9-812-128 MARCH 28, 2012

JOHN A. DAVIS

BERNARDO BERTOLDI

ROBERTO QUAGLIA

The Agnellis and : Family Business Governance in a Crisis (A)

On Saturday evening, May 29, 2004, left the funeral of Umberto , which took place at the family’s ornate private chapel in the Cimitero di Villar Perosa outside of Turin, saddened and concerned about the challenges facing the he now led. The public outpouring of affection during the day, as Umberto’s body lay in state at the Fiat museum archive in Turin, reassured him about the loyalty of many people to the Agnelli family. But these were risky times. Umberto, the chairman of Fiat Group, had died after a brief illness, only a year after the death of his older brother and family patriarch, . John had been designated the future leader of the family in 1997, and now it was his job to make important and difficult decisions for his family.

The Agnellis had a tradition of granting complete authority over their business holdings to the family leader. That tradition had done much to give the family stability, direction, and unity. The stability was enforced by the presence of Gianluigi Gabetti, who had served Giovanni and then Umberto for thirty years as trusted advisor and chief executive of the family’s main holding company. With Umberto’s death at 70 years old, John now had this authority, and he would likely draw heavily on advice from Gabetti.

But in this time of transition for the family, the family business was in trouble. Fiat Group, the Agnellis’ prized investment and the largest industrial concern in , was in bad shape. Its fourth CEO in three years, 57-year-old Giuseppe Morchio, had just launched a major turnaround. As the family’s designated (but not formally confirmed) leader, John’s priority was get the Group’s many stakeholders, including the banks, to support Morchio’s plan. This would be harder now than when Gianni and then Umberto clearly had been in charge. John left the funeral and went back to his office with Gabetti to think about the challenges ahead.

John had been struck at seeing Morchio at center stage of the public condolences, actively shaking hands. He was even more surprised to hear from Gabetti about a request passed on from Morchio’s assistant. Morchio had asked that Fiat’s board of directors meet in special session the very next day, a Sunday. The assistant explained the urgency of this request by citing the annual gathering of bankers and industrialists at the Italian Central Bank on Monday. With Umberto’s passing, Morchio wanted to send a strong message to the country’s economic leaders that Fiat was not rudderless, and that he was

Senior Lecturer John A. Davis, Professors Bernardo Bertoldi of the University of Torino, and Roberto Quaglia of ESCP-Europe prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

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firmly in charge, endorsed by the family. Morchio, John learned, was going to ask the board to make him the chairman of Fiat.

The request alarmed John because it would rush the board, whose members would still be feeling the sorrows of Umberto’s passing. More important, it would be the first time since the early years of Fiat, aside from the rebuilding period after World War II, that the same person was both chairman and CEO of Fiat. To John and his family the separation of these roles was a pillar of governance on which the family business was built. The family was comfortable with delegating operational control of Fiat to a non- family CEO. A combined chairman-CEO would be harder for the family to overrule.

Morchio’s demand had come at the worst possible time. Fiat Group desperately needed a strong leader like Morchio. But giving him both CEO and chairman roles could fundamentally change the family’s ties to the business. John faced a difficult first decision.

At such a dire time for the company and family, John wondered why Morchio would want both responsibilities for himself alone. It didn’t help that Morchio hadn’t bothered to walk over himself to discuss his proposal with John. Maybe Italian state television, which had covered Umberto’s funeral as a national event, was right in saying that his passing was the end of an era for the Agnellis and for Fiat.

Governing the Agnelli Family Business

Governance had been simpler in earlier decades of “Fabbrica Italiana Automobili Torino,” or Fiat. The first Giovanni Agnelli (1866-1945) was an ex-cavalry officer and son of a small landowner when he got interested in the new horseless carriages. He and eight other gentry and aristocrats started the business in 1899 in Turin, close to his home in Villar Perosa. Initially all had equal shares in the limited public company, with one of them, Ludovico Scarfiotti, serving as the chairman. A power struggle among the owners ensued early on. Agnelli, who had some engineering training of his own, favored products developed elsewhere, while chief engineer Aristide Faccioli preferred using his own product ideas.

Agnelli won that battle (Faccioli left the company) in 1902 and became CEO of Fiat, with Scarfiotti continuing as Chairman. As the company expanded, Giovanni and two other partners invested heavily in the business and sold shares to the public. The financial panic of 1907 forced the company to reorganize under pressure from the banks, and the shareholders lost nearly all their equity. But with support from the banks, Agnelli remained in operational control.

