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special regime has always applied to related-party transactions involving boardmembers: these transactions need to be approved by the board and ratified by theshareholder meeting, unless they are deemed to be routine “current transactionsentered into at normal conditions.” In general, however, judges and practitionershave traditionally provided a mild interpretation of this regime; for example, byclassifying most transactions with companies of a same group as routine (Enriques,2004).In Italy, a separate board of auditors—an internal body composed exclusivelyof formally independent members—has traditionally performed the internal auditfunctions. Neither the board of directors nor the board of auditors have ever beenable to exercise effective control over managers (and hence over the dominantshareholders who appoint them), as the Parmalat scandal vividly illustrated. Moregenerally, 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 ofthe 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 nationalcapital markets more attractive at a time when international competition for equitycapital was increasing due to deregulation, globalization, and large-scale privatiza-tions (Kamar, 2006). Second, changes were spurred as part of the EuropeanCommunity’s efforts to institute a common regulatory framework for Europeanfinancial markets, especially on disclosure issues (Ferran, 2004). Finally, many ofthe corporate law reforms recently enacted in Europe have come as a response tocorporate scandals, including both the well-publicized cases like Enron and Par-malat, and many other scandals, like the recent financial frauds in France andGermany discussed in Enriques (2003). For example, a 1998 German corporategovernance reform was enacted after Metallgesellschaft and other corporate scan-128Journal of Economic Perspectives
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 listedcorporations.2Tables 4 to 7 summarize the relevant reforms. For general overviewsof 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 MechanismsIn the wake of U.S. scandals, reforms enacted by the U.S. Congress and themain stock exchanges (NYSE and Nasdaq) have required that a majority of direc-tors be independent, that audit committees be entirely composed of independentdirectors and that companies have adequate internal control mechanisms. Further,