of recent corporate events have highlighted some particularly significant aspects with regards to the more general subject of good corporate governance.

Reference is made specifically to: (i) the remuneration of directors of listed companies; and (ii) plans to replace executive directors.

In order to guarantee a suitable level of transparency with regards to the market on these aspects, as a temporary measure and whilst awaiting a more systematic definition of the regulation on the transparency of remuneration, which will be prepared by the implementation of Italian Legislative Decree no. 259 of 30 December 2010 (see paragraph 2.1 below), the Commission has considered it necessary to provide a general communication containing requests in accordance with art. 114, paragraph 5 of Italian Legislative Decree no. 58/98 (the "Consolidated Law on Finance") and recommendations.

Information has to be included in the "Report on corporate governance and ownership structures" (as for the requests on indemnities in the case of early termination and recommendations on succession planning) and in the Notes to the financial statements closed from 31 December 2010 onwards (as for the recommendation on the implementation of the transparency rules on individual remuneration under Article 78 Issuers Regulation). Should the Report on corporate governance have already been approved by the company at the time the communication was approved, the information required or recommended may be published in a separate supplementary document, in accordance with the same terms and conditions established for the report on corporate governance.

The temporary nature of the Consob measure aims to stimulate the development of self-regulatory initiatives, in particular on succession planning, and a better disclosure by individual listed companies on remuneration practices already recommended by the Self-Regulatory Code. Consob will follow the developments of self-discipline and the evolution of issuers’ behaviour on these matters, with the aim of evaluating possible future regulatory actions, also of a permanent nature. Monitoring by Consob will also cover board evaluation, a topic which was subject to a specific request in the draft regulatory measures submitted to consultation and on which, for now, no intervention is forecast.

2. Requests of information and recommendations on remuneration matters

2.1 Introduction

The remuneration of directors of listed companies and, in particular, those holding executive roles, is a fundamental incentive and control mechanism by which to ensure the integrity and efficiency of the corporate governance mechanisms. In recent years, and increasingly from the start of the financial crisis, the attention of regulators has focused on this issue, both nationally and during international coordination, with the aim of increasing shareholder involvement in defining remuneration policies and strengthening the transparency on the content of these policies and their effective implementation.

In Europe, the growing attention paid to this subject is borne out by the various community initiatives that have been taken.More specifically, in 2004 the Commission issued a first Recommendation (2004/913/EC) in relation to the promotion of a suitable regime with regards to the remuneration of directors of listed companies and, in 2005, a second Recommendation (2005/162/EC) on the role of non- executive directors or the directors of listed companies and on the committees of the supervisory board. More recently, the Commission has issued the Recommendation 2009/385/EC, which integrates the two previous Recommendations and applies to all listed companies, and Recommendation 2009/384/EC in relation to remuneration policies in the financial sector.

Consob had already expressed "its intent to take action on the matter of the remuneration policies of listed companies in the short-term" when publishing the second consultation document on related party transactions on 3 August 2009. This was with the aim of ensuring a full and timely implementation of the European Commission Recommendations on the matter.

The observations presented by the parties consulted, which suggested optimising the forms of self-regulation in order to implement the European recommendations, on the one hand, and to start-up a legislative process on the other, have led Consob to postpone its intervention whilst awaiting the definition of these initiatives.

In terms of self-regulation, the Self-Regulatory Code of listed companies was amended in March 2010, in the part relating to the remuneration of directors and managers with strategic responsibilities, introducing the main contents of the European Recommendations on the process for defining remuneration policies and their content.

Issuers are asked to apply the new principles and related application criteria contained in the new article 7 of the Code by the end of the year starting in 2011, notifying the market with the report on corporate governance to be published in 2012.

As for regulation, Article 24 of Italian Law no. 96 of 4 June 2010 (Community Law 2009) has appointed the government to adopt a legislative decree with which to implement Recommendations 2004/913/EC and 2009/385/EC⁽¹⁾. Consequently, there is a need, on the one hand, to increase the level of transparency on current remuneration policies and on the remuneration paid by virtue of said policies and, on the other, to encourage "the involvement of the shareholders’ meeting in approving the remuneration policy".

