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Commentary: Italy Needs A Renaissance In Corporate And Market Regulation


First it was the hyping of $13 billion in Argentine bonds that turned out to be worthless. Then it was the marketing of unrated corporate debt issued by Italy's Cirio, a food conglomerate that defaulted on its unrated bonds in 2002. Next up, millions of dollars worth of Parmalat bonds were sold to an estimated 100,000 unwitting mom-and-pop investors before that company's Dec. 24 bankruptcy. Italians -- finally -- are fighting mad. They're coming out swinging after being on the receiving end of a triple punch that has wiped out the life savings of thousands and sparked nationwide outrage. "Italians feel betrayed," says Rosario Trefiletti, president of Federconsumatori, a Rome-based consumers' group that's filing suits and staging noisy demonstrations.

What Italy's long-suffering investors are demanding is tougher penalties for implicated executives and the financial pros who were allegedly in cahoots. Beyond that, they're calling for reimbursement from banks that sold the ill-fated bonds issued by the likes of Parmalat, the milk empire that has a $13 billion black hole in its accounts. And most important, they want fast action from policymakers who have been asleep at the switch. Italians are clamoring for greater balance-sheet transparency, strict new rules on corporate governance, potent new financial market regulators, and class-action suits -- which currently aren't allowed in Italy. "We Italian investors get no help at all from the government," laments Vincenzo Nieri, a retired manager of a Bristol-Myers Squibb unit in Milan. "Nobody has ever taken the initiative to protect investors."

A handful of executives are in jail on preliminary charges of fraud, false accounting, and rigging markets. Meanwhile, plunging confidence in the financial system has prodded some banks to repent. In a commendable damage control effort, Capitalia announced on Jan. 9 that it would reimburse its clients for $52 million in defaulted bonds, covering three recent corporate defaults, including Cirio and Parmalat. Banca Intesa and Unicredito Italiano are also talking about reimbursing investors. While it's laudable that the country's biggest banks are moving to shore up their credibility, the heaviest responsibility for Italy's crisis lies with the political class. Outrage over Parmalat looks likely to finally force reform. Prime Minister Silvio Berlusconi's center-right government has spent most of the past month promising far-reaching new laws. Finance Minister Giulio Tremonti has vowed to revamp financial market regulation, vesting a new authority with extensive oversight powers. But these moves are a decade late. The scandalous collapse of Ferruzzi Finanziaria, with $20 billion in debt, way back in 1993 should have been the wakeup call.

THE GOVERNANCE GAP. Meanwhile, Berlusconi & Co. have willfully overlooked the need for stiff penalties for accounting irregularities. Cooking the books at an American company can land an executive in jail for 20 years. Berlusconi's government, by contrast, essentially decriminalized most kinds of fraudulent accounting in 2001 by making it a mere misdemeanor instead of a felony. The law should be revised -- but only some factions of Berlusconi's coalition agree. That hardly sends the right signal to Italy Inc. Moreover, little of the government debate on financial market reform has focused on key issues like the need for more independent board members and an autonomous audit committee. Crony boards are flourishing in Italy. Parmalat had one -- stacked with family and friends of boss Calisto Tanzi. Italy urgently needs to extend the law giving minority shareholders the right to choose independent board members. It now covers only privatized former state-owned companies.

Italy's man in the street is right to be angry. Italian capitalism is stuck halfway between its state-dominated past and a modern market system. That's a dangerous place to be, a kind of no-man's-land of unpoliced markets. It will take courage to force Italy Inc. to embrace real transparency. But the sooner the better. If politicians don't act to put long-overdue controls in place, they may find the next corporate implosion even more devastating. By Gail Edmondson


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