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					   Corporate Governance, Innovation, and Economic Performance in the EU

A research project funded by the Targeted Socio-Economic Research (TSER)
Programme of the European Commission (DGXII) under the Fourth Framework
Programme, European Commission (Contract no.: SOE1-CT98-1114; Project no:
053), coordinated by William Lazonick and Mary O'Sullivan at the European Institute
of Business Administration (INSEAD).

               Corporate Governance at Fiat SpA

                               Giuseppe Volpato

                      Ca’ Foscari University of Venice

                          Tel. +39.041.2574209 (direct)
                               Fax. +39.041.2574362
                            Email :
Volpato - Fiat

                             Corporate Governance at Fiat SpA

                                      Executive Summary

The specific traits of Fiat’s role in Italy

A proper interpretation of the current corporate governance policy in place at the Fiat SpA
group requires to keep in mind two elements: on the one hand the extraordinary weight that
the company has played within the Italian economic landscape and then the importance that
the “external” scenario had (and has) as well for the history of the company; on the other hand
the extraordinary continuity in company management which during its first century of life has
seen only three chairmen: Senator Giovanni Agnelli, professor Vittorio Valletta and
“Avvocato” (lawyer) Gianni Agnelli. In other words it is necessary to acknowledge that the
specific traits of the current corporate governance at Fiat SpA can be fairly interpreted only
through a wide historical perspective which defines its key stages of evolution.

The Fiat Group, the main Italian private industrial company, during its hundred years of
history has seen a series of stages of fast growth, crises and profound reorganisations which
have been influenced not only by the evolution of the Italian and international automobile
market, but also, given the economic relevance and the strategic role which the motorisation
process played in the past, by the socio-political equilibria which unfolded in Italy.

As a consequence, the policy developed by the company management, soon transformed into
a multi-business group, albeit mainly centered upon the manufacturing of cars and
commercial vehicles, mirrored not only the objectives which the top management meant to
achieve, but also the balances generated among the subjects holding the controlling shares,
and between them and the other stake-holders.
The Fiat Group holds still today a specific role in the Italian economic system, not just due to
its size, but also due to the charismatic role which the “avvocato” Agnelli still plays with
respect to public opinion in general and with respect to the management of the company,
albeit he is acting as honorary chairman, that is a role apparently without a direct influence
over the company.

The stage of Senator Agnelli

The stage of Senator Agnelli stretched from the establishment of the company (1899) until the
end of World War Two. During such period the model of a large company took shape, at first
with an almost autocratic control by him, and then by his family. The undisputed success
achieve by Fiat consolidated the image that a large capital company necessarily had to be
managed by the economic subject in first person (capitalist entrepreneur), who drew towards
his own initiative the capital of small individuals, based upon a relationship of trust for the
capabilities of the company chief to lead the company to growth and prosperity. During such
stage, thanks also to the specific culture of the Sabaudian Piedmont, for which it was easy to
see the role of the industry leader Giovanni Agnelli as a sort of “prince of the economy”, the
Agnelli family as well ended up acquiring the role of a dynasty.

Other specific traits of such stage were:
   - the possibility for Senator Giovanni Agnelli to exert his control over a very large
        mass of capital through the cascade-like mechanism of control over the majority stage
        of the mother company (a trait which was common to the whole Italian family-driven
   - the absence of an autonomous role of the management which felt like (and was
        considered as) a direct and almost mechanical expression of the decisions adopted by
        the company leader;

Volpato - Fiat

    -    the modest scope of the role played by the Italian financia l system which (on such
         aspect see also the essay by Franco Amatori e Andrea Colli, Corporate Governance:
         the Italian Story, August 2000), due to the modest weight of institutional investors,
         could never be able to play a role of control and protection of the interests of stock-
    -    even the role of banks in short- and medium-term financing appeared marginal for the
         cash situation of the company which usually operated in a situation of net
         availabilities, and who resorted to credit only to offset temporary needs in its
         expansion strategy.

The stage of professor Vittorio Valletta

In abstract terms the long stage of presidency by Vittorio Valletta (from 1942 to 1962) could
lead to think of a transitional stage from an autocratic family-driven capitalis m to a
managerial capitalism. But things were different. Valletta was instead the “priest”, custodian
of the interests of the Agnelli dynasty. From the standpoint of development, these years were
the most impressive for the Turin auto company which in 1955, with the launch of the first
authentically popular car (the “600” model), finally entered a stage of mass motorisation
which allowed it to exploit in a sort of monopolis tic position the strong growth of the “Italian
economic miracle” in the second post-war stage.
It was an extremely large growth (Fiat was due to become the leading automaker in Europe),
but also particularly unbalanced, with respect to the problems which are currently related to a
correct corporate governance. As a matter of fact the minority shareholders were completely
excluded not just by the management of the company, but also by the possibility to correctly
interpret the strategies and the structure of the Fiat “galaxy”, organised as a single company in
which a set of “strategic business units” were collated together, managed by an outdated
functional structure, inevitably slow and opaque to the eyes of financial analysts.

The stage of the “avvocato” Gianni Agnelli

With the return of an Agnelli in first person to lead group there was no visible change of
direction in terms of Corporate Governance. The management of the company was still a
matter of the family (the brother Umberto Agnelli also took a direct leading role as managing
director for the group), which dictated the strategic objectives in an exclusive manner, while
the role of the management was still seen as a matter of loyalty similarly to the role of a
military elite towards its leader. The minority shareholders only received a reasonable
remuneration of capital, without any influence or protection with respect to the key choices of
the company. Such relationship was fully granted by the Italian legislation which allowed the
subscription of privileged shares and saving shares, which had a lower decision power in
general assemblies.

In such stage the new element was represented mainly by the emergence of the crisis in the
automobile industry at the end of the 1960s and by the stage of strong international inflation
which followed. For the first time, after the financially troubled stages in the very early years
of Fiat, the Agnelli family was in trouble to carry out its own role of key capitalist, and the
Avvocato Agnelli had to resort to the financial intermediation of Mediobanca, the leading
Italian investment bank, to devise a solution in order to supply the necessary capital to
revamp the industrial group, without affecting the hegemony of the family. The solution was
the entry of a “friendly” shareholder played by Lafico (Libyan Arab Foreign Bank), interested
into trading a role of pure economic spectator in the company management board, in
exchange for a political credit to Libya (and to Colonel Gaddafi) in the international

Volpato - Fiat

Another innovative aspect of this stage was the effort by Giovanni Agnelli to balance around
his own figure the equilibria of powers in the Agnelli family, which then had grown over the
generations to a range of subjects and interests which, if not adequately managed, could
threaten the cohesion in the majority shareholder. The solu tion was found in 1987 through the
establishment of the Giovanni Agnelli & C., Società in Accomandita per Azioni (SAPA).
With such a company tool the shares of the family were “concentrated” and managed by
Gianni Agnelli, also with the objective to ensure the m      aximum bargaining power of the
family towards partners which joined the majority shareholders (among which some banks,
and Mediobanca).

Towards the Shareholder Value Policy

The economic events, mainly unfavourable, which the company had to face in the 1990s, and
the difficulties encountered by the Agnelli family in designating a own member capable of
taking over the role of company leader, started to push during the first half of the 1990s
towards a gradual but profound transformation of the role of management within the
company. It was still Gianni Agnelli who led such transformation, but the eye of the president
aimed at the stage in which his age would force him to a less active and direct role.

A key stage in such transformation, which partly followed the Anglo-Saxon corporate
governance approach, began in 1996. The scheme sought after was a media tion between the
powers of the various stakeholders which could play as guarantee of transparency and
efficient management of the economic interests of the shareholders (majority and minority
ones) and of the financial system in general. This meant to build an equilibrium which
continued to privilege the priority role of the majority shareholder, that is the Agnelli family
represented by its financial tool: the Giovanni Agnelli & C. SAPA, which was in charge of
the definition of the key strategic lines of the group, and which remained the guarantee
towards the political power (the Italian Government) of the ownership structure in a stage in
which the concentration process which was taking place in the international automobile
industry could lead someone to fear a possible shift to foreign control.

On the operational standpoint the role of the management was gradually boosted, a
management which was on the one hand very loyal to the Agnelli family, but at the same time
aware of the needs of fairness and transparency towards the international financial community
in particular. Such wide ranging design took shape mainly with the gradual entry of Paolo
Fresco in the company, an Italian manager who had worked in the USA for a long time, in
close contact with Jack Welsh of General Electric. Such American manager can be considered
as one of the most brilliant examples of an approach aiming over a long term to a Shareholder
Value Policy.

The change was driven by a clear perception of Gianni Agnelli and its management that the
new stage which the international economy and the automobile industry were entering called
for a stage of marked globalisation which no player could refuse if it aimed at carrying on
playing an autonomous and dynamic competitive role. It was the dawn of a stage of mergers,
acquisitions and alliances in which not even the most important industry groups (such as
General Motors and Ford) could think of playing their role in autonomy, without creating
synergies and forms of competitive integration with other partners in the various markets. At
the time, albeit maintaining its own nature of family-run company, Fiat had to be able to
operate in a way which was not different from that operated by companies belonging to most
advanced capitalisms.

However it must be noted that such transition towards a more modern corporate governance,
in tune with international standards, is hindered by an unfavourable trend in the economic and
financial equilibrium of the company. The auto industry is undergoing a stage of strong
competition and relevant financial commitment which disadvantages mainly the companies

Volpato - Fiat

whose manufacturing specialisation focuses on lower segments, where competition is fierce
and more open to dumping policies operated by manufacturers in trouble (such as the Korean

A further difficulty is due to the fact that the application of a corporate governance model
based upon the shareholder value policy implies the sale of activities which are not capable of
generating value for shareholders, but because the sale of considerable parts of Fiat (mainly in
the most critical areas of cars, commercial vehicles and earth moving equipment) could only
happen through foreign hands, one faces a situation which is wider than a simple sale. As a
consequence Fiat SpA albeit flying the flag of value creation for all shareholders (and using
methods of investment evaluation which are in line with such approach) has ended up, for the
last few years, to draw up balance sheets which mainly in the automobile unit (Fiat Auto
SpA) mark destruction of value for shareholders.

The recent agreement between Fiat Auto and General Motors mirrors such delicate
equilibrium. There is a financial operation which aims at creating large cost savings and
relevant industrial synergies, but in such way not to automatically imply a sale to GM of
something which over time has acquired the nature of primary symbol of the Italian industry.

Volpato - Fiat

                       Corporate Governance at Fiat SpA


1. How Many Capitalism? How Many Concepts?                                       7

2. Peculiar Aspects of the Corporate Governance at Fiat SpA                      9

3. The Automotive Filière and Its Importance on Italian Economy                  12
        3.1. Fiscal contribut ion
        3.2. Employment in the sector
        3.3. Import-Export flows

4. Historical Evolution of Fiat Governance 1899-1979                             16
        4.1. The incorporation of Fiat SpA
        4.2. The development of a technically advanced management body
        4.3. The “regency” of Vittorio Valletta
        4.4. The Valletta culture of monolith
        4.5. The management of Agnelli family
        4.6. The divisional approach of Umberto Agnelli
        4.7. Strategy and Structure
        4.8. Tentative Management by Objectives
        4.9. De Benedetti: a meteor
        4.10. The incorporation of Fiat Auto Spa

        5. The Fiat Group’s Structure                                            32
        5.1. The growth years
        5.2. The union crisis and the oil shock
        5.3. The “Lafico” operation
        5.4. Fiat SpA as a holding

6. Fiat’s Corporate Governance Rationale                                         38
        6.1. Opening to the market
        6.2. Fiat as an “integrated industrial Group”
        6.3. Conflicts of interests between majority and minority shareholders
        6.4. The establishment of the Giovanni Agnelli & C. S.A.P.A.

7. Fiat’s Shareholder Value Policy                                          46
        7.1. Until 1996: the ROI and ROE scheme
        7.2. Value Based Management
        7.3. E.V.A. as a performance measure
        7.4. The adoption of the management model based upon value creation
        7.5. The incentive tools at Fiat
        7.6. Stock Option Systems in Italy
        7.7. Stock Option System at Fiat
        7.8. Fiat Directors’ Compensation

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8. The policy of investment-divestment of the Fiat Group                        58
       8.1. The stage of multidimensional expansion
       8.2. The reorganisation of captive suppliers
       8.3. The reorganisation of the 1980s
       8.4. The “re-entry” in the 1990s
       8.5. Investments and divestments: the theory of the “competitive weight”
       8.6. The role of the financial companies of the Agnelli family IFI and IFIL

9. The Research & Development Policy of Fiat                                   68
       9.1. Research activities as a whole
       9.2. The Fiat Research Centre
       9.3. The Elasis Company
       9.4. The evolution of Fiat R&D investment

10. Fiat’s financial trends and stock quotation                                72
       10.1. The financial-economic trend of the Group
       10.2. Value creation
       10.3. Dividends, market capitalization and share value

11. The GM-Fiat alliance                                                       78
       11.1. The objectives of the alliance
       11.2. The structure of the agreement
       11.3. The juridical and financial aspects of the agreement
       11.4. Synergy savings
       11.5. What effects on corporate governance

12. Conclusions on Fiat’s Corporate governance                                 85

Appendix No.1 Fiat Group’s Relevant Financial Initiatives                      86

References                                                                     90

Volpato - Fiat

1. How Many Capitalisms? How Many Concepts?

        The theme of corporate governance is an issue of great importance which
invests areas whose relevance is not just economic, but also political and social since
a judge ment on the efficiency and desirability of a given corporate governance
system inevitably leads to raise the question of the efficiency and desirability of a
capitalist system, with all that such a question implies also on the ideological and
evocative standpoint. For example the use of the “Capitalism” word in itself raises a
variety of questions since there are more and more scholars believing that the concept
is obsolete, also because on the practical standpoint the other major political and
social system which has traditionally been opposed to it (“Socialism”) appears
gradually dissolving all over the world, albeit with varying forms and reasons in
different countries.
        Here we move from the idea that the concept of capitalism is still an
explanatory definition dense with meanings, but at the same time there are many
capitalisms which, although sharing a common basis and maintaining if not
reinforcing the mutual economic and social links, still have specific traits which are
highly different. This stateme nt per se is trivial, and nobody argues with that.
However it is less trivial what derives from it in a direct and immediate form,
although it is not always take into account as it would deserve. It is the difficulty of
using conceptual categories which ha ve historically developed and have been applied
to the study of a given feature of the capitalist system, and the comparison to another
capitalist system one.
         Moving on to practical issues, as the most important and more studied and
known capitalist system is undoubtedly the US one, then there is a tendency to apply
the conceptual categories usefully adopted to study and classify US capitalism also in
the study of other capitalisms, such as for example the Italian one. This operation per
se has justifications both on the standpoint of an “economic” use of intellectual
production (why continuously inventing new concepts if there are many already
available) and on that, even more important, linked to the nature of understanding
itself. To understand a reality means to identify its boundaries both in a positive sense
(what a given reality is about) and in a negative sense (what a given reality is not), in
other words it means to compare different realities. But this is the focal point of
research and scientific knowledge: it is mainly the capability to distinguish.
        Therefore to use concept already elaborated for the “most important”
capitalism works well to study other capitalisms, but given that these concepts are
used not as an arrival points, but rather as a starting point. On the one hand if we
would not use these concepts it would be difficult to compare different capitalisms for
a semantic dishomogeneity which would unusefully make researchers’s task harder,
and could generate misunderstanding mainly amo ng researchers with a different
cultural heritage. But on the other hand we must keep in mind that these concepts, and
mainly the meanings which go with them, must be adequately conjugated according
to the specific traits of the capitalism considered. Without this “keeping the distance”
from the meaning of a concept in the capitalism system of reference (the US one), the
use of categories used in it instead of helping to “distinguish” would on the contrary
have a “covering” effect which would prevent from understanding the reality of other

Volpato - Fiat

         At this point an example could be useful. If one considers one of the most
recent and complete surveys 1 devoted to the theme of Corporate Governance one
would note that it takes as a key problem that of the separation between property and
control, hence it mainly focuses on the so-called “Agency Problem”. As a matter of
fact in Italy one could say that only during the most recent years and in a quite limited
number of companies such problem is beginning to come forward, as the coincidence
of property and control in companies represents the rule (almost without exceptions),
as we will see in the Fiat case as well.
         A direct consequence of the methodological position which we want to bring
forward is that there are many different capitalisms and as “structurally different” they
cannot be reduced to expressions of different stages of maturity of a single form of
capitalism the most mature hence the most “perfect” (the US one). Obviously anyone
is free not just to prefer a given kind of capitalism (this is an issue of free political
choice, hence it lies in the “metaphysical” space of individual preferences), but
anyone is also free to believe that a given capitalism is more efficient than another
one. This second issue is properly a scientific issue, but it is so complex and difficult
that it remains confined into a limbo, lying between “physics” and “metaphysics”2 .
        It is possible in the future that following a process of further integration among
the different econo mies and progressive homogenization of the socio-political
systems, the current distinctive kinds of capitalism are bound to disappear to merge
into a single form of capitalism. But for the moment to assume that any capitalism
different from the US one are nothing but “raw” and “imperfect” forms of capitalism,
which can be positioned in terms of “distance” from the most complete and mature
model, means to adopt a methodological perspective which is superficial and
misleading. This position stems from the fact that the capitalist structure is certainly a
highly significant share of the structure of a society, but it does not absorb the whole
of it. For example, the system of natural resources – in its wider sense – available to a
society, is left out of it, as well as important parts of the cultural complex of a society
which are certainly influenced by the nature of the capitalist structure, but are not
wholly determined by it. So these differences influence to a certain extent the way a
given capitalist model works and its social meaning. In other words, as a capitalist
system is also the outcome of what lies outside the capitalist system of a society, to
adopt the perspective of capitalist systems which differ only in terms of degrees of
maturity with respect to the most mature one, means to wipe out, from the
methodological horizon of the researcher, all the effects which could derive from that
share of society which are not exclusively determined by the capitalist system itself.

  Shleifer and Vishny [1997]: “Corporate Governance deals with the ways in which suppliers of finance
to corporations assure themselves of getting a return on their investment. How do the suppliers of
finance get managers to return some of the profits to them? How do they make sure that managers do
not steal the capital they supply or invest it in bad projects? How do suppliers of finance control
managers?” […] “Our perspective on corporate governance is a straightforward agency perspective,
sometime referred to as separation of ownership and control. We want to know how investors get the
managers to give them back their money”.
  My view on this matter is that one can try to express an evaluation on which is the most efficient
model of capitalism, but only with respect to a given socio-economic situation, and in a given historical
moment. On the contrary I believe that the idea that one can express a comparative judgement over
capitalisms with a universal claim (applying anywhere and anytime) is the outcome of a positivistic
ideological bias.

Volpato - Fiat

        In order to allow to grasp the implications of this position (and those which
would automatically be eliminated if we were to adopt the scheme of the single
model, which differs only for degrees of maturity) we can raise the following question
which in the US system appears discriminatory with respect to the judgement over the
governance of an enterprise: is it managed according to criteria of value creation for
shareholders? In the US system this question appears as the most relevant one just
because it is drawn from a situation in which the separation between property and
control is taken as a typical feature of the most part of the company structures.
On the contrary if we raise this kind of question upon the Italian system, both on
small and large private companies, the reply (only apparently provocative), cannot but
be affirmative, right because we don’t have the separation between property and
control hence the fact that the firm is managed toward the interest of the property (as
expression of the majority share of capital) is no t only true but also truistic.
        As a consequence in the Italian system the key question lies in the
understanding, in broad terms, whether a system featuring a limited degree of
development in managerial professionalism (which lies at the roots of a gradual
separation between property and control) could survive in face of competitive
pressures induced by the competitive globalization process and, in more analytical
terms, whether the protection mechanisms for minority shareholders are effective in
order to create the conditions to attract enough financial resources to allow economic
development of firms. The first question is too complex to be dealt with here, while
with respect to the second the trend in the Milan stock exchange during 2000 seems to
eventua lly show that both Italian entrepreneurs and shareholders are gaining
confidence with the stock market which appears more and more oriented to provide a
marked contribution in creating growth opportunities for the economic system.
        Over the last 12 months 49 companies have been listed 3 , equal to 16.5% of the
number of companies listed at year end (297) which represents an all time high.
Market capitalization has grown to 1,600 trillion lire (800 billion euro) equal to 70.6%
of GDP. With respect to capital supply, in 2000 there have been 48 listings in the
stock market with public offering which have raised 13 billion euro to which 31
capital increases must be added, for an extra 3.8 billion euro.

2. Peculiar Aspects of Corporate Governance at Fiat SpA
         In accordance with the methodological aspects which have been outlined in
the previous paragraph, albeit in a concise way, the analysis of the corporate
governance model which has evolved over time at Fiat must be grasped in its specific
traits. The Fiat Group, since the leadership of Senator Giovanni Agnelli has emerged
among founding partners in 1902 4 , has shared with most Italian firms being
expression of a family-driven capitalism, although being up to a few years ago the

 Companies withdrawals from listing in 2000 were 21, six of which for incorporation, and nine for
buyout by a controlling company through a public offering, for a total amount of 23,600 billion lire.
  At that time Giovanni Agnelli became Chairman of the company, although his dominant position can
be traced back to at least one year earlier, when the company was just two years old. In fact in 1901
there was a contrast between the strategic position of Giovanni Agnelli, favorable to rely on
experiences gained outside automobile technology, and Ing. Enrico Faccioli, in charge of vehicle
design, and determined to follow his own personal view. Giovanni Agnelli became chairman of Fiat in
1920. See Castronovo [1971].

Volpato - Fiat

largest private Italian company. This strong and permeating presence of the family
view 5 , capable of aggregate “friendly” investors around it, ensuring to the family the
share of capital necessary in order to lead the company without uncertainty on the
financial control standpoint, has developed along a set of elements, some of which are
still in place. This applies also over most recent years, during which there are signs of
a transformation which seems bound to mark the separation between property and
control, but which for the time being is not completed.
   As a matter of fact if on the one hand it could be said that the process of
separation between property and control started symbolically with the move of Gianni
Agnelli from President of the Board of Fiat SpA to honorary President, on the other
hand one must consider that the process is just starting, for a set of reasons:
    a) The “Avvocato” Agnelli seems determined to keep on dealing with the
       Company. This means that, although not directly involved in the range of
       relevant issues associated to the management of a multifaceted and complex
       group as today’s Fiat, he cannot be seen as an owner stranger to managing,
       and who evaluates ex post choices expressed by a professional management
       according to financial results. In reality he keeps on acting as a key reference
       point for most relevant choices.
    b) Another aspect which characterizes the maintaining of a link between property
       and control, in the current company structure as well, is related to the fact that
       Umberto Agnelli too, Gianni Agnelli’s brother, and for many years chairman
       of Fiat SpA6 , keeps on being an “active” holder of a significant share of
       capital, both for his share on the “special” company controlling the majority
       stake in Fiat SpA (the Società in Accomandita per Azioni Giovanni Agne lli &
       C.), and as Chairman of the Istituto Finanziario Italiano (I.F.I.), which
       represents the financial company which groups most stakes in various
       companies belonging to the Agnelli family, whose activities continuously
       interplay with the Fiat Group strategies. Therefore Umberto Agnelli as well,
       similarly to his brother Gianni, stands out as a direct manager rather than a
       side observer and owner of a capitalist rent.
    c) This view is relevant also in operational terms if one considers that Fiat in the
       Italian landscape (but even more in the Piedmont and Turin area), cannot be
       compared to any other firm, be it large and important. It represents and entity
       which goes beyond the mere economic nature of any firm. In order to

  As it is known, after World War II the Agnelli family was formally stripped of the property of the
company: This was motivated by allegations over fascism support of Giovanni Agnelli. But this stage
is related to extraordinary reasons of political nature, and not derived by to financial issues. Moreover,
one should note that the strength of the link between the company and the Agnelli family is confirmed
by the ease and speed with which the family, reintegrated in the property, took back management
control in tune with the past. A highly relevant role in this continuity has certainly been played by
Vittorio Valletta buying into the Weltanschauung developed over time by Giovanni Agnelli. Valletta,
working with him since 1921, become Managing Director in 1928, then Chairman from 1946 to 1966,
cannot be considered as a “professional manager” in a true sense but rather an interpreter of the
interests of Fiat and the Agnelli family, regarded as a single entity, up to the time in which family
control ceases being exerted through an intermediary, with an Agnelli returning to the position of
Chairman. See Bairati [1983].
  Umberto Agnelli was managing director of Fiat Spa from 1970 to 1980 and then chairman of Fiat
Auto SpA and vice-chairman of Fiat SpA until 1992, when he left the board of Fiat SpA. In the same
year Giovanni Alberto Agnelli, son of Umberto, joined the board of Fiat SpA.

