The Bank of Italy supports the transformation of listed cooperative banks into limited companies

Posted on June 6, 2013

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On his concluding remarks at the Bank of Italy’s annual meeting, held on may 31st, the Governor Ignazio Visco reminded the original purpose of the cooperative banks, intended as “restricted to a limited geographical area and marked by a high degree of mutuality”, underlining how such purpose may be in contrast with the status of listed company. Finally, Mr. Visco wished for an easier transformation of listed cooperative banks into limited companies.

It is clear the Governor’s reference to Banca Popolare di Milano (“BPM”), where the Management Board recently tried to turn the Bank into a limited company. The proposal was submitted to the BPM’s EGM, to be held on next June 21st, but the very strong opposition coming from the internal structure blocked the resolution, that was finally withdrawn.

The internal contrasts were so strong to even jeopardize the approval of the 2012 BPM’s financials (only 10 out of 18 Board members voted for). Given a so strong opposition, the  Supervisory Board’s Chairman Filippo Annunziata resigned, followed by 3 other Board members.

Why is the status of cooperative bank so relevant for the Bank’s employees? And why should it be relevant for external shareholders?

On the blog post “Banca Popolare di Milano’s rights issue and the problem of listed cooperative banks in Italy”, dated September 30th, 2011, we already described the peculiarities of Italian listed cooperatives: distinction of shareholders between “members” and “non-members”; only “members” are enabled to vote at General Meetings; each “member” casts one vote, regardless the number of shares held; each proxy agent (compulsorily a non-employee “member”) may represent a restricted number of other “members”. All rules that aim to strongly limit the influence of external shareholders on the Bank’s governance. But the employees’ interests do not always fit with the creation of value for all shareholders (that should be the main purpose of a listed company).

The example reported in the 2011 post, related to the EGM held on June of the same year, is quite clear. Two main resolutions were submitted: a share capital increase, that would have almost tripled the BPM’s outstanding shares, and the increase of the maximum number of proxies per agent, from 3 to 5. Surprisingly, almost the entire discussion at the meeting focused on the number of proxies: clearly the shareholder-members where much more interested in keeping external shareholders away. At that meeting, 3.840 members voted (almost 3.5%), of which approximately 10% underage, representing 2.02% of the share capital. Of course, the considerable share capital increase was approved by 99.5% of voting members, while the increase in proxies per agent was rejected by 55%.

The actual oddity of listed cooperative banks lies in their hybrid nature: big banking groups, open to international investors and operating worldwide (some having branches in Luxembourg, Switzerland, Ireland, USA, China, Singapore and so on) that follows very local strategies. Just to give an example of their governance, at Banco Popolare at least 16 Board members must reside in the Bank’s “historical areas” of Verona, Lodi and Novara.

As highlighted by the Bank of Italy’s Governor, the issue is not the cooperative system by itself, but the distortion of their scope caused by the status of listed companies. Cooperative banks have a capital role in the Italian economy: they support local businesses and the territorial development, without necessarily focusing on the creation of value for their shareholders (that should be the meaning of “mutuality”).

Mr. Visco correctly reminded that listed companies are also held by “institutional investors representing a multitude of small savers whose aims and interests are unrelated to mutuality”. And each listed company should pursue the interest of all shareholders.

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Posted in: Market rules, News