Introduction to the new Corporate Governance Code

Michele MontiExecutive DirectorLegal & Institutional AffairsBorsa Italiana S.p.A.

London, September 28, 2006

This presentation is solely for the use of the attendees to this event. No part of it may be circulated, quoted, or reproduced for distribution without prior written approval from Borsa Italiana S.p.A. This material was used by Borsa Italiana S.p.A. during an oral presentation and it is not a complete record of the discussion.

3

The New Corporate Governance Code

Evolution of the legislation

Contents

1999-2006 - how did it go

Introduction

4

Introduction

A new Code, Why?

Changes in the laws and regulations (EU Commission Financial Services Action Plan, new corporate law, Investor Protection Act)

Need to tailor the recommendations of the Code to the various types of listed companies

Issuers became more mature after few years of implementation of the previous Code

5

Introduction

The new Code substitutes the one released in October 1999 and revisited in July 2002

The principle “comply or explain” is confirmed: listed companies are invited to implement the Code within the closing of the fiscal year beginning in 2006 and to give information to the market within the report on corporate governance to be filed in 2007

Borsa Italiana will monitor the implementation of the Code and will follow the continuous upgrading of corporate governance principles

Effectiveness

6

Introduction

Corporate governance in Italy: main steps

1999: Release of the Code of Corporate Governance

2002: Code of Corporate Governance Revised

2000: Mandatory deposit of the C.G. Report provided in the Rules

2005: Investor Protection Act

2006: New Code of Corporate Governance

2003: Borsa’s Guidelines on the preparation of the Report

2004: Corporate law Reform / Assonime Guidelines

7

The New Corporate Governance Code

Evolution of the legislation

Contents

1999-2006 - how did it go

Introduction

8

Corporate Law Action Plan May 21, 2003Section: Corporate Governance

Recommendation on compensation(published on 12/29/2004)

Shareholder rights Directive(Commission proposal filed on 01/05/2006)

Directive •Issuers disclosure on corporate governance •Liability for financial information

(Commission proposal filed on 10/28/2004)

Directive on the protection of Company’s capital

(recently approved by the EU Parliament)

Investors Disclosure Directive(still to be adopted)

Directive on Groups(still to be adopted)

Recommendation on independent directors(published on 02/15/2005)

Audit Directive(approved – still to be published in EUOG)

Evolution of the legislation

1. The European Union legislation 1/2

9

2003 Action Plan2003 Action Plan

• a single European code on corporate governance has not been deemed useful (due to the variety of company laws in the Member States; it would have resulted in a list of abstract principles or it would have allowed too many derogations);

• on the contrary it has been deemed useful to introduce a common approach at the EU level regarding a limited number of main principles, so to adequately coordinate the codes of the single Member States;

• Main goals in the corporate governance field:

a) Increasing the transparency in the corporate governance

b) Strengthening the Shareholders Rights

c) Updating of the Board of Directors

Evolution of the legislation

1. The European Union legislation 2/2

10

Decree Amending Vietti’s law(D. Lgs. 310/04) supervisory board: independence and role interests of the sole director related parties

In force as of 01/01/2005

Law on Market Abuse internal dealing

approved in April 2005 and implemented by Consob

Corporate law reform (a.k.a Vietti’s law)• role of the Board of Directors role of the C.E.O. conflicts of interests alternative models in force as of 01/01/2004

Evolution of the legislation

2. National scenario: evolution

Investor Protection Act (262/05)

slate voting to appoint directors independent/minority directors minority auditor enforcement In force as of January 2006

11

The New Corporate Governance Code

Evolution of the legislation

Contents

1999-2006 - how did it go

Introduction

12

Contents

Borsa Italiana promoted the formation of a Committee representing market participants and entrepreneurs

The works of the Committee have been supported by a Working Group made of

experts designated by Borsa Italiana and by the relevant business associations

(Abi, Ania, Assirevi, Assogestioni, Assonime, Confindustria) coordinated by 3

highly reputable experts

The Working Group was assisted also by contributions made by other

associations, professionals and experts

Committee

13

Contents

Structure of the Code

The principles in the new Code replicates the order of the old Corporate Governance Code but the new Code has deeply changed the structure; every article is now divided in three different sections:

Principles, having a general character

Criteria, containing detailed indication on how to comply with the implementation of the Principles

Comments, aiming at clarifying Principles and Criteria, giving also adequate examples.

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ContentsMain innovations

• Role of the Board of Directors: the recommendations of the Code have been adapted to the new laws and regulations on corporate law, also regarding group of companies; further the new Code contains recommendations on the limitations of the plurality of offices and on the yearly self-assessment self-assessment of the Board

• Composition of the Board of Directors: improved definition of the role of the non executives directors; introduction of the lead independentlead independent director in case of concentration of the office of Chairman and C.E.O. in the same person

• Independent Directors: introduction of the principle that substance prevails over form in evaluating the independence of a director; list of examples to be used by the Board of Directors in evaluating the independence; active role of the Board of Statutory Auditors in controlling the correct implementation of the criteria to evaluate independence; independent directors meetings

• Committees within the Board of Directors: general provision on the compositions, functions and procedures to be adopted by the Committees

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ContentsMain Innovations

• Appointment of Directors: transparency in the appointment procedures; list of examples of the functions of the nomination committee

• Remuneration of the Directors: definition of the structure and objective of the remuneration, distinguishing between executive and non executive directors; specification of the functions of the remuneration committee

• Internal Control System: update of the notion of internal control to put it in line with the international best practice as evolved; improved definition of the roles and relationship among the various bodies involved in the definition, monitoring and updating of the internal control system (in particular between the board of statutory auditors and internal control committee)

• Directors interests and transaction with related parties: recommendations in line with the changed laws and regulations (Article 2391 and 2391-rticle 2391 and 2391-bisbis of the Civil Code)

• Statutory Auditors: broadening of the independence of the auditors and definition of measures aimed at guaranteeing an efficient and effective performance of their role

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ContentsMain innovations

• Relationship with shareholders: promotions of initiatives aimed at increasing the knowledge of the corporate information and easing the participation to the general meetings and the exercise of shareholders’ rights

• Alternative systems: recommendations to companies adopting the one-tier or two-tier system to implement the recommendations of the Code adapting them to the chosen system and to give ample disclosure on the adaptations made and on the reasons behind the choice

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Contents

Concentration of the role of Chairman and C.E.O.