Volpato - Fiat

           understand the meaning of Fiat, particularly within the Piedmont milieu, one
           must interpret the company as a sort of kingdom in which the Agnelli family
           holds all the traits of a dynasty and its managers must be regarded as a
           priestlike caste who tends to come together with the family dynastic interests.
           In reality this has been more true in the past than now, when many
           transformations have pushed towards a laicization of management and against
           the maintaining of such feeling within the company. Until recently also at
           middle management levels to be employed at Fiat meant to hold a sort of
           nobility and with it a sense of identification and loyalty to the family and to
           the charismatic lead of Avvocato Agnelli. Even blue collar workers, who in
           some instances could manifest conflictual expressions with the company and
           the management hierarchy, were anyway agreeing in feeling part of a blue-
           collar aristocracy. Fiat, in such sense, was not a company but “The Company”,
           a true symbol of Italy’s efficiency and of its capacity to compete in
           international ma rkets.
       d) At higher managerial levels this marked sense of belonging is like to the
          Piedmont tradition of loyalty and affection to the monarchy and to the Savoia
          family 7 . For a Fiat manager loyalty to the Agnelli family could not be
          interpreted as mere proof of acceptance of a contractual relationship between
          “employer” and “worker”, but rather as a higher expression of loyalty which
          could be compared to one between a feudal vassal to his landlord. Moreover
          the tendency to lifetime employment of Fiat contributed significantly to
          reinforce these aspects and it is not by chance that careers up to highest
          hierarchical levels in the company did take place (as it currently does) almost
          exclusively through “internal” routes, without the introduction of manager8
          who have grown in other contexts and therefore less sensible to this process of
          identification with the company and the family which represented it.
        The anecdotes which could help highlighting this reality, which appears
different from other company contexts and therefore could not even be imagined
elsewhere, are many. Here we would just point out one of them, directly drawn by the
writer during a company interview with a former Fiat manger, who then moved on to
another car company. At Fiat it was always felt right for a manager to stay on and
work beyond normal working hours, and spend part of the Sunday at the office, even
when this did not imply any incentive. Clearly, for some young manager who was
fond of the mountain this represented a major sacrifice, particularly during winter
times. Hence the interviewed manager developed the habit, when the call of the
mountain was irresistible, of wearing a wide hat with a cloth covering up his face, to
prevent getting tanned, in order not to make his “scarce dedication” to the company
visible at a quick glimpse on the following Monday9 .

    The Savoia family is the family of the Kings of Italy.
  There are very few exceptions to this rule, the first dating back to 1974 which coincided to the call of
Cesare Romiti to the position of financial manager for the group. Another one, even more important,
was that of Paolo Fresco to the position of chairman of the board of the holding company in 1999. The
other “insertions” quantitatively limited for a group which at some times had over 300,000 employees,
had a limited lifespan just due to the specific company environment at Fiat. One could think of the so
called “100 days” of ing. Carlo De Benedetti as chairman in 1976 besides Umberto Agnelli and Cesare
    See Volpato [1996].

Volpato - Fiat

        Clearly such a priestlike view of the duties of the Fiat manager has gradually
softened, but there is no doubt that for a significant share of the employees, and
particularly for those coming from Piedmont and Turin, such a sense of belonging is
partly still present. Therefore it would be completely misleading, in order to
understand the model of corporate governance at Fiat, to adopt a view which is
exclusively based upon aspects linked to the share of capital held by the Agnelli
family and by the number of family members directly involved in managerial
responsibilities. Just to quote an example, there is no doubt that the share of financial
control of the Quandt family over Bayerische M        otoren Werke (BMW) is largely
higher than that of the Agnelli family over Fiat, but while in the first case the
separation between property and control is an acquired and undisputable fact, one
cannot say the same about the second case. To some extent, the link between property
and control which currently stands at Fiat appears even more solid than in a smaller
company where, although a member of the family stands in the top position, there
isn’t such a form of identification as the one previously mentioned.
3. The Automotive Filière and Its Importance on Italian Economy
3.1. The fiscal contribution of the automobile world
         Before moving on to analyze more closely the specific traits of the Corporate
Governance model at Fiat it is worth providing some information which helps
understanding the role of the Fiat Group in the Italian economy. As it will be showed
in more detail later one, car manufacturing and the complex of activities linked to
vehicle manufacturing represent only a share of the activities of the Fiat Group, which
encompasses also activities in the fields of Manufacturing Systems with the firms
Comau Sistemi di Produzione and Pico, of Aviation (Fiat Avio), of communication
(Itedi), of insurance (Toro). However the weight represented by the complex of
activities linked to vehicle manufacturing in general is so high that for convenience
reasons in this stage we will refer just to these.
         A first important element is the contribution of the “automobile world” to the
Italian economy. It is a complex phenomenon which cannot be summed up in a few
figures, but one could get an idea of the importance of the automobile in daily lives of
Italian citizens by noting that over 18% of the whole fiscal revenue stems from
economic activities revolving around the automobile world (Fig. 1).
Fig.1 - Automotive Industry’s Contribution to Italian Tax Revenue
(Billion Lire - 1999)
Excise and Value-Added Taxes on Fuels                                         53,700
Excise and Value-Added Taxes on Lubricants                                     1.800
Value-Added Tax on Vehicle purchases and Repair                               26,000
Value-Added Tax on Purchases of Spare Parts                                    3,850
Value-Added Tax on car radios & Phone                                            700
Value-Added Tax on Vehicle Towing Charges                                      2,400
Value-Added Tax on Road Tolls                                                  1,600
Provincial Registration Tax (IPT)                                              2,000
Vehicle Ownership Tax                                                         10,300
Vehicle Registration Fees                                                      1,300
Tax on Vehicle Insurance                                                       5,700
Total Vehicle Taxes                                                          109,350
% on Total Domestic Tax Revenue                                               18,6%
Source: Anfia

Volpato - Fiat

3.2. Employment in the filière
         Total employment worldwide of the Fiat Group at the end of 1999 was
221,319 units, of which 163,432 in the range of industries linked to vehicles
(Automobiles, Commercial Vehicles, Agricultural and Construction Equipment,
Automotive Components), which in turn divide between 53.55% in Italy and 46.45%
abroad. Therefore one could say that the 87,519 employees in Italy represent a
majority share of the Italian vehicle filière, albeit it can be hardly quantified.
Estimates suggest that the automobile filière, defined as the set of industrial activities
ranging from manufactur ing of components which are specific to the automotive
industry to the assembly of cars and commercial vehicles, accounts for about 10% of
Italian industrial employment, with a total employment of 130,000 units. It is a rough
estimate since there are no official statistics on the subject. Clearly employment is
significantly higher than 110,000 units since only the 110 firms associated to the
Associazione Nazionale Fra Industrie Automobilistiche 10 (ANFIA) accounted for
109,200 workers in 1998. Hence this measurement cannot grasp all the small- medium
firms which, although specialized in whole or in parts in vehicle component
manufacturing, are not interested in joining ANFIA. They are believed to be about
800 since estimates suggest that firms mainly specialized in vehicle component
manufacturing are about 900 units.
       Employment in the filière tends anyway to decrease in a marked way, along
with the process of globalization of automobile manufacturing which is replacing
vehicle export flows from more industrialized areas to less industrialized areas,
through the development of manufacturing activities in countries with a growing
motorization process. Over the last ten years industrial employment recorded by
companies joining ANFIA (Fig. 2) has reduced by 50%, from 205,009 to 109,200

Fig. 2 - People Employed in the Italian Automotive Filière
  Year       Blue Collars    White Collars        Total
  1989             157,491             47,518       205,009
  1990             154,094             49,215       203,309
  1991             138,009             44,481       182,490
  1992             133,972             42,182       176,154
  1993             112,480             35,520       148,000
  1994             102,600             32,400       135,000
  1995              98,600             31,400       130,000
  1996              94,000             29,500       123,500
  1997              89,000             27,000       116,000
  1998              83,700             25,500       109,200
Source: ANFIA
Note: People employed in firms associated to Anfia: Automobiles,
Commercial Vehic les, Sport and Special Cars, Body Manufacturers for
Industrial and multipurpose vehicles, Automotive Components Manufacturers
(Tyre Manufacturers included).

     It stands for National Association of Automobile Industries

Volpato - Fiat

3.3. Import-Export at Fiat Group
        The internationalisation process at Fiat has led to gradually increase both
foreign revenues for the group and export flows. With respect to the former, Fig. 3
shows that in 1990 a major share of the group turnover was achieved in Italy (83%).
In 1998 it still mainly comes from Italy but some rebalancing took place, since 38%
of revenues come from activities located in Europe (excluding Italy) or the rest of the
world. In 1999 there is another small move towards an international presence since
the share in value of products manufactured in Italy decreases to 61%. However it is
worth noting that the rooting of activities in Italy took place in tune with the whole
growth of the group, hence the loss in percentage weight of Italian turnover is linked
to a rather constant absolute value produced in the domestic market.
        This means that the reduction in employment levels for the group in Italy is
due to a productivity gain and not to relocalization of activities which have reduced
internal employment levels.
        If one moves on to analyze revenues by country of destination (Fig. 4) it is
easy to see how Fiat has maintained over time a rather constant volume of sales in the
Italian market, and growth took place in a first stage in Europe and later on mainly in
the rest of the world, where turnover represents one fourth of total.
       In terms of vehicles exported one can provide a detailed numerical example.
With respect to cars, units exported by the Fiat Group in 1999 were 609,012, equal to
42.2% of manufactured units. For commercial vehicles, instead, units exported were
203,378, that is 70% of domestic production.

                          Fig. 3 - Fiat Group Turnover by Origin

                                           45,8 bn €                48,1 bn €
   40,0                                         8,7
                 29,5 bn €                      8,7                    10,6
   30,0                      1,2
                                                28,4                   29,3

                   1990                         1998                   1999

                  Italy            Rest of Europe         Rest of the World

Volpato - Fiat

                          Fig. 4 - Fiat Group Turn Over by Destination


                                               45,8 bn €                   48,1 bn €

   40,0                                           11,5
                 29,5 bn €
   30,0                       2,7                                              19,7
   20,0            10,3

   10,0            16,5                           16,9                         18,3

                   1990                          1998                          1999

                             Italy   Rest of Europe        Rest of the World

Volpato - Fiat

4. Historical Evolution of Fiat Governance

4.1. The establishment of a Public Limited Company

        Fiat was born in 1899 as a public limited company with an equity of 800,000
lire, subscribed by nine founding partners, each of whom had an equal number of
shares (150). However the managerial role of partners soon started to differentiate,
with the emergence of the position and personal commitment of Giovanni Agnelli,
who became chairman of the company in 1902. With the first commercial successes
for Fiat 11 there were also considerable changes in equity shares, mainly with the
admission to the stock exchange market in 1904. Three of the nine founding partners
(Giovanni Agnelli, Luigi Damevino and Ludovico Scarfiotti) started to acquire large
numbers of shares, making stock values grow.
        Facing the promising market scenario, it was key to increase capital in order to
finance the investments required by manufacturing expans ion. Hence in 1906 it was
decided, not without dissent among partners and opposition by a number of minority
shareholders, to liquidate the company and to establish a new one bound to acquire its
activities, with a capital of 9 million lire, divided in 90,000 shares. In the new
company the trio Agnelli, Damevino and Scarfiotti had 71.7% of shares, with Agnelli
as the major shareholder.
        But during the following year there was a downward economic trend, which
slowed sales, to which Agnelli did not attribute importance, believing it was a
temporary decrease in sales, and continuing in expanding manufacturing. Soon there
was a considerable financial tension, which caused serious difficulties to the three key
shareholders, who were also accused of poor company management. This delicate
stage of crisis led in July 1908 to the resignation by all members of the Board of
Directors. However the managerial role played by Agnelli was believed (mainly by
creditor banks) too important for the overcoming of the difficulties, and he was
renamed Chairman in April 1909. With this change the dominant position of Giovanni
Agnelli was finally consolidated, both on the equity side and on the managerial one.
       During the following years there was a strong development of the automobile
market and of Fiat, whose capital was strengthened at many stages with increases
which expanded capital from 12 million in 1909, to 14 in 1910, to 17 in 1912.
       During World War One Fiat kept on growing rapidly, with large distribution
of profits, growth of share prices, and high compensation for board members, which
allowed Giovanni Agnelli to keep on maintaining control of the company in the light
of many considerable capital increases.
        Another delicate passage on the property side took place in the 1917-1919
period. During those years there was:
       a) The purchasing by Fiat of a group of companies controlled by the holding
           called “Gruppo Piemontese”,
       b) Giovanni Agnelli entering the controlling group of shares in the Banca
           Commerciale Italiana (Comit), who in turn was the first bank financing
           Fiat, and who had a considerable number of shares of the company;
       c) Two subsequent and considerable capital increases, half of which assigned
           to shareholders as option. They were complex and reckless actions, judged
     In 1903 company profits were particularly high.

Volpato - Fiat

               harmful to the interests of minority shareholders, but aimed at fighting
               back a takeover effort of Fiat moved by the Ansaldo company.
       The year 1919 closed with the establishment of the Società Generale
Finanziaria (Sgf) whose capital was subscribed for 50% by Fiat and for 50% by a
group of shareholders, with Giovanni Agnelli in a leading position. The task of Sgf
was to manage Fiat shares and the whole stock portfolio of Fiat holdings. The next
year Giovanni Agnelli became President of Fiat.
        During the 1920s Agnelli’s position as head of financial control was ultimately
enshrined. In 1922 Sgf was winded up and in 1924 there was a gigantic capital
increase given in option to shareholders. Fiat equity grew from 200 to 400 million lire
and in such increase subscriptions by a syndicate led by Agnelli and Comit were
particularly relevant. Further dominance by Agnelli became official in 1926 with the
appointment of his son Edoardo as vice-president.
        Soon after Agnelli called off the control syndicate made with Comit and on
24th july 1927 he announced the establishment of a financial company called Istituto
Finanziario Industriale (Ifi). The key shareholders of Ifi were Giovanni and Edoardo
Agnelli and some companies controlled by Fiat, but there were small share portions
held by two key families in the Italian industrial landscape: Pirelli and Borletti. Ifi,
with a company capital of 10 million lire, had the task of stabilizing stock values of
Fiat shares, constituting a majority block through a control syndicate capable of
drawing other shareholders, using Fiat shares for carry over operations through which
to finance Fiat itself, and acquire a range of holdings. After its creation Ifi continued
to acquire holdings and increase the share of Fiat shares controlled, reaching in 1932
the control of absolute majority. In the same year some norms were established by the
council of Ifi, aimed at maintaining shared of the founding partners, prescribing the
need for board authorization in case of transfer. Ifi then acquired the role of safe for
the Agnelli family, role which maintained until 1987 when Fiat shares will be
conferred to the “Società in accomandita per azioni Giovanni Agnelli & C”. The
Agnelli family was also owner of the RIV company, specialized in the manufacturing
of ball bearings. It had Edoardo Agnelli as chairman from 1921 onwards.

4.2. The development of an advanced technical management
        One of Giovanni Agnelli’s worries, since his appointment to chairman in
1902, was to favour the growth of managers skilled on the technical standpoint. This
objective was mainly pursued through frequent contacts with the US industrial
world 12 . The key reference point for Giovanni Agnelli was the study of the fordist
experience, although with the smart aim of not imitating in a mechanic way solutions
adopted overseas, but to absorb mass production ideas and studying solutions which
were suitable for the specific traits of the economic and social environment of Italy at
that time.
      The specific skill of Giovanni Agnelli was to manage to tie t gether the
management of the company, still maintaining and stimulating forms of
competitiveness and antagonism across different company functions, in particular
between vehicle design and the production side, which were seen as the building

     See Bigazzi [1999] and Volpato [2000].

Volpato - Fiat

blocks of the company, rather than the administrative functions 13 . This state of
identification of management with the objectives of development of Fiat, linked to a
latent antagonism between managerial functions, had a twofold advantage. On the one
side the situation manifested through a strong cohesion of managers around the
company top leaders, represented by the chairman Giovanni Agnelli and general
manager Vittorio Valletta, appointed to such position since 1928. At the same time
since only the top leaders (these two people) had complete information over the
different managerial aspects, the whole strategic elaboration of the company was
centered and taken away from any form of evaluation based upon consensus with
functional managers.
        The situation featured evident inefficiencies which however did not seriously
affect the company which had acquired for some time a position of absolute
competitive dominance in the national market, and considerable economic and
political weight in the Italian economy.
        The mechanisms through which Giovanni Agnelli will build such absolute
loyalty of his managers without having to call them to share strategic choices, are
many and subtle, and for a great extent linked to the fact that in Italy and even more in
Piedmont, to work at Fiat represented a status symbol of great significance. It was
certainly the most successful firm in Italy, operating in industries which were among
the most technologically advanced at that time, hence among the most important:
automobiles, industrial vehicles, aeronautics, marine engines, etc. Fiat was among the
few firms which could compete with the international industries of countries which
were far more advanced than Italy. Among these mechanisms of identification
between individual and company there were the methods merit-based selection based
almost exclusively on the internal career. In such way the merit-based system tended
inevitably to marry the loyalty principle, as it was the boss to select growth of his
collaborators, hence it does not surprise that merit and loyalty to positions expressed
by the boss tended to come together, if not to merge.
        At the highest levels this mechanism of internal progression in the company
had its maximum expression in the rule that, in case of death or resignation by one of
the board members at Fiat, the replacement took place with people coming from the
firm top management 14 . The analysis of the composition of the board since the 1920s
shows this aspect with great evidence, given the almost exclusive presence of
members of the Agnelli family, such as Giovanni Agnelli’s nephew, Giancarlo
Camerana, elected board secretary in 1927, and company managers.

   Castronovo [1999] points out that “In the company production engineers were important, or at least
they believed to carry out roles which were predominant over any other one. According to them the
success of the company depended only upon the design and good operation of plants, independently
from the validity of administrative and financial methods”.
   This statutory change was due also to worries to prevent insertion in the board of political
representatives associated to Fascism. See Castronovo [1999].

Volpato - Fiat

4.3. Valletta’s “Supplenza”
        In 1945 with the end of World Was Two it is the National Liberation
Committee (CNL) of the Piedmo nt Region to acquire control of the City of Turin and
of Fiat. The CNL soon takes a decision of temporary purge against Agnelli, Valletta,
Camerana, accused of cooperation with the nazi- fascism, and the appointment of four
commissaries in charge of managing the company. There was hence a dichotomy
were on the one side there were the four commissaries and on the other the majority
shareholders, that is the Ifi and the Agnelli family, hit by a seizure concerning the
personal properties of Giovanni Agnelli due to the purge allegation. None of the two
parties was in the condition to autonomously carry out the massive reorganization of
Fiat in the delicate stage of reconstruction. Hence there was a stage of stalemate,
where the Communist Party proposed a nationa lization of the company, similar to the
one carried out in France for Renault, while Allies pushed to the appointment of a
single Commissary, and for the return of control to the property.
        During such impasse it became evident that Fiat, seriously damaged on the
manufacturing side by warfare destructions, was exposed to very serious risks, as it
needed a clear reorganization program, huge finance interventions, and large supplies
of materials and energy to start its own recovery. The stalemate became even more
dramatic with the death of Giovanni Agnelli on 16th December 1945, little before that
the judicial proceedings concerning the allegations of cooperation with Fascism was
closed, with the cancellation.
       At the death of Giovanni Agnelli his properties (including Ifi) were divided
among the eleven nephews: the six sons of Edoardo and the five sons of Tina Agnelli
and Giovanni Nasi. All nephews received an equal share of Fiat excluding Gianni
Agnelli, son of Edoardo, who received a double share. Clearly this fragmentation of
shareholders made the uncertainty climate around the company grow, along with the
problems of its survival.
        The stalemate situation was overcome at the beginning of 1946 when the CNL
accepted an agreement which restored the position of control by the shareholders, and
instituted some Management Councils with consulting power. Valletta, who had
negotiated on behalf of the Agnelli family such agreement, regained in practice the
lead of the company, and his position became official in June 1946 with his
appointment to general director and chairman. His lead on Fiat lasted without
interruptions until 1966 with the complete support 15 of the Agnelli family and with
Gianni Agnelli as vice-president.
       A long period of growth hence begins for Fiat, in tune with an exceptional
development of the domestic automobile market, and a robust growth in the national
economy. During post-war years, the management style of Vittorio Valletta tended to
a degree of centralization, whenever possible, which was even greater than Giovanni
Agnelli 16 . It was common practice that during meetings of the Executive Committee
on Thursdays, the highest and most restricted decisional organ for Fiat, made with 5-6
people including Valletta and Gaudenzio Bono, the general manager, almost Valletta
alone spoke to express his guidelines 17 . It was not hard to imagine that such practice
  During the long period with Valletta at the helm of Fiat there were some rumors on frictions between
Valletta and the Agnelli family, albeit these were just rumors, without a precise record.
     On these aspects see the book by Giacosa [1988].
     See Pochna [1989].

Volpato - Fiat

was going to produce serious difficulties, which however emerged only much later, at
the end of the 1960s, thanks to a favorable economic trend. A single figure is enough
in order to clarify the long growth season enjoyed by Fiat up to 1969: in 1949 the
company manufactured 70,800 vehicles, much more than the all time high of 1937,
with little less than 55,000 units. From that year production grew steadily until 1968,
when all- time high was reached with 1,751,400 vehicles, equal to twenty- five times
the starting point.

4.4. The Valletta “monolith- like” culture
        Under the lead of Giovanni Agnelli the company had developed during its first
forty years of age, according to the organizational culture of that time, through a
typically hierarchical and centralized scheme. On the contrary in the USA, starting
from the 1920s, there gradually emerges a scheme which favors a process of
decentralization of decisional responsibilities, under the name of “divisionalization”.
Each economic area of activity which can be specialized according to variables such
as market, production process, technology, makes up a “division” of the greater firm
structure, to which it grants an adequate operational autonomy.
        The most typical example of this approach lies in General Motors, which
under the lead of Alfred P. Sloan had an organization based upon individual brands of
cars, in order to fully exploit the innovation potential of the divisional structure, and
seize the growing propensity of the US market for products which were more and
more targeted to specific market segments. In General Motors such reorganization
around divisions represented a somewhat natural solutions, because differently from
other US and European car makers, it was born as a grouping of previously
independent firms, and rather differentiated in terms of market orientation. At the
beginning, given the scarce degree of coordination of the six brands merged into
General Motors 18 , the heterogeneity was a weakness compared to the strategy of
radical standardization of Ford. It will be Alfred P. Sloan, who became chairman of
General Motors in 1923, to grasp the profound change taking place in the US market,
and to transform such weakness of the previous stage into a sustainable competitive
advantage in the new stage which began in the 1920s. Such competitive advantage
was perfectly summed up in the slogan made for General Motors: A car for every
purse and purpose19 .
         However the Fiat case was at the end of the 1960s a twofold centralized
reality, both on the horizontal side (since only the very top management was in charge
of overseeing the multitude of industrial and technical activities carried on by the
company), and on the vertical side (since there wasn’t any significant division of tasks
along the continuum which linked decisions which had prevalent strategic content to
those which had prevalent operational content. Such situation, as shown in the
organization chart no.1, was due to the fact that Vittorio Valletta grouped in himself
both the role of single chairman and the role of general manager, directly in charge of
leading all the departments from procurement to sales. It is not by chance that in the
official organization chart of Fiat there were the unusual figures of “Assistant

  They were: Chevrolet; Oakland (later on renamed as Pontiac); Oldsmo bile; Scripps-Booth and
Sheridan whose makes were later on eliminated; Buick and Cadillac.
     See Sloan [1963].

Volpato - Fiat

Managers to the General Manager”. They were roles placed in a staff position with
respect to the line of authority of the General Manager.

                                   Organigramma n.1
                        Struttura organizzativa Fiat SpA – 1966

                                  Amministratore Delegato Unico
                                     e Direttore Generale
                                        (Vittorio Valletta)


            Comitato                                               Direttori Assistenti
            Direttivo                                              Alla Dir. Generale

             Enti con funzioni                                     Comparti di
             aziendali centrali                                produzione e vendita

         Funzioni organizzative,                          Automobili e Veicoli Industriali
        amministrative, finanziarie                        Ferrotramviario, Aviazione
               e tecniche                                      Siderurgia, Marina

        Facing the growth in size and complexity after World War II, the management
of the Vittorio Valletta tended to further enhance such approach, even though his
great dynamic attitude and charisma made, in the short terms, the risks of such
organizational involution less evident. At the beginning of the 1960s Fiat appeared as
a massive conglomerate of industrial activities revolving around vehicle manu-
acturing. The degree of vertical integration was very high, not only in production
terms, but also on the juridical and company standpoint, since the majority of
activities were included in Fiat SpA. It was the outcome of the policy of wildfire

Volpato - Fiat

expansion on vehicle component manufacturing 20 and in related activities and by
fiscal policies which at that time affected the sale and not the added value.

