Corporate Governance
Instructor:
Team Members (FT13):
Prof. S. Lioukas
• Angeliki , AVLONITI
• Nikolina, STAMELATOU
• Kalliopi Aikaterini, VELONA
1
The Parmalat Case
• 1961  Calisto Tanzi, a 22 year-old college dropout,
founded a small pasteurisation unit in Parma,
Italy
• 1990’s  Parmalat is one of Italy’s biggest success
stories, with a global presence in over 30
countries.
• 2003  Parmalat is one of Europe’s biggest scandal’s,
dubbed as “Europe’s Enron”.
2
The Company
 Parmalat Group is one of the major players worldwide in the
production and distribution of food and beverages
The range of products include:
 Milk
 Mainstream dairy products
(yoghurt, cream-based white sauces, desserts and cheeses)
 Fruit-based drinks
3
The Brands

4
The Company
 Family owned business based in Parma
 50% market share in the Italian milk and milk-derivative market
 1.5% of the Italian GNP
 8th largest industry in Italy
 Personnel: 36.000
 Activities in 32 Countries and 36 companies
 Dozens of associated companies (estimated up to 200)
 Listed in the NYSE
 Strong CSR policy (donations to Catholic causes , rebuilt Cathedral)
 (260 offshore speculative entities…)
5
Expansion
• Paternalistic approach of Mr.Tanzi to business.
• Advertising: "milk of champions“ (CSR, racing, agreements with
Ferrari).
• Over-expansion start of fraud through off-shore operations
Presence through Manufacturing
Presence through Licences
6
Real story
 Family business corporate governance
 Acquisition of companies with unrelated scope (tourism, football)
 No transparency, arrogance, fraud, tax evasion, secret financing of family choices.
 Acquisition of Odeon TV in order to compete Berlusconi  sell at a loss of € 45
Million
 Dubitable financial data
 Poor and distorted economic results
 Political connections (financing politicians)
 Major shareholder with 51% !
 Complex schema of companies
7
Real story
 Used offshore companies in Cayman Islands to hide debts
 Uncollected amounts were transferred to these companies
 Overstated assets and income to cover debts
 Various amounts were transferred to family accounts for personal
investments
 Recorded non existent recovery of a bond loan
 False trading transactions & double records for the same amounts
 Didn’t record loans or didn’t record real numbers
 The CFO received a € 3 million bonus from an offshore company in
Luxemburg
 Continuous changes in company’s Chief Financial Officers (scandals, lack of
trust)
8
Timeline
[1/2]
1961 Calisto Tanzi forms Parmalat after inheriting a small,
family-run shop in Parma at the age of 22.
90’s
Aggressive acquisitions era,
diversification of portfolio,
expansion abroad,
stock price sky rocketed.
Enters Tourism &Sports industry
•From 1998 to 2002 it acquires 25
companies
•More than 200 companies in 50
countries by 2002
 Resulting in red figures
The company sets up off-shore subsidiary Bonlat
in the Cayman Islands 1999
Parmalat's share price reaches a record
2002
(firm valuation: 3.7bn euros)!
9
Timeline
[2/2]
October 2002 150 million € bond issue
November 2002 200 million € bond issue. Balance sheet
shows 3.5 billion € liquidity and high proportion of debt
February 2003
Corporate bond issue is rejected due to lack of formation
CFO resigns but remains in the BOD Stock price
fell 45% (from November 2002)
Italian Stock Market April 2003
Commission runs an investigation!
November 2003
Bank of America asks info on Parmalat’s liquidity!
Deloitte raises doubts on the accuracy of the financial
statements!
The Fall!!
December 2003
10
Timeline Year 2003
[1/2]
8/12
Calisto Tanzi, CEO resigns
 Enrico Bondi runs
now the company
•Epicurum cannot repay
15/12
the expiring bond loan
•S&P downgrades
Parmalat’s bonds into
junk.
•Company reveals it
never recovered $589.9
million from the
Epicurum hedge fund it
had financed in Cayman
Islands.
17/12
Parmalat shares hit
their lowest level,
losing 97% of their
Parmalat discloses
value, and are
that Bonalat
suspended
account in Cayman
(company’s value
Islands is fake.
20/12 under 90m euros)
Bank of America
reveals that Parmalat
had forged a €3.95
billion account.
19/12
Italy's prime
22/12
minister, Silvio
Berlusconi, says
that the
government will
not allow the
bankruptcy of
Parmalat
23/12
Italian
investigators
assert $11 billion
in liabilities in
over a decade
11
Timeline Year 2003
[2/2]
Parmalat files for bankruptcy
under a new government decree
passed hastily by Berlusconi. The
decree allows the company to
survive as a legal entity rather
than have its assets liquefied on
creditors’ benefit.
24/12
29/12
The Securities and
Exchange
Commission sues
Parmalat, claiming
the company tricked
U.S. investors into
buying more than
$1.5 billion worth of
bonds and other
securities.
Seven more
executives
and advisers
are under
investigation
31/12
7/01
Investigation
includes Italian
and foreign
banks suspected
of involvement
in the fraud.
12
Starring...
 Tanzi family, CEO, CFO, BoD, employees
 Auditors: Grant Thornton, Deloitte
 Banks (Bank of America, Citicorp-Citibank,
Deutsche Bank, Bank of Italy)
 Milan Stock Exchange
 Capital Market Commission
 And of course…the Italian Government!
13
Board of
Directors!
 Calisto Tanzi: Founder, CEO and member of BoDs
 Stefano Tanzi (son)
 Giovanni Tanzi (brother)
 Paola Visconti (niece)
 Fausto Tonna (CFO)
8 members
in total
 Three Executive members:
 Lucianno del Soldato,
 Alberto Ferrari (new CFO by April 2003),
 Francesco Giufreddi
BoD stuffed with family members and friends!
No shareholder representation!
14
“Independent”
members of BoDs!

