A de facto contest at Enel is putting the always-complicated Italian board election system under scrutiny. While the shareholder proponent has expressed concerns about the energy multinational’s process for identifying director candidates, the issues raised appear to be relevant across the market.

A Twist on Shareholder-Proposed Slate Elections

In Italy, a board election involving multiple slates may not necessarily be indicative of controversy — boards are routinely elected from slates, or lists, which are generally proposed by shareholders. Although Italian law allows outgoing boards to present their own slate of nominees, few boards have availed of this option. The list that receives the most votes only make up a majority of the actual board, with the remaining seats filled from the second place (and third place, if multiple groups of minority shareholders get involved) ‘minority’ list (or lists). Often, the main list is the only full slate, with other lists limited to between one-to-five nominees. The expectation is that the main list, often proposed by a major shareholder, will take most of the board, augmented by a few minority shareholder candidates.

At least, that’s how it normally works.

Enel’s upcoming AGM is shaping up differently. As is typical, the largest shareholder, the Italian Ministry of Economy and Finance (“MEF”), has presented a ‘full’ list of six nominees for the nine-director board, and Assogestioni, the Italian association of institutional investors, has presented a shorter list of three nominees on behalf of a group of institutions representing 1.86% of share capital. However, Covalis, a 0.64% shareholder, has also presented a ‘full’ list of its own comprising six nominees, and has even indicated a proposed chair for its alternative slate.

Both the number of nominees and the inclusion of board leadership may indicate that Covalis isn’t looking to supplement MEF’s slate with a few directors, but to replace it. Shareholders may reasonably view this situation as a de-facto contest with management. Indeed, ahead of the meeting there has been plenty of contest-speak – such as Covalis reporting that its intention is not to disrupt the company, but rather empower it to reach its potential.

However, there appears to be some room for cooperation. In news coverage, the founder of Covalis declared that not indicating a CEO was intentional, and if the slate was successful, Covalis intends to adopt an open approach to dialogue to identify the best suited candidate to act as CEO, including the nominee proposed by the MEF.

Targeting Enel – Or the Shareholder Slate System?

It’s worth noting that although Covalis’ argument is focused on Enel, the concerns raised largely reflect issues with the Italian election system in general, rather than company-specific practices. In the press release accompanying the presentation of its slate, Covalis seems to target the “opaque process” of identifying nominees, stating that:

“…the uncertainty surrounding the board appointment process contributes to shares in Enel trading at a discount to peers and the company having a higher cost of capital than would otherwise be the case. Covalis thinks the process and risk of interference are the main reasons for the valuation discount. We want to end this process and propose that our independent board would consult with shareholders, proxy advisers and corporate governance experts to propose a solution that is more in line with international best practice and produces a better outcome for all stakeholders…“

Notably, the process described above seems to be an intrinsic feature of the Italian slate system when the appointments are typically made by shareholders. Companies will conduct board reviews, identify a desired skill mix, and provide guidelines on the optimal composition of the board. However, it will ultimately be up to shareholder proponents to identify nominees. Typically, in our understanding, external advisors are appointed to assist in identifying an initial long-list, and ultimately a shortlist, of director nominees. While Assogestioni has outlined the processes it follows in managing the technicalities of the nomination process, the specific details and underlying rationale behind other proponents’ slates can be highly opaque.

Some companies (typically those with higher free-float) have revised their election procedures in recent years with the goal of increasing the representation of minority shareholders past minimum legal requirements – an important change in a market traditionally dominated by major shareholders that has seen a significant influx of international institutional investors in recent years. Despite the positive direction of travel, investors, both domestic and international, would likely welcome increased disclosure on the processes used to identify the final nominees, in line with international best practice – but this issue applies across the market, rather than being specific to Enel.

We note that the process for the MEF to identify nominees is dictated by law (Directive of January 31, 2023, which applies to all listed companies where the state is a major shareholder); nonetheless, the MEF may have opened itself up to scrutiny by choosing to include two non-independent nominees on its slate for Enel. In contrast, the slate proposed by the MEF at the last election, in 2020, was fully independent (aside from the CEO). Nonetheless, any possible outcome of the election will result in a percentage of independent directors higher than legal and regulatory requirements, or best practice recommendations.

Possible Outcomes

In light of Enel’s share ownership structure, quorum at previous AGMs (which ranged between 65% – 70% in the past three years), and the number of proposed slates and nominees, it is difficult to predict the outcome of the election. Given the MEF’s shareholding, it has the best chance of prevailing, and is effectively guaranteed to have at least some of its nominees on the board.

However….

If Assogestioni was to receive the highest support, all three of its nominees would be elected and, for the remaining six positions, the MEF and Covalis would elect nominees proportionally to the number of votes received.

If the Covalis slate received the highest support, all six nominees would be elected to the board. The remaining three seats would then be divided between the MEF and Assogestioni slates proportionally to the number of votes received. This scenario could present two different outcomes: (i) the MEF receives enough support to fill all three seats, and none of the nominees presented by Assogestioni are elected; or (ii) Assogestioni receives enough votes to appoint nominees – in which case the proposed CEO, listed third in the slate presented by the MEF, would not get elected.

Looking for More?

The post above was adapted from our 2023 AGM Proxy Paper for Enel SpA, which includes full details of the competing slates of directors, analysis of the candidates and supporting rationales, and Glass Lewis’ benchmark policy voting recommendations — along with a direct response from Covalis via the Report Feedback Statement service, which gives the companies and proponents we cover the opportunity to deliver their opinion on our proxy research directly to the voting decision makers at every investor customer in time for voting decisions to be made or changed.

Read the Proxy Paper

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