4.5. The management of the Agnelli family in first person
        Gianni Agnelli after the appointment to vice-president of Fiat did not seem
interested into committing to managing the firm. He usually showed up to Fiat
headquarters in Corso Marconi in Turin only fo r board and committee meetings. He
preferred dividing himself between managing RIV21 , being mayor of Villar Perosa,
and more mundane things. However over the following years he started a long
training stage towards the appointment to the role to which he was pre-destined: that
of chairman of Fiat. One step towards this direction took place in 1959 with the
presidency of Ifi and, later one, with a stronger commitment in managing the firm
particularly in legal aspects and issues related to the firm international relationships.
        At the beginning of the 1960s in the entourage of the Agnelli family there
matured the idea that the time of a change at the helm of the company had come.
However the company was performing so well that only a specific will of Valletta in
this direction would have made room to the appointment of Giovanni Agnelli without
frictions and consequences. On the contrary Valletta was clearly determined to extend
to the limit its role of chairman. Moreover, his will was for Gaudenzio Bono to be
general manager and chairman, a person in many instances similar to Valletta, taking
his place at the helm of Fiat.
        The shift matured in 1966, due to a series of events: on the one side the
physical decline of Valletta, on the other side the emergence of some strategic
mistakes in the management of the company such as the development of the new
Rivalta plant, near Turin, which attracted a huge flow of workers from other parts of
Italy, mainly from the South and from Veneto. Turin and its surroundings were not
capable of absorbing such inflow without a serious unease which later on led to flashy
forms of social degradation and political unrest.
        Thinking of a “normal” company, the years ranging from 1946 to 1966 could
be seen as a typical example of separation between property and control, but this
would be a superficial perspective, which would not take into account neither the
specific personality of Vittorio Valletta, nor the specific traits of a firm like Fiat,
featuring a managerial culture made of peculiar rituals. On the one side there is no
doubt that Valletta had always managed Fiat on behalf of the primary interest of the
Agnelli family, as Giovanni Agnelli would have done, linking centralization to a
marked degree of paternalism towards employees. On the other hand it would have
been unnatural to imagine the loss of confidence by the Agnelli family towards
Valletta, both because he was seen as the only one capable of leading the company
with a firm hand, and for the sacred consideration of command living in Fiat
managers and in the Agnelli family, so that any form of contrast against the leadership
of Valletta would have looked like a “palace plot”, something which would have been
destabilizing for the company.

  For an analysis of the reasons which favored internal component production compared to external
purchase see Volpato [1983].
     Company specialized in the manufacturing of ball bearings, wholly owned by the Agnelli family.

Volpato - Fiat

        In such sense we believe that the two decades with Valletta leading the
company are an extension of the previous period of complete identification between
property and control. If one would distinguish the lead of Giovanni Agnelli by that of
Vittorio Valletta, he would have to talk about a period of “management without
control by property”, meaning that Valletta had received a sort of formal investiture
and he exerted it with an extreme consistency evoked by a sacerdotal role and outside
any personal interest.
        I believe that one can talk about an extension of the relationship between
property and control during the Valletta stage, as he takes the role of “regent” who
interprets the interest of the Agnelli family on the basis of a commitment taken for
affection and respect towards Giovanni Agnelli. Therefore Valletta behaved like a
loyal feudal vassal would have done, in charge of preserving the fief of his landlord in
order to pass it on to the heir, one he reached the right age. In such sense Valletta did
not feel controlled by the Agnelli family, and there are many small anecdotes
highlighting how he decided with great freedom, led by the will to pursue the interest
of the Agnelli family just as he perceived such interest22 hence without really
consulting with Gianni Agnelli.

4.6. The divisional approach by Umberto Agnelli
         With the shift in presidency from Vittorio Valletta to Gianni Agnelli in 1966,
there was a profound and burdensome reorganization process, which received another
push with the appointment of Umberto Agnelli as chairman in 1970. Umberto Agnelli
was particularly receptive towards the cultural wave matured in the USA on
managerial themes. He was responsible, among other things, for the development of
the Institute for Organisational Development (ISVOR), aimed at developing training
for managers of Fiat. The institution was placed under the Personnel and Social
Relations management, and started its activities in the middle of 1972. Umberto
Agnelli realized that the drive for growth expressed by Vittorio Valletta, and the
virtual absence of competition in the domestic car market, had determined an
organizational structure which was inadequate. He then decided to start a deep
evaluation of the company structure, which was mandated to a US consulting
company. Such step was the starting point for a modernization project of the whole
organizational and decisional structure. It was a hard task, mainly because a specific
decisional structure ends up exerting a people selection process, in charge of different
roles, with features which are consistent with the structure itself. A centralized
structure, which rewards mainly the loyalty to bosses 23 , inevitably tends to get rid of
all intermediate managers with attitudes which are “dissonant”, but, even more so, a
too centralized structure does not allow the maturation of entrepreneurial experiences
adequate to create the next managerial élite. As a consequence, when it is time to
intervene and redesign the organization it is not enough to change the structure roles.
People must be changed as well, since they did not have a chance to achieve the
training-on-the-job required to adequately carry out the new roles.
        Some documents with the first ideas of reorganization of the company
structure started to spread in Fiat since 1967, but the definition of a new organization

     On this aspect see Bairati [1983] and Pochna [1989].
     This is recorded , both for managerial cadres and for Fiat “bosses”, by Rieser [1985].

Volpato - Fiat

chart began to take shape only in April 1970. The objectives to achieve through the
reorganization were later on underlined by a study developed by Alberto Mosconi,
then working in the Studies, Planning and Control Head Office of Fiat SpA:
          a) To develop a more manageable structure;
          b) To acquire a more flexible company structure, also with respect to sales
             and acquisitions;
          c) To ease financial constraints to the development of the group activities.
          The general problem of “manageability” is summed up by Mosconi as follows:
        "To make the system more manageable it means for Fiat, in those years, to
bring out the identity of each industrial activity, to verify one by one its capability to
compete in the international markets, to diagnose any situations of dependence of
even parasitic to the leading industries of the group, to draw the strategic directions
which were more suitable for each product line and, even more, to develop a
management capable of carrying out such process, a management which would
identify himself with each reality by developing in a smaller scale a complete
entrepreneurial vision"24 .
        For any large company with old traditions any profound reorganization brings
considerable problems, as any change compared to the past implies an implicit
critique to the previous organization and to the people who managed it. It is therefore
inevitable that any reorganization implies not only a redistribution in responsibilities
and power of management at different levels, but also turnover in people. Hence the
need for a transformation which is gradually smoothed over time, so that the
unavoidable traumatic aspects of the process do not reach such intensity to destabilize
previous equilibria, before the new company structure is capable of developing new
        The first step towards a new structure at Fiat was not a true divisional structure
(organization chart no. 2), but represented an intermediate stage, with the
establishment of “Operation Groups” and “Head Directions”. The Operation Groups
were instituted as entities featuring autonomy on the field of design, manufacturing,
administrative and marketing, with full responsibility of the global economic result,
and they represented the stage of “decentralization”. Instead the “Head Directions”
represented the stage of “coordination” at the holding level. The Operation Groups
which came out of this restructuring included still highly different entities. They were
just three: the “Automobiles” group, the “Industrial Vehicles” group, and the
“Diversified Activities” one. The Head Directions were eight: Finance, Admi-
nistration and Control, Research and Development, Personnel and Social Relations,
Organization and Additional functions, International industrial developments;
External relations, Marketing and development.
        The possible overlappings of competences and duplications of functions and
structures in such scheme are very evident. It represented a compromise between the
various drives and counter-drives which were generated during its development.
However the development of the new organization chart stimulated the process of
selecting the right attitudes of managers and highlighted the professional competences
which were not available within the company and had to be sought after outside.
Albeit with these elements of caution the personnel turnover was undoubtedly

     See Mosconi and Rullani [1978].

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“bloody”. The previous approach, which had lasted for so long had accumulated such
a delay with respect to emerging needs, was so deep to make gradual solutions

Volpato - Fiat

                                Organigramma n.2
                     Struttura organizzativa Fiat SpA – 1973

                                Consiglio di Amministrazione

                                  Presidente G.Agnelli                 Comitato

    Vicepresidente                     Amministratore           Comitato       Comitato
       G. Bono                           Delegato               Finanza        Personale
                                         U. Agnelli

                                      Direzione Generale       Comitato        Comitato
                                      N. Gioia – F. Rota     Pianificazione    Prodotti

                 Direzioni Centrali                        Vicedirettori       Comitato
                 E Gruppi Operativi                         Generali          Di Direzione

     Veicoli Automobili Attività
   Industriali         Diversificate

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4.7. Strategy and structure
        It is important to ask ourselves which were the reasons behind this long
organizational crystallization which was in clear contrast with the image and the
results of a company of international stature, operating in technologically advanced
industries, linked to international interests and with frequent contacts with industrial
and financial US and European contexts, more exposed to needs of changing
management criteria. As usual, the reasons were many. Clearly the centralizing
attitude of Vittorio Valletta played a role, and the fact that this attitude translated into
a selection of his closest collaborators according to criteria which were suitable to
reproduce this kind of behavior. Certainly also the “Piedmont style” represented a
favorable environment to this managerial approach. But there is no doubt that the
“environmental conditions” played a significant role mainly in those linked to the
nature of the competitive confrontation during those years.
      In order to clarify the terms of the issue it is worthwhile distinguish between the
managerial need to define the company strategy to be put in place (what is referred to
as strategy in the Anglo-Saxon contexts), and the need to translate such strategy in a
set of timed actions leading to the achievement of objectives (planning). The more
uncertain and complex the definition of the company objectives, the more necessary
to have a strong information and evaluation integration of top management, if one
wants to prevent a too centralized lead from excessively restraining the range of
options which are actually considered before the decision. Once the strategy is
defined, through a strong information interaction among roles and the subjects who
are the keepers of the different professional skills, a centralized management can
regain a functional validity, given that the implementation does not have too many
problems. In other words, as many studies have documented 25 , the achievement of
high efficiency standards requires that some relationship is maintained between the
complexity of the task which a firm organization has to face and the degree of
“organic” interaction among those who make up the decision staff. If the definition of
the strategy does not raise specific problems, as the objectives are evident, without
alternatives and shared, there is no doubt that a centralized management has the
advantage (at least in theory) of a higher decision speed and a complete focus of the
planning initiatives.
      One can say that, after the move of Fiat to mass production in the 1950s which
represents clearly the critical choice upon which Valletta put the whole future of Fiat
at stake, there was a problem of efficient achievement of this objective, but up to the
end of the 1960s there are no more situations of great problems in company choices.
Clearly this does not mean that those years were “static”, on the other hand on the
quantitative standpoint they were years of deep change, but it was an extrapolative
change, which moved in a form of continuity of the scenario and the competitive
      With the takeoff of the Italian automobile market Fiat had to move with decision
and speed along a rather straight road. There were no national competitors capable of
disturbing it and international competition was restrained until 1968 by intra- EEC
tariff barriers. Even later, however, until the oil crisis in 1973, it was a competition
which was softened by the fact that all major markets were expanding. The main

 Among the first researches in this field see these of Burns and Stalker [1961], Chandler [1962] and
Woodward [1965].

Volpato - Fiat

worry of car makers was the long waiting time between ordering and delivery of the
cars. In such a situation competition was formally present, but in practice frozen,
mainly among competitors of different countries, since demand was capable of super-
saturating supply and car makers had no interest in engaging in price wars. Hence
even a vehicle model which was comparatively less successful found its way into the
market, since the desire for motorization was such that a too long waiting time shifted
demand towards less required models. As a matter of fact in the 1960s even
companies who were less competitive on the cost standpoint had a chance to grow:
one can think about Alfa Romeo in Italy, Simca in France, NSU in Germany, British
Motor Co. in England, DAF in the Netherlands.
     As a consequence the centralized structure of Fiat did not visibly contrast with
the need of decisional functionalities which the situation required. Clearly such
situation determined less managerial updating for management cadres and some delay
in the evolution of the organizational structure and the decisional procedures, but they
were aspects which did not emerge from the outside of a structure which grew larger
and stronger without interruptions. A higher degree of exposure on this field would
have allowed to trigger processes of gradual modernization, with a twofold advantage
of being able to better tune the pace of transformation and with the peace of mind that
the favorable moment would allow also to “make mistakes”.
     However if one attempts a parallel with other European car makers one cannot
see marked differences. They were as well particularly centralized. But it must be said
that for them this form of organizational obsolescence was less visible for many
reasons. Firstly they were firms who were almost exclusively oriented to vehicle
productio n without the degree of diversification of Fiat. In the case of Volkswagen
there was just one model (the “Beetle”), but even when the range was richer, the
scope of the business extended just to industrial vehicles, like Renault. Moreover,
even though it w a typical “manufacturer’s market”, the presence of a number of
national makers, of comparable size, which played along the same market segments,
exerted anyway a competitive stimulus which had to be taken into consideration. In
France, where there was the great tradition of the Grandes Écoles and where the State
controlled, but did not intervene in the management of the Régie Renault, the chances
of managerial turnover were far more frequent.
     Probably if there had been no oil crisis with effects of worsening and anticipation
of the foreseeable phenomena of industry transformation, such as the change of
demand from prevalent first motorization to prevalent replacement, the changes in the
organization at Fiat could have taken place in a framework of routine evolution. On
the contrary, its actual position within a stage of particular turbulence, made change a
highly critical phenomenon, as we will see later on.

4.8. An attempt of Management by Objectives
        From the standpoint of the whole group management there were three
problems to face: one of managerial nature to complete the process of decentralization
of responsibilities within the group, one of strategic nature lying in the making of a
firm strategy for the whole of the industries, mainly for cars, and one of financial
nature aimed at acquiring the resources needed for the group expansion. Clearly the
three problems were highly inter-related. The managerial one was the first issue to
deal with, since the difficulties facing the company were a highly different scenario

Volpato - Fiat

compared to the past, and they required the insertion of new ideas and managerial
methods within a framework which maintained some stable reference points
represented by the property and by the commitment of Gianni and Umberto Agnelli.
        In 1974 Nicola Tufarelli was appointed Director of the Automobile Group
and his task was to reorganize the automobile structure and define a response strategy
to the disorientation caused by the oil crisis, which had dramatically worsened the
outlook for the industry. Mister Tufarelli came from Olivetti and joined Fiat two years
before as Head Director of Finance, Planning and Control. Already as Head Director
Tufarelli had started a deep process of reorganization in control procedures, mainly
with respect to industrial accounting and material management. The insertion of an
“external” element like Tufarelli in a key position as the Direction of the Automobile
Group was a small shock for the managerial environment of Fiat. In the past the
advancement of manage ment for “internal” lines represented a rule with no
exceptions. But when in October of the same year Mr Cesare Romiti was appointed
Head Director in the place formerly held by Tufarelli, the impression was even
greater, also because the initiatives adopted by Romiti put considerable pressure on
the financial habits of Fiat, which was sleepy after a long period of management
without financial tensions, but which now required dramatic choices to face a heavy
situation. As Cesare Romiti himself pointed out in the interview-book edited by
Giampaolo Pansa, the strong salary increases during the previous years, the inflation
due to marked rise in oil-related products, the building up of unsold stocks and the
investments put in place for the Fiat plant in Brazil, had generated a situation of
particularly dangerous debt.
        Fiat in a few years moved from a creditor position towards the banking system
for thousands of billions, to a debtor position, for a similar amount. It is significant to
note that such situation was so unusual for internal management at Fiat, used to be
courted by the financial system, that it tended to generate a sort of paralysis. The
insertion of an “external and resolute” figure like Cesare Romiti represented a right
move. On the one hand he did not bear any responsibility for the previous paralysis of
the financial management, and he could then move with greater freedom rejuvenating
the management through the insertion of new figures, more aggressive and skilled; on
the other hand the real difficulties of Fiat were not yet perceived from the outside in
their whole scope, and Romiti managed, through a series of quick moves, to take
advantage of the influence of Fiat towards the banking system.
         Tufarelli tried to renovate the decisional structure of the Automobile Group as
well. Given the situation of high uncertainty of the automobile scenario, and as an
antidote to the previous organization, wholly vertical, he developed a “matrix- like”
structure, where the traditional vertical lines of command, which reflect the specific
traits of functions, are crossed with a system of horizontal coordination focused upon
objectives. In theory it was a quite advanced organizational design, which had the
merit of highlighting the support by external consultants. However, in order to make
the structure of Management By Objectives (MBO) work, objectives must be clear
and shared. On the contrary, this was just what was missing, both because the
situation was quite difficult, and because in the top management of the automobile
sector there was no convergence of views about the forms through which to actively
face the crisis, hence the matrix- like structure, instead of producing synergies, tended
to enhance mutual contrasts generated by the multiplication of “Management
Committees” and by contrasts among different functional areas. Not to count that a

Volpato - Fiat

matrix- like decisional structure requires a long learning period to gradually define
roles and mutual responsibilities.

4.9. The “meteor” De Benedetti
        However the situation did not show margins for fine-tuning operations. On the
contrary there was a need for precise directives and strong figures, with capabilities to
galvanize into action the company staff. Fiat already had a charismatic figure like the
“Avvocato” Gianni Agnelli, and the commitment of the Agnelli family was reinforced
also by Umberto Agnelli, as Vice-president and chairman. However both brothers
thought that they could consolidate the group position further in the Italian economic
scenario through a public post. In May of 1974 Gianni Agnelli became President of
the Confindustria and, given his sympathies were with the Republican Party, he was
continuously asked to actively enter politics, while Umberto was courted by the
Christian Democrats (Democrazia Cristiana)26 . At the same time the stage was so
delicate that in case of failure a complete operational involvement of the Agnelli
family would have caused risks in the shareholder equilibrium.
        Hence came the idea to have somebody from the “outside” leading the group
operations, somebody who by temper and culture could have an entrepreneurial
flavor. In Turin at that time mister Carlo De Benedetti was emerging, both as owner
of Gilardini, a company specialized in vehicle and industrial component
manufacturing, and as President of the Entrepreneur Association (Unione Industriale)
of Turin. Carlo De Benedetti, friend of Umberto Agnelli and sharing his same age,
had all the features to exert the leadership which Fiat needed. In March 1976 the new
top structure of Fiat SpA was created, with three managing directors: Umberto
Agnelli, Carlo De Benedetti and Cesare Romiti. But the insertion of De Benedetti
lasted only for three months. The reasons were differently commented by the
protagonists 27 .
         Here what is matters is that the short interlude of De Benedetti made the car
situation worse on the management standpoint. The few months of the De Benedetti
initiative were used by the new chairman to evaluate the situation and to “scare” the
old management with strong sentenc es on the need to cut a lot of heads. De Benedetti
spoke also about the need to develop new models, which is a fact which in the
company is taken for granted, since anybody knew that Fiat survival was linked to
such initiatives. The problems lay however in correctly deciding product and process
investments to be carried out, but on these crucial aspects there was no agreement at
top management level and the climate was tense: both for attitude differences among
protagonists, and for rumors on a design by De Benedetti to buyout Fiat. However
they were issues which did not become known to the most part of the company
structure, and the decision of De Benedetti to leave Fiat was the typical lightning in a
clear sky.

   In July 1976 Gianni Agnelli leaves the presidency of Confindustria and there are growing rumors
that he is going to enter the political scene. Instead it will be Umberto Agnelli to take a seat in the
Christian Democrats for an experience which will later on disappoint him.
  See Romiti [1988] and the interview to Carlo De Benedetti by Mario La Ferla for “l'Espresso” in
October 1976.

Volpato - Fiat

        Tufarelli was then reinserted at the head of the Automobile Group in a hurry,
but it is easy to imagine the further disorientation which the even generated among
top managers and cadres, although the product renovation program had restarted.

4.10. The establishment of Fiat Auto SpA
        Luckily the project of organizational and financial decentralization of Fiat,
started in 1972, was going on. The objective was               to achieve an actual
divisionalization of the group by product lines (business units). At the beginning it
was not clear whether such operation should end by maintaining a tight company
structure (as for General Motors), or a true disassembly of companies in entities
which were autonomous on the juridical standpoint, but coordinated by Fiat SpA as
the main holding. It was gradually this second option which became true, and this
eased the distribution of decisional responsibilities. In 1979 the new structure was
launched. Fiat SpA became a holding which controlled, both on the shareholding and
financial standpoint, a range of industrial companies with autonomy in each
individual market. Within the holding company the operational responsibilities were
assigned to Umberto Agnelli, on whose side were placed two other managing
directors: Cesare Romiti in charge of finance and control and Nicola Tufarelli in
charge of international relations. The Avvocato Gianni Agnelli remained at the
presidency of the group and he was in charge of strategic decisions, which required
approval of the board and executive committee.
        With the establishment of Fiat Auto SpA, which was officially born on 1st
January 1979, the process of establishing the different industrial areas where Fiat was
operating was completed. The creation of Fiat Auto finally allowed to provide a
precise structure to decisional responsibilities of the automobile industry, through the
appointment of Vittorio Ghidella as chairman. His initiative moved mainly along two
directions. One marked acceleration of investments aimed at process automation and a
new organizational concept aimed at an intermediate position between the traditional
functional structure of the Valletta period and the “matrix- like” interaction of
Tufarelli. Ghidella decided to bet upon “product managers”, whose task was to
coordinate work of traditional functions (design, purchasing, ma nufacturing,
marketing, etc.), who kept on representing the ribs along which the company structure
of Fiat Auto was based.
        Ghidella launched a new work pace, helped by a profound knowledge of the
product and of process technologies, and this allowed him to step in for most critical
decisions. Certainly during this stage he was also helped by the atmosphere of “last
resort” which had originated in the company, where everybody knew they were
betting their last chances, besides the ample mandate which he received by Gianni
Agnelli. In a short time many managers were replaced by younger and more
motivated personnel. The new managers felt they have to commit deeply, because if
the new organizational chart did not work out the risks for the survival of Fiat Auto,
and with it of the whole Fiat group, would have been quite high.

Volpato - Fiat

5. The Fiat Group’s Structure 1899-1979

5.1. The growth years
       Fiat was established with the aim of manufacturing automobiles, but it enjoyed
a development process in other industries since its early years. The ratio of such
development moved along two lines:
       a) To achieve a process of vertical integration;
       b) To carry out a process of manufacturing diversification through
           transferring to other industries the technological and organizational
           knowledge accumulated in vehicle manufacturing.
        Vertical integration was led by the will to carry out autonomously a significant
share of materials required by vehicle manufacturing. This need stemmed from two
reasons. The first was the need to manufacture ve hicle components, which the Italian
mechanic industry, quite backward at that time, was not capable of making,
differently from the United Kingdom, France and Germany. The second was the need
to replace purchasing of intermediate material which could be found in the domestic
market with own production, since they could be carried out internally with a higher
degree of efficiency. In fact Fiat had a technical know- how which was far superior to
the majority of firms supplying it, and internal production allowed a rationalization of
logistics which made the whole flow of activities more programmable and efficient.
        Instead diversification meant the aim to widen investments to other industries,
similar by technology but different from the automobile one, in order to achieve a
diversification of risk and a mechanism of compensation between different economic
cycles of various industries.
        Hence since its early years much of the cash flow generated by the company
was constantly used in operations of vertical integration and diversification. Industrial
vehicles were added in 1903, diesel marine engines in 1907, aviation engines in 1908,
airplanes in 1915, agricultural tractors in 1919, railway cars in 1931, electronics in
1957, ground moving machines in 1958. The fact that a high share of activities was
carried out within Fiat SpA did not allow a detailed separation of the weights of
different sectors. However according to our estimates in 1960 total turnover came for
70% from automobiles, for 9% from commercial and industrial vehicles, for 5% from
tractors and ground moving machines, and the remaining 16% from other sectors.
However such division tends to reduce the importance of primary production (steel,
cast iron, rolled products, etc.) and of intermediate productions since they, although
absorbing high amounts of investments and employees, produced goods which were
reutilized in downward production stages without reaching the market.
         In general expansion was financed by cash flow generated by internal
activities, and only in some specific times of crisis there was a high degree of
financial exposure towards bankc, while it was during the stages of highest production
expansion that capital increases necessary to finance such programs were carried out.
The most important operations on this standpoint (Fig.5) were carried out between
1910 and 1912, between 1917 and 1919, and during the reconstruction years 1947-48.
       The analysis of company balance sheets showed an important element of
novelty starting in the middle 1960s that is the strengthening of the financial activities
which were going to be reinforced over the coming years. During those years Fiat
financed its expansion for 60%-70% throuh self financing, and the rest through non

Volpato - Fiat

financial debts (debts towards suppliers). Short terms debts with the banking system
were almost nonexistent, while also medium and long term financial debts were quite
modest. Such structure of the financial sources is not different from that of other
European car makers who during the 1960s managed to completely support the
growth effort with their own means and through self- financing28 .

