Società per le Bonifiche Ferraresi – Effect on Stock Exchange -Proposed Reform of Company Law – Auditors

«The Economist», 27 settembre 1930, pp. 572-573

Turin, September 9

The Italian Stock Exchange opened very badly after the usual mid-August recess, owing to lurid disclosures with regard to one of the oldest and best-known Italian joint stock companies. The Società per le Bonifiche Ferraresi (Ferrara Land Reclamation Company) was founded in 1872 by a group of Italian and foreign, mainly Swiss, capitalists, with the aim of reclaiming malarious and partly-submerged territories in the province of Ferrara, near the mouth of the River Po. The company, which did for a time true pioneering work in a country where only a few fishermen lived, got into difficulties and the shareholders decided in 1882 to put it into liquidation. Another group, this time headed by capable Piedmontese capitalists, reconstructed it in 1898, and its fortunes were thenceforward assured. It owned 23,000 hectares (about 57,500 acres) of well-reclaimed land, with good roads, buildings, machinery and cattle, in what had become the most fertile agricultural belt of Italy. The policy of the old directorate, which was popularly identified with the name of the chairman, Signor Marangoni, was one of conservative dividend distribution, building up of hidden reserves out of undistributed profits, and periodical writing off of capital. In this way the capital was reduced from 15 million lire in 1898 to 9.2 million in 1918.

After the death of Signor Marangoni, the Piedmontese group, in 1919, sold its interests, apparently at a good price, to another group headed by Comm. Gino Lisi, of a different and more adventurous financial school. The capital was rapidly raised from 9.2 to 100 million lire; and while in pre-war times 7 1/2 per cent, dividends were paid on the small capital, in the last years from 12 1/2 to 14 per cent, was paid on the vastly increased capital.

The most extraordinary feature of the collapse was that, as recently as last April, a balance sheet was laid on the table at the general shareholders’ meeting in which, in addition to the capital of 100 million lire, there appeared reserves to the amount of upwards of 90 million lire, and debts, mostly long-term mortgages, for only 83 million lire. The debts seemed to be amply covered by the assets, among which the lands were said to be very conservatively valued at 136 million lire. Assuming the 23,000 hectares of good land to be worth only 10,000 lire per hectare, it appeared that there was a hidden reserve of almost 100 million lire. The meeting, at which, in a not very prosperous year, profits available for distribution amounted to 15,078,808 lire were announced, passed a unanimous vote of thanks to the chairman and directors.

Suddenly it was made known that during the August recess, the Tribunal of Ferrara, where the company had its administrative seat – its legal seat was always Turin – had granted to the company the benefit of the concordat preventive, that is to say, had initiated a procedure in virtue of which, with the consent of a certain percentage of creditors, the company may settle its debts with the payment of at least 40 per cent, of the sums due to creditors. A balance sheet presented to the Tribunal purported to show total debts to the tune of 250 million lire and total assets valued at only 150 million lire. The moral shock in the Italian bourses was great. How could it happen that 23,000 hectares of the best land in Italy had been swallowed up, so that not a penny remains in favour of the shareholders, and creditors are left with a percentage of 40 per cent., or not much more than that? How can the shareholders of other companies feel sure that lands, houses, machinery and good visible assets will not fade away, leaving them with worthless scraps of paper? The Bonifiche Ferraresi shares, which some time ago were up to 800 lire, and closed before the recess at 160 (par value 200 lire), were offered at from 5 to 20 lire. The market in general was bad and many shares suffered heavily. The public prosecutor instituted a vigorous investigation and his conclusions were certainly of a serious kind, as the chairman, Signor Lisi, and various other directors were arrested.

Though the worst of the shock is over, markets remain sluggish. In the commercial daily II Sole there is published today a list of current prices of the shares of 54 big and favourably-known companies, from which it appears that none of them yield less than 6.53 per cent., the great majority ranging from 7 and 10 per cent., four going over 10 per cent., and one going as high as 12.50 per cent. Chances of picking up good shares at low prices seem abundant. To restore confidence, an official communique announced that joint-stock company law is to be reformed. Such reform is at present under discussion in many European countries, in consequence of the world stock exchange crises, and of such incidents as the Hatry case in England, the Gazette du Franc case in France, and the present affair in Italy. Besides the usual questions, the right of shareholders to have their questions answered, plural voting, the right to a vote of shares pledged as collateral for speculative loans (riporti), and items to be compulsorily and separately specified in the balance sheet, one point in particular is raised here: the constitution of the body of auditors (collegio dei sindaci). At present the auditors are appointed annually by the shareholders assembled in general meeting, that is to say by the very body which also appoints the board of directors. The consequence is that the group of men who are able, because they possess the majority of shares, or represent such possessors, to appoint the board of directors, are also able to appoint the auditors. These last know that they will only be reappointed if they are subservient to the wishes of the dominant group. Therefore, auditors’ reports are mostly colourless and always conclude that everything is in order. Shareholders in such cases as that of the Bonifiche Ferraresi, awake only when it is too late. A solution would be found in a return to the practice which existed before the enactment of the present Commerce Code (1882), of the appointment of auditors by tribunals, from a list of candidates having certain minimum qualifications. The system was then discarded because the auditors, as official employees, without a stake in industry, did not notice irregularities until they were too advanced to be cured. Another suggested solution is to give to a possible minority of shareholders the right to appoint a certain proportion of the auditors.

Perhaps when the markets take a turn for the better, all these discussions will be suddenly forgotten. Today, in Italy, as elsewhere, much ink is consumed in order to persuade the public to come back to the stock exchanges. It is doubtful whether good regulations can have such an effect; but it is certain that periods of crisis are sometimes useful, as they force on public opinion the necessity of reform.