The company, which by then had developed an expertise in engineering, flourished during World War I and the boom of the 1920s. Fiat was the first European carmaker to invest in the Ford model of assembly line production, giving it a tremendous leg up on the competition. Soon it moved into manufacturing trucks, airplanes and locomotives. As part of a strategy of vertical integration, it even made its own steel and electricity and opened a financing subsidiary. By 1929 Fiat was the third largest Italian industrial company.

To solidify ownership control over the rapidly expanding operation, Giovanni in 1927 set up a holding company, the Industrial Financial Institute (IFI). IFI held a majority of the Fiat shares, and Giovanni and his son, Edoardo, held nearly all the IFI shares. Two other Italian industrial families, the Pirellis (tires) and Borlettis (department stores), held the remaining IFI shares. From this point on, the Agnelli family, through IFI and other holding companies, always owned a controlling stake in Fiat.

Starting in the 1990s, Italian law forced anyone acquiring 30% or more of a listed company’s stock to make an offer to buy all the remaining shares. IFI owned more than the 30% of Fiat before the law was issued, and was exempted from the rule, but anyone else trying to amass shares to gain control would

2 The Agnellis and Fiat: Family Business Governance in a Crisis (A) 812-128

have the burden of making a full bid. Since then, the Agnellis, through IFI, have kept their ownership of Fiat above the 30% level.

IFI proved useful for controlling other investments as well. As Fiat’s expansion started generating returns, Giovanni Agnelli went beyond automotive and invested in a variety of industries: beverages (Cinzano), concrete (Unicem), coal (Vetrocoke), air transportation (Società Aviolinee Italiane), hydroelectric energy (SIP), publishing (), construction (Impresit), soccer (Turin’s Juventus team) and ski resorts (Sestriere). Fiat itself owned all operations related to auto making, while IFI held the controlling shares in other enterprises as well as Fiat itself. IFI was thus the nerve center for controlling all of Agnelli’s investments.

As his holdings prospered, Giovanni Agnelli became a kind of industrial prince like the Borromeos, Medicis and the Savoias during the Italian Renaissance. He was knighted and made senator for life in the Italian Republic, an honorary position that gave him the nickname of Senatore. Akin to the feudal estates of old, his autocratic role brought extraordinary loyalty from the management, who became a kind of gentry themselves. Like many Italian family companies, Fiat developed a tradition of lifetime employment and promotion through the ranks, cementing this loyalty. Added to that was the excitement of working on world-class engineering in a modern industry.

Starting in 1920, Senatore delegated operating responsibilities of Fiat and the other companies to a series of non-family CEOs. He remained in full control as chairman of Fiat, with a board of directors consisting of his son Edoardo, company managers and other shareholder representatives.

Senatore’s concerns about control extended to his family. Himself an only child, he had a daughter, Aniceta, as well as a son, Edoardo. Senatore groomed Edoardo as his successor by putting him in charge of Juventus starting in 1922, when he was 30. Aniceta’s husband, Carlo Nasi, was fifteen years older than Edoardo, but neither he nor Aniceta ever had a chance at leadership. It became a tradition that only direct male descendants of Senatore could become the leader of the family. And only in later decades did women take on executive responsibilities in Fiat or in other entities controlled by the family.

Tragically, in 1935, Edoardo died in a plane accident at the age of 43. (Indeed, Senatore and his wife ended up outliving everyone in the second generation.) Senatore was already 66 by then, so he quickly chose a successor from among his five grandsons. Only two had reached their teen years at that point, both named Giovanni after him: Aniceta’s 17-year old and Edoardo’s 14-year old. He settled on the latter, Gianni, as he was often called. (See Exhibit 1, the Agnelli family genogram; and Exhibit 2, identifying the leadership of relevant companies.)

As for Aniceta’s son, Giovanni Nasi, he later became the Chairman of IFI and a director at Fiat. An influential family member his entire life, he was a reference point for important family decisions.

Senatore had a firm policy, “One leader at a time,” and despite losing Edoardo, he continued that policy. The family leader had the responsibility of choosing his successor from those in the younger generation with the willingness and proven capability to lead. The family talent pool has thus been a vital element of family success. Senatore chose Gianni after the premature death of his indicated successor, and seventy years later Gianni chose John Elkann after the premature death of his indicated successor.