Fig.5 – Fiat capital 1899-1960
     Years          Capital        Years        Capital          Years        Capital
                  (million ITL)             (million ITL)                  (million ITL)
      1899                   0.8   1904                    0.8   1906                       9
      1908                    9    1909                    12    1910                    14
      1912                   17    1915                   25.5   1916                    34
      1917                   50    1918                   125    1919                   200
      1924                  400    1947               4,000      1948              12,000
      1950                21,000   1951              36,000      1953              57,000
      1956                76,000   1957            100,000       1960             115,000
Source: Fiat

5.2. The union crisis and the oil shock
        During the 1960s Fiat had achieved very high profits which allowed it to gain
a net creditor position with the financial system. One must consider that Fiat SpA
during those years achieved a level of profit after tax which was ranging between 2%
and 3% of turnover. But already in 1969, along with the effects of the “hot autumn”,
production losses due to conflictual relations and lower productivity of labor had
reduced such source of self- financing. In 1969 net profit decreased below 1%, and in
1973 profits came down to zero. In ordinary situations reserves would have allowed to
deal with the situation. However during those years there was a marked growth in the
financial needs which led the company to a critical situation already in 1974. In fact at
the beginning of the 1970s Fiat had launched an important investment program for the
South of Italy (Cassino, Termoli, Sulmona), which, although supported by State aids
(low rate financing and capital contributions), required a considerable amount of
resources. Also the establishment of the subsidiary company Fiat Automoveis exerted
a considerable financial pressure to which one had to add the launch of the automation
program for the production process.
        Hence the need to borrow capitals in a massive way. The total of financial
debts started to grow very rapidly. In 1973 it amounted to 168 billion and reached 651
billion in the following year, and 764 billion in 1976. Clearly, given the fast growth,
the financial needs had to be covered through short term debts, whose cost is higher
than medium- long term ones. In 1972 the weight of short term debts was below 1% of

     See Comito [1982].

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financial exposure, while in 1974 it accounted for little more than 60%. These
changes in the financial structure of the company were quite serious, as they triggered
a vicious circle which was quite hard to deal with. The growth in debts meant lower
coverage of investments by own company resources (capital and reserves), and this
increased the risk factor for creditors, who had to be boosted with growing interest
rates, which in turn reduced operating margins.
        Stock valuations for Fiat shares were also affected, both for the dark
perspectives which many cast on the automobile industry in general (some were even
foreseeing its demise), and for the specific situation of the Turin company. It is
enough to say that the ratio between market capitalization of Fiat and net equity (as of
the balance sheet), which in 1972 was larger than one (1.6), decreased below one in
1974 (0.6) and even reached 0.2 in 1979. In other words the stock market evaluated
the Turin group as a modest share of the subscribed capital and reserves accumulated
over time, notwithstanding Fiat was keeping on distributing dividends, coming from
reserves, in a measure which exceeded achieved profits.

5.3. The “Lafico” operation
      As a consequence a broad financial restructuring was urgently needed, aimed a
achieving an equilibrium between sources and investments. A complex operation
which implied initiatives on many tables, and which will be completed only in the
middle 1980s. It can be divided in two periods: from 1974 to 1980 and from 1981 to
1985. The first stage was an intervention aimed at tamponing and acquiring the
financial means necessary for the firm survival and for the completion of operations
initiated before the oil shock. In the second stage (1981-1985) there was a strong debt
for the company as well, but linked to the program of reorganization and turnaround.
It was hence a piloted debt, which undoubtedly mirrors a situation of a risk which
was still high, but which assumes a different outlook than before.
         The most part of the tampon stage was carried out through a massive capital
increase through the entry of Lafico, the Libyan Arab Foreign Bank. It was an
initiative which at that time represented a true coup de théâtre and raised much
criticism, mainly from abroad 29 , but this operation, seen from the top helm of Fiat,
had no alternative routes. There was no doubt that the Turin group needed a
considerable injection of capital. The fact was that such capital was not available
through “normal” financial channels. On the one hand the Agnelli family was not
capable of joining a large capital increase, and in such situation a significant issue of
new stock would have meant a corresponding reduction in the share of control On the
other hand, even overlooking the risks of such operation for the unity of company
politics, the largest question related to the actual possibility of finding subjects willing
to invest high amounts of capital in an industrial group in clear troub led waters, and
committed to a large extent in industries in crisis, as the automobile and industrial
vehicles ones.
        For these reasons the participation of the Libyan Arab Foreign Bank
represented a highly attractive solution. On the one hand it joined the property at all
effects, through a large injection of capital and with two representatives at board
level, of which one in the restricted and powerful executive committee, but on the

     See on that Friedman [1988].

Volpato - Fiat

other hand there was an agreement not to interfere in any way with the strategic
objectives of the shareholder with relative majority. Hence it was a relevant
participation on the economic standpoint, but “frozen” on the operational one.
        The operation was engineered in order to have 360 billion lire flow into Fiat
cash, of which however only half directly in shares. A first part of the agreement
entailed the subscription by the Libyan bank of thirty million new shares with a
nominal value of 500 lire, of which 20 million common shared (with a total growing
from 200 to 220 million) and 10 million privileged shares (from 100 to 110 million).
The peculiar aspect of this part of the operation was that the Lafico participation
evaluated Fiat shares with a surplus of about 5,500 lira per share: a great surplus,
since at the end of 1976 common Fiat shares were traded in the stock market at about
2,000 lire and the privileged ones at 1,300 lire.
        The second part of the agreement entailed the issuing by Fiat of a convertible
bond for 90 billion at an annual rate of 9.50%. Lafico had the right to convert, as it
actually did, bonds starting from 30th June 1978, with two common and one
privileged for 18 bonds worth 1,000 lire, since in this case as well there was the high
surplus paid for the direct share purchase.
        Finally the Libyan bank granted Fiat a loan of 104 million dollars (90 billion
lira) linked to the Libor rate. Such loan (with a ten year duration) had a
reimbursement plan starting from the end of the third year following the agreement.
As one can see it was a highly advantageous agreement for Fiat. It left the Turin
company some rooms for maneuver if cohabitation with representatives of Colonel
Gaddafi turned out to be difficult. This did not happen, since the role of Lafico
remained limited to that of pure finance provider up to the expiration of the agreement
in 1986. There is no doubt that this operation has significantly contributed to draw
Fiat out of a very delicate position. And at the end Lafico as well closed the operation
with a positive balance, since in 1986 it cashed 3 billion dollars given the high growth
of market capitalization of Fiat shares which took place in the period 30 and to other
subscriptions which took place after 1977.

5.4. Fiat SpA as a holding
        At the end of the 1970s the stage of reorganization of the whole group which
initiated in the 1970s ended. In 1976 the group organizational chart is a divisional
structure with eleven business units. Fiat SpA acquired before the nature of “mixed”
holding as it keeps on managing directly automobile and steel activities, and later on
the nature of “pure” holding with the sale of steel activities and the incorporation Fiat
Auto (1979):

       "The Fiat Holding manages and coordinates only functions of primary
importance for the Fiat Group: the whole image of the company towards the external
environment, the development, management and allocation of financial resources,

   Unfortunately the liquidation of Lafico did not yield positive returns for everyone. Small Fiat
shareholders were particularly hurt, since values fell after the market placement of two thirds of shares
held by Lafico. The consortium of banks led by Deutsche Bank and Mediobanca encountered great
difficulties in the subsequent placement of shares, since the market was reluctant to absorb such a great
stock volume, and this drove down prices. On this matter see critical points raised by Giampaolo Pansa
and the replies by Cesare Romiti [1988].

Volpato - Fiat

planning and management control, meant as management control on objectives and
results for the sectors, problems deriving from development policies”31 .
        This transformation does not relate only to the organization of the company
but also to financial aspects since the crisis of automobile-related activities in general
and of the automobile in particular pushes Fiat and the Agnelli family (Ifi) to evaluate
the opportunity to increase the role of non-automotive activities, previously
considered as ancillary. Hence there was a range of sales, de-merging and acquisitions
aimed at leaning and strengthening the automotive 32 sector and to reinforce other
sectors which could, in case of a durable crisis in automobile activities, represent a
viable alternative.
        The leaning of the automobile sector was carried out mainly through the exit
from the Spanish company Seat, the sale of most siderurgical activities, and a
profound reorganization of the automotive component sector. In the past transfer
prices between group companies had privileged the profits objectives of final
activities represented by automobiles 33 , but they also played as a “safety net” when
captive productions were less competitive than those made by independent
suppliers 34 . With the new situation it was clear that such policy on the one hand had
played against the development of innovative capabilities of “satellite” activities,
which now had to be highly stimulated, and on the other hand had taken transparency
away from management control and from differences in performance which then had
to emerge in order to stimulate adequate reorganization efforts.
        In tune with such policy of realignment to the market the hold ing company
tried to highly incentive, by controlled firms, supply to other automobile
manufacturers and to the parts market in general. Just to this respect in the middle of
1976 it was decided that component manufacturing companies utilized own makes
and own distribution networks for the aftermarket sales: for example in 1987
distribution companies for Magneti Marelli in Italy, France, Spain and Germany were
made operational.
        On the diversification standpoint Fiat reorganized the activities it already
owned which, in the structure by sector, acquired a higher degree of operational
dynamism, and entered new areas which were believed to have high growth potential.
The most important area was the telecommunications one which had started in 1968
with the purchase of 35% of Telettra SpA and consolidated in 1976 with a total
control of capital.
       After these operations the specific weight of automobiles was quite reduced,
from 70% in 1960 to 65% in 1970 and to 40% in 1976 (Fig.6,7,8).

     See Mosconi and Rullani [1978].
   The automotive sector encompasses: automobiles, industrial and commercial vehicles, tractors and
ground mo ving equipment.
     See Comito [1982].
     Captive production refer to components manufactured by firms controlled by automobile companies.

Volpato - Fiat

                 Fig.6 - Fiat's Turnover Break Down for per sector - 1960
                            3%                               Auto
                       7%                                    V.I.
                                                             Trattori e MMT
                    12%                                      Ingegneria e Territorio
                                                             Altri settori

                                 Tab.7 - Fiat's Turnover Break Down - 1970

                                 4% 2%
                       6%                                           Auto
                                                                    Trattori e MMT
                                                                    Ingegneria e Territorio
                 17%                                                Siderurgia
                                                                    Altri settori

Volpato - Fiat

                 Fig.8 - Fiat's Turnover Break Down per sector - 1976

                            4% 6%
                        5%                                    V.I.
                       9%                                     Trattori e MMT
                                                              Ingegneria e Territorio
                      11%                                     Componenti
                                                              Altri settori


6. Fiat’s Corporate Governance Rationale 1980-2000

6.1. Opening to the market
        As shown in the previous period the strategic posture of Fiat was that of a
highly integrated and diversified group, albeit basically grounded upon the
automobile business. Clearly the selection criterion for investments and divestments
was the search for profit maximization over the long term, but with some significant
    a) The core business was considered to be the automobile one and in particular
       cars, hence many collateral activities were meant to reinforce the core business
       (safety in supplies, lower acquisition costs, production planning given the final
       production stages, etc.);
    b) Secondly these collateral activities did not operate on the supply market, but
       had as almost exclusive customer end operations at Fiat (captive productions);
    c) This meant that profitability which was constantly monitored was that of
       automobile production, also because it was Fiat SpA to be publicly traded, and
       all other activities were: either internal divisions of Fiat (and therefore it was
       superfluous to distinguish their profitability for the sake of an evaluation of a
       total profitability for Fiat SpA), or they were autonomous companies, deriving
       from acquisitions by Fiat after their establishment, but wholly controlled and
       not traded;
    d) As a consequence even minority shareholders of Fiat could not actually exert a
       conditioning power over strategic choices of the company, and they were
       considered by the majority shareholders as long term shareholders (cassettisti)

Volpato - Fiat

         whose major interest was to earn a “reasonable” dividend and to see the stock
         value grow.
        Therefore if one neglects the period from the first years of the XX century,
when reasons of contrast and battle among majority and minority shareholders had
been frequent and long-ranging, in the following stage Fiat had known a long period
of economic development which had allowed a dividend policy which was adequate
to the expectations of all shareholders, also because the growth in the members of the
“Agnelli Family” over new generations had led to the creation of a large number of
people owning fractions of capital and not directly involved in the management of the
company which remained in the hands of Gianni and Umberto Agnelli. The interest of
such extended family was then that of rentiers mainly interested to receive good
annual dividends and see the market value of their stock protected 35 . In other words
the great majority of components of the extended Agnelli family had interests which
could be compared to those of the “cassettisti”.
        As a consequence one can say that the company actually developed a general
strategic posture which was not diverging from the interest of minority shareholders.
It operated in a framework which in case of contrast would not have offered
significant protection to minority shareholders, however such circumstance thanks to
favorable economic conditions did not turn out to happen. For example even after the
first years of crisis derived from the “hot autumn” the company kept on distributing
dividends even with losses in balance sheets, drawing resources from profits which
were previously accumulated, both to maintain stock values and to make the crisis
situation “softer” to the eyes of external observers, and because a large share of the
extended property expected a congruous dividend distribution.
        With the divisionalization of internal activities in Fiat and its transformation in
pure financial holding there is a new stage in which even without great
transformations in the corporate governance of the Group there are important changes
in the strategic posture. The new competitive framework which had matured in the
second half of the 1970s unmistakably showed that it is not enough to look at the
whole efficiency of Fiat, as this observa tion point was inadequate not only in order to
highlight areas of inefficiency within the company, but also and mostly to provide
organizational guidance for the response strategies to market challenges. On the one
hand the economic and financial trend of the company showed times of great
difficulties which required firm and profound actions, on the other hand the
administrative structure of control showed considerable difficulties in highlighting,
given the complexity and the interplay of managing actions, the real causes of
inefficiency, but mostly it is the command structure of the company which does not
have, due to the distance between locations where difficulties arise and one must
intervene and those in which lies the actual decision power, of operational levers
featuring the necessary power and flexibility of action.

   Such “demographic” transformation in the Agnelli family was a key factor within the ownership of
the majority share which, as it will be discussed later on, led to the establishment of the Società in
Accomandita per Azioni Giovanni Agnelli & C. with the specific objective of maintaining internal
cohesion within property.

Volpato - Fiat

6.2. Fiat as an “integrated industrial Group”
        The strategic posture which played a reference for the Fiat Group since the
1980s refers more and more to the framework expressed by Porter 36 . Each individual
section of the group configured as a profit center must directly confront with the
market giving its contribution to the company value chain. Fiat, as a multi-business
company, had to operate in such a way to enhance competitive advantages deriving
from its structure. The global efficiency of the group required as a key pre-requisite
the efficiency of each individual part (business unit), but it was from sinergies
deriving from being a group that a defendable competitive advantage could and had to
be obtained.
        As Clemente Signoroni37 , head of the “Development, coordination and
control” function at Fiat, had clearly said a few years later, at the beginning of the
1980s the company chose the “establishment of an industrial group which altho ugh
operating in different businesses, with different competitors and markets, meant to
keep a high degree of internal coordination”. In theory one could have chosen a
conglomerate model in which the different majority shares belonging to the
controlling holding were considered as a portfolio of activities to be independently
maximized, by minimizing risks deriving from simultaneous industry crises, but it
was the history of Fiat itself to rule out such kind of solution. The issue was instead to
establish an organic set of businesses by achieving a hard but fundamental
equilibrium between a flexible and entrepreneurial management of each individual
unit and a whole coordination of strategies capable of generating competitive
advantages through sharing of products, technologies, distribution networks, etc. “The
group value must hence be larger than the sum of the values of the individual units”.
        Still, according to Signoroni, the achievement of such outcome is conditioned
by the following elements:
    1. adequate competitive size of each business unit;
    2. strong correlation of the different activities, that is by pursuing clear sharing of
        product/market/technology which can be developed in an integrated
        framework with synergic results for each individual activity;
    3. diversification carried out a competitive entry cost, frequently achieved
        through lateral internal development;
    4. managerial system capable of maintaining a vision of the whole, and to
        develop adequate tools for horizontal coordination.
        However at the beginning of the 1980s such design had yet to be achieved.
Fiat was still trying to grant an entrepreneurial function to each business unit. It was
just the efficiency of each activity with respect to the market which had to be verified
first, and then strengthened. It was the beginning of a decade with considerable
actions on the group structure, linked to relevant operations on the financial
        With respect to vehicles in general, the company aimed towards a growth in
size intended as a necessary condition to obtain the relevant scale economies which
the industry implies. In the new framework in the development stage the “relevant
size” was not in first instance the manufacturing size, seen as a necessary condition to

     See Porter [1980, 1985].
     See Signoroni [1987].

Volpato - Fiat

achieve a fordist reorganization of a mass production system. Such stage had already
been acquired in the 1960s with the full development of smaller vehicles. The new
“relevant size” was that of market share. Hence there were acquisitions and alliances38
and at the same time material and component manufacturing activities were sold
reducing the degree of vertical integration in all activities which seemed not have the
technological and commercial resources to concretely exit a status of captive activity,
mainly aimed at internal supply, and agreements and mergers were sought for
activities which had promising competitive developments 39 .

6.3. Conflicts of interests between majority and minority shareholders
        It was during the energetic reorganization stage of the Fiat group in the 1980s
that there were actual situations of contrast between the majority and minority
shareholders, and probably also within the majority shareholders, that is within the
Agnelli family.
        One case is represented by the concluding stage in the Lafico operation. The
launch of the operation had achieved wide consensus among minority shareholders,
much more worried about the urgency of a strong capital injection for the company,
capital which was needed in order to strengthen Fiat competitiveness on many fields,
and less fearful, as Gianni Agnelli was, of any future negative effects from the US
government for the political moves towards the Libyan government, accused of
supporting terrorist groups. In fact if on the one hand it was true that the public and
with it minority shareholders did not have a clear picture of the crisis, this did not rule
out that the anxiety among shareholders was quite high. It is enough saying that in
1979 the ratio between market capitalization of Fiat stock and net equity from balance
sheets recorded a value which was one fourth of that of 1974.
        Instead the liquidation of the Lafico share had generated marked unhappiness.
In particular those holding Fiat shares had been hurt, as stock values fell after the
market placement of two thirds of shares held by Lafico. The consortium of banks led
by Deutsche Bank and Mediobanca, in charge of the public placement of shares,
encountered many difficulties, since the market was reluctant to absorb such a large
amount of shares, and this drove down values 40 . Also, this drove Deutsche Bank to

  In automobiles Alfa Romeo and then Innocenti are acquired; in Industrial Vehicles there was a joint-
venture with Ford UK.
  The completion of the Fiat component reorganization was achieved through a process of sale of some
activities for which the opportunities for internal development were inadequate, and the acquisition of
control stakes in firms with high technological specialization. Among these initiatives there was the
agreement sealed in 1986 with the French group Matra through the establishment of the Ufima
company (60% Fiat). In 1987 the structure of the Fiat component industry was organized around three
great specialised poles:
        - Magneti Marelli, as an industrial holding, with functions of governing the six operational
groups: Instruments (36% o turnover), Electromechanics (25%), Engine control (19%), Lighting
(11%), Air Conditioning (6%), Electronics (3%);
         - Gilardini, as an industrial holding in charge of overseeing five groups, of which three
operating in vehicle components (encompassing five divisions: rubber components, mechanical
components, filters, exhausts, accessories) and two specialized in industrial component production
(components for Defense and Energy);
           - Teksid, in charge of coordinating metallurgic production (cast iron and light alloys).
     See critical observations by Giampaolo Pansa and replies by Cesare Romiti. See Romiti [1988].

Volpato - Fiat

retain a considerable amount of shares, and to enter the Board of Fiat with its own
        Another situation of conflict derived form the results of the negotiation started
with Ford Motor Company for the establishment of an European company merging
Fiat and Ford Europe. The project started in 1984 between the top management of
Fiat Auto and that of Ford Europe, and, given the convergence of viewpoints on the
key aspects of the initiative, contacts turned into a true negotiation to the highest
level. According to estimated by the two partner companies, joint production of an
automobile vehicle could have allowed savings in manufacturing costs in the order of
10%-15% and this would have configured a competitive lever of great importance.
Anyway, such restful would have been only a first step compared to the many
opportunities which the agreement would have allowed.
        It would have represented a revolutionary event in the international automobile
landscape, not only for the effects which it could have generated on the international
competitive equilibrium, but also for the innovative nature of the agreement which
would not have any predecessor, both for the industry and for the scope of the
interests at stake, and the signs which the press gathered at the headquarters of the two
partners were highly encouraging. The most evident proof of the “idyllic” climate of
the negotiation, as it was defined by the media, took place during the Geneva motor
show in February 1985. At that time, for the first time, both Bob Lutz, President of
Ford of Europe, and Vittorio Ghidella, provided an official confirmation of the
negotiation in place. Moreover the words of the two executives made clear that: if on
the one hand the agreement had to be considered as a normal evolutionary outcome of
the international competitive framework, on the other hand it aimed at establishing an
agreement to be carried out at the highest level.
       As a matter of fact the competitive potential deriving from a structure capable
of integrating on the industrial standpoint the two entities, which would have still
retained their market presence through different makes and distribution networks,
would have been quite considerable. Just in 1984 European market shares for Fiat and
Ford were topping, with 12.8% and 12.7%, followed by Volkswagen (12.1%),
Peugeot (11.5%), General Motors (11.1%) and Renault (11%). Hence the simple
merger would have originated a formidable competitor with a production capacity of
over 3 million units per year, and on a market share of one fourth of the European
         But clearly if the integration had succeeded in a satisfactory way the
competitive strengths would have multiplied, starting from manufacturing costs then
encompassing other areas of activity. For example Ford would have gained a
privileged access to the new manufacturing technologies where Fiat was developing
state-of-the-art solutions (such as the new Termoli plant), while Fiat could have
benefitted from the long experience accumulated by Ford in the making of vehicles
with low polluting levels. Furthermore, Ford could have brought advantage, thanks to
its Italian partner, of a revitalization in vehicle design, which had been for a while one
of the weaknesses of the make. On the other h        and Fiat could have used the highly
internationalized structure of Ford Europe.
       Then, in a later moment, synergies could have come through a triangulation
with the USA: both in terms of easing market presence and in terms of designing a
world car, that is a vehicle which with minor adaptations could have been sold in all
main automobile markets. Gianni Agnelli himself, in an interview carried out in

Volpato - Fiat

September 1985, and published at the beginning of the following month, mentioned
such possibility41 , and he underlined as in the agreement being discussed between Fiat
and Ford there were, besides immediate benefits on the automobile industry, also
important perspectives of future cooperation for many other industries of the Fiat
        It was natural that facing the importance of the initiative and the many choices
that the production integration process between the two companies would have
required it was crucial to clearly attribute decision powers. According to the press, in
the end Ford proposed to give Fiat the management of the company, but for a fixed
period (5 to 7 years), probably until the retirement of Avvocato Agnelli. Later control
would have been turned to Ford for good. Such solution was not accepted by the
Italian partner and led to the interruption of negotiations. It was a decision which
yielded some painful consequences. It is said that within the Fiat management there
was a clear disparity between the Chairman of Fiat Auto, Vittorio Ghidella, highly
favorable to the solution proposed by Ford 42 , also because by any chance he would
have been the one to lead the company during the time of Italian control, while the
chairman of the holding company, Cesare Romiti, was strongly against, also because
he would have lost control of the most relevant company of the Group.
        Anyway for the “cassettisti” shareholders the interruption of the negotiation
represented the vanishing of a great opportunity of competitive growth, of value
creation and of achieving dividends and capital gains, albeit the favorable period for
Fiat, who at that time enjoyed the highest sales volume in the European automobile
market, yielded a rise of Fiat stock values which was not damaged by the project
withdrowal43 . However there is no doubt that at that time there was a contrast between
the interest of company control and the interest of valorizing company capital.