Yesterday:

Where, in order to promote the effective and efficient management of the company, the board has delegated powers to the chairman, it shall disclose adequate information in its annual report on the powers delegated (Art. 4.3)

Today:

Where the Board of Directors has delegated management powers to the chairman, it shall disclose adequate information in the report of corporate governance on the reasons for such organisational choice (Art. 2.P.5)

In the event that the chairman of the BoD is C.E.O. of the company, as well as in the event that the office of chairman is covered by the person controlling the issuer, the board shall designate a lead independent director, who represents a reference and coordination point for the requests and contributions of non-executives directors, in particular, the independents (art. 2.C.3)

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ContentsIndependent Directors

Yesterday:

The independent director (Art. 3.1):

• has not recently entertained business relationship with the company, its subsidiaries, the executive directors or the shareholders or group of shareholders who controls the company of such a significance to influence his/her autonomous judgment;

• does not own a quantity of shares enabling him/her to control the company or exercise a considerable influence over it nor participate in a shareholders’ agreement to control the company;

• The independence shall be periodically assessed by the board of directors (Art. 3.2)

Today:

Principle (art.3.P.1): substantially unchanged

Criteria:

The BoD shall evaluate the independence of its non-executive directors having regard more to the contents than to the form keeping in mind that a director usually does not appear independent when (3.C.1):

[a list of examples follows in the text of the Code]

The Board of Auditors shall ascertain the correct application of the assessment criteria by the BoD (3.C.5)

The independent directors shall meet at least once a year without the presence of the other directors (3.C.6)

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Contents

Composition of the Remuneration Committee

Yesterday:

The BoD shall form an inside committee on remuneration and stock option or equity based remuneration plans. The majority of the members of this committee shall be non executive … (Art. 8.1)

Today:

The BoD shall establish among its members a remuneration committee made up of non-executive directors, the majority of which are independent (Art. 7.P.3)

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ContentsComposition of the Internal Control Committee

Yesterday:

The BoD shall establish an internal control committee charged with the task of giving advice and making proposals made up of non-executive directors, of which the majority shall be independent (Art. 10.1)

Today:

The BoD shall establish an internal control committee, made up of non-executive directors, of which the majority shall be independent. […] At least one member of the committee must have an adequate experience in accounting and finance, to be evaluated by the BoD at the time of his/her appointment (Art. 8.P.4)

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Contents

Two tier and One tier management and control systems

Yesterday:

No provision

Today:

In the event of adopting a two tier or one tier management and control system, the articles of the Code shall apply insofar as compatible, adapting individual provisions to the particular system adopted, consistently with the objectives of good corporate governance, transparency of information and protection of investors and the market pursued by the Code (Art.12.P.1)

22

The New Corporate Governance Code

Evolution of the legislation

Contents

1999-2006 - how did it go

Introduction

23

From 2001 to 2006: how did it go so far for companies included in the S&P/MIB Index

Continuous and significant increase in the communication to the market by listed companies, from a quantity and a quality perspective

Issuers continuous increase of compliance with the principles of the Code

1999-2006

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Composition of the board of directors

S&P: 14 - 15 directors (average) STAR: 9 - 10 directors (average)

13%

37%

50%

31%

31%

38%

0%

20%

40%

60%

80%

100%

S&P STAR

Executive directors Non executive directors Independent directors

25

Independent directors in the STAR companies

+33%+33%compared with compared with

STAR requirementSTAR requirement

193

257

0

50

100

150

200

250

300

Independent directorsaccording to STAR listing

requirements

Independent directorsappointed by STAR

companies

26

Nomination committee

S&P: optional appointmentS&P: optional appointment

STAR: optional appointment

Remuneration committee

S&P: recommended appointmentS&P: recommended appointment

STAR: mandatory appointment (unless

remuneration linked to company’s profitability is

adopted)

Internal control committee

S&P: recommended appointmentS&P: recommended appointment

STAR: mandatory appointment

Internal committee of the board of directors

18%12%

92% 93%97% 100%

0%

20%

40%

60%

80%

100%

Nominationcommittee

Remunerationcommitte

Internal controlcommittee

S&P STAR

27

Disclosure on appointment of directors and statutory auditors

Advanced deposit of proposals and CV

74%

85% 85%89%

0%

20%

40%

60%

80%

100%

Appointment of directors Appointment of auditors

S&P STAR

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Transactions with related parties

Transactions with related parties shall comply with criteria of substantial and procedural fairness (art. 11.1)

Directors who have an interest, inform the board about it and abandon the board meeting when the issue is discussed (11.2).

If necessary, transaction with related parties is concluded with the assistance of independent (art. 11.3).

100%

90%

79%

64%

95%

60%

0%

20%

40%

60%

80%

100%

Art. 11.1 Art. 11.2 Art. 11.3

S&P STAR