According to family tradition, relatives other than the successor were neither encouraged nor discouraged to join the family business. Anyone interested in joining a company owned by the family was welcome to do so, but would have to meet the requirements of the business and win the approval of the family leader. The family stressed the importance of having the family leader be chairman of IFI and

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Fiat, though in special circumstances the leader could leave the chairmanship of either company to another relative. Anyone, family or not, could be chairman of the other non-Fiat enterprises owned by IFI.1

Why such a strict approach? Senatore was undoubtedly influenced by his experience in the military, which relied on the core principle of unitary command. Fiat was always known to have a military style of organization. Italy’s , where Villar Perosa and Turin were situated, was the home of kings during the Italian monarchy and favored an autocratic style. Painful memories of battles with his partners early on may have driven Senatore as well. Whatever the reason, a quick and clear decision-making structure in the early years of the automobile industry probably gave Fiat an advantage over rivals, which had more complex ownership and governance.

Just as Gianni came of age, World War II ravaged Fiat and most of the country. When Germany finally fell in May 1945 and the Allies liberated Italy, the newly emerging national government seized the company. Accusing Senatore and CEO Vittorio Valletta of collaborating with the discredited Fascist government, they dismissed the board and appointed outsiders to run the badly damaged operation. They began talk of nationalizing Fiat, as France had already done with Renault. Shortly thereafter, in December 1945, Senatore died at the age of 79.

Gianni Agnelli Takes Over

Although only 24, Gianni immediately took over as leader of the family. The family owners were Gianni, his six siblings, and their five Nasi cousins. With the death of their grandmother, Senatore’s wife, a few months after her husband at the age of 77, only the third generation survived. Gianni’s cousin Clara Nasi was the oldest Agnelli at 33. For his part, since reaching adulthood, Gianni had spent his time acquiring a law degree and serving as a lieutenant in the war.

Senatore’s will divided his assets equally among his twelve grandchildren, except that Gianni received a double portion and the ownership of RIV, a ball bearing company. But Senatore’s blessing counted far more than the voting shares. Other family members readily deferred to Gianni on Fiat and other investments, continuing Senatore’s rule of only one leader at a time.

Immediately this young family had to respond to the threat of losing Fiat to the government. The left- leaning government distrusted the Agnellis, and Gianni’s youth didn’t help to build their confidence. The 62-year-old Valletta, a manager of Fiat since 1921 and CEO since 1939, stepped into the breach and won crucial support from the occupying Allied forces, which worried about the spread of communism. He soon negotiated the return of the company to the shareholders, and by the end of 1946 also won back management control.

At that point, as a loyal Fiat executive, Valletta offered the chairmanship to Gianni. Gianni knew he was not ready to lead the business, so he made Valletta chairman as well as CEO while taking the vice- chairmanship for himself. Aside from representing the company at various events and receiving regular updates, Gianni stayed away from operations and preferred to explore the world and build his network of business contacts.

By that point the minority shareholders of IFI had sold their shares of IFI, giving the Agnellis complete ownership of IFI and, in turn, 30% ownership of Fiat. Gianni became vice-chairman of IFI and left the chairmanship of IFI to Giovanni Nasi, while Annibale Vola was the non-family CEO.

Meanwhile, the post-war reconstruction, aided by Marshall Plan loans and high import tariffs, greatly favored established companies such as Fiat. The company just had to rebuild and grow as fast as possible,

4 The Agnellis and Fiat: Family Business Governance in a Crisis (A) 812-128

and Valletta proved to be a strong operational leader to get this done. Fiat’s well-developed assembly lines were ideal for the emerging era of middle class consumerism, and affordable Fiat automobiles were soon all over Italy and Europe. At Valletta’s retirement in 1966 at age 83, Fiat was the largest industrial company in Italy.

Gianni had already stepped up his involvement by then, starting by assuming the chairmanship of IFI in 1959, taking over from Giovanni Nasi. With Valletta’s retirement Gianni also became chairman of Fiat. Rising to CEO of Fiat was Valletta’s long-time deputy, Gaudenzio Bono, giving continuity to the company management. Gianni convinced his 32-year-old younger brother Umberto to join him at Fiat, first as the manager of the company’s new French operation and then as CEO five years later.

Fully intent on continuing his grandfather’s diversification, Gianni was eager to attract the outside investment needed to pay for his ambitious designs. He also wanted to ensure Agnelli unity and control over the businesses. To do that, he created a class of IFI nonvoting, preferred stock, and listed it on the Italian Stock Exchange in 1968. The Agnellis continued to hold all the common voting stock, maintaining their control of IFI and Fiat.