On 15 November 2010, the Ministry of Economy and Finance began a consultation procedure on a draft legislative decree implementing the Recommendations of the European Commission. The consultation came to an end on 3 December 2010. The legislative decree was approved by the Council of Ministers on 22 December 2010 and published on 7 February 2011 in the Official Gazette of the Italian Republic (Italian Legislative Decree no. 259 of 30 December 2010). With reference to the area of transparency, the new art. 123-ter of the Consolidated Law on Finance establishes that listed companies shall make a report on remuneration available to the public, at least 21 days prior to the date of the ordinary annual shareholders’ meeting. The report will be divided up into two sections.The first section explains the policy for the remuneration of the members of the board of directors, the general managers and managers with strategic responsibilities, with reference at least to the next year, and the procedures used to adopt and implement the policy. The second section will provide an analytical explanation of the remuneration effectively paid or in any case attributed to said parties, in nominative form for the members of the boards of directors and auditors and for the general managers and in aggregate form for managers with strategic responsibilities, except where otherwise indicated by Consob regulations. As concerns shareholder involvement, paragraph 3 of the new art. 123-ter of the Consolidated Law on Finance establishes that the shareholders’ meeting shall express a non-binding vote on the first section of the report and that the outcome of the vote will be made available to the public.

Consob has been appointed to indicate by regulation which information is to be included in the first section of the report, by first consulting with the Bank of Italy and Isvap as concerns the parties respectively supervised and considering industry EU regulations, and all information to be included in the second section⁽²⁾.

Art. 2 ("Coming into effect") of the stated legislative decree, finally, establishes that the remuneration report envisaged by the new art. 123-ter of the Consolidated Law on Finance shall be presented to the ordinary annual shareholders’ meeting "called for the year following that during which the regulation came into effect" issued by Consob in accordance with paragraphs 7 and 8 of the same art. 123-ter. No specific terms are envisaged for the issue of said regulation.

Once it has consulted with the Bank of Italy and Isvap as concerns the parties respectively supervised, Consob will shortly be starting the public consultation for the implementation of said regulatory powers. It is therefore envisaged that information on remuneration in accordance with the new rules will be supplied during 2012, upon approval of the financial statements pertaining to 2011.

Considering that the new provisions of the Self-Regulatory Code and those to be adopted in order to implement the legislative decree will only come into effect as from 2012, the Commission deems it appropriate to hereby intervene on a temporary basis on some areas considered as particularly sensitive and which are already concerned by current regulation, in order to improve transparency on remuneration at the time of the shareholders’ meetings called to approve the financial statements for 2010. More specifically, the action aims to encourage better information to the public:

a) on indemnities due in the event of early termination;

b) on remuneration paid.

With reference to the indemnity due in the event of early termination, at present companies issuing securities admitted to trading on regulated markets must, in accordance with art. 123-bis, paragraph 1, letter i) of the Consolidated Law on Finance, provide detailed information on "agreements between companies and directors, members of the control body or supervisory council which envisage indemnities in the event of resignation or dismissal without just cause, or if their employment contract should terminate as the result of a takeover bid."⁽³⁾.

With reference to remuneration paid, art. 78 of Consob regulation no. 11971 of 14 May 1999, as subsequently amended (the "Issuers Regulation") establishes that "the share issuers⁽⁴⁾ point out, in the notes to the balance sheet, subjectively and according to the criteria established in Annexe 3C, the emoluments to the members of the administration and control bodies and general management, in whatever right and in whatever form, as well as from controlling companies".Annex 3C requires the companies to provide the information demanded through specific tables.

