Time for a break in the family circle Parmalat will force a review of Italy's traditional corporate model
Sophie Arie in Rome Thursday January 15, 2004 The Guardian As scabby kneed kids, Calisto Tanzi and Fausto Tonna sat on the same schoolroom bench in the small town of Collecchio, outside Parma. Decades later they were running a booming dairy firm, first dominating the Italian market and eventually building the company into a multinational dairy business. As director and financial director of Parmalat, billions of pounds of investment from around the world were placed in their hands. Ta & To, as they were fondly known, seemed a classic Italian success story. But now, with both in jail and the black hole in the bankrupt company's finances growing, what seemed to be a trustworthy, family business has turned out to be one big con. It has yet to be proven whether Ta & To were systematically embezzling funds for the personal profit of a privileged few. But it is clear that as they rapidly built Parmalat into a huge food empire, based on successful milk production, they made one bad financial move after another, losing millions at every turn. Parma Football club, 98% owned by Parmalat and entrusted to Tanzi's son Stefano, has lost almost â80m (Â55m) and Italian media reports say Parmatour, a family-owned tourism group with Tanzi's daughter Francesca on its board, may have lost up to â2bn. Unreported But with the Tanzi family owning 51% of Parmalat shares and the company's board made up mainly of family and friends - Tanzi's brother Giovanni, his son Stefano and niece Paola Visconti all held senior positions - the mistakes went unreported for years. Creditor banks in Parma were probably best positioned to notice trouble was brewing. But several of their chiefs were old friends of the Tanzi family. One Parma bank, the Banca del Monte, was run by another Collecchio man, Franco Gorreri, who was also an internal auditor for Parmalat. And the president of Cariparma savings bank, Luciano Silingardi, was a Parmalat board member until early December. While international banks are increasingly suspected of involvement in the fraud, the close-knit family model that kept Parmalat's troubles a secret is a fundamental part of the problem. "There is nothing wrong with keeping things in the family or close," said economist Carlo Scarpa, a professor at the University of Brescia. "If people are good, why not?" "The problem is when you become a public company, when you take billions of pounds from the market to help you grow, you have to let other stakeholders have a say in who runs the show. Italian firms refuse to do that. It's a cultural problem." Italy is traditionally dominated by small and medium sized, family-run companies. A few of those, like the Agnelli's Fiat, Benetton and Pirelli, blossomed in post-war Italy to become respected public companies and worldwide brands. These families have been admired not just as businessmen but as patrons of culture - be it renaissance art or football. Loyal workers at Parmalat, like Fiat, not only depend on the firm for their incomes but invest their savings in the family company they trust. But since the Tangentopoli bribe scandals of the early 1990s Italy, Europe's fourth largest economy, has fought to shake off its reputation for corruption. But it struggles to attract foreign investors on the same level as its European neighbours. A recent report by the American chamber of commerce in Italy showed that of all US investment abroad, Italy attracted only 2% compared with 20% invested in Britain. The core of Parmalat's business represents 0.8% of GDP. Many of its 36,000 jobs around the world look likely to be saved by emergency bankruptcy legislation passed late last year and the turnaround skills of government-appointed company administrator Enrico Bondi. But if Italy's regulatory system and family capitalism model are not seen to change dramatically, the Parmalat scandal could cause serious damage to the already tainted image of the country. The Italian prime minister's unique combination of business and political interests does not help boost confidence in Italy. Silvio Berlusconi, who faced trial for corruption until an immunity law was passed last June, has changed legislation to reduce, not increase, the penalties for false accounting and now Mr Berlusconi's government is pushing through a law that will allow his media empire to expand. "There is a danger that Italy will be labelled as a country with no rules. Or where the laws are just there to be changed," said Tito Boeri, a professor of economics at Milan's Bocconi University. "If moves are not seen to be made fast and effectively there could be real trouble for the whole Italian economy. It's not looking hopeful. But I hope they will be made." The Italian economy is already struggling, having slipped into recession early last year and hard hit by runaway inflation since the euro arrived. The Italian government is considering reforming its weak regulatory system to ensure that a Parmalat-style fraud will never go unnoticed again. Under the plans a new regulatory body similar to the US securities and exchange committee could be set up, removing controls entrusted to the Bank of Italy. Corporate governance experts suggest that large family firms should be obliged to include real outsiders on their board of directors. But there are fears that the reforms may take time, failing to send the clear, fast signal of change that international investors need to see. In an editorial entitled "New rules or disaster", La Repubblica newspaper wrote last week that all Italian companies will find it harder to seek investors abroad, following the Parmalat scandal. "This in itself is like a hidden tax on the Italian economy," said Federico Rampini. "In a way, if the government does not act in time, market forces will do their work for them," said Scarpa. "Family-run firms will see that if they are not more transparent, they will have to stay small. Foreign investors will no longer help them grow."