With Fiat’s maturing business starting to generate significant cash distributions, Gianni invested in growth industries from banks to publishers. In 1957 he bought and transformed an additional holding company, the Istituto Finanziario Italiano Laniero (IFIL), to be his vehicle for acquiring financial institutions and other investments in Italy. A year later he created IFINT (IFI International), renamed Group in 1993, in order to pursue investments in promising geographical areas outside of Italy. Along the way he bought up controlling interests in Italy’s remaining carmakers, the luxury brands , , and . Finally in 1978, in order to better deal with the complexity of Fiat itself, he reorganized that company’s several different activities into wholly-owned separate legal entities under the newly chartered Fiat Group.

IFI remained the center of the Agnelli system, owning the controlling shares in IFINT and IFIL as well as more than 30% of the centerpiece Fiat Group. (See Exhibit 3.) All four of these companies (IFI, IFIL, IFINT, and Fiat Group) had a different mix of directors, reflecting their different purposes. Gianni chaired all but IFIL, where his brother Umberto led the board.

Operationally in Fiat, Gianni started off trying to do nearly as much as Valletta had. He eventually realized he was better suited to strategic concerns, and he left day-to-day affairs to Umberto. Gianni pushed Fiat far beyond Western Europe, opening factories and penetrating markets in Eastern Europe and Latin America, especially in Brazil. His aggressive efforts, combined with a strong personality and style, made him highly influential at home and abroad. For many proud Italians this “King of Italy” signified their rebuilt country’s emergence as an economic power.

With such far-flung efforts Gianni greatly needed loyal advisors, and he found his main advisor in Gianluigi Gabetti. Four years younger than Gianni and like him a lawyer by training, Gabetti rose to high positions in the Banca Commerciale Italiana in the postwar years. In 1965, the Olivetti Corporation hired him to run their American operation. Six years later, at the age of 46, Gabetti met Gianni in New York. They hit it off so well that, after a series of meetings in New York in 1972, Gianni made him CEO of IFI. Akin to the professorial Valletta, Gabetti said he worked “in the spirit of a civil servant,” with the needs of the Agnelli family chiefly in mind.

While some of Gianni’s initiatives went well, Fiat as a whole began to suffer in the 1970s. Oil-price shocks, macroeconomic difficulties, foreign competition, and labor unrest all cut deeply into sales and profits. Meanwhile, Fiat Auto was also investing heavily in automating its production process.

5 812-128 The Agnellis and Fiat: Family Business Governance in a Crisis (A)

These were also years of great political instability in Italy. The Communist Party began attracting a large number of votes, raising fears of nationalization if they controlled the government. The Red Brigade, terrorists who aimed at overthrowing Italian capitalism, saw Fiat as the prime target. From 1975 to 1980, they killed four Fiat managers and wounded 27 others. Gianni and Umberto’s continuing personal involvement in the company showed the family’s commitment to the enterprise during that time of crisis.

Fiat Group, whose reserves had ballooned in the 1960s because of large profits, now took on a heavy load of expensive short-term debt. The Group desperately needed a new infusion of capital, but the Agnelli family wasn’t able to produce the large sums needed.

Gianni’s pragmatism saved the day in 1977, when he increased Fiat’s capital by $600 million. The Agnellis contributed enough to maintain their 30% share, mostly by shifting some assets in IFI directly to Fiat. But nearly all the rest of the amount came from a $415 million investment by the Libyan National Bank, which was flush with cash from the oil shocks. The Libyans acquired a 9.7% equity position (later increased to 14%), second only to IFI’s, and gained two seats on the board. In exchange they promised not to interfere in decisions.

Gianni was naturally concerned about the United States’ reaction to dealing with a country suspected of supporting terrorists, especially since IFI’s holdings included a weapons manufacturer. He met with George H.W. Bush, then the head of the Central Intelligence Agency, and with officials at the Pentagon. Since Gadhafi was not yet seen as a mastermind of international terrorism, Gianni decided that the reputational damage caused by the deal could be contained. By the time the Libyans cashed out at a good profit in 1986, Fiat had used the Libyan investment to grow out of the crisis.

