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Management candidates at listed Italian state-controlled companies may be selected by executive search companies, but the final choices are ultimately made by ruling politicians and typically their allies are selected. Experts and investors regard this decades-long system as a blight on good corporate governance, but until recently it had rarely come into question. 

Every three years, ahead of the annual general meetings at companies in which the state is the largest shareholder, the government of the day presents investors with a slate of candidates to renew the boards of directors. Such companies, including energy majors Enel and Eni and defence group Leonardo, were fully state-owned until the 1990s. The only other board proposals usually come from the domestic funds association, Assogestioni. It submits lists of names to fill the seats that by law must go to minority investors.

Term after term the nomination process has been dominated by power plays within ruling coalitions. This year’s appointments, the first by the government of Prime Minister Giorgia Meloni, were no different. But the reaction by a small group of international investors to Meloni’s picks for the chief executive and chair roles for Rome-based Enel was something of a watershed moment for corporate Italy. In the past the government, which owns a 23.6 per cent stake in Europe’s largest utility, would have been unchallenged in its choices.

This time a little-known London-based hedge fund, Covalis Capital, which owns a 1 per cent stake in Enel, presented an alternative slate of board candidates. The fund hoped to defeat the government’s list which, it complained, was “the result of political compromise and lacked transparency”.

Covalis’s list was backed by investors representing 6.94 per cent of the share capital but fell short of thresholds to elect a single board member. The government got its way with its board picks securing the support of 49 per cent of the votes. But Giuliano Noci, a strategy professor at Politecnico di Milano, points out: “The process is no longer how it used to be, with the government deciding and everyone else staying silent no matter what.”

Indeed, Italian treasury officials travelled to London ahead of the meeting to explain why their picks deserved backing, according to several investors, while public relations firms reached out to journalists to offer background chats with the candidates. This effort was out of the ordinary when it comes to state-backed groups.

Francesco Starace, Enel’s outgoing chief executive, had support among international investors but not in Italy’s new government. Meloni privately spent months discussing successors with her allies, only to ditch her preferred candidate at the last minute in favour of former Terna and Telecom Italia chief executive Flavio Cattaneo. He became the preferred candidate after a compromise with Meloni’s coalition partners, according to media reports and several Italian officials.

Minority shareholders questioned the process. Elizabeth Desmond, chief investment officer for international equities at Mondrian Investment Partners, which holds a 1.7 per cent stake in Enel, said last month: “We have been extremely disappointed by the complete lack of transparency around the nomination process.” 

The choice of Paolo Scaroni, one of the most seasoned Italian energy sector executives, as Enel’s chair was also questioned. He was previously chief executive at both Enel and Eni. But he came under fire before the vote on May 10 for remarks criticising the EU’s management of the energy crisis and sanctions against Russia which, he said, would ultimately benefit countries such as the US and Norway. Scaroni fostered strong energy ties between Italy and Russia as chief executive of Eni for nine years from 2005 to 2014. Norway’s sovereign wealth fund, an investor in Enel, backed Covalis’s candidate for chair rather than Scaroni.

Noci says there was a public clash of “two very distant approaches” to corporate governance — between a state that still acts like these are private companies it owns, and a group of assertive funds that are used to taking a stance on environmental, social and governance issues.

The push by minority shareholders did not change the board outcome. But Noci says it was still a shock to Italy’s corporate governance mechanisms: “You can no longer apply the state-led approach to a context that is dominated by the market, where even a small fund can cause a ruckus.”

silvia.borelli@ft.com