6.4. The establishment of the Giovanni Agnelli & C. S.A.P.A.
         The stage of crisis which started at the end of the 1970s had some influences
inside the Agnelli family as well. On the one hand Umberto Agnelli believed that is
was better to resign from chairman after the difficulties encountered during those
years. On the other hand the unavoidable reduction in dividends operated by the
company had generated some fears among the family members who were plain
rentiers. Therefore in line with the growth in the number of family members the
Avvocato believed it was about time to develop a mechanism capable of “ensuring
unity and continuity in the management” of the controlling share of the financial

   "During the 1990s the world car will likely happen: a car bound to be manufactured in six digit
figures, a car which will drive along roads all over the world. Who says that such car cannot be
manufactured right here, in Europe?". See Turani [1985].
  During the interviews at the opening of the Frankfurt motor show Vittorio Ghidella had underlined
how the policy of agreements between great automobile groups was a mandatory choice in the path of
competitive strengthening.
   The growth trend of stock values took off at the beginning of 1985 with a value above 6,500 for
common shares, and reached 11,600 at the time of cancellation of the proposed merger between Fiat
Auto and Ford Europe, and maintained a revaluation stage up to September 1986, when values topped
an all time high of 41,498. Since then a decrease started which will stop in February 1988, after hitting
the 23,945 lira.

Volpato - Fiat

company Ifi of the Agnelli family, hence on the relative majority share of Fiat SpA
and the group of companies controlled by it.
        The initiative took place in 1987 through the transformation of the limited
company Giovanni Agnelli & C. in a “Società in Accomandita per Azioni” (Sapa), (a
special type of company based on a limited partnership), to which all common IFI
shares of the Agnelli family would be conferred. It was a solution which gave
exceptional unity to the stock share of Ifi as the institutional mechanisms entailed in
Sapa centralize decision power not only in one figure (the company chairman) but
also in some people, those playing the role of “Accomandatari” partners 44 (acting
partners). For example the names of the “Accomandatari” partners were inscribed in
the founding act of the company, hence the replacement of chairmen of a Sapa is a
peculiar operation which requires a qualified majority of company capital. At the
same time also the insertion of other acting partners is subject to special procedures,
and even tighter restraints are in place for replacing managing director. For example
the appointment of a new managing director must be approved by all managing
directors still in charge. The unity of the decision mechanism of the company stems
also from the fact that according to the statutory books45 “the Board of Directors has
the highest power of ordinary and extraordinary administration and decision,
excluding those which are by law mandated to the assembly. They exert them with the
favorable vote by all acting partners in charge, less one. However, the same powers,
without exception, are attributed singularly to Giovanni (Gianni) Agnelli […] In any
case any decision over common stock of the Ifi company p.a. which does not leave in
full property of the Giovanni Agnelli & C. s.a.p.a. at least 51% of ordinary Ifi capital
must be previously authorized by all acting partners in charge and by the
extraordinary assembly”.
        Another significant aspect is that applying to the sale and disposal of shares
which: “cannot be alienated to subjects other than “consanguineous” of the current
owner, by Group companies and other stock holders, if they are not previously offered
in option to them”.
       In substance the establishment of this company ensured a sort of unity of
command to Gianni Agnelli on the control of Ifi (hence of Fiat SpA) and to those
family members who, after him, are going to become company Chairman.
After the restructuring following the establishment of the Sapa in 1987 the system of
share ownership of the Agnelli family is represented in the figure 9.

   In the statutory books of the G. Agnelli & C. s.a.p.a. the acting partners were: Giovanni (Gianni)
Agnelli, Umberto Agnelli, Giovanni Nasi, Gianluigi Gambetti and Cesare Romiti, the only one not
belonging to the Agnelli family. Gianni Agnelli and Giovanni Nasi were appointed Chairman and
Vice-chairman of the board of acting partners.
     Art.11, 1° e 2° catch of the company’s statute.

Volpato - Fiat

                     Fig.9 – Agnelli Family’s Share Control over Ifi and Fiat
                                          (Principali ramificazioni)

                                               Gianni Agnelli 38%
                                               Giovanni Nasi 12%
                                              Umberto Agnelli 11%
                                                Altri Agnelli 19%
                                                 Altri Nasi 20%
                      Giovanni Agnelli
                                            Giovanni Agnelli & C.
     Vittoria Ass.
       Gemina                                           75%
     Altri Alleati

                                                   IFI                        IFIL      IFILP
                                     1%                                                6,7%
                 4%                               28%



Volpato - Fiat

7. Fiat’s Shareholder Value Policy

7.1. Until 1996: the ROI and ROE scheme
        The management control applied at Fiat enjoyed a constant development from
earliest rough methods applied at the beginning of the century and based mainly upon
the measure in absolute value of the profit achieved, and of its ratio with turnover
(ROS), moving on then to methods based upon the return on investment (ROI) and
return on equity (ROE).
        Such a method of analysis was applied in a first stage as evaluation parameter
ex post in order to assess how good the firm strategy was. In a more recent stage,
along with the retirement of Vittorio Valletta and Umberto Agnelli becoming
managing director (1966), a more articulated system of management control began to
be developed, which tried to evaluate ex ante the validity of strategic alternatives and
in particular the investments’ profitability. With a process of gradual refinement
during the 1970s a Central Office at the “Head of Studies, Planning and Control” was
established, in charge of developing a framework for analysing balance sheets to be
applied both to Fiat and to its main competitors, in order to carry out a business
intelligence analysis. Later on the most consolidated techniques of balance sheet and
financial analysis were introduced in the individual managing activities through the
tool of the annual budget, hence they were used as information support for choices on
more operational and lower levels.

7.2. Value Based Management
        However from the Corporate Governance standpoint the most significant
change occurred at the end of 1996 with the adoption of an attitude markedly inspired
to creation of value defined as “Capability of the firm to generate a cash return with
on invested capital higher than the cost of capital itself”, and indicated as Value Based
Management. It was a key choice which was indicated in the document accompanying
the 1996 balance sheet, presented in June 1997 46 , and defined in detail in a Group 47

   “An indispensable prerequisite for growth is the internal financing of our activities through a
vigorous effort to increase the profitability of our invested capital and keep it at an optimum level.
With this in mind, the Group has made the creation of value a criterion of every operating decision and
a measure for the progress of the Company.
        This is precisely the logic behind the current process of globalization, which is designed to
give the Group a solid position in the markets with the highest growth potential, through strong
synergies amount the various Sectors.
          This same objective of increased value is served by the strategic management of our portfolio
of activities, based on a careful appraisal of their potential for profitability and internal financing.
        A third essential element of our strategy is the constant reduction of costs through
organizational innovation streamlining of logistics and sales networks, control of working capital,
reduction of vertical integration and a steadily increasing partnership with suppliers.
         Finally, we intend to proceed with the outsourcing of all non-strategic activities, so that the
Company’s management can concentrate its efforts exclusively on the creation of further value. The
main thrust of our policy will therefore be to optimize our existing and future investments and to take
every step that may help to raise the value of the Company”.

Volpato - Fiat

         “Value creation is the obligation we have towards our shareholders. Each of us holds
the responsibility of contributing to the development of the Group hence to hand over to those
who will follow, shareholders and employees, a Company with higher value. All decisions
and actions must respond to the objective of increasing the economic value of the Group as a
whole. Value creation is meant and measured as the share of operating income exceeding the
cost of capital employed to obta in it”.
           “The Core Values of the Company are:
-          Creation of Shareholder value,
-          Customer Satisfaction,
-          Human Resources Empowerment ” .
           “The Guiding Principles of the Company are:
-          Globalization,
-          Integrity and rigor,
-          Systematic benchmarking,
-          Proactiveness,
-          Passionate dedication to professional competence,
-          Promptness and determination in decision-making,
-          The will to put team performance ahead of personal considerations.”
       It was an approach which probably already reflected a change inspired by the
entry of Paolo Fresco in the Board of Directors, who will move to presidency in 1999
with the exit of Cesare Romiti.
        The reasons for this change of the company strategy at the corporate level can
be found both on the ground of the competitive situation which was emerging in the
automobile industry given globalisation, and on the ground of the need to adjust such
new reality under the ideological and cultural standpoint. On the competitive
standpoint the gradual slowdown in the growth rate of automobile demand in most
advanced countries, which had led the development of the industry since its
establishment, pushed more and more considerably towards the need to establish
production capacity in markets with emerging motorisation such as Latin America,
Eastern European countries, and South-East Asia. Such transformation implied a huge
amounts of capital which would have been available only if investments were focused
on the activities related to design and final assembly of vehicles and to maximise the
efficiency of use. In other words the challenge of globalisation implied a leaning of
the degree of vertical integration in order to leave, to a car maker such as Fiat, only
the operations tightly related to the core business and the capability to accurately
monitor the technical forms of investment in order to maintain the maximum level of
        However the amount of capital to be found in order to carry out the
globalisation project for Fiat would have been so relevant that the mere self- financing
would have been insufficient and a massive use of international capital markets would
have been needed. Therefore there was also the need that Fiat could stand up in front
of the international financial community as a company led by the same economic
guidelines of that community. In other words, a company defined itself
“international” not only by having a worldwide distribution of its activities, but also
by having a managing culture which warrants the forms of behaviour towards the
main stakeholders and in the first place towards the shareholders. The fact that “value
creation” has represented a lead parameter in evaluating the strategic appropriateness

     “I Valori del Gruppo Fiat” (The Values of the Fiat Group), Gruppo Fiat, 1998

Volpato - Fiat

of a firm by the international financial community represented by Banks, Institutional
Investors, Rating companies, etc., is a sort of test which no economic agent can avoid.

7.3. E.V.A. as a performance measure
        The development of a Value Based Management at Fiat took place through the
adoption of the Economic Value Added (EVA) approach which has been assumed as a
parameter for measuring performance. As it is known the EVA method is based upon
the measurement of value generated (or destroyed) every year by a company
expressed as the difference between the operating income after taxes and the notional
cost of capital as the following formula:
                                 EVA = NOPAT – WACC (IC)
NOPAT = Net Operating Profit After Taxes
WACC = Weighted Average Cost of Capital
IC = Invested Capital (Debt + Equity)
         The indicative value of the EVA derives from a range of features:
     a) It forces the management to evaluate investments and de- investments
        according to their capacity to create a return of value which is higher than the
        amount used;
     b) It links capital budgeting to value creation for shareholders;
     c) It allows to define clear objectives for the management and to evaluate results
        ex post;
     d) It allows to correlate management compensation to a overall measure of
        performance in pursuing the assigned objective.
       Fiat has tried to use such indicator by adapting it to the reporting system which
had been applied within the company for a long time, in order to minimise
adjustments required by the new approach. Hence it came the “Fiat formula” to
measure created value, as follows:
                                    CV = OP – NEC (WACC)
CV = Created Value
OP = Operating Profit (before taxes)
NEC = Net Employed Capital48
      Such formula, partially different from the classic formulation by Stern &
Steward, is influenced by the following conditions:
     1. to make the forms of calculation of the measure of value creation easy to
        understand and to communicate to all members of the organisation;
     2. to have a planning and control tool compatible with the whole system of
     3. to be able to apply the formula of value creation to any business area;

   The calculation of capital cost is one of the most important aspects in measuring value creation.
Initially it was decided to use the same weighted cost of capital for all industries, equal to 12%. In a
later moment the cost of capital was differentiated according to the risk associated to each industry. In
particular, it is provided that investments in the car industry have a weighted average cost of capital
which is half a percentage point higher than for other industries.

Volpato - Fiat

     4. to use an internal decisional tool which was compatible with the logics and the
        variables traditionally used in financial analysis 49 .

7.4. The adoption of the management model based upon value creation
       The process of implementation of the model based upon value creation has
been divided into more separate stages, although linked to each other, in which it
moved through the definition of the “Fiat formula”, its communication and the
personnel training activities at various levels for a profound transformation of
managing culture of the Group personnel. It was a wide operation, which started in
1997 and ended in 1998 which involved over 450 people in the top management, over
3,500 managers and over 23,000 cadres of all controlled companies.
        The objective of the training program named “Creating Value” were defined,
in broad terms, in the diffusion of the set of concepts which are at the roots of the
social and economic legitimation of value creation and in the focus of attention on the
relationship between values in the income statement and in the balance sheet in
determining and creating value. This latter aspect was particularly underlined in the
training activities targeted to managers and operational cadres which usually tend to
focus almost exclusively on values and outcomes of the income statement.
        The training activity has also benefited from a specific software developed for
a what if analysis which could rapidly and clearly highlight the change of the
influence generated by the different variables of the accounting system on value
creation. From this training effort came the need to adjust also the system of
management incentives, as it will be discussed later on.
        The attention posed upon cultural growth of management has also suggested
to focus the attention of managing personnel on some important value drivers, mainly
related to the economy in the use of capital employed and its most efficient use
through careful choices of de-investment from activities which are non strategic or
which cannot be carried out with the required standards of excellence and with a more
advanced organisation of global sourcing. Hence it came:
    a) a systematic review of criteria adopted in the selection of investments;
    b) the use of an integrated information system capable of monitoring the relevant
        key drivers and of configuring a tableau de bord moved by value creation
        tailored to each business sector;
    c) the activation of a system of ex post verification of gaps with respect to
        hypotheses adopted in the evaluation of investments, in order to recalibrate the
        assumptions towards the correction of strategic plans.

7.5. The incentive tools at Fiat
        In order to make the new attitude based upon value creation fully operational
the measure of financial performance has been applied to manager monetary
incentives. It is based upon four tools:
    1. salary increases;

   To this respect Fiat has verified for a significant length of time that differences in results which
would have been obtained with a formula slightly different from the standard one could yield similar

Volpato - Fiat

     2. discretional annual bonuses;
     3. annual bonuses coming from the implementation of Management by
        objectives (MBO) and the Evaluation of Work Results (Valutazione dei
        Risultati di Lavoro - VRL);
     4. stock options.
        Salary increases are applied annually to a share of managers (about 20% of
total), and are assigned as a recognition of a growth in individual competences.
Discretional annual bonuses are used to specific tasks in which one intends to
reinforce incentives on key qualitative objectives. Both these tools represent “non
standard” incentive forms which are used also depending upon the variety of company
situations which reflect a worldwide group.
       Differently, the MBO and VRL incentive programs are tools with systematic
and general usage. Their introduction is anterior (1983) to the value based approach,
but they have been redefined according to the new objectives.
        The management pyramid of the Fiat Group can be divided into four layers,
which are in turn divided in other levels. At the foundation we find the layer of the
“Cadres” with about 20,000 units, followed by that of “Managers” with about 3,500
managers, then that of “Top Managers” (about 500 people). Inside the Top Managers
layer we can distinguish The “Executive Officers” (about twenty) and inside the m the
“Directors” which are member of the “Fiat Board of Directors” with eleven units.
The layers of Cadres and Managers are stimulate according to the VRL program
(Evaluation of Work Results), which has a potential maximum of 25% of average
salary of the corresponding level. The incentives which are individually acquired are
calculated differently whether the subject belongs to an industry division or to the
central staff of the holding company50 . If he or she belongs to an industry division the
result is calculated by weighting the value creation achieved at industry level (20%)
and at division level (80%), while for personnel in central staff units the result is
wholly determined by the average performance of the sector.
        The people defined “Top managers” operate instead within the MBO program.
It entails a potential maximum of 30% of average compensation of the corresponding
level, and according to a more elaborate weighting scheme based upon four Top
managers types (Sector Chief, Division Chief, Head of Function for Central Staff,
Head of Function for Group Staff), as highlighted in fig. 10 and on specific functional
objectives which are additional to the “Value Creation” parameter as exemplified for
the three managerial figures in Fig. 11.

  However one must consider that central staff although located in the holding company are not strictly
centralised as they remain autonomous for any sector, and depend upon sector chiefs.

Volpato - Fiat

          Fig. 10 - Weighting of MBO targets
                 Sector      Division           Sector          Group-level
                                              Central Staff        Staff
                  Other        Other              Other
                 targets      targets            targets
                  30%                                              Other
                               30%                30%             targets
                  Sector    Creation 30%          Sector
                  Value                           Value            Sector
                 Creation     Division           Creation          Value
                   70%         Value               70%            Creation
                              Creation                              50%

                 Sector       Division          Head of          Head of
                 Chief         Chief            Function         Function
        Source: Fiat

Fig.11 – Weighting of MBO objectives
(Indicative values)
                                   Chairman        Commercial     Operations
                                                    Director       Director
Value creation                          70%            50%           50%
Market shares                           10%            20%
Warranty costs                          10%            15%
Product quality                                                      20%
New product development                                              15%
Product cost                                                         15%
New product penetration                 10%
Targa Service                                          15%
Total                         100%                100%          100%
Source: Fiat

Volpato - Fiat

7.6. Stock Option Systems in Italy
        In Italy as in other countries the introduction of incentive schemes based upon
Stock Options is becoming more frequent 51 . To this respect the data available from
main consulting companies on the composition of manager compensation for Italian
companies, and in particular those publicly traded, highlight the more and more
relevant role of the variable component, indicating a changed attitude in the forms of
enterprise management and of the valorisation of human resources. The process of
competitive globalisation has provided considerable impulse since it has stimulated
the comparison between compensation policies in the Anglo-Saxon areas and in the
European world, more than in the past.
         This last aspect become particularly evident in relation to the introduction of
incentive schemes based upon Stock Options. However it must be pointed out that
such homogenisation of compensation policies is less strong than is could seem.
While in the Anglo-Saxon world the introduction of Stock Option plans is born as an
incentive tool and for neutralising managerial behaviors which are not aligned to
value creation for shareholders, in continental Europe, where the separation between
property and control is less advanced (as for example in Italy) the introduction of
Stock Options mainly stems from the need to apply compensation models capable of
attracting and retaining mana gers with new and rare competences, mainly those linked
to e-business and to the new economy, where expectations for growth in market
capitalisation of stocks are particularly evident.
        Managers compensated with plans of stock incentives share, with
shareholders, the increase in value of the company, hence they cash their managerial
competences. Compared to a traditional bonus the advantage lies also on the fiscal
side both for the company and for the manager, as for the firm the payment of social
security contributions is waived, and for the manager taxed applied to employed
labour compensation are waived.
        In Italy Stock Option plans aimed at top management start to develop in the
early 1990s, but mainly in Italian firms controlled by foreign groups of British or US
origin. According to a study by Towers Perrin52 on incentive systems in 1995, stock
plans which were operational or being studied involved only 11% of Italian
companies with a turnover over € 1 billion, but in 1998 the share grew to 79%.
        More detailed information is available through the study conducted by Società
Ricerche & Studi (R&S) involving 218 Italian groups with large turnover in all
industries excluding that related to web activities which, given their recent
establishment, are not yet included in the annual sample monitored by R&S 53 .
According to this study 54 companies (that is 25% of the sample) adopted plans of
stock incentives and 53 of them are publicly traded: 50 in Italy and 3 abroad (Fig.12).

     Gualtieri [1993].
     Towers Perrin [1998].
     R&S [1999].

Volpato - Fiat

        An interesting division of the sample is that allowing to segment the analysis
by industry. According to this classification one can find a higher diffusion of stock
plans as compensation and participation mechanisms in companies belonging to the
financial, banking and insurance industries, as well as in those competing in global
markets such as the auto and tyre industries (Fig. 13).

Fig.12 – The adoption of Stock Option plans in firms of the R&S sample
                                                          Firms with Stock Option
                                      Number of firms                                    Percentage
Firms publicly traded in Italy              88                      50                     56.8%
Firms publicly traded abroad                    8                   3                      37.5%
Total publicly traded firms                 96                      53                     55.2%
Non publicly traded firms                   122                     1                      0.8%
Total sample                                218                     54                     24.8%
Source: R&S [1999].

      Fig. 13 - Firms with stock plans by industry













                                 0%   20%           40%          60%          80%

        Source: R&S

Volpato - Fiat

        With respect to technical forms of implemented plans, there is a clear
dominance of plans of paid emission (58% of cases), including those with discounted
terms, but with a strong presence of free emissions (32% of cases). In other words the
firms have mainly used capital increases aiming at assignments which were free or
discounted (subscription at discounted prices). More than with an objective of
incentive, those plans seem carried out with the aim of granting an award for past
outcomes or as a mean to ensure a higher degree of involvement of the management
on the future development of the firm.

7.7. Stock Option System at Fiat
        A Stock Option program has been introduced by Fiat in 1998. The Board of
Directors has voted a capital increase for a maximum of 36.5 million ordinary shares
with a nominal value of 5 euro, equal to about 1% of capital in this type of shares
reserved to managers of Fiat and controlled companies. Its introduction has been
presented by Paolo Fresco, who became during that same year Fiat Chairman taking
Cesare Romiti’s place 54 , as a “management tool widely common on an international
scale, useful to develop a culture of confidence in the value growth for the company,
which stock markets eye more and more favourably. The plan which will be carried
out in more stages, entails the distribution of options valid to subscribe three years
after the assignment to a price set as the average of official prices in the Milan Stock
Exchange during the month preceding the assignment.
        In March 1999, the Board of Directors of Fiat SpA adopted a new stock
option plan – The 1999 Plan – whereby the Board may grant options to purchase up to
the aggregate number of Fiat ordinary shares to be issued pursuant to the resolution of
the B oard of Directors dated December 9, 1998 authorizing a capital increase of a
total par value of 18.9 million euro for such purpose. The 1999 Plan authorized the
Board to grant to eligible employees of Fiat SpA and its Italian and foreign
subsidiaries options in respect of a total of 1,248,000 ordinary shares at a purchase
price of 28.45 euro per share. The share purchase price, which is subject to
adjustment in certain circumstances involving a change in Fiat’s share capital, was
determined by averaging the official price of Fiat’s ordinary shares on the Italian
Stock Exchange during the last twenty daily trading sessions preceding March 29,
1999, the date of the first grant of options under the 1999 Plan. At such time the
Board approved the grant options in respect of 1,248,000 ordinary shares to
approximately 700 managers of the Fiat Group.
       The 1999 Plan is only open to employees that, on March 29, 1999 are
employees of Fiat or of a subsidiary of Fiat on an indefinite basis, have the title of
“Direttore 55 ” and have completed all required probationary periods. Eligible
employees will be excluded from the 1999 Plan if they have given or received notice
   Cesare Romiti, after 24 years working with Fiat, has enjoyed the largest stock option compensation
in Italy. The leaving president walked out with a value of ITL 105 billion.
   In order to avoid confusion it is worth pointing out that the Italian position of “Direttore” (Executive
Officer) differs from the Anglo-Saxon one of “Director”. The “Direttori” carry out their activity at the
helm of Fiat SpA or of subsidiaries. Among them there are in particular Gian Carlo Boschetti, Chief
Executive Officer of Iveco N.V., Luca Cordero di Montezemolo Chief Executive Officer of Ferrari
SpA, Jan Pierre Rosso Chief Executive Officer of CNH Global N.V. and Roberto Testore Chief
Executive Officer of Fiat Auto. The name “Director” (Amministratore) refers instead to members of
the Board of Fiat SpA.

Volpato - Fiat

of their intent to terminate employment, are scheduled to leave the Group in 1999 or
qualify for mandatory age pensions before April 1, 2001. The number of options
offered to each individual grantee has been determined according to certain evaluation
criteria including the grantee’s level of responsibility and job performance. In
determining the number of options granted under the 1999 Plan, the Board of
Directors considered the results of the Group and of the grantee for the years 1996,
1997 and 1998.
        The options granted under the 1999 Plan my be exercised in tranches to be
determined by the grantee from and after the expiration of the third year following the
grant. The grantee may exercise up to 50% of the total options granted during the
period from April 1, 2001 to April 1, 2002, and the remaining balance from April 1,
2002 until the expiration of all such options on March 31, 2007. However the options
may not be exercised between January 1 and the date of which the results of Fiat SpA
for the proceeding year are first publicly announced. Furthermore during the option
period of employment, for or without cause, except for intragroup transfers within
thirty calendar days after termination and in the event that the employing company of
the grantee loses its status as a subsidiary, thirty calendar days after such event.
Options issued under the 1999 Plan which ha ve not become exercisable will be
determined on conditions similar to those for options that have become exercisable.
Options that are exercisable upon the grantee’s death may be exercisable by a person
entitled to do so under the applicable inheritance laws, however such options must be
exercised not later than March 31, 2007.
        On February 18, 2000 the Board of Directors approved a second stock option
plan – The 2000 Plan – characterized by an extension with respect to the previous
one. The 2000 Plan will be offered to about 850 managers, of the Group’s Italian and
foreign subsidiaries, who are qualified as “Direttore” or have been included in the
Management Development Program for High-Potential Managers 56 . A total of
5,158,000 options have been awarded under this plan, giving holders the right to
purchase an equal number of Fiat ordinary shares at a price of € 30.63 per share. This
figure corresponds to the average price for the shares on the Italian Stock Exchange
over the 20 trading days immediately preceding the date of the award. These options
my be exercised between February 18, 2001 and February 18,2008. However, during
the first four years of that period, option may only be exercised in cumulative annual
tranches that do not exceed 25% of the total number awarded. Pursuant to these plans,
a total of 5,506,000 shares, equivalent to 1% of the Fiat’s total capital stock and 1,5%
of its ordinary shares, will be issued through a special dedicated capital increase,
which the Board has already approved. In addition, approximately 900,000 treasury
shares will be sold to option holders in accordance with the provisions of the
respective regulations. The Fig.14 summarizes the data for all stock options
outstanding at December 31, 1999.

