The relationship between independent minority directors and related party transaction disclosure

Abstract

The thesis investigates the role minority shareholders' representation plays on detrimental and abusive Related party transactions (RPT) in Italy. The purpose is to analyse the impact that the slate-vote system can exercise on the fairness of the RPT procedure and the transparency of its disclosure. The role of RPT is central in the literature debate, also considering conceptual difficulties in defining and measuring its consequences. Mainly, academic research has been interested in the potential economic and social impacts of these peculiar transactions. There are conflicting views on whether RPTs are beneficial or detrimental to stakeholders. A review of the existing academic literature will be proposed (Chapter 1) to analyse the prevalent approaches that fuel academic debate: some studies give priority to risks over the benefits arising from the transaction (conflict of interest hypothesis); others emphasize the natural ability of RPT to compress monitoring costs (efficient transaction hypothesis); a more recent part of literature overcomes this dichotomy, offering a new perspective of RPT under contingency theory. Chapter 2 will show the most common legal techniques usable to tackle the risks of self-dealing RPT. Disclosure requirements and the procedures for approval by the board and/or shareholders, external independent advice, and ex-post standard-based tools are described in detail. In Italian institutional setting characterized by high concentrated ownership entities, independent directors do not have the actual effectiveness in fostering corporate transparency since they lack the mandate, the incentives, and the ability to be an efficient monitoring mechanism. In this context - in any setting that shares the same features and critical issue - the presence of objective, disinterested outsiders' members on boards of directors can represent an effective corporate governance solution to reduce the risk of opportunistic behaviours, overcoming the limits traced to the appointment of independent directors and disclosure requirements. The abandonment of the single-winner model – according to which the shareholder who holds most of the voting rights has the power to elect the entire board –in favour of a new multiple winner election systems (also known as 'slate-vote-system') – in which the appointment of the members of the board is also an expression of the will of the minorities – may therefore represent an effective mechanism to alleviate the principal-principal conflict and risk of majority shareholders can expropriate value to the detriment of minority ones (endemic issue of Italian setting). The appointment of at least one director by non-controlling shareholders reinforces the board independence from the corporate controllers (the management or the block- holder in case of high-ownership concentration) and ensure that at least some of the relevant resolutions of the company are adopted with the involvement of the minorities. The analysis will illustrate in Chapter 3 the Italian Regulation to steam the risk of detrimental RPT. In particular, procedures of fairness as rules to be followed in the decision-making process of the competent bodies (substantive Regulation) and transparency obligations, i.e., disclosure obligations that the company must fulfil periodically or immediately, to convey all necessary information to the market (transparency regulation) will be shown in detail. In the last part of the thesis, content analysis is conducted on RPT information documents to infer the influence that minority shareholders' representativeness could exercise on the immediate disclosure on the highly material transaction (Chapter 4). It evaluates the relationship with the ability of RPT communication to convey valuable information for all stakeholders, limiting self-serving managerial disclosure. The contribution restricts analysis to narrative disclosures 160 information documents on material RPTs approved by non-financial Italian listed companies to capture the influence of minority directors on impression management of RPT corporate disclosure. From the methodological point of view, besides the general descriptive aspects and statistics that allow the observation of the phenomena, qualitative and quantitative tools will be cross-sectionally and sometimes jointly used in carrying out the research objectives. The findings of this thesis contribute to the advancement of knowledge on the role of minority directors: this could be the basis for future suggestions related to the legislative framework and future insight for academics and practitioners.