How Meloni’s new ‘Capital Bill’ could backfire on corporate Italy

Forget the S&P 500, and the frenzied excitement of recent weeks as the US index flirted with record levels. The FTSE MIB index of Italy’s 40 biggest stocks is where the real boom story is at. Over the past three years, the Italian benchmark has eclipsed the S&P 500 index in local currency terms. And while the S&P never did hit a new high and has fallen back in January, the Italian market has continued its upward momentum.

The boom is arguably healthier too. Whereas the Magnificent Seven tech stocks have accounted for the bulk of US gains, Italy’s bull run has been driven by a broader spread of companies — among them defence contractor Leonardo, which has seen its shares double over the past year; carmaker Ferrari (up 50 per cent); and the banks, led by UniCredit (up 77 per cent).

Now the government of Giorgia Meloni is promising to go further to make stock market access easier and reward shareholders who invest for the long term: the so-called DDL Capitali — or capital bill — expected to pass through parliament in the next few weeks. The measures are supposed to boost the Italian economy and stem a flight of local companies to rival EU locations, particularly the Netherlands. They should also directly benefit the government’s privatisation programme, slated to raise €20bn over the next three years.

But alarm has been spreading among some companies and shareholders that the legislation, rather than liberalising and boosting investment in corporate Italy, may do the reverse. Late amendments have given it a protectionist bent, serving the interests of allies of Meloni, and potentially discouraging international investment.

Among the most striking amendments is a rule that would give an extreme incentive to hold shares for 10 years or more, granting such investors 10 times more voting rights than short-term shareholders. While the provision would theoretically apply to any investor, it in effect favours certain types of Italian shareholders — typically family-backed entities that seek to retain control of companies, as well as the kinds of local fondazione that have been long-term, though often politicised, shareholders of Italy’s banks.

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The benefit that comes from extra voting power is expected to be most significantly exercised via another of the key provisions in the new law, which gives shareholders a greater say over the appointment of a company’s board members. That might sound positive. Yet it would neuter hedge fund activists. And convoluted new mechanisms for director appointments would make an already quirky corporate governance regime — whereby large company boards and their most vocal shareholders often put forward rival lists of proposed directors — into a potentially unworkable one, according to experts. A report from the Consob securities regulator said the reforms could “represent a unique [set-up] internationally, undermining the objectives of simplification, stability and comprehensibility of sector regulations”. 

The most obvious beneficiary of the amended bill is billionaire Francesco Gaetano Caltagirone, the octogenarian construction and media baron, a significant shareholder in two of Italy’s most powerful financial services groups, Generali and Mediobanca. He and his allies were thwarted in their attempts to impose new boards at both companies. Caltagirone is also a key ally for Meloni’s government: he owns influential newspapers in regions where her support is strong. 

If the law does pass as proposed, it would represent a second retrograde step for Italian markets in a matter of months. Last August, bank shares tumbled after a chaotic announcement of a bank tax. After wrangling within Meloni’s coalition government, the rate of the tax was reduced, and then an alternative was introduced, whereby a bank can boost its reserves rather than pay a levy.

The Italian Treasury has hailed the outcome, which has seen next to no tax revenue raised, as a boost to the capital strength of banks at a time when higher interest rates threaten to trigger a spike in non-performing loans. Even if this is true, any accidental benefit has been undermined by the reputational damage done by the episode. Ad hoc taxes and policy flip-flops have made many US asset managers wary of markets such as Italy, Spain and the UK.

So far the Italian stock market has prospered in spite of all this — but Meloni’s government can hardly afford to be sanguine: the trailing price/earnings ratio of the S&P 500 is about 25 times; the FTSE MIB is still in single digits.

patrick.jenkins@ft.com

Letter in response to this article:

Meloni government swims against the tide of history / From Jon Johannessen, Venice, CA, US