Paolo Sciume (Tanzi family lawyer)

Luciano Silingrandi (Friend and former accountant of Callisto
Tanzi, member of various BoDs and President of the Cassa di
Risparmio di Parma)

Enrico Baranchini (Member of various BoDs, member of the BoD
of Banca Popolare di Lodi, second in cooperation with Parmalat)
Lack of Independence!!
“Independent” members were related to Tanzi
familly!!
15
Internal Audit
Committee!
 3 people out of which 1 was the CFO !
 The other two were Francesco Giufreddi
and Luciano Silingrandi
Lack of Independence of Internal Audit
Committee!!
16
Auditors!
• Grant Thornton: until 1999 3 yrs & 2 renewals (Italian law). GT were also
auditors of Cirio’s company! GT said that it received a confirmation of
Parmalat’s cash account existence → forged.
GT relied on internal mail rather than write independently to banks for
confirmation of cash balances!!
• Deloitte & Touche Tohmatsu (1999-2003): a Brazilian auditor who was
removed from Parmalat’s account when he doubted of his co-operator’s
(GT) financial elements.
• The Capital Market Committee (CMC) obliged GT to refer its doubts
regarding Parmalat’s liquidity ( April 2003)
Ineffective Auditing!!
Failed to detect fraud OR were they also engaged?
17
Other
stakeholders
Banks
Milan Stock Exchange
Italian Capital Market Commission
Central Bank of Italy
Italian Government
18
CG Failures
in Sum
• Lack of Transparency and Disclosure of information
• Ineffective BoDs:
• Familly members and friends
• Lack of Independence of independent non-executive members
• No representation of shareholders
• Chair = CEO
• No Auditing Efficiency and Independence
• Banks engaged in fraud
• No Investor Protection
– No or misleading information concerning Parmalat bonds
• Lack of sufficient Regulation
19
•http://www.reuters.com/news/video?videoChannel=2602&videoId=78138
•http://www.youtube.com/watch?v=m6EJ_5lL7I8
Ashley Mote speaks at the European Parliament on organised crime; specifically the collapse of
the giant Italian Dairy company, Parmalat, and the deaths of a former member of the City Bank
board and a former President of the European Central Bank.
•http://news.bbc.co.uk/player/nol/newsid_4290000/newsid_4291600/4291682.stm?bw=nb&m
p=wm&news=1&bbcws=1
•http://www.cnbc.com/id/15840232?video=626569885
20
Consequences...
• Parmalat bonds are classified as junk
• Parmalat share price fall by 40%
• Government Intervention
• Investors lured away by the banks had worthless
paper in their hands…
• Employees uncertain about their future
• Banks’ role questioned
21
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5
Returns
Stock
Performance
Parmalat Share Price (2005-2009)
3.5
3
2.5
2
1.5
Series1
1
0.5
0
Month
22
Latest Updates
[1/2]
 US Jury finds Parmalat Defrauded Citigroup (21/10/ 2008)
 Citigroup awarded $364m in Parmalat fraud case (22/10/ 2008)
 Parmalat Spa stock plummets even further (24/10/ 2008)
 Prosecutors seek 13-Year sentence for Calisto Tanzi
 September 2009: 3 lawsuits by Parmalat Capital Finance Ltd. and
Enrico Bondi, CEO of Parmalat, against Bank of America and auditors
Grant Thornton are dismissed
24
Latest Updates
[2/2]
 Parmalat is in administration - quarantine!
 Protection from its creditors
 Had to sell off many of the companies (foreign subsidiaries)
 Had to reduce its workforce as part of financial restructuring
plan
 Had to decrease the product portfolio
 Weaker bargaining power
 Danone and Nestle most likely to pick up the pieces…
 Today is surviving in shrunken form although with very good
financial numbers
 Its market credibility is reformed and gained back day by day
25
26
“How we govern Parmalat”
“We worked hard since Parmalat came back to the Stock
Market to be able to comply with the general principles of
good corporate governance, and in particular with the
Italian Corporate Governance Code.”
Parmalat’s corporate organization is based on the socalled Italian “conventional” model.
27
“How we govern Parmalat”
Parmalat’s corporate organization is based on the
so-called Italian “conventional” model
The Model consists the following CG bodies:
Shareholders’ Meeting
 Board of Directors
 Board of Statutory Auditors
Independent Auditors.
28
Parmalat Vs Enron
Parmalat (“Europe’s Enron”)
Enron
Still operates with growing
profits
Closed
Proportionally larger than the
combined ratio of the Enron
and WorldCom bankruptcies
to the U.S. GNP
29
30