special regime has always applied to related party transactions involving board

Special regime has always applied to related party

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special regime has always applied to related-party transactions involving board members: these transactions need to be approved by the board and ratified by the shareholder meeting, unless they are deemed to be routine “current transactions entered into at normal conditions.” In general, however, judges and practitioners have traditionally provided a mild interpretation of this regime; for example, by classifying most transactions with companies of a same group as routine (Enriques, 2004). In Italy, a separate board of auditors—an internal body composed exclusively of formally independent members—has traditionally performed the internal audit functions. Neither the board of directors nor the board of auditors have ever been able to exercise effective control over managers (and hence over the dominant shareholders who appoint them), as the Parmalat scandal vividly illustrated. More generally, Italian corporate law has historically provided poor protection for inves- tors, while enforcement institutions, like courts or the Italian securities and ex- change commission (Consob), have been unable to make up for the deficiencies of the law (Aganin and Volpin, 2005). Three main factors have driven the reforms in continental European corpo- rate governance over the last two decades. First, reforms aimed to make national capital markets more attractive at a time when international competition for equity capital was increasing due to deregulation, globalization, and large-scale privatiza- tions (Kamar, 2006). Second, changes were spurred as part of the European Community’s efforts to institute a common regulatory framework for European financial markets, especially on disclosure issues (Ferran, 2004). Finally, many of the corporate law reforms recently enacted in Europe have come as a response to corporate scandals, including both the well-publicized cases like Enron and Par- malat, and many other scandals, like the recent financial frauds in France and Germany discussed in Enriques (2003). For example, a 1998 German corporate governance reform was enacted after Metallgesellschaft and other corporate scan- 128 Journal of Economic Perspectives
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dals exposed German corporations’ defective internal control mechanisms (Cioffi, 2002). The discussion that follows highlights the efforts of lawmakers to enact corpo- rate governance reforms that may help protect minority shareholders of listed corporations. 2 Tables 4 to 7 summarize the relevant reforms. For general overviews of European corporate law reforms, see Nowak (2004) and Noack and Zetzsche (2005) (Germany); Conac (forthcoming) (France); and Bianchi and Enriques (2005) and Ferrarini, Giudici, and Stella Richter (2005) (Italy). Enriques and Gatti (2006) provide an overview of recent reforms at the European Community level. Strengthening Internal Governance Mechanisms In the wake of U.S. scandals, reforms enacted by the U.S. Congress and the main stock exchanges (NYSE and Nasdaq) have required that a majority of direc- tors be independent, that audit committees be entirely composed of independent directors and that companies have adequate internal control mechanisms. Further,
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