2.2 Analysis

The need to intervene in the above two areas in a timely manner comes from the results of an analysis performed by Consob on the methods by which listed companies currently comply to the above disclosure obligations. The results of the analysis are as follows.

a) Indemnities in the event of early termination

In order to assess the ways by which the issuers provide the information pursuant to art. 123-bis, paragraph 1, letter i) of the Consolidated Law on Finance, the corporate governance reports and ownership structures for 2009 were analysed for the companies belonging to the FTSE MIB index. These were 38 companies⁽⁵⁾ collectively accounting for around 80% of the market capitalisation.

Of the 38 companies analysed, 4 (11% of the sample) provided no type of information, 20 (53% of the sample) declared that they envisaged no form of indemnity, whilst the remaining 14 companies (37% of the sample) declared that they provided for indemnity in the event of early termination of office (see Table 1).

Table 1: Information on the existence of agreements which envisage indemnities in the event of early termination

As concerns the information supplied by the 14 companies who declare they have agreements envisaging indemnity for directors in the event of early termination, the analysis reveals the following (seeTable 2):

1. almost all companies indicate the terms of the contractual agreement stipulated in summary form;
   
    
2. only one company quantifies the amount of the indemnity to be paid to the director.This is a company that provides the director with a fixed indemnity, the estimate of which does not, therefore, require a specific analysis;
   
    
3. only two companies clarify the destiny of the rights due to directors in relation to incentive plans based on financial instruments.More specifically, both companies declare that the agreement lets the director "retain his rights to subscribe shares" in the relevant company;
   
    
4. all the companies specify the circumstances in which the right matures (the most common are revocation without just cause and resignation for just cause).

Table 2: Information provided by companies which envisage agreements in the event of early termination

The results of the analysis therefore highlight the following critical issues:

• some companies from the reference sample do not provide information in accordance with art. 123-bis, paragraph 1, letter i) of the Consolidated Law on Finance;
  
   
• the information supplied by the companies on agreements for early termination is minimal and not detailed (as instead is required by the law), and is unsuitable for providing the market with the tools necessary for an in-depth assessment of the agreements stipulated. More specifically, with the exception of very few cases, there is insufficient information on some particularly relevant aspects for a correct assessment by the market of agreements in place, namely: (i) a quantitative estimate of the value of the indemnity to be paid in the event of termination of the contract on a certain date (e.g. at the end of the year of reference); (ii) whether or not the parties who have ceased their offices retain any rights assigned them by way of incentive plans based on financial instruments⁽⁶⁾;
  
   
• agreements with directors for situations of termination (early or otherwise) of employment may sometimes provide for directors to retain non-monetary benefits (the so-called "post-retirement perks") in addition to the stipulation of specific consulting contracts for a period subsequent to termination. The analysis shows that information on the existence of such agreements has never been supplied by the issuers and it is not clear whether this lack of information is due to the non-existence of such agreements or otherwise.

b) Remuneration paid

The analysis refers to the information supplied in accordance with art. 78 Issuers Regulation by companies listed in 2007, 2008 and 2009 and refers to remuneration paid to managing directors only⁽⁷⁾.

In accordance with the mentioned Annex 3C, the disclosure on remuneration paid should be presented in tabular form, according to the specifically prepared Model 1, and must contain the following information for each party concerned:

• emoluments for the office in the company drawing up the financial statement. This item includes emoluments for the period resolved by the shareholders’ meeting or pursuant to article 2389, paragraph 2 of the Italian Civil Code, even if not paid, any profit-sharing, attendance allowances and expense reimbursements;
  
   
• non-monetary benefits, namely fringe benefits and insurance policies;
  
   
• bonuses and other incentives.These include the portion of remuneration due on a one off basis, with the exclusion of the values of stock-options assigned or exercised;
  
   
• other remuneration.This item includes emoluments for offices held in listed and unlisted subsidiaries, employment salaries, severance indemnity and all other remuneration resulting from other services provided.

Table 3 shows the total amount of remuneration paid to managing directors in Italian listed companies in the three years considered and the related breakdown into the various sub-items.The analysis concerns 267 companies in 2007, 263 in 2008 and 258 in 2009. Some companies have been excluded from the analysis as the data on remuneration was present in aggregate form.

