Del Vecchio: the cracks in a rigid system of governance
familyandtrends, after commenting on the Del Vecchio’s legacy in July 2022 and having identified the three challenges facing his heirs, he felt he had nothing further to say. In light of recent events, the Italian (and international) press has been more concerned with spreading rumours and smearing family capitalism than with helping readers to understand, going so far as to claim, in the words of a great journalist, that “the model that for a century has been the pride of the Italian economy: the legendary family capitalism, which has gone from being the driving force behind the Italian economic miracle to becoming the symbol of parental greed…”. It seemed appropriate to return to the subject.
Of course, continuity in family-run businesses is difficult: if it weren’t, familyandtrends would have no reason to exist. But to declare the end of family capitalism on the basis of a few cases of family tensions – however striking in scale they may be – seems excessive. To clarify matters, let’s look at the three challenges identified by familyandtrends in July 2022, shortly after the death of Leonardo Del Vecchio.
“The company,” it was written at the time, “must remain as united as it was when there was only one shareholder; it is essential that shareholders are bound by shared values, that each one has a clear understanding of the system of representation, their rights and duties, and that, overall, there is a clear investment strategy.” Even then, a weakness was highlighted: “In this respect, perhaps, Del Vecchio made a mistake by establishing a governance structure that requires unanimity amongst the current shareholders for certain decisions. It is a common mistake among the current generation, which seeks family harmony but underestimates the fact that unanimity grants excessive veto power to one shareholder and can stifle – even severely – a constructive discussion and the resulting better decision.” Leonardo Maria Del Vecchio, by proposing to buy 25 per cent from Luca and Paola, has demonstrated a willingness to unblock a governance structure stifled by veto rights: he would come to hold 37.5 per cent, a long way from the 88.5 per cent required for key decisions; but he would have a slightly greater say amongst the shareholders. Over time, Leonardo Maria could acquire further shares and inherit some from his mother; of course, it is unthinkable to finance the purchase of 87.5 per cent of Delfin through debt whilst starting with a 12.5 per cent stake. It is more likely that, over time, the larger stake will lead to changes in the corporate structure decided by the shareholders or the board.
The debt-financed purchase has, however, already been put on hold because the banks that were due to lend the 10 billion to acquire Luca and Paola’s shares have requested a guarantee from Delfin. Apart from the sums involved, this request is standard practice in banking and, however daunting the figure may seem, it would have been a ‘good deal’ for Delfin: if the debt were honoured by Leonardo Maria, the company would have a potential controlling shareholder in the future; if it were not honoured, Delfin would acquire 37.5 per cent of itself for 10 billion, a stake valued at between 15 and 20 billion.
The letter of support has created the most dangerous breach in the dam that the founder had erected between the shareholders and the companies he owns: the Board of Directors has split. Voting in favour were Francesco Milleri, chairman of Delfin and chairman and chief executive of EssilorLuxottica, and Mario Notari, a trusted notary and former director of EssilorLuxottica; Delfin’s ‘more technical’ directors – Romolo Bardin, Delfin’s chief executive, Giovanni Giallombardo and Aloyse May – abstained, effectively blocking the deal. If even the directors chosen by the founder – who can only be removed with the agreement of all shareholders – cannot reach a consensus on Delfin’s future structure and investment strategy, there is a risk of the dam bursting and chaos ensuing across all the subsidiaries controlled by the holding company. This rift can be interpreted as a division between those who, being more hands-on and closer to the subsidiaries, are seeking a governance structure better able to provide clear direction, and those who are more technically minded and focused on Delfin, wishing to avoid excessive risks for the holding company – such as having to raise 10 billion euros to honour the bank’s letter of patronage.