During this period, Fiat needed to overhaul its operations. Gianni and Umberto gradually realized the need for fresh thinking and professional management at the top, not to mention a major downsizing of what had become bloated operations. In 1976 Gianni went outside the company and hired , then a rising industrialist and later the leader of the Olivetti conglomerate. He was to be co- CEO with Umberto. De Benedetti quit three months later, partly because Gianni thought his turnaround plan was too tough, but mainly because Gianni thought his management style wasn’t compatible with the company culture. As Gianni later explained, “He is the sort of person who could run a thing only if he could run it totally…He would have run the whole thing on his own, probably well, but that was not my intention.”2

While realizing that he needed outside management help, Gianni insisted on keeping the biggest decisions in the hands of the major stockholder. He believed strongly in the family’s continuing influence in the company. As he told an interviewer, “The presence of a major shareholder is important because he best represents the shareholders as a whole. In the Fiat case the shareholder is Agnelli, which holds one third of the company and has the relative majority. This shareholder is responsible toward the thousand shareholders who trust him. The CEO needs a reference point and someone to be accountable to, and the shareholders need someone to function as a guide for shareholder interests.”3

To replace De Benedetti, Gianni and Umberto promoted the 53-year-old Cesare Romiti, a hard-nosed finance expert and outsider hired in 1974 from the state airline Alitalia. Umberto gradually handed him operational power until 1980, when he resigned completely and Romiti became the sole CEO of Fiat. Over the next three years the company dismissed 100,000 workers and greatly reduced the number of strikes. Productivity doubled, and the company was again strong in most markets.

Despite these improvements, Fiat began discussions with Ford Motor Company about a merger of automobile operations. International competition was putting pressure on all car companies to improve

6 The Agnellis and Fiat: Family Business Governance in a Crisis (A) 812-128

operations, and both companies aimed to combine technologies and manufacturing scale to create new efficiencies and markets. The plan was for Fiat Auto to merge Ford’s European subsidiary into its operations for five years, until 1988, and then for Fiat Auto in turn to merge with Ford as a whole.

Fiat Auto CEO Vittorio Ghidella favored the deal, along with many Agnelli family members who expected it to boost the value of their shares. Gianni, however, ultimately vetoed the deal, perhaps because he was not yet ready to lose control of the centerpiece of his investments.

The deliberations with Ford did convince Gianni and Romiti to tighten the company’s accounting and relax its autocratic management style. They also tried to boost Fiat Auto with reinvestment and new models, and these brought some improvement. Gianni, on the other side, continued his diversification strategy, mostly within Fiat Group but also in IFI. The latter included food & beverage (Danone), chemicals (Snia-Viscosa-Bpd), insurance (Toro Assicurazioni) and publishing (RCS Rizzoli). (See Exhibit 3 for a description of the Fiat Group’s operations in 2004.)

Succession and Structural Challenges

Senatore’s direct descendants now numbered over fifty as the fifth generation began to come of age. Each time IFI shares traded hands among the relatives, Gabetti and the family had to prepare a new shareholders agreement. This was now becoming more frequent. To avoid the trouble, Gianni in 1987 created a new holding company, Giovanni Agnelli & Co. Societa in Accomandita per Azioni. As a limited partnership, this new entity gave the family greater flexibility in transferring shares. “The Accomandita” consisted solely of the family’s shares of IFI common stock. Whoever controlled the Accomandita controlled all the family’s investments.

A large majority (88%) of Senatore’s descendants submitted their shares in IFI and received the corresponding shares in the Accomandita. When all the remaining shareholders did the same few years later, Gianni held 33.4%, Giovanni Nasi had 10.6%, Umberto had 9.7%, and the other members of the third generation or their successors divided the remaining 46.3%. Only direct descendants of Senatore could hold the shares, and they could sell only to other descendants. The various branches of the family held their Accomandita shares individually or through family trusts.

The limited partners elected five of them to the role of managing partners: a mix of senior members of the family, chosen for life, and trusted outsiders who served at the will of the other partners. In 1987, the managing partners were Gianni, Giovanni Nasi, and Umberto from the family, along with Gabetti and Romiti as CEOs of IFI and Fiat Group respectively. The latter two were given a token single share in the Accomandita for legal reasons.

The managing partners in turn elected a chairman who would hold that position as long as he or she had the support of the majority of the partners and 2/3 of shareholder votes, and it was a foregone conclusion that they would elect the family leader as the chairman. The managing partners also appointed a vice-chairman who would serve as chairman in the latter’s absence, and this was Giovanni Nasi and later Umberto. As chairman, Gianni consulted with the partners but made all the decisions himself. The Accomandita structure thus gave the family leader full control over IFI who assured an acceptable dividend stream for the rest of the family. Gianni could appoint the next family leader from any branch of the family, no matter how few its shares, and he or she would have as much authority as Gianni did assuming support from the managing partners and the Accomandita shareholders.