Table 3: Total amount of remuneration paid to managing directors in companies belonging to the reference sample

In all three years concerned by the analysis, the most significant items of the remuneration were represented by "Emoluments for the office" and "Other remuneration" which, on average, respectively accounted for around 43% and 33% of the entire remuneration.The next relevant were the items "Bonuses and other incentives" and "Non-monetary benefits" which, on average, respectively account for 22% and 1.3% of the entire remuneration.

The analysis therefore highlights:

• situations where the information on remuneration is provided in an aggregate manner under a single entry, with it not being possible to identify in full the various components of the remuneration specified by the provisions of art. 78 Issuers Regulation;
  
   
• the relevance in quantitative terms of the items of the remuneration "Emoluments for the office" and "Other remuneration", which, in accordance with Model 1 of Annex 3C, consist of aggregates of various components, which are particularly significant also in terms of quality.A more detailed disclosure of the various sub-items that come together to form the "Emoluments for the office" and "Other remuneration", already spontaneously supplied by some issuers may, therefore, be useful to ensure the market a fuller understanding of the director remuneration structure.

On the basis of the results of the analysis performed, Consob deems it appropriate to issue a request in accordance with article 114, paragraph 5 of the Consolidated Law on Finance on the matter of indemnity in the case of early termination and a recommendation with regards to the disclosure on remuneration established by art. 78 Issuers Regulation. The content of the two interventions is highlighted below.

2.3 Requests pursuant to Article 114, paragraph 5, of the Consolidated Law on Finance on agreements which envisage indemnities in the case of early termination

Pursuant to Article 114, paragraph 5, of the Consolidated Law on Finance, Issuers of listed shares as defined by article 65, paragraph 1, c), of Consob Regulation no. 11971 ("Issuer Regulation"), shall disclose in the "Report on corporate governance and ownership structures":

a) the existence of the agreements referred to in Article 123-bis, paragraph 1, i), of the Consolidated Law on Finance. In case these agreements do not exist, issuers shall disclose this circumstance;

b) the criteria used in order to determine the indemnity in favor of each director, member of the control body or supervisory council. In the case the indemnity is expressed as a function of the yearly payment, issuers shall provide detailed information on the components of this yearly payment;

c) a description of the effects generated by the termination of the employment relationship on the assignments made according to the schemes based on financial instruments and or on cash payments;

d) the events in which the right accrues;

e) the existence, if any, of agreements which envisage the assignment or the retention of non monetary benefits in case of termination (so-called "post-retirement perks") or the stipulation of post-retirement consulting contracts;

f) the possible existence of agreements which envisage remuneration for non competition clauses.

2.4 Recommendation on information disclosed ex Article 78 of Issuer Regulation

With regard to Model 1 of Annex 3C of Consob Regulation no. 11971 ("Issuers Regulation"), Issuers of listed shares as defined by article 65, paragraph 1, c), of Issuers Regulation, are recommended to disclose:

a) information on the remuneration paid using Model 1 in full, also specifying the elements of the remuneration which have not been paid;

b) in the relevant columns or in ad hoc footnotes, information on the different items which are part of "Emoluments for the office" and "Other remuneration", also taking into account the specific elements indicated by Model 1. With reference to "Emoluments for the office", issuers are recommended to disclose separately also the remuneration paid to directors for their participation to any committee.

3. Recommendations on succession planning

3.1 Introduction

Recent corporate events have shown that it is important for a company to provide for a structured succession plan for its executive directors. The existence of suitable succession plans allows companies not only to readily replace directors who have left their office, thereby ensuring continuity and certainty in company management, but also to select the best candidates for succession.

A well-developed succession plan should, in fact, identify the selection method and criteria of the possible internal and external substitutes, for each key position in the business.

For lack of these plans, it may be impossible to readily replace any directors who have left their offices, thereby generating discontinuity and uncertainty in company management, with negative effects both on performance and in terms of reputation.Furthermore, an extemporaneous choice, not assisted by a structured process, may not ensure that the best resources are chosen.