   The Board of Directors has established in 1999 two internal committees: the Audit Committee,
which comprises four non-executive Directors (Gabriele Galateri di Genola, who chairs the committee,
John P. Elkman, Gianfranco Gutty and Carl L. von Boehm      -Bezing), and the Compensation Committee,
which comprises four Directors, two of whom have executive authority (Paolo Fresco, who chairs the
committee and Paolo Cantarella, as well as including Franzo Grande Stevens and John F. Welch). The
Compensation Committee develops proposal for approval by the full Board of Directors, mainly with
regard to general and individual compensation plans for senior employees and the compensation for
executive directors, including stock option plans, as well as appointments to senior positions within the

Volpato - Fiat

Fig.14 – Stock Options Situation at December 31,1999
Options awarded in 1999 not yet exercisable at Dec.31, 1999                                       1,248,000

Average exercise price (euros per share)                                                                28.45

Market price on the award date (euros per share)                                                        28.45

Market price at December 31, 1999                                                                       30,09

Exercise period:         624,000 options exercisable between April 1, 2001 and March 31, 2007

                          624,000 options exercisable between April 1, 2002 and March 31, 2007
Source: Fiat

7.8. Fiat Directors’ Compensation
       The compensation for some members of the Board of Directors57 uses a stock
option system as well. According to the prospect published in the Form 20-F required
by the Securities and Exchange Commission referring to Fiscal Year ended on 31st
Dec 1999, Directors’ compensation has been determined as shown in Fig. 15.
       It is worth to note that the annual compensation for the post of Chairman
(1,181,000 euro is a variable amount equal to the average stock market value for the
months of April and October of 40,000 ordinary Fiat shares. The Chairman also has
the right, exercisable between July 1, 2002 and October 30, 2008, to receive an
amount equivalent to the difference between the price of 25.823 euro per share and
the average market price per share in the month this right us exercised, multiplied by
1,000,000 ordinary Fiat shares. This right will expire if the employment relationship
is terminated prior to the Stockholders’ Meeting that will approve the financial
statements at December 31,2001.
        As far as it concerns the compensation for the post of Chief Executive Officer
(2,896,000 euro) includes a fixed amount of 1,859,000 euro and a variable portion
equivalent to the average market value in April and October of 32,000 ordinary Fiat
shares. The CEO has also the right to receive amounts equivalent to the difference
between a predetermined reference price for the ordinary Fiat share and the average
market price per share in the month this right is exercised, multiplied by 100,000
shares (reference price 28,45 euro) exercisable between April 1, 2001 and December
31, 2007, and by an additional 100,000 shares (reference price 30.63 euro),
exercisable gradually over the first four years, between February 18, 2002 and
February 18, 2008. If this employment relationship is terminated for any reason other
than just cause before June 30, 2002, the CEO is entitled to receive supplemental
compensation determined on the basis of his annual salary at the time the employment
relationship is terminated, prorated for the period from the date of termination until
June 30, 2002.

  The Directors of the Board have a term office of three years. At the annual meeting of shareholders
held on June 23, 1999 the shareholders elected or re-elected each of the Directors for a new term.
Which will expire on the date of the annual general meeting of shareholders to be held in the year

  Volpato - Fiat

  Fig.15 – Fiat’s Directors Compensation – 1999 – (Thousands of euro)
           Name              Position      Compensation       Noncash      Bonuses     Other
                                           for office held    Benfits        and     compensati
                                                 (*)           (**)         Other       on
Paolo Fresco               Chairman            1,633             25
Paolo Cantarella           CEO                 3,348             12           516           37
Franco Bernabé             Director                56             7
John P. Elkan              Director                446            7
Gabriele Galateri di       Director                452            7                         10
Franzo Grande Stevens      Secretary               659            7                         560
Gianfranco Gutty           Director                440            7
Virgilio Marrone           Director                59             7
Franck Riboud              Director                428            7
Carl L. von Boehm-         Director                47             7
John Welch                 Director                53             7
Henry C. M artin           Director                385                                      31
Gianluigi Gabetti          Vice-                   452
Ulrich Weiss               Director                391
   (*) For Directors, the amount includes the portion of the 1998 net income (338,000 euro per
  person), appropriated as compensation for the 1999 term of office (prorated on the basis of
  the time served) in the amount determined by the Stockholders’ Meeting, special
  compensation for assignments and functions performed and the balance of compensation
  owed to them for membership in the International Advisory Board.
  (**) Includes pro-rata share of the premiums for the insurance policy approved by
  Stockholders’ Meeting (7,350 euro) and the use of transportation equipment.

         At the annual general meeting of shareholders held on June 23, 1999, the
  shareholders of Fiat SpA approved certain amendments to the by-laws that changed
  the manner in which compensation to be paid to the members of the Board of
  Directors with respect to their service is calculated. Such compensation now includes
  an element based on the average market price of Fiat shares, as well as a set fee of
  3,000 euro for attendance at each meeting of the Board or committee thereof and the
  cost of premium s for directors’ liability insurance. Such amount are included in the
  amounts set forth in the Fig.15.
         On June 23, 1999 the Board of Directors gave the Chairman, Paolo Fresco,
  and the Chief Executive Officer, Paolo Cantarella, broad operating powers
  authorizing them to perform all acts that are consistent with the Company’s purposes.

Volpato - Fiat

Notwithstanding the ample powers granted to them, the Chairman and the Chief
Executive Officer must regularly submit for approval to the Board of Directors all
transactions that have a material impact on the Company’s profitability, balance sheet
and financial position, and must provide the Directors and Statutory Auditors with
adequate information on any transaction performed by virtue of the powers granted to
them which may be atypical, unusual or involve related parties.

8. The policy of investment-divestment of the Fiat Group

8.1. The stage of multidimensional expansion
        As previously shown Fiat maintained, since its establishment until the crisis
years after 1970, a policy largely based upon expansion. It was however a large but
non homogeneous expansion, with different political guidelines. There are those
concerning the automobile industries (Automobiles, Commercial Vehicles, Agri-
cultural & Earthmoving Equipments), where it is easy to see the general plan of Fiat
management. There are the guidelines regarding the industries still revolving around
the automobile industry itself, such as Metallurgical Products, Components and
Automated Productions Systems, but seen as ancillary and not autonomous with
respect to automotive industries. Finally there are the many other industries not linked
to the automotive one, for which the lines of development vary over time.
        With respect to the three main automotive industries there is no doubt that the
strategic guidelines of the Fiat management have constantly moved towards growth in
size both through gaining relevant scale economies (hence to a growth in efficiency),
and through acquisition of forms of control of market shares seen as the necessary
complement to maintaining the group profitability.
        Moving on to consider the field of automotive components the group strategy
is highly diverse, deriving from different needs matured in subsequent times. The
starting point of the Fiat policy lay, since its establishment, in the need to develop a
wide range of internal production which is necessary due to the limited degree of
Italian industrial development which made choices mainly based on the assembly of
components manufactured externally (as it happened for French, German and
English58 car makers) inapplicable. The specific traits of the Italian situation were due
also to the fact that Fiat was the only domestic car maker with large size. This
determined that even independent component manufacturers ended up revolving
around Fiat’s orbit. As a consequence it was common that facing a situation of crisis
for the supplier in the capability to satisfy technological and organisational needs of
the main (if not exclusive) client, Fia t decided to step in by acquiring firms whose
difficulties threatened the maintaining of a steady production flow. In such way,
however, the growth in vertical integration did not derive from a detailed plan of
development for the group technological potential, but it was led by waving facts
connected with the suppliers’ stories.
        In the fields not linked to automotive the investment and divestment policies
were even more diverse. Fiat not only decided to rapidly enter industries where it
believed to have competencies which were transferable from the industry of main
interest, but the considerable financial resources produced by favourable market
stages induced it to often try forms of conglomerate diversification.

     See Volpato [1996].

Volpato - Fiat

        However such diversification forms, even when they were promising, had
difficulties in acquire a distinctive development policy of their own. Until 1976, year
in which Fiat was transformed into industrial holding and activities were grouped
along 11 sectors, it was the hierarchical and decisional organisation in itself to prevent
forms of collateral development on new promising activities since the monolithic
structure of Fiat inevitably ended up granting enough attention to the automobile
business only. Hence other businesses although potentially highly interesting were
neglected. On the contrary, during times in which the economic recession negatively
influenced the automotive industry, the easiest way to acquire the necessary resources
to boost investments in the group’s leading industry consisted in the sale of “non
strategic” activities. Only a substantial degree of autonomy of the individual
businesses could have provided the condition, necessary albeit not sufficient, to carry
out adequate strategies of value valorisation in diversified activities.

8.2. The reorganisation of captive suppliers

        Already at the beginning of the 1970s, before the stage of profound industry
reorganisation driven by the first oil shock Fiat was involved in the production of a
very wide range of components, but the following years intensified this situation
further. Infact the 1973 oil shock and the subsequent recession in automobile demand,
and the strong inflation drive in the second half of the 1970s, generated considerable
difficulties to component suppliers, eve n to those directly controlled by Fiat, but
mainly to the independent ones. On the sales end Fiat could adjust vehicle prices,
which in Italy grew to a pace which was higher than retail prices and, after 1975, also
than wholesale prices59 . But price adjustments for component suppliers were
inevitably slowed down, if not for the lengthening of payment terms. Furthermore
Fiat, which in some areas had excess personnel and plants, had a natural interest for
reintroducing work which was before outsourced. Hence the development of
considerable employment and productive restructuring by suppliers, particularly by
those who were weaker on the financial side, who were not able to carry out the
necessary investments to gain considerable productivity gains. There matured also the
interest for Fiat to acquire component makers in trouble, or who played a considerable
importance for the objectives of productive rationalisation.
       It was a stage which was burdensome on the economic standpoint, which had
to be rationalised by an operation of organisational “clean-up”. Between 1977 and
1979 Fiat carried out a comparative analysis of the component market in Europe, and
technical and commercial features of the manufactured components are evaluated 60 .
There were two most important points.
           A) Fiat component production was distributed over a high number of
              component product families, differently from what main independent
              component makers did, even those who were more diversified. On a total
              of 60 families related to the three key indus tries (electromechanical,
              mechanical and chemical) Fiat was present in 46 families, compared to
              Lucas, the most diversified, with 27 (Fig.16).
   Also in the French and German automobile markets the increase in automobile prices was higher
than retail prices, but lower than wholesale prices. For an analysis of automobile price trends in Italy,
France and West Germany from 1973 to 1985 see Volpato (1988).
     See Fiat (1979).

Volpato - Fiat

         B) Although with such a wide spectrum of activity, Fiat component activities
            during those years were more present in products with lower technological
            content than in those more sophisticated and complex (Fig. 17). They
            frequently were products with low technological and productive barriers
            and which independent firms, smaller and more flexible, could
            manufacture with higher productivity levels. Such considerations moved
            Fiat to develop a long-ranging operation, aimed at redesigning the
            boundaries of its activities which will lead to the acquisitions in the second
            half of the 1980s.
Fig. 16 – Technological content of components
                                        No. of component families manufactured
                                                and technological content
       Companies            High        Medium Medium Medium              Low       Total
                                         High                 Low
Fiat                         11            7             10     5            13      46
Lucas                        11            4             2      2            8       27
Ferodo                       10            4             2      1            7       24
Bosch                        11            3             3      -            5       22
Bendix                       10            3             2      -            5       20
ITT                           5            4             3      1            6       19
AC Delco                      8            1             3      1            5       18
GKN                           8            5             -      -            -       13
TRW                         5          -       3                1            1       10
Source: Fiat
Fig.17 – Degree of diversification in components
                           Electro-            Mechanical       Chemical          Total
                          mechanical           technologies   technologies
Tot no. of families           17                    28              15             60
Fiat                          15                    16              15             46
Lucas                         13                    8               6              27
Ferodo                        12                    8               4              24
Bosch                         14                    7               1              22
Bendix                        11                    6               3              20
ITT                            5                    9               5              19

AC Delco                       9                    7               2              18
GKN                            1                    11              1              13
TRW                            2                    7               1              10
Source: Fiat

Volpato - Fiat

        The new situation required also a change in the way of looking at the
component sector. In the past transfer prices between group firms had traditionally
privileged profit objectives of final activities represented by automobiles 61 , but they
had also played as a “safety net” in cases in which captive productions were less
competitive than those developed by independent suppliers 62 . With the new situation
it was clear that such policy on the one hand played against the development of
innovative capabilities by “satellite” activities, which now had to be highly
developed, and on the other hand took transparency out of management control and of
differences in performance, which in turn had to be able to emerge in order to
stimulate adequate restructuring efforts.
        In tune with such a policy of realignment to the market, the holding company
tried to boost captive component companies to supply other car manufacturers and the
part aftermarket in general. Just to this respect it was decided, in the middle of 1976,
that component firms had to use own makes and own commercial networks for spare
part sales: for example in 1987 Magneti Marelli established own distribution
companies in Italy, France, Spain and Germany.
        During those years the most important acquisitions in the component arena
were: Gilardini, sold by Carlo De Benedetti in exchange of a considerable package of
Fiat shares (little less than 5%) and Corte & Cosso. But there were also considerable
internal reorganisations, through the sale and establishment of firms for activities
which were previously integrated in vehicle manufacturing. In 1977 the organisation
of component activities were structured along three levels. At the lowest one there
were individual firms. They referred to 7 “Groups”, defined according to the
technological affinity of products and production processes (plastics operations,
electromechanical components, carburettors, paint, lubricants, etc.) and the groups
finally converged into the component “Sector” where the strategic coordination of
such activities took place.
        It was a structure which in 1979 had 37,200 employees, about sixty operation
units, almost exclusively operating in Italy, a turnover of about 1,460 billion lira.
About 75% of it referred to vehicle components, which for 50% were sold to Fiat,
while the remaining 25% fed the aftermarkets. Only a few firms, like Magneti
Marelli, Weber and the related company Borletti, could feature constant supply to
other car manufacturers. The establishment of the component “Sector” implied, on the
other hand, an overall examination by Fiat of objectives and strategies to be assigned
to that area, which was more and more important towards a fast and effective
renovation of models, as required by the automobile market.

8.3. The reorganisation of the 1980s

        With the presentation of the first consolidated balance sheet in fiscal year 1981
it was possible to have a complete picture of the structure of the Fiat Group. It
featured 432 controlled companies and 26 related companies in 60 countries and
operating in a wide spectrum of activities 63 .

     See Comito (1982).
     Captive production are those carried out by firms controlled by car manufacturers.
  In the book by Enrietti and Fornengo [1989], from which many interesting pieces of information
were drawn, there are 16 business industries recorded.

Volpato - Fiat

        With respect to the “Automobile” sector in the 1980s the Latin-American
market featured a stage of crisis. During the previous period initiatives over there
were relevant with the establishment of Fiat Automoveis in Brazil with participation
by the State of Minas Gerais (1973) and of Sevel in Argentina, with participation by
the French company Peugeot (1980). But the unfavourable trend led first to the sale of
Sevel by the two car makers to local capital (Macrì Group) in 1982, and then in Brazil
the retreat of the State of Minas Gerais which forced Fiat to acquire all shares of Fiat
Automoveis (1986). Instead, in the European landscape, automobile activities featured
three important acquisitions: Alfa Romeo, acquired in 1986 and incorporated in 1987,
the Innocenti make in 1989 and the Maserati make in 1990.
        The industrial vehicle sector also carried out acquisitions of some relevance.
The international policy in this sector started in 1974 with the establishment of Iveco
with headquarters in Amsterdam, with a 20% participation by the German group
Klockner-Hunboldt-Deutz (KHD), which was reinforced further through the
acquisition of the whole share package. In 1986 the Iveco-Ford Truck Ltd company
was established in Langley (UK) with the aim of manufacturing and distribute
commercial vehicles in UK over 3.5 tons under the two makes.
        Even in the sector of agricultural tractors and earth- moving machines during
this decade there was a marked rationalisation mainly based upon the acquisition of
new companies previously controlled by the US companies Allis and Ford and finally
to the reunification of the various companies coordinated by Fiat Allis and Ford New
Holland in a single sector under the management of the newly established company
New Holland Geotech (1990).
        However in the automotive sector (in its wide sense) the most profound
transformation took place in the component industry. Here it was clearly visible the
outcome induced by the analysis carried out at the end of the 1970s, which were
previously highlighted. The Group carried out many acquisitions and sales aimed at
exiting from technological arenas where the Fiat Group believed not to have strong
enough competitive cards, and to acquire new companies in sectors where
perspectives are more promising. The sector in 1986, during the acquisition stage,
coordinated 100 companies, including controlled and linked, which decreased to 84 in
1987, when the divestment stage begun. On the whole the most important operation is
the joint-venture carried out with the French company Matra for the establishment of
a new pole specialised in components (Ufima company) in 1987.
         During the middle of the 1980s there was a considerable expansion for
automobile activities in Fiat with strong cash generation at group level, mainly
derived from the international success of the “Uno” model manufactured since 1983.
The consolidated net profit moved from the modest levels achieved in 1981 and 1982
(90 and 137 billion lira respectively) to larger values which exceeded 2,000 billion in
1986 and 3,000 in 1988. Hence an expansion potential whic h involved also businesses
outside the automotive one. To this respect the most important acquisition was that of
Snia BPD in which Fiat in 1983 had already a minority stake, previously controlled
by the Montedison company. After its integration into the Fiat Group the Snia was
leading a complex of 85 companies grouped along five entities: defense and space,
fibers, chemical products, textiles and bioengineering. The first four were already
controlled by the leading company in the past, and Fiat conferred t it also the
activities previously developed within the group in the bioengineering sector.

Volpato - Fiat

        With such move one can say that the Fiat Group begins a diversification stage
outside the traditional mechanical and metallurgical ones. There grew the idea that the
technological industries where Fiat had built its growth in the past could not offer
expansion opportunities which could be compared to more advanced industries such
as defense and space applications, chemical products, bioengineering and mainly the
information and telecommunication technology. At the middle of the 1980s the
investment and divestment policy seemed to indicate the willingness of Gianni
Agnelli and Fiat’s management to pursue a gradual repositioning of the Group
through the growth in more technologically advanced industries.
        Fiat had initiated its presence in the telecommunications industry already in
1968 with the purchase of a share of 35% of Telettra SpA, a company specialised in
the design and manufacturing of telecommunication systems, radio and electronic
devices. In 1976 Fiat had acquired control of the whole company aiming at making it
its main tool in the telecommunication industry. Such initiatives did grow manifold
starting in 1982 along with the growth in investments operated by S.I.P, a company
controlled by the system of State Participations (IRI) and Italian entity for telephone
networks. Moreover, Telettra acquired in 1988 the control shares in Telettra Norge
and Telettra Española. Such last operation, which increase Fiat share from 49% to
90% acquired a specific meaning since it entailed an agreement with the Spanish
company: Compañia Telefonica Nacional which acquired the remaining 10% of
Telettra Española. With the operations carried out after 1982 Telettra Spa became in
1988 the fifth European maker of TCL systems with a market share of 35% in Italy
and sales abroad for 50% of its turnover.

8.4. The “re-entry” in the 1990s

        However such policy of refocusing towards a higher operational diversi-
fication did not last. With the worsening of the national and international economic
trend in the early 1990s Fiat went back with the sale of Telettra and the exit from the
telecommunication industry. At the time the move was justified by the Company
Report with the fact that the core business of the group was represented by auto-
motive activities, while other investments, seen as a sort of legacy of the past, had just
a function of anti-cyclical stability for the financial and economic equilibrium of the
         “Fiat considers the Automotive Sectors as its principal activities and is committed to
fortifying and stabilizing leading positions in the various segments comprised in the business.
         The function of the Group’s diversified operations, all of which represent activies that
date back to the origins of Fiat itself, is to develop both high-tech industrial Sector and
Services, in order to enhance the Group’s subtance and compensate for the cyclical nature of
its automotive manufacturing activities64 ”
        The argument did not appear convincing both because the diversification
policy continued beyond the “origins” of Fiat, and because if they were truly activities
linked to the origins one could not see why they could relate to the High Technology
industry. As a matter of fact in this case too the Group had applied a rather simple
scheme which consisted in moving along the diversification path any time in which
the favourable trend in the automotive business generated enough cash, while selling
such activities in times of financial stress.
     Fiat Annual Report 1991.

Volpato - Fiat

         In 1993 there came the sale of Fiat participation in the retailing industry
(Rinascente). Some years later, in 1998, the same happened to Snia BPD, acquired
with the aim of diversifying with a long ranging move within a wide range of
activities previous ly linked to chemical and fibres. In 1999 came the sale of 51% of
Fiat Ferroviaria which was sold to the French company Alshton for 153 million euro.
The operation entails a “put & call” option which grants Alshton the right of purchase
and Fiat the right of sale of the remaining 49% within 2001.
        Broadly speaking the aim of such sales (including some less relevant ones),
was that of acquiring financial resources necessary to revamp automotive initiatives,
such as the purchase of the US company Case in the earth moving industry for the
establishment of the Case New Holland Global and of the US company Progressive
Tools & Industries (Pico) and of the French company Renault Automation to be
incorporated into Comau SpA.
         In some cases sales were certainly adequate since they related to industrial
activities which were scarcely competitive, at least in the short term. However in
other cases they were sales of activities with good profitability, certainly better than
the majority of the automotive ones, and a competitive position which could not be
neglected on the international side. For example it was the case of Fiat Ferroviaria.
The Group had entered the railway material industry in 1917 operating mainly for the
internal market. During the early 1970s the diffusion of high speed trains did move
Fiat Ferroviaria to develop research on a variable-trim train, named “Pendolino”,
specifically studied for tortuous lines such as those present in many areas of Italy and
in areas surrounding the Alps, and capable of operating in traditional lines not
specifically designed for high speed trains such as the French TGV and the Japanese
Shikansen. Thanks to these features the Pendolino had acquired good success in the
international landscape and the company did record a considerable average
profitability, around 4% of turnover. Hence, given the perspectives for future
strengthening of European and international railway systems, the strategy of “value
creation” for shareholders which had been declared years before by the Turin
company should have suggested a different attitude towards this industry.

8.5. Investments and divestments: the theory of the “competitive weight”

        In reality by analysing the various operations of investment and divestment of
Fiat over time one has the impression that the management of Fiat, and certainly
Gianni Agnelli, did apply a sort of “competitive weight” theory. It must be said that
such idea has never been clearly formulated by Fiat management, and it rather appears
as a sort of “external interpretation”, made by the writer, on the basis of the analysis
of the whole of initiatives of investment and divestment in the group during the last
three decades. It can be expressed as follows: “in the long term the profitability of an
industrial activity depends (in the Fiat’s management view) upon the ability to acquire
a dominant position in the market exerted in a prevailing measure, albeit not
exclusively, by its market share. In other words, if a company managed to acquire a
dominant position, such position represents a sort of “insurance” capable of allowing
the acquisition, beyond highs and lows of the economic trend, of a satisfactory level
of growth and profits. In such sense it would pay more to be “big” in an industry even
though it is relatively mature and les dynamic, rather than being outsiders in industries
with big growth rates. Naturally this attitude mainly refers to industrial activities
directly managed by the Fiat management and not the participations in the portfolio

Volpato - Fiat

such as for example those achieved by the two financial companies of the Agnelli
family IFI and IFIL which will be analysed shortly.
       As a matter of fact the whole investment policy of Fiat management appears as
the application of such scheme:
        a) when the management of automotive activities, and cars in particular,
achieve relevant results generating considerable financial resources, the management
of Fiat carried out “experimental” investments by diversifying into industries which
are believed to be promising;
        b) if the favourable trend results to be brief, it is almost unavoidable that
positions acquired outside the automotive business is sold after a short stage of direct
       c) instead if the growth in the core business is long enough to sustain a
prolonged direct ma nagement, the maintaining of the divestment of the activity
depends whether such activity has reached a relevant competitive weight, capable of
placing it within a restricted oligopolistic range;
        d) to this respect Fiat uses the concept of core business, also because it is that
most widely supported by US managerial literature, but as a matter of fact what is
placed within the “core” and “non core” areas does not depend upon the technological
homogeneity with the automotive industry, but whether some activity is part of the
leading oligopoly which controls the market. Such market could be the Italian
domestic one for some industries whose internationalisation process is restrained by
juridical or tariff barriers (such as the “Publishing and Communication” or the
“Insurance” ones), or the European or worldwide ones if the internationalisation of
markets is a consolidated reality.
        Given that for the Fiat Group automotive is referred to as “core business” and
cars are the reference point within that, clearly more relevant than commercial
vehicles and agricultural and earth moving equipment, one should see that the
component industry, and auto components in particular, belongs to the core business
to a wider extent than such two industries and that of automated production systems
led by Comau, not to speak about “Publishing and Communication” and “Insurance”.
However it is known that the Magneti Marelli group, after some partial sales, already
materialised in 1999 with the sale of “rotating machines”, “fuel control systems” and
“lubricants”65 is due to be broken into parts and sold to international automotive
component manufacturers. Moreover, Magneti Marelli profitability is not astonishing,
but certainly higher than other activities considered not for sale as integral part of the
“core business”.
        But here what comes into play is mainly the fact that Magneti Marelli cannot
enjoy a relevant oligopolistic weight which places it within the restricted group of
industry leaders. Fiat during the years has carried out many initiatives of grouping and
rationalisation of the sector, as shown in Fig. 18, right with the aim of providing it
with the necessary “weight”, but unfortunately the evolution of the international
globalisation in the industry has been so fast that the g of a leadership position

   The lubricant division of Magneti Marelli, recently sold, was traditionally one of the most profitable
divisions in Magneti Marelli, and hence appeared as one of the activities capable of a sustained value
creation for shareholders.