Indeed, in 1995 Gianni designated one of his nephews to succeed him: Umberto’s son Giovanni Alberto Agnelli. The 32-year-old Giovanni Alberto had joined his mother’s family firm, , and

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helped turn around the struggling Vespa scooter business. That experience won over Gianni, who once said, “The important thing is that there is someone in each family generation who takes responsibility and has the right talents.”

Years before, Gianni had set 75 as the age limit for Fiat Group board members, and when he hit the milestone in 1996 he followed through on the commitment. He didn’t think Giovanni Alberto was quite ready to take over, so he had the trusted Romiti move up to the chairmanship of Fiat Group for two years. The head of Fiat Auto, Paolo Cantarella, succeeded him as CEO for the overall Group. With affairs now seemingly in order, the 71-year-old Gianluigi Gabetti also retired and moved to Switzerland.

Unfortunately, Giovanni Alberto died of cancer soon after these promotions. Like his grandfather, Gianni then skipped to the next generation for a successor. He chose his daughter’s son, John Elkann, who was finishing an engineering degree and had worked at Fiat plants during school breaks. Elkann was only 21, but upon Giovanni Alberto’s death, he promptly received a seat on the Group and IFI boards, and later became a partner in the Accomandita.

In 1996 the Fiat Group had consolidated revenues of more than €45 billion and profits of around €2 billion. Although half of profits came from Fiat Auto, the automobile company still struggled in this fast- changing industry. Competition had emboldened customers to demand more features, and automotive technology was becoming a great deal more sophisticated. Even though Brazil and a few other markets were still growing strongly for Fiat, Fiat was falling behind its competitors.

Despite losing Alberto, Gianni had Romiti retire on schedule in 1998. To replace him as chairman he brought in Paolo Fresco, a high-ranking executive in General Electric. Fresco himself attracted GE chairman Jack Welch to the Fiat board. Fresco’s international background made him a good fit for his main responsibility–seeking a partner for Fiat Auto. Realizing that the car company was too small to afford the huge R&D investment to be fully competitive worldwide, Gianni was now ready to consider a joint arrangement for his flagship enterprise.

Fresco approached a number of large automobile companies about combining operations, and both General Motors and Daimler made offers. Daimler’s bid was a cash-only purchase while General Motors offered stock, which Gianni strongly preferred. The ensuing deal between Fiat and GM in 2000 provided for some initial operational ties and a minority exchange of shares. Four years into the deal, Fiat Group would have a “put” option of exchanging the remaining shares of Fiat Auto with GM’s according to current stock market valuations.

The family supported the move as a way to protect their wealth. Fiat Auto was also less important to the family financially, having gone from 40% of their assets in 1991 to only 20% in 2001. Even the entire Fiat Group had become less than half of the family’s wealth. For his part, Gianni probably believed that the Agnellis could play a major role at GM, because they would be the largest single owners of GM stock and they would bring stability and focus to the company. Twenty years earlier, when he was considering the merger with Ford, he told an interviewer that “GM is so big that I don’t know how much weight the shareholders can have. But we have to consider that at GM the leaders change every three or four years, whereas at Fiat we had my grandfather for 50 years, Valletta for 25, and now myself for 17.”4

The put option offered little help in the short term. Fiat Auto had last reported a profit in 1997, and the situation soon grew much worse. The company’s biggest model launch in years had the misfortune of taking place a week before the 9/11 terrorists attacks. Automobile sales fell further instead of improving. For Gianni and Fresco, the responsibility for turning around Fiat Auto lay with Group CEO Cantarella, and they fired him in early 2002. When his replacement, Galateri di Genola, did no better, they let him go after only a few months.

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Heavy losses and the need for new capital put Fiat Group in a difficult position. To shore up their weak finances, Fresco raised nearly €7 billion during 2002. A billion Euros came from an assessment of all stockholders, which meant that the Agnelli family and other IFI shareholders had to put forth €300 million at their 30% share of the Group. A sale of non-strategic companies in the Group raised almost €3 billion. The final €3 billion came from a special mandatory convertible loan from the banks. If the Group failed to meet payment deadlines, the loan would automatically become equity in the Group. In that case the banks would become the largest shareholders in the Group, jeopardizing Agnelli control.

Even with the infusion of cash, Fiat remained in desperate straits. 2002 ended with the Group losing €3.9 billion, raising questions about how much GM would actually have to pay for Fiat Auto. Fiat Group stock, which had been in the high €20s before 9/11, plateaued at €7. (See Exhibit 4, describing Fiat Group stock.) And then in January 2003, Gianni died of prostate cancer after a yearlong struggle.

