Governance of Unlisted Companies: Openness is Good, and It Should Speed up

Governance of Unlisted Companies: Openness is Good, and It Should Speed up


The opening of corporate governance and the succession in leadership are events that have a positive impact on the performance of large unlisted companies (turnover in excess of €100 million), but these are steps that companies are still too reluctant to take. This is highlighted by the first Observatory on the governance of unlisted companies, created by SDA Bocconi School of Management, Banca Generali and PwC TLS Avvocati e Commercialisti, in collaboration with Cerved.
The Observatory, coordinated by Alessandro Minichilli and Daniela Montemerlo, analyzed 2,831 large unlisted companies (and 224 listed ones for benchmarking purposes) from 2012 to 2017.
The opening of the board of directors to outsiders has more positive effects on unlisted companies than on listed ones, perhaps because, for the latter, it is now a widespread feature. In general, the ROE adj of companies that insert an outsider is 0.9 points higher than the rest and the ROA adj improves by 0.26 points compared to the year before the entry.
The same applies to the opening to younger directors: the variation in the ROA adj decreases by 0.4 points when the board of directors are, on average, 10 years older than those of other companies. Both in the case of openness to outsiders and in the case of rejuvenation, these are decisions made very often when performance is negative.
The presence of external directors also facilitates the succession of corporate leadership, an event that businesses, especially family businesses, are reluctant to implement, but that the demographic evolution of Italian business leaders and its consequences on profitability and growth make increasingly urgent. In 2012, there were 107 80-year-old leaders, in 2017 they had become 178 and the impact on performance is strong: after the age of 70 the adj ROA is lower by 0.74 points and the adj ROE growth is lower by two points. In addition, after the leader's 60th birthday, growth declines dramatically, from an average of 14% to 8.4% when a leader turns 70. Moreover, family businesses have a probability of succession that is one-fifth that of other businesses, and that is reduced especially when the leader is also a founder (-52%) and when he is a member of the family (-73%).
The Observatory's data suggest the need to speed up the process of developing a market for directors and the benchmark with companies listed on the AIM and MTA markets suggests, for unlisted companies, the usefulness of learning from the more structured ones. An unlisted company that counts, among its directors, professionals who also have assignments in listed companies, obtains better results than those who do not have them.
The market for directors of unlisted companies, on the other hand, is still structured on a relational basis and displays little geographical mobility. Of the 9,608 directors mapped, in 2017 only 350 were foreigners and concentrated mainly in operating companies, thus testifying to their likely role as consultants in the assault to foreign markets.
The opening of the board of directors to outsiders also tends to take place when performance is worse. Also in this case, the effects of the opening are positive for the succession in leadership and performance.
Overall, therefore, ownership structures and governance choices are decisive for business success and require careful planning, all the more so in an increasingly difficult environment.

The Observatory was created by SDA Bocconi as part of its Corporate Governance Lab. Banca Generali is the main partner of the Observatory and PwC TLS Avvocati e Commercialisti is the technical and scientific partner of the Corporate Governace Lab. Cerved is the scientific partner of the initiative.

by Fabio Todesco


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