Volpato - Fiat

would have required a policy of acquisitions so vast and urgent to be practically
       On the other hand one must ask himself whether Fiat would have sold Telettra
in case of a positive outcome for the agreement between Fiat and Stet, financial
company of the IRI group, leading entity in telecommunications, which had
materialised into the Telit company, through the coupling of Telettra and Italtel, with
the aim of establishing, with the support of Mediobanca, the national pole of
        In the end the guiding principles of the policy of acquisition and divestment of
the Fiat Group seem deeply influenced by a sort of path dependence linked to the
history of the company and in particular to its position of undisputed leader in the
internal market and then of member of a restricted group of manufacturers in the
European and then worldwide landscape, ruling out solutions as a possible merger
with the DaimlerChrysler Group which would have inevitably led to a loss of
autonomy. This means also that the management of Fiat tends to discard as a matter of
principle the possibility to play the outsider role in industries with high growth rates
but with high risk, where an aggressive company, with a winning managerial or
technological idea, could generate increases in value for shareholders by far higher
than those traditionally afflicted by excess capacity on a worldwide scale like
automobiles. On this standpoint the management of Fiat shows no interest towards
operations which are limited on the investment side, but aimed at valorising own
entrepreneurial ideas (or belonging to small emerging companies), to be sustained
through forms of joint venture.
        In theory a large group as the Turin one, with a vast international experience,
solid commercial relationships with a wide range of large international groups and
markets, would seem the ideal partner to invest in a range of initiatives quantitatively
small, on the investment standpoint, but with high risk and returns even higher in case
of success. The added value which Fiat could place into these kind of joint- ventures
would be to limit the risks to which firms without a management with international
stature and links - which instead the Fiat Group could provide - would be exposed.

Volpato - Fiat

Fig.18 – Fiat Group Investments and Divestments
                  Sectors             1970-1974     1975-1979     1980-1984     1985-1989      1990-94      1995-1999

                                    No.inv No.div No.inv No.div No.inv No.div No.inv No.div No.inv No.div No.inv No.div Total

             Automobiles              1             1             2      1      3             3             1              12

        Comme rcial Vehicles          1                           1             1             1                             4

Agricultural & earthmoving Equip.     1             4             1             3             3      1      1              14

       Metallurgical Products                                            1                                  1               2

             Components               1      1      5                           4      1      3      5      4      1       25

  Automated Production Systems                                                                              2               2

                 Aviation                           1                           1                                           2

   Publishing & Communications        1      1             1                                         1                      4

                 Insurance                                                                    1             1               2

                  Others                            1      1      2             2      1      2                    2       11

                   Total              5      2      12     2      6      2      14     2      13     7      10     3       78
Source: Fiat Annual Reports

Volpato - Fiat

9. The Research & Development Policy of Fiat

9.1. Research activities as a whole

        Research and development activities have always played a relevant role in
building the competitiveness of the Fiat Group even though, as it will be shown later,
the trend of such investments over time has been influenced by the economic trend of
the various company businesses. In absolute terms the Turin group represents one of the
largest research centres in the Italian economic system, with an expense that in the year
2000 amounted to 1,725 million euro. The whole of R&D activities are carried out in a
range of centres, of which many are located within manufacturing plants, mainly with
respect to new product design and development. On the whole the Fiat Group has 131
Italian and foreign R&D centres which in the year 2000 have involved 13,000
technicians and researchers.
        With respect to the activities of base research the Fiat Group has some
specialised centres which operate in a “horizontal” way, with effects on all Group
sectors, such as the Centro Ricerche Fiat – CFR (Fiat Research Centre) and the
company Elasis.

9.2. The Fiat Research Centre

        With a wealth of particularly high-tech equipment, over 900 technicians and
researchers, with a network of over 1,000 external researchers, often represented by
scientists and university scholars, the CFR is the most important Italian private research
centre which operates not only for Fiat sectors but also for other entities which are
external to the Group, in general for small and medium Italian firms. In the year 2000
the Centre has transferred to the many Group sectors 110 new produc ts/processes and
156 operational methodologies, and has carried out over 300 initiatives of consulting
and technological transfer towards suppliers of the Fiat Group and towards other small
and medium firms.
        The strategy of internationalisation of the CRF has led over recent years to a
wide participation to European Union research programmes. In the year 2000, 49 new
projects have been awarded to the CRF, which, added to the ones previously awarded,
position the CRF as the leader in European research by number of approved projects
within the “Fifth Programme Framework”. On a national base the CFR, in the year
2000, has presented 16 new research projects for a total investment of over 80 million
euro. The relevance of the investment in R&D co- financed by international and national
public institutions must be particularly underlined since it represents a significant
enlargement of expenses for research compared to that managed within the various
manufacturing units of the group, even though understandably the achieved results of
this second kind of activity cannot be appropriated exclusively by Fiat as they are
subject to regulation entailed in contracts of public co- financing of research.
        Among the most important results achieved over recent years by the CRF there

Volpato - Fiat

     -   Multijet, a second generation (1999) “common rail” injection system which has
         many significant improvements compared to the first generation one 66 . The new
         system allows to reduce fuel consumption by 20% compared to other common
         rail systems, allowing also to meet European emission regulations named as
         Euro 4, which will be enforced in 2005. The Fiat solution is particularly relevant
         because the compliance is achieved without costly systems of post-treatment at
     -   The development of the Ecobasic concept car for which over 50 patents have
         been registered (1999). This concept car has a second generation common rail
         diesel engine of 1,200 cc, already Euro 4 compliant and with a fuel consumption
         below 3 litres per 100 km.
     -   The development of a vehicle prototype with fuel cell powered by hydrogen,
         developed with a partial financing by the Italian Ministry of the Environment. It
         is a prototype which has considerably expanded the performance of a
         conventional electric car already manufactured and distributed by Fiat. It is the
         Fiat Seicento Elettra which, thanks to the new device, has seen its fuel
         autonomy grow by 70% with a recharging time of only 10 minutes.
     -   The Concept Tripmate NEA, a vehicle prototype developed on behalf of Fiat
         Auto within Intelligent Transport Systems Programme aiming at high safety
         standards and at expanding the driver communication potential through new
         opportunities of Information and Communication Technology.
     -   A new commercial vehicle required by the Iveco company, head of the Fiat
         group for the commercial vehicle sector, named InfoDaily, which allows to
         access a range of integrated services: mobile telephony, traffic information,
         remote roadside assistance, logistics tracking management, tele- navigation, tele-

9.3. The Elasis company

        Elasis is a company established by the Fiat Group with the aim of developing in
Southern Italy a technical-scientific network providing innovation to the manufacturing
units of the group. Its structure encompasses 7 R&D centres and over 1,000 researchers
and technicians. The most relevant competences of Elasis are focussed on the area of
vehicles, telecommunications, aeronautics, environment/safety. Virtual reality
techniques are used to develop new vehicles and to fine-tune new control strategies for
electronic systems which manage the main vehicle functions.
        The agreement between Fiat and General Motors had an important impact over
the activity of Elasis which has launched the study of a new engine particularly aimed at
fuel economy and the design of a new gearshift/transmission with reduced size and wide
fields of application. They are examples thought mainly towards common platforms for
the new Fiat and General Motors models, in the medium- high product segments.

   As it is known also the first “unijet common rail” system has been developed by the CRF in 1998 and
later on sold to Bosch for the following industrialisation stage.

Volpato - Fiat

9.4. The evolution of Fiat R&D investment

      In the decade 1991-2000 the policy of R&D investment in the Fiat Group has
marked some variations due to a plurality of factors, among which the most important
    -    The trend in the operating income in the automotive sector;
    -    The choices of focusing the Group around automotive sectors in the broader
    -    The reduction in the degree of vertical integration within the automotive and the
         vehicle sector in particular.
        With respect to the first aspect the most visible element is a marked cyclical
trend in the creation of profit and cash- flow. The Group had enjoyed up to the end of the
1980s a stage of strong expansion, led mainly by the automotive sector which had
achieved a considerable growth also in Europe, but mainly in Italy with record sales
levels and with very high market shares of Fiat, equal to almost 60% of the domestic
market. All makes of the Fiat Group took advantage of such trend (Fiat, Alfa Romeo,
Lancia and Innocenti). During these years the R&D investment was quite high, in the
order of 4.5% of sales turn-over of industrial sectors, with a peak of 5% in the auto
sector in 1990.
        However with the beginning of the new decade the competitiveness of Fiat
appeared on a downward trend both in the European market and in the domestic one,
where the renewed aggressiveness of foreign automakers could be felt in terms of loss
of market share in models of medium segments (“Tipo”) and medium- large ones
(“Croma”) which had entered a downward trend in their lifecycle. Such competitive
evolution had negatively influenced the financial and economic trend of the Group
which had tried at the beginning of the decade to maintain a high level of R&D
investments, kept between 1991-93 over 4.5% of sales in the auto sector and over 4% in
the whole of the group (Fig.19). Unfortunately the competitive landscape had worsened
further in 1993, with a marked sales downturn in the domestic market. Such downturn
had mainly hit domestic makes, whose market share for the first time fell below 45%.
Hence the dilution in financial resources of Fiat turned into a marked reduction in the
R&D investment, which decreased after many years below the threshold of 3% of sales,
with a weight for automobiles comparatively lower than for the rest of the group.
       Such stage of slowing down is still on, mainly due to the negative economic
trend in the auto sector which has recorded negative operational results in 1992 and
1993, modest results between 1994 and 1997, negative results again in 1998 and 1999,
and a modest comeback in the year 2000 (44 million euro in the auto sector). Such trend
cannot but raise worries since, if it is obvious that the adverse economic trend in the
sector makes it harder to find resources to be invested into the development of new
models, it is obvio us as well that an actual comeback in competitiveness can take place
only through a policy of profound renovation of the product range. Such renovation,
however, when looking at the whole of segments, has not materialised, but should be
put in place in 2002 with the new models of Fiat (Stilo, Stilo S.W. and Ulysse), Alfa
Romeo (GTA) and Lancia (Thesis and New Y) .

Volpato - Fiat

                                                               Fig.19 - R&D Expenses as % of Turn-over


                         4,9%          4,8%
                                4,4%          4,2%


                                                                                                                                                    3,0%    3,0%
                                                                   2,8% 2,9%          3,0%                                       2,8%
                                                                                                                                        2,9% 2,9%
            3,0%                                                                                     2,8%
                                                                               2,4%           2,3%                 2,5%   2,4%



                          1991          1992          1993          1994         1995            1996         1997          1998          1999           2000

                                                                                  Fiat Auto   Fiat Gruppo
                 Source: Fiat SpA Annual Reports

Volpato - Fiat

        The pessimism emerging from the mere analysis of data concerning R&D
spending, must however be eased in the light of a policy of redefinition in the whole of
activities of the group aiming at privileging mainly the so-called core business and at
reducing the degree of vertical integration in the automobile sector. In fact with these
two kinds of policies the Fiat Group has redesigned the profile of the group’s borders by
considerably reducing some industrial activities previously carried out internally, and
which being aimed at manufacturing investment goods (railway sector), intermediate
products (fibers) and automotive components required R&D investments. Such
significant transformation in the group structure and in the degree of vertical integration
(reduction of upward activities in the automobile filière) cannot be directly traced
through a simple index of the intensity of R&D expense as the rate of investment
compared to turnover.
       There follows that, in reality, the reprise of R&D investment recorded between
1997 (where a minimum of 2% has been hit) and 3% recorded in the year 2000, has
been greater than what these two figures seem to indicate, since the concentration of
R&D efforts has grown, with focus mainly on total vehicle design, reducing the
involvement in components. To this respect it can be reasonably argued that over the
coming years the total investment is bound to return to levels of excellence, both due to
innovation initiatives stemming from cooperation agreements with General Motors, and
due to the wide renovation program of the whole automobile product range, recently
announced by Fiat Top Management.

10. Fiat’s financial trends and stock quotation

10.1. The financial-economic trend of the Group

        Notwithstanding a stated commitment by Fiat top management to develop a
strategy for value creation for the Group, the results obtained since 1996, year in which
such orientation has become an explicit goal, did not match shareholders’ expectations.
As usual to ascertain the multitude of causes which concurred to determine such result
is quite a complex task. However the main reasons can be grouped as follows:
   -     A negative economic trend in some markets which were important for the
   -     The higher degree of competitiveness in the industries which were considered as
       core business for the Turin company;
   -     A slowdown in the renovation cycle of models, some of which did not achieve
       the expected targets in the market.
        If one looks at the data on total turnover of the Group and for individual sectors
(Fig.20) one can see that turnover has remained high in all sectors, and even m    arking
some significant increases. Such increases are partly due to acquisitions carried out by
Fiat within its globalization strategy.

Volpato - Fiat

Fig.20 – Net Revenue per Sector
                                              1996           1997   1998         1999         2000
Fiat Group Net Revenue            40,244    46,257    45,769     48,123                      57,555
Million euro
Fiat Auto                         21,950    26,201    24,859     24,101                      25,361
Million euro
CNH Global                         4,419     5,284     5,127      5,246                      10,770
Million euro
Iveco                              5,551     5,850     6,649      7,387                      8,611
Million euro
Teksid                             1,012     1,190     1,165      1,682                      1,873
Million euro
Magneti Marelli                    2,998     3,451     3,793      4,062                      4,451
Million euro
Comau                               831       841       843       1,693                      2,440
Million euro
Fiat Avio                           901      1,262     1,361      1,361                      1,491
Million euro
Altre attività                     2,582     2,178     1,972      2,591                      2,558
Million euro
Source: Our elaboration from Fiat Group Consolidated Annual Reports

        This is the case of earth moving equipment and tractors, led by CNH Global,
born after the merger between the US company Case and the previous head of sector
New Holland, and that of automatic manufacturing systems in which Comau, head of
sector, carried out important acquisitions in the USA, France and Germany67 . On the
other hand they indicate that the group companies preferred to carry out a firm defense
of their own market shares even in situations which were objectively difficult, as in the
automobile sector.
        Hence a trend in the operating income (Fig.21) which on the whole is not very
satisfying mainly due to the automobile sector, which in 1998 suffered the impact of the
economic crisis in Latin America, and that of earth moving equipment, due to the costs
of integration among the companies in the sector and the recently acquired Case, which
suffered the hard situation of this market on an international scale.
        The policy of globalization pursued by Fiat has required great investments both
on the manufacturing and on the financial side linked to acquisitions 68 . Such
acquisitions were only for a small part financed through cash flow generated by
operations. The remaining and largest share has benefitted, with respect to the
automobile sector, from the subscription of shares by General Motors, linked to a sale of

     See the part focusing on the analysis of investments.
   Among “acquisitions” one should also consider the two purchasing public offerings moved by Fiat SpA
to acquire 100% of capital of Magneti Marelli (components) and Toro (insurance) for an expense of 3,300
million euro.

Volpato - Fiat

20% of the equity of Fiat Auto and, with respect to automotive components, from the
sale of he “Lubricants” division of Magneti Marelli. On the whole however the financial
resources required by the Group strategy have determined a marked increase in debt,
only partially eased by the sales carried out in non-core industrial activities, as in rail
systems and textile fibers.

Fig.21 - Operating Income
                                     1996       1997        1998       1999        2000
Fiat Group Operating Income       1.225     1.787            746        788         855
Million euro
Fiat Auto                          242       758            (108)      (121)        44
Million euro
CNH Global                         393       601             452        371         45
Million euro
Iveco                              161       202             261        311         489
Million euro
Teksid                              30        53             42          76         101
Milioni di euro
Magneti Marelli                     81        98             56         108         55
Million euro
Comau                               35        27             (1)         43         87
Million euro
Fiat Avio                           34        56             60         109         143
Million euro
Altre attività                     249         8             23         109        (109)
Million euro
Source: Fiat Group Consolidated Annual Reports

        The net financial position in the year 2000 marked net debts for 6,467 million
euro, 2,436 million higher than the previous year. As a consequence the increase in total
interest costs did play a significant influence over the net profitability of the Group.

10.2. Value creation

        The result of the above mentioned trend has determined in the 1996-2000 period
a return on investment for the Fiat Group, defined as a ratio between the annual result
(equal to the sum of the Operating Income plus the Income from participations) and the
average net capital employed, of negative value (value destruction) for all the years with
the only exception of 1997, in which there was value creation for 144 million euro
(Fig.22). Such result was considered clearly unsatisfactory by the top management of
Fiat, and it was generated notwithstanding the improvement in the international
financial trend and the reduction in interest rates by the Federal Reserve and by the
European Monetary Union has allowed a decrease in the WACC for Fiat from 12% to

Volpato - Fiat

10% during the last two years (1999-2000). This means that while in the 1996-1998
period the return on investment necessary to create value had to exceed the threshold of
12%, during the following two years that threshold was just 10%.
      These data show with great evidence the urgency which Fiat had to rapidly
complete the reorganization in the Group activities, and in particular those in the two
most important ones for turnover and investment (Automobiles and Earth moving
equipment) which were responsible for the missed objective of value creation.

Fig.22 - Main financial and economic data
                               1996         1997         1998        1999        2000
Group net income                1,225        1.248         621    353    664
Million euro
Objective return on capital    12.0%         12.0%       12.0%  10.0%  10.0%
Actual return on capital        8.5%         12.8%        7.7%   7.0%   6.0%
Value creation(*)               (607)         144         (714)  (480)  (899)
in absolute term
Distributed dividends           361.1        361.1       353.7   353.7  353.7
Million euro
Market capitalisation          10,108       12,423      13,740  13,734 12,706
Million euro
(*) Difference between the Operating Income of the year, including income from
participations, and the average net cost of capital employed.
Source: Our elaboration from Fiat Group Consolidated Annual Reports

       To this respect it is relevant to fully exploit the synergies which can be achieved
in the automobile sector through the alliance with General Motors which will be
examined shortly.

10.3. Dividends, market capitalization and share value

        In such delicate evolution the management of Fiat carried out a “conservatory”
policy with respect to dividend distribution. Differently from the tradition of US public
companies, in which the policy of income distribution constantly matches short-term
profitability, Fiat has always carried out a policy of considerable re- investment during
favorable years, both to finance expansion and diversification strategies for the group,
on which we have already talked about in another chapter, and to accumulate reserves to
use to level distribution of dividends during less favourable years.
       As shown in Figure 23, Fiat has adopted this policy also in the five years
considered during which the low profitability rate has not prevented a distribution of

Volpato - Fiat

dividends in the last three years as well, which was only marginally lower than in years
with a more brilliant economic result. However the policy of dividend support carried
out by Fiat has turned out insufficient to sustain the trend in stock values 69 which have
recorded a downward trend for some time.
        In general, considering the trend in stock values during a large time span (from
1984 to December 2000), one can see that the stock has recorded rather big movements,
clearly linked to the trend in financial and economic results, but also due to speculative
rumours on financial operations of extraordinary scope, which however did not happen.
       Hence at the end of 1986 there was a strong upward trend in stock values due to
the favourable financial-economic trend of the Group, which reached its peak with the
acquisition of Alfa Romeo which Fiat successfuly won over Ford. In January 1997 the
value of common stock of Fiat SpA was at its historical peak of 44.4 euro.
        However the stage of contrast between Cesare Romiti, Chairman of the Group,
and Vittorio Ghidella, Chairman of Fiat Auto, which became evident in 1988, created a
climate of uncertainty which was exacerbated further by the resignation of Vittorio
Ghidella and by the slowdown in the renovation in the product range which came after
it. Then came a stage of reduction in the competitiveness of the automobile sector,
which influenced the whole group with a very negative effect on the financial and
economic results, aggravated further by the market crisis during the early 1990s. During
that stage the stock value reached its minimum of the 1994-2000 period, with 11.1 euro.

  As it is known the stocks of Fiat SpA are divided into three kind of shares: common (with right to
vote), privileged and savings. To keep things simple, here we refer just to common shares.

                                                                                                                                               Volpato - Fiat








     Source: Milan Stock Exchange









                                                                                                    Fig.23 - Fiat SpA stock value by quarter


Volpato - Fiat

       Only with the turnaround in sales which followed the launch of the Fiat Punto
model in 1994, which strengthened further in 1995, the stock value showed signs of
take-off, which however did soften already in 1996. Later because of rumors on an
incoming financ ial operation by Fiat, involving the automobile sector, generated an
increase in the stock value mainly due to speculative movements. The most credited
hypothesis around the stock market, and reinforced by the analysis of highly known
financial consultants, was that negotiations were in place between the Daimler-
Chrysler Group and Fiat for the de-merging and sale of Fiat Auto to the German-US
        Such operation, besides the difficulties which emerged later on within the
Daimler-Chrysler Group for the negative trend in sales of the US brand, did have an
industrial logic of its own, and such logic fed a flow of upward negotiations in stocks
which rapidly exceeded 41 euro.
        However the rumors in the stock market were based upon the hypothesis, later
on disconfirmed by facts, that not only the Agnelli family but also the Honorary
President Gianni Agnelli had matured the idea that in the new era of globalization the
opportunities of comeback for Fiat Auto could materialize only within a mega- merger
which gave the lead of the automobile sector outside Fiat and outside the Agnelli
family itself. It was a wrong hypothesis, particularly in a stage in which Fiat was
preparing to celebrate the historical record of a century of life of the company and of
its automobile brand. If one had considered the effects of such a traumatic event, as
the sale of automobile activities of Fiat, would have inevitably produced for the Turin
company, and for the international image of the Agnelli family and for the charismatic
figure of Gianni Agnelli, it would have been evident that such hypothesis could
materialize only in case of a crisis with no way out in the auto sector within the Fiat
Group, which clearly was not the case.
         However it is worth pointing out that the analysts of consulting companies and
institutional investors did express some negative views over the agreement between
Fiat and General Motors. For some the critiques were based upon the missed
opportunity in increase in the stock value, which in fact marked a rapid and
considerable decrease. For other, not conditioned by expectations for higher stock
values, skepticism derived from the fact that it was not clear yet in which way the
agreement would have produced the conditions for the management turnaround which
was believed to be necessary not only for Fiat Auto, but also for General Motors.
Hence an attitude of wait-and-see with some skepticism.