At present, and differently from other countries (e.g. the United Kingdom, France and Germany), the provision for structured succession plans for executive directors is not subject to recommendations of self-regulation. As such, listed companies are not required to provide market disclosure on the existence of said plans in fulfilment of the comply or explain principle. However, the Consolidated Law on Finance requires the companies to provide information concerning the adoption of self-regulation codes "and the corporate governance practices actually applied by the company over and above any legal or regulatory obligations". (art. 123-bis, paragraph 2, letter a) of the Consolidated Law on Finance) in the "Report on corporate governance and ownership structures".

Given the importance that succession planning can have for a company, it is considered that ensuring a suitable disclosure to the market of their existence and main characteristics is an objective worth protecting, despite the fact that no such obligation is currently provided by self-regulation initiatives or rules.

With reference to the scope of application, in view of the cost-benefit analysis performed, it has been decided that the recommendation on succession planning shall be limited to the companies belonging to the FTSE MIB index.

3.2 Recommendations on succession planning

Italian issuers of listed shares included in the FTSE MIB Index are recommended to disclose in the "Report on corporate governance and ownership structures":

a) the existence of a succession plan for executives directors, specifying whether a procedure for the succession of executive directors is in place in the event of an unforeseeable vacancy. In case this plan does not exist, issuers are recommended to disclose this circumstance;

b) the bodies, committees or persons involved in the set-up of the succession plan and their role;

c) the procedure and timing for the revision, if any, of the succession plan.

________________________
Footnotes:

¹ More specifically, the Legislative Decree aims to implement sections II and III of Commission Recommendation 2004/913/EC and section II, paragraphs 5 and 6 of Commission Recommendation 2009/385/EC.

² More specifically, paragraphs 7 and 8 of Art. 123-ter of the Consolidated Law on Finance establish: "7. By regulation, adopted having first consulted with the Bank of Italy and Isvap as concerns the parties respectively supervised and considering sector Community regulations, Consob indicates the information to be included in the section of the remuneration report established by paragraph 3, including all information aiming to highlight the coherence of the remuneration policy with the pursuit of the company's long-term interests and with the risk management policy, in accordance with the provisions of paragraph 3 of Recommendation 2004/913/EC and paragraph 5 of Recommendation 2006/385/EC.
8. By regulation adopted in accordance with paragraph 7, Consob also indicates the information to be included in the section of the remuneration report envisaged by paragraph 4. Consob may:
a) identify the managers with strategic responsibilities for which information is supplied in nominative form;
b) differentiate the level of information detail according to company dimension.".

³ The Self-Regulatory Code of listed companies, as amended in March 2010, also contains a recommendation on indemnity in the event of early termination. Principle 7, criteria 7.C.1, letter f) establishes that any indemnity for the early termination of the office or for the lack of its renewal should be defined in such a way that its total amount shall not exceed a given amount or a given number of years of remuneration. This indemnity shall not be paid if the termination is due to having achieved objectively inadequate results.

⁴ In accordance with art. 65, paragraph 1, letter c) of the Issuers’ Regulation, the terms "issuers of shares" means: "the parties who issue shares listed on an organized market in Italy and which have Italy as the home member nation in accordance with Article 1, subsection 1, paragraph w-quater of the Consolidated Law".

⁵ 40 companies actually belong to the index. Two companies (Stmicroelectronics and Tenaris) were excluded as they were not incorporated under the laws of Italy.

⁶ This information must, moreover, be supplied by the company in the information document prepared by the administrative body for the shareholders’ meeting called to approve the compensation schemes based on financial instruments, in accordance with art. 84-bis Issuers Regulation, which implements the delegated power envisaged by art. 114-bis of the Consolidated Law on Finance (see Annex 3A, Table 7, p. 4.8).

⁷ Some companies do not have managing directors appointed. In these cases, reference was made to the parties who, by virtue of the powers of attorney conferred, carry out similar tasks to those of the managing director.