May 21, 2014 / 4:10 PM / 3 years ago

UPDATE 1-Investors advised to reject Italy's corporate ethics clause

(Recasts, adds comments, background)

By Maria Pia Quaglia and Danilo Masoni

MILAN, May 21 (Reuters) - Italian government plans to impose ethics clauses on state-owned companies have been criticised as ill-conceived and possibly illegal by two advisory groups, who urged big shareholders to vote against the adoption of such policies at two major groups.

Earlier this year the cross-party coalition government of Prime Minister Matteo Renzi pressed state-controlled companies to introduce enhanced "honourability" rules into their bylaws, aiming to eject directors charged of financial crimes.

But motions put forward by the main state shareholders of oil and gas group Eni, Italy's biggest listed company, and defense firm Finmeccanica were thrown out by investors earlier this month.

Now two proxy advisors - which give advice on how to vote on corporate matters to institutional investors such as pension funds - have recommended investors in utility Enel and power grid operator Terna do the same thing.

Advisory group ISS has advised Terna investors to vote against the motion, according to a document seen by Reuters, while peer Glass Lewis has recommended "no" votes at Enel and Terna, according to people familiar with the matter.

"This item warrants a vote against because ... the proponent (the state) has failed to disclose a sound rationale and a risk-benefit assessment associated to the proposed bylaw amendments," ISS said in a recommendation for Terna investors seen by Reuters.

Terna, 30 percent owned by state lender Cassa Depositi e Prestiti, holds its shareholder meeting on May 27.

ISS said in its recommendation Rome had not explained why enhanced honourability requirements would be beneficial or how they could offset potential risks to management stability.

It also cited an opinion that Eni obtained from lawyer and academic Guido Rossi, a former president of Italian stock market watchdog Consob, who argued the proposed clause went against the assumption of innocence granted by the Italian constitution.

ISS, Glass Lewis and Enel declined comment. Terna was not immediately available for comment.


Under the proposed clauses, a board member would be required to leave his or her functions once charged, but before the verdict of any court case.

Some smaller Italian investors however said the clauses could be seen as a step forward in a drive to fight corruption and improve corporate accountability.

"I think they strike a positive note. All companies must respond to tough ethical standards," said Roberto Lottici, a fund manager at Ifigest. Eni is 3 percent of his portfolio.

Corporate Italy has been shaken by a string of corruption scandals often involving alleged kickbacks to politicians and financial intermediaries.

Defence group Finmeccanica is grappling with several corruption cases involving its former management, while former Eni CEO Paolo Scaroni is under investigation in a corruption probe involving oil service company Saipem.

Scaroni, Saipem and Finmeccanica all deny wrongdoing.

The leader of Italy's anti-establishment 5-Star Movement, Beppe Grillo, is winning strong support across the country in a campaign against the ruling elite and widespread corruption.

But Italian retail investors could yet make a difference at Enel, Italy's biggest utility, industry sources said.

State-controlled Enel is due to hold its shareholder meeting on Thursday, May 22, and the greater presence of retail investors could leave the Treasury with enough clout to get the ethics clause through.

"The Treasury had 65 percent of votes present last year and so it would only need another 2 percent or so to reach the two-thirds quorum for this sort of vote," said Sergio Carbonara at consultancy Frontis Governance.

Carbonara acknowledged the clauses did not exist elsewhere in Europe but said they could be useful. (Additional reporting and writing by Stephen Jewkes; Editing by David Holmes)

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