11. The GM-Fiat alliance

11.1. The objectives of the alliance

        General Motors is the largest automaker with an annual production (as of
2000) of over 8.5 million vehicles, equal to 15% of world production, with total
employment of 386,000 units and turnover over $ 184 billion, 87% of which achieved
in vehicle sales. Hence it stands out as the best positioned automaker from the
international competitive perspective, to the point that its commercial presence is sig-
nificant in all the main commercial areas, with market shares equal to: 26.7% in North

Volpato - Fiat

America, 9.3% in Europe, 16.3% in the whole of Latin America, Africa and Middle
East, and 3.7% in the Asia-Pacific zone.
        However the General Motors giant seems to have lost part of its past dynamic
attitude, and features some areas in which financial and economic results are not as
brilliant as one would expect for such an automaker (for example in the USA) or they
even record some losses (as Opel operating in Europe). During recent years GM has
also suffered the confrontation with its traditional competitor, Ford Motor Company,
who managed to achieve better results and to feature an image of higher
aggressiveness. For example, the recent decision by General Motors to stop
manufacturing vehicles with the Oldsmobile brand appears as an evident sign of
weakness which in some way had to be balanced by some wide ranging initiative
which could boost image of the Detroit automaker.
        General Motors had and certainly has the resources to carry out acquisitions,
however for the top management an initiatives based upon an alliance features a set of
advantages which are believed as essential for the new competitive climate, as the
company recently underlined:
         “Alliances are sometimes the only option that available companies will
consider. Quite simply, we are not in the business of acquiring company we cannot
work with on a partnership basis, because the auto business is just too hard for us to
be fighting with our own partners. With an alliance we enter the relationship knowing
that our partner also wants to enter the relationship. With some of our current partners
we chose an alliance because tha t’s the way our partners wanted to go.
        Alliances ensure that everyone, including management talent, stays actively
engaged. And we need good management around the globe, especially in places like
Japan, where GM’s presence has been limited since World War II. We are pleased
and enthused to have the leadership of Fiat Auto, for example, in control of their
brand and driving for mutual synergies just as hard as we are.
        Alliances sidestep much of the cultural and market place trauma that come
with a full merger. We avoid the typical concerns that arise about who is taking over
whom, or who is winning, and instead can focus on getting business results. That’s
constructive and important, because cultural disconnects can destroy morale and
ultimately cost you in the marketplace.
        Finally alliances are capital efficient. They provide many of the benefits of
mergers and acquisitions without the capital commitment from one side or the other.
This allows us to focus more of our financial resources on the biggest benefit of
alliances: innovative products and services”70 .
        Finally one can remember that in a heavily oligopolistic competitive landscape
as that of the current automobile industry, an agreement with a relevant partner has
the advantage (which is not negligible ) to prevent agreements of the partner with
other competitors. From this standpoint any form of alliance has a “defense” value,
compared to antagonist agreements, which nobody can afford to neglect.
        The Fiat Group has undoubtedly even more important reasons to pursue an
agreement capable of strengthening its competitive opportunities without resorting to
more radical moves. On the one hand the Italian automaker could have some
difficulties in finding the financial resources to acquire a major partner. From this

     General Motors Stockholder News, September 2000.

Volpato - Fiat

standpoint Fiat had already shown to prefer moves which were financially less
burdensome, but significant under the competitive profile in other industries of
interest for the Group such as that of Commercial Vehicles, of Tractors and earth-
moving equipment, of automated production systems. But at the same time an
acquisition or a merger with other partners, such as the hypothesis brought forward by
the specialized press over an agreement with Daimler-Chrysler, would have been
quite a shock for the Italian public opinion.
        One must not forget that, differently from many automakers, the Fiat Group is
not a public company but a company controlled by a family whose presence within
the top management has always played a relevant role since its establishment (1899)
with the presidency of Giovanni Agnelli which lasted until 1945. A role which was
maintained also during the presidency (from 1946 to 1966) of Vittorio Valletta, a
manager with great managerial capabilities but completely loyal to the interest of the
Agnelli family 71 . The identification between the company and the family has become,
if possible, even more marked and definitive with the long and charismatic presidency
of the “avvocato” Gianni Agnelli, which has led the group in first person from 1966 to
1996, to then take on the role of honorary president, formally more marginal, but not
less relevant with respect to fundamental choices of strategy. The mix between the
image of the group and the person of Gianni Agnelli is so deeply rooted, even
internationally, that a sale, and even a merger among equals with other makes, would
have appeared as a sort of “treason” with respect to a family tradition founded over a
century before by Giovanni Agnelli, the grandfather of Gianni Agnelli.
        However that Fiat had to take some important initiative was a true fact. On the
one hand the whole of makes controlled by the Fiat Group: Fiat, Alfa Romeo and
Lancia 72 had suffered some competitive weakening during recent years, mainly in
Italy but also in Western Europe, decreasing from a share of 42.6% and 11.73% in
1997 to 35.4% and 9.5% in 2000. On the other hand in South America the brilliant
trend in sales of models derived by the “178” project had suffered a marked delay due
to the economic crisis which affected those countries starting in 1998.
        Certainly the Fiat Group could have kept on going on its own, but it would
have been a highly risky move. A negative trend in the domestic market or in Europe,
or the unsuccessful launch of a new model which was important to the sales volumes
of the Turin company would have been enough for the top management to face a
situation hard to manage. Hence the need to study an initiative capable of offering
new important opportunities both on the cost reduction side, and on the enhancement
of product quality perceived by consumers 73 .
        If one accepts the view that ruled out the possibility to carry out an initiative
which could have reduced the “sovereignty” of the Turin automaker 74 there is no
doubt that the alliance between Fiat and General Motors appears the best which could
be designed. On the one hand there is a partnership with the first world automaker on
     See Castronovo [1999].
 The Fiat Group controls also the Ferrari and Maserati makes, which however do not fall within the
GM agreement and which anyway enjoy, given their specific traits, ample managerial autonomy.
  See the interview to the Managing Director of Fiat Auto: “C’est long à changer une reputation”, in
L’Auto Journal, 8 Mars 2001.
   To this respect the term “sovereignty” has a precise meaning if one considers that quite often the
international press identifies Gianni Agnelli as the king of the Italian automobile industry and the
Agnelli family as a true dynasty.

Volpato - Fiat

initiatives capable of generating significant cost reductions, and on the other hand the
three makes of the automaker maintain their individual nature: Fiat, Alfa Romeo and
Lancia can be turned around even in higher segments, in which Fiat suffers a
structural weakness derived from specific traits of the Italian market and from the
Italian government’s fiscal policy carried out for years towards motorization75 .

11.2. The structure of the agreement

        One of the advantages of an alliance which does not entail mergers or
company acquisition consists in the speed with which one can move from the stage of
negotiation to that of initiatives useful on the competitive side. After a few months of
confidential contacts, the agreement has been made public, but still in the definition
stage on 13th March 2000. The end of the juridical aspects of the agreement took
place on 24th July of the same year and at that time priorities were set at the highest
level, to be carried out as soon as the European Union authorized it, which took place
on 16th August76 . In such way already on 13th September it was possible to name the
Board of Directors and the main Top Executives of two 50/50 joint companies
between General Motors Corporation and Fiat Auto SpA. The latter is the head
company of car manufacturing activities, controlled by Fiat SpA, holding of the
Italian industrial group, which in turn controls other industry holdings which form the
economic galaxy of Agnelli Family.
        These two companies in joint-venture, having a twin and mirror organization
between the two mother companies, are GM-Fiat Worldwide Purchasing BV, with
operational headquarters in Ruesselsheim, and Fiat-GM Powertrain BV with
operational headquarters in Turin, whose structures started to officially operate on 1st
January 2001. Such JVs play a role of considerable importance with respect to full
manufacturing cost: in fact the weight of purchasing and manufacturing of the
powertrain systems represents about 80% of the whole vehicle manufacturing cost.
        The alliance is geographically limited to South America and Europe. This is
due to the fact that in North America there isn’t presently any “strategic room” for
such initiatives, since GM does not suffer particular competitive pressures. Vice
versa, Latin America represents a market which the industry competitors judge very
relevant for its growth potential, while in Europe competition has become particularly
strong and, in such sense, the alliance aims at achieving a cost leadership.
        The establishment of a 50/50 joint- venture to manage purchasing has been
made easier since the amount of purchasing costs of the two companies was basically
the same.
        Alongside the establishment of the two above mentioned JVs, an agreement of
cooperation in financial services was signed, plus common initiatives in many other
functional areas, such as informa tion technology, logistics, quality, R&D,
engineering, etc.

     On this particular aspect see Volpato [1996].
  The European Commission Release said: “The Commission took the view that although Fiat and
General Motors will coordinate, on an exclusive basis their activities in the production of powertrains
and in the purchasing of components and parts, the alliance should benefit consumers. The
Commission noted comp onents accounted for a large part of the cost of new cars , so any savings the
two firm make should be passed on to the consumers”.

Volpato - Fiat

       The main objective of the agreement, as for all the other mergers and
acquisitions carried out in the automobile industry over recent years, is cost reduction:
when such agreement operates at full pace it should allow the two companies to save
on the whole 2 billion euro. In fact the motto of the agreement is: “Allies in costs,
competitors in the markets”.
       With respect to purchasing activities Fiat Auto has declared to have achieved,
thanks to this JV, the first positive results already at the end of the year 2000.

11.3. The juridical and financial aspects of the agreement

         Taking into account that the agreement between the two partners involves
mainly the manufacturing areas, since on the commercial standpoint the various
makes managed by the two automakers will keep on operating separately, it involves
directly the activities carried out in Europe and in Latin America. This means that
from the perspective of General Motors the makes involved are basically Opel,
Vauxhall, Saab and Chevrolet (the latter for Latin America) while for Fiat the makes
involved are those directly controlled by Fiat Auto: Fiat, Alfa Romeo and Lancia. The
strategic industrial alliance with General Motors has implied, during the year 2000, a
reorganization of the company structure in the Fiat Automobile Sector. Since 1st July
2000 Fiat Auto SpA (now Fiat Auto Partecipazioni SpA) has de- merged its
operational activities which have been conferred to a new head company Fiat Auto
Holdings b.v. At the same time General Motors Corporation has acquired a stake in
Fiat Auto Holdings B.V. for 20% and Fiat has acquired a stake of about 6% in
General Motors Corporation itself. The considerable gain generated by the sale of
20% of Fiat Auto Holdings b.v. equity to General Motors has allowed to launch many
initiatives of industrial restructuring and capital strengthening of the company which
will be mostly completed in 2001, for which some non-current costs have been
         The equity swap did not take place at market values, but rather on the basis of
the evaluation of the company branches which have been conferred. By considering
the market prices at that time, the operation meant that the whole equity of Fiat Auto
was estimated at about 12 billion dollars, that is about 1.5 times net equity. Such
estimate corresponds also to the market capitalization of the whole Fiat group (of
which Fiat Auto represents about half in terms of sales), before that rumors on
imminent agreements triggered upward speculation.
         As previously said the equity of the two joint-ventures: GM-Fiat Worldwide
Purchasing BV and Fiat-GM Powertrain BV is divided exactly at 50% between the
two partners and the two companies have respectively a Chairman appointed by GM
and a CEO appointed by Fiat Auto and vice versa. Furthermore the operational
headquarters is located for the first JV at the headquarters of Opel and for the second
JV in the Mirafiori industrial complex in Turin (previously headquarters of
mechanical activities), where the Fiat Auto headquarters is also located.

Volpato - Fiat

11.4. Synergy savings

       According to calculations proposed by the partners themselves, the economies
deriving from the integration process should materialize already in 2001 to then get to
2005, thanks to the contribution of economies allowed by the plan of convergence in
engines and transmissions and then by common architectures, with a total of 2 billion
euro (Fig.24). Such amount, if related to the sum of revenues highlighted by
consolidated balance sheets of Fiat Auto and GME in 2000 (equal to about 53 billion
euro), would provide a percentage of about 3% (if one includes also GM in Latin
America). It is a significant value equal to the rate of profitability of an automaker
which financial analysts would certainly define “in good health”.

                                     Fig.24 - Synergy Savings
                                             ( Euro Billion)



                            2001                     2003                     2005

                         Purchasing          Powertrain          Platforms        Other
         Source: Fiat
        Just for the sake of comparison one could say that in 2000 the whole
automotive division of General Motors (with a production of 8.5 million units) totaled
profits for 2.3 billion dollars equal to about 2.4 billion euro, but with sales equal to
148.1 billion dollars, which corresponds to about 150 billion euro. As one can see a
total saving for Fiat Auto and GME of 2 billion euro would represent a considerable
amount, which would allow a combined strategy both on sales prices reduction and
market share increase, and on profit increase, of which both companies have urgent
need, to be invested in future programs of quality enhancements and strengthening in
higher segments which are known to be the weak point in the product offer of Fiat
Auto and GME.
        With respect to the break-up of cost economies the data provided by the two
partners highlight a significant saving deriving from the synergies in purchasing77
which will materialize since the start of the cooperation. Later one, albeit representing
the largest source of savings in the timeframe considered, even the remaining savings

  In the calculation of savings the category “Purchasing” does not include the purchasing of parts and
components linked to the development of “Powertrains” and of “Architectures”.

Volpato - Fiat

should become considerable, mainly due to the plan of convergence of engines and
transmissions and the sharing of architectures. It is significant that by adding
Purchasing activities to Powertrain manufacturing one obtains on average 80% of the
total manufacturing cost of a vehicle, while the remaining 20% corresponds to the
activities of final assembly of the product.

11.5. What effects on corporate governance?

        The alliance is still too recent to make a sure judgement on the outcomes
which it will generate on the corporate governance of the Fiat Group. In the
meanwhile the top management itself underlines that: “the alliance has taken off in its
best conditions. At the end of last year [2000] Fiat has already marked in its income
statement a net benefit in purchasing which equals to euro 20 million. Synergies will
increase to about euro 200 million in 2001, to reach one billion in 2005”78 .
Undoubtedly however, on the financial-economic evolution standpoint, perspectives
are encouraging since the synergies which could be achieved are significant, and they
should contribute in a marked way to the strategy of value creation. From this
standpoint the fact that General Motors is a shareholder for 20% of Fiat Auto Holding
b.v. represents another stimulus for Fiat to restore an adequate level of profitability of
its main controlled company.
        However it is likely that the Fiat-GM alliance will generate interesting results
on other fields. For example already during recent years the financial communication
carried out by the Turin company towards private and institutional investors had
clearly improved through a rich program of initiatives aimed at improving “investor
relations”. Meetings have been held at the time of publication of annual Balance
sheets and mid- year reports, as well as seminars for discussing the management trend
and the strategies in the main sectors and “roadshows” which allow direct contact
between the top management of the Group and the financial analysts of the main
international markets, with particular attention for London and New York 79 .
        In general it appears hence most likely that the Fiat-GM cooperation will more
and more bring along also within the Italian Group management habits and practices
which are consolidated in the US environment.

     Fiat SpA Consolidated Annual Report 2000.
     See for instance the recent Fiat Group’s Usa Roadshow Presentation in New York of June 2001.

Volpato - Fiat

12. Conclusions on Fiat’s Corporate Governance

        At the end of the reconstruction of the long and complex history of Fiat SpA,
the conclusions which can be drawn highlight how the company during recent years is
moving on an evolutionary path which clearly brings closer the corporate governance
of the company, still tightly controlled by a family group, to the schemes of a more
open and mature capitalism, as that of Anglo-Saxon style. In such sense the introduc-
tion of value creation for the shareholder as a value of reference in the elaboration of
company strategies has already become a component in the culture of management
and a clear element of benchmarking in determining bonuses attrib uted to managers in
the various sectors.
        However such new awareness, stated and operated since 1996, has clashed
with the difficulties generated by harder international competition in the automotive
sector on a global scale, and with the financial-economic difficulties which came after
        As it is known the response strategy of Fiat was to carry out a vast process of
refocusing of the Group on core businesses defined as those areas of activity in which
the company has reached or plans to reach positions of global competitive excellence.
As a consequence it is right the capability to achieve such final objective the proof of
validity of the adopted path, and the basis of request for trust directed to majority and
minority shareholders.

Volpato - Fiat

Appendix No.1
Fiat Group’s Relevant Financial Initiatives
Year                                          Initiative
1973 Establishment in Brazil of Fiat Automòveis between Fiat (50%) and the State of Minas Gerais
1973 Establishment of the Fiat Allis group with equal shares between Fiat and Allis Chalmers. The
       two companies merge all activities in the earth moving equipment industry.
1974 Agreement between Fiat and the German company Klockner-Hunboldt-Deutz AG (KHD) of
       Köln for the establishment of the Iveco company with headquarters in Amsterdam. Fiat acquires
       80% of shares.
1975   The reorganisation of the manufacturing structure carried on with the demerging and
       establishment as company of Ages (Components), Fiat Lubrificanti (Lubricants), Sepa
       (Electronics for automation).
1975   Fiat acquires the whole capital of Telettra SpA, specialised in the design and manufacturing of
       telecommunication systems. The group had acquired an initial participation of 35% in the
       company already in 1968.
1975   Fiat buys 20% of stock of the Pietro Laverda company (agricultural machines and motorcycles).
1975   Sale of Radiomarelli and exit from the industry of radio equipment and tape recording.
1976   Agreement with the Lybian Arab Foreign Bank (Lafico) which buys the capital increase of Fiat
       from 150 to 165 billion ITL, underwrites the issue of 90 million convertible bonds at 1,000 ITL
       each and lends Fiat USD 104 million.
1976   Fiat acquires the majority of Gilardini SpA stock.
1976   Magneti Marelli acquires the company York (batteries).
1976   Establishment of Fiat Aviazione SpA and the research centre (Centro Ricerche Fiat SpA).
1976   The company Piemonte Sviluppo Industriale SpA changes name into Fidis SpA, financial
       company with participation in manufacturing activities of the Fiat Group.
1977   Fiat Trattori (tractors) buys the companies Ghepardi, Saimm and Toselli specialised in the
       manufacturing of agricultural machines.
1978   The share of Fiat in Fiat Allis (earth moving equipment) is increased from 77% to 80.2%.
1978   Gilardini (components) incorporates Whitehead Motofides and Simonini.
1979   Fiat Auto SpA is established, grouping the makes Fiat, Lancia, Ferrari, Autobianchi. With such
       move Fiat Spa becomes a financial company with participation in firms grouped in 11 industries.
1979   Establishment of Marelli Autronica SpA.
1979   Gilardini acquires Castagnetti (components)
1980   Established in Argentina Sevel SpA, with equal participation by Fiat Auto and P.S.A.
1981   Fiat SpA increases its stake in Fiat Allis from 80.2% to 88%.
1981   Fiat participates to the establishment of Gemina Spa with an investment of 30 billion lire. The
       firms acquiring Gemina by Montedison are, besides Fiat: Mediobanca, Invest, Pirelli and SMI.
1982   Fiat sells its own siderurgical activities to Finsider (IRI) for ITL 64 billion.
1982   Sevel Argentina is sold to local investors (Macrì Group).
1982   Fiat acquires a minority stake in KHD in Iveco for ITL 367 billion acquiring control of the whole
       of Iveco capital.
1983   Fiat SpA acquires the relative majority stake in Snia (fibres) for ITL 21 b illion.
1985   Fiat acquires the whole of Fiat Allis (J.V. with Allis Chalmers in 1973) for ITL 18 billion.
1985   Fiat sells majority of Ventana to Compagnie International des Wagon Lits.
1986   Fiat acquires the whole of shares by Brazilian Fiat Automòveis.
1986   Fiat repurchases Lybian stock for ITL 1,485 billion.
1986   Fiat acquires a participation in Westland (helicopters) for ITL 65 billion.
1986   Fiat acquires Alfa Romeo SpA for ITL 1,050 billion.
1986 Sale of the company Altena (braking systems) to Allied Signal.
1986 Establishment of Iveco-Ford Truck Ltd. in Langley (UK) aiming at manufacturing and
       distributing under the two makes commercial vehicles over 3.5 tons.

Volpato - Fiat

1986 Fiat acquires Fratelli Borletti SpA (components).
1987 Fiat acquires control of Snia BPD
1987 Joint-venture Fiat-Matra with the establishment of Ufima

Year                                              Initiative
1988 Fiat incorporates the company Pietro Laverda into Fiat Allis changing its name in Fiat Geotech.
1988 Fiat increases its stake in Telettra Española from 49% to 90%. The remaining 10% is acquired by
       the Compañia Telefonica Nacional. In 1988 Fiat acquires whole control of Telette Norge.
1989   Fiat acquires 51% of car maker Innocenti.
1989   Absorbing of companies: Sepi SpA and Autoflug (components).
1990   Fiat acquires control (80%) of Ford New-Holland.
1990   Toro (insurance) and Rinascente (retailing) enter into the Fiat Group.
1990   Fiat acquires 49% of car maker Maserati. The remaining 51% remains owned by the De Tomaso
1991   Iveco acquires the Spanish company Enasa-Pegaso (industrial vehicles) previously controlled by
       the Istituto Nacional de Industria (INI) and renames it Iveco-Pegaso S.A.
1991   Establishment of New Holland Geotech from the merging of Ford New Holland and Fiat
       Geotech. Fiat holds 80% of shares.
1991   Fiat deals some agreements with the French group CGE (later on renamed Alcatel Alshtom). In
       telecommunications there is the assignment to the Alcatel of Telettra, renamed Alcatel Italia,
       with a gain of ITL 1,640 billion. In the battery industries there is the purchase by Fiat of
       Compagnie Européenne d’Accomulateurs (CEAC). On a broader level Fiat acquires 2% of
       Alcatel Alshtom shares, with which Fiat becomes the second shareholder after the French
       company Société Générale, and the sale to Alcatel Alshton of Fiat shares equal to 2% of capital.
1991   Sale of Cavis SpA to French Labinal.
1992   Fiat establishes Fiat Auto Poland acquiring Fsm from the Polish State. The acquisition of shares
       implies an investment of USD 650 million.
1992   Sale of Magneti Marelli activities in batteries to the French company Ceac S.A.
1993   Acquisition of whole control of New-Holland Geotech renamed New Holland with activities
       grouped along two sectors: a) tractors and agricultural machines, b) earth moving equipment.
1993   Fiat acquires whole control of Maserati.
1993   In Brazil Magneti Marelli acquires ABC Autronica S.A.
1994 Many component activities are sold to foreign companies: to the French Labinal (cables), to the
       US Allied Signal (safety systems) and to Lear Seating (seats).
1994   Gilardini is merged with Magneti Marelli and Magneti Marelli SpA is established as head of
       component activities of the Fiat Group.
1996   International placement of 46.5 million New Holland N.V. shares, equal to 31.2% of capital at a
       unit price of 21.5 USD for a total value of USD 950 million.
1997   Acquisition of the Brazilian group Cofap, national leader in suspension manufacturing.
1997   Fiat sales to the Société Générale its own share (2%) in Alcatel Alshtom with a return of 590
       billion lire and a gain of about 200 billion.
1998   Sale of control participation, equal to 45.9% of ordinary capital of Snia BPD through placement
       of shares in the national and international markets. The initiative generated cash for ITL 708
       billion, with a gross profit of ITL 214 billion, and a reduction of net invested capital for about
       ITL 1,900 billion.
1998   Sale of 80% of “rotating machines” activities and “fuel control systems” to Japanese company
1998   Acquisition by Magneti Marelli of European activities of Midas specialised in quick service.
1999   Integration of foundry activities of Renault S.A. in Teksid. At the end of the operation Fiat holds
       66.5% and Renault 33.5%.
1999   Acquisition of French company Seima (lighting) and establishment of joint-venture Automotive
       Lighting Holding with control of worldwide activities, with German company Bosch.

Volpato - Fiat

Year                                         Initiative
1999 From 23th Aug 1999 Fiat shares are converted in €, with a rounding by defect of nominal value
       of ITL 1,000 to 0.50 euro, and then regrouped with a new common share (there are three types of
       shares: ordinary share, privileged share or saving share), for a nominal value of 5 € every 10 old
       shares. Subsequently also the Fiat ADR (issues by JP Morgan at the New York Stock Exchange),
       which represent 5 shares are grouped in the ratio of 1 new ADR for every two in the market;
       hence a Fiat ADR now equals one share.
1999   Establishment of Case New Holland Global (CNH) from the merging of New Holland and Case
       Co. (Fiat share at 71%) with an investment by Fiat equal to $ 4.5 billion.
1999   Public purchase offer for Toro (519 million euro), Comau SpA ( 69 million) and Magneti Marelli
       (278 million) end with success increasing Fiat share respectively to 98% for the first company,
       96% in Comau (renamed Comau Systems SpA) and over 99% in Magneti Marelli.
1999   Fiat sells 51% of Fiat Ferroviaria to French company Alshtom (153 million). The operation
       entails a “put & call” option which grants Alshtom the right of purcahse and Fiat the right of sale
       of the remaining 49% over the next two years.
1999   Fiat Spa acquires the group Progressive Tools & Industries Co. (Pico), US leader in body
       manufacturing (306 million euro for the acquisition and further 200 million for capital increase)
       and Comau Spa acquires 51% of French company Renault Automation (engine component
2000   Strategic alliance between GM and Fiat Auto through acquisition by GM of 20% of Fiat Auto
       capital for a total of USD 2.4 billion. This translates into a whole valuation of Fiat Auto at USD
       12 billion. Fiat SpA has acquired for a similar amount a share of 5.7% of GM, hence Fiat
       becomes the major GM shareholder. The operation has generated at consolidated level a gain of
       euro 1,780 million.
2000   The whole of operations of strategic repositioning of the Group in the different industries has
       implied a remarkable financial commitment, over 6,000 million euro, a value which was never
       achieved in the past.

Volpato - Fiat


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