Enter Giuseppe Morchio

As Gianni had designated, Umberto, vice-chairman of the Accomandita, assumed the leadership of the family and became chairman of the Accomandita as well as of IFI and Fiat Group. He asked Gabetti, now 77, to come out of retirement to advise him, making him vice-chairman of the Accomandita, chairman of IFIL as well as a director of IFI.

Umberto also replaced the latest CEO of Fiat Group, Alessandro Barberis. He had learned his lesson with Romiti, and he hired another hard-driving change agent from outside the industry, Giuseppe Morchio. Unlike Fresco and Barberis, who had used the put option to justify diversifying away from Fiat Auto, the 56-year-old Morchio had an aggressive plan to reinvest in automobiles – either to improve the exchange price with GM or to retain the flagship.

Morchio had spent his career in the rubber industry, eventually joining the big tire maker Pirelli. Assigned to the sleepy cable division, he had recognized the potential for fiber optics just as the Internet was taking off. He shifted the division heavily toward optics, and eventually sold most of the operation to Corning and Cisco for a huge gain – some of which he realized through stock options that made him personally wealthy. He left Pirelli in 2001, at age 54. Umberto lured him from semi-retirement with the challenge of a much greater turnaround situation.

Morchio, whose take-charge nature had only increased with his extraordinary success at Pirelli, quickly got to business at Fiat. He believed that the automobile business still had a great deal of potential and just needed more attention, at least to improve the value of the GM put option.

Morchio and Umberto convinced the Agnellis and other shareholders, still caught up in the emotions of Gianni’s passing, to agree to a second capital increase of 1.8 billion euros in the foundering Group. This time the family’s assessment was €250 million. Morchio also intensified the sale of non-automotive assets and used the cash to pay for extensive R&D in automobiles, especially in the smaller models that he saw expanding in the future. He topped off the investments by luring experienced automobile executives from elsewhere in Europe to take charge of the car company. Separately, he and Umberto negotiated an extension of the GM put option to 2005, to give Fiat Auto time to regain value. For his part, Umberto sold off several Agnelli holdings outside of Fiat Group and shifted all the remaining companies to IFIL, leaving IFI as a shell company.

A year later, Fiat Auto’s sales growth was running ahead of the overall industry for the first time in many years. Morchio was working hard to win confidence from shareholders and analysts. (See Exhibit 5, describing Fiat Group Financial Highlights.) Yet sales were not increasing fast enough for the company

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to be confident of meeting the payment deadlines for the convertible debt. Morchio asked for more time to pay off the debt, but the banks refused. If he couldn’t find additional cash, the banks would gain the leading equity position at Fiat Group in September 2005.

2004 was very different from 1907, when the banks had forced the reorganization of an overextended Fiat. Back then an Agnelli was the clear choice for management, but now the banks would likely look elsewhere for guidance. Every month seemed to bring forth a new rescue plan from one industrialist or another, most of which involved breaking the Group into various pieces and selling them.

It was then in May 2004 that Umberto suddenly fell ill and died. The Fiat chairmanship was vacant and Morchio was using the central bank event to press for complete authority over the Group. Traditionally the Central Bank had invited only the chairman of Fiat Group, not the CEO. Morchio believed that his presence at the prominent meeting would reassure financial and political leaders about Fiat’s stability and commitment to restructuring. He also believed that combining the two positions would strengthen his hand in tough negotiations with the banks, which were still inclined to dismiss Morchio as yet another weak captain of a floundering ship.

The Family Meeting

John Elkann was disappointed as well as alarmed by Morchio’s request. As Group chairman Umberto had never interfered with Morchio’s efforts, and there was nothing to make Morchio assume that his successor would do so either. John had been a Group board member since 1997 and he and the board had fully supported Morchio’s turnaround. Surely at such a dire time, John thought, Morchio would welcome the help of a leader who might manage the shareholders and other stakeholders. By respecting the company’s traditions Morchio would also improve his standing with nervous family members.

In their meeting that Saturday evening, Gabetti told John he didn’t think Morchio was trying to usurp Agnelli control over its investments, as he showed no interest in running IFIL. But it did seem that he was using the leadership transition to carve a new kind of role with the family – and perhaps also benefit from selling Fiat Auto as he did with the sale of Pirelli’s cable division. At the same time, John was reluctant to oppose Morchio’s wishes when so much depended on his efforts. Much of the Agnelli wealth was at stake.

Rather than passively let an outsider to the family, Morchio, fill the leadership vacuum, John consulted with Gabetti and decided to act. The family tradition was to take important decisions with the support of the entire family, and he had no time to lose. He first conferred with Gabetti and with Franzo Grande Stevens, the secretary of the Fiat Group board. Together they outlined the plan. They then called two meetings: first the family for 10:30am the next morning, and then the Group Board at 3pm that afternoon. John, Gabetti and Grande Stevens personally called all the members of both bodies. The short notice was possible only because most family members were already in the area for the funeral. The few that couldn’t come would participate through teleconference.

With the family convened at its office the next morning, John, Gabetti and Grande Stevens briefed them on the situation.5 Gabetti told them, “We are here to collect your views on Mr. Morchio’s proposal that he become both chairman and CEO of the Group. We would like to have you share ideas and comments before the decision of the Group board. Please note that you are not called here to evaluate the man and his performance. You have to decide on a question of corporate governance: whether to unify the two positions, and nothing else.”

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Never had the family been asked to deliberate in this way. Even assembling the far-flung Agnellis at all was a rarity. Many of the shareholders participated, not just the Accomandita managing partners.

One family member opened the discussion by saying that he liked Morchio and the work he had accomplished. The family had been asked to contribute a burdensome capital increase to sustain the floundering Fiat business, and after huge losses and four CEOs, the company had finally started an effective turnaround plan. Appointing him chairman of Fiat Group as well as CEO was a clear way to empower him and guarantee the plan’s execution. This decision would be seen as a strong message from the Agnellis to the Italian industrial and political system. “Even in a critical situation we believe he can get Fiat back on track. He is the man for the job.”

Another participant pointed out that Morchio was asking them to give full power to a single person. “This is not in accordance with our tradition. Why should we change? What is different now?”

“The situation is extremely difficult this time,” someone else responded. “In a few months we have lost our family leaders who, for forty years, had led the family and the business. The nominated successor is in place, but he is too young. John cannot face this terrible situation alone, so he cannot be the chairman now. Extreme situations justify extreme decisions.”

Another suggested that they propose that Morchio remain CEO but allow him to nominate a chairman that he deems worthy. “Who can be a chairman and satisfy both Mr. Morchio and ourselves? What kind of chairman do we need now? The chairman’s role is to represent Fiat to the shareholders and stakeholders, especially unions, banks and government. Particularly in this very difficult moment, he must not have any operational power and he must not create any conflict with Mr. Morchio.”

Another participant disagreed: “This role could be held by Mr. Morchio himself, as he now has a great deal of credibility among the shareholders and stakeholders. Besides that, appointing him as chairman and CEO would discourage outsiders from sensing a power vacuum and acquiring a significant share of Fiat in order to influence the management. We have to consider how much the General Motors put option and the convertible bond could affect the future ownership structure.”

“We should also consider,” yet another family member said, “that we will have to share and support our decision with the other shareholders and then with the bank system. By proposing Mr. Morchio we will have a strong consensus and we will avoid the risk of a counter-proposal from the other shareholders or stakeholders.”

Gabetti then asked the family for their opinion regarding Luca di Montezemolo as a potential chairman. The son of an aristocratic Piedmont family, the 57-year-old Montezemolo had entered Fiat Group by driving for one of its rally teams. In the 1980s he ran the beverage and then the publishing division, and went on to turn around the debt-ridden Ferrari road car business in the 1990s. Umberto had named him to the Group board only a year earlier, but the family knew him well and had applauded his achievements as well as his efforts in putting on the 1990 Soccer World Cup in Italy. He had been close to both Gianni and Umberto, and his management approach was to team up with talented executives, making him a good partner for Morchio.

“Mr. Montezemolo has just been nominated president of the Italian Employers’ Association, a very high profile and demanding role,” someone intervened “Why he should accept such a high position at Fiat as well?” “How he can take on the two roles?” “Gianni did it in the 1970s,” another family member reminded him, “and to hold both offices is to give credibility and the moral power of persuasion to the chairman. It would be very demanding, but the two roles would have a lot of synergies.”

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“Before carrying on with this discussion, we should ask Mr. Montezemolo for his availability,” John said. “If you all agree, I will call him.”

Montezemolo gave his availability over the phone with John.

“How risky would it be in these hard times to change our board’s organization?” someone asked. “If we propose a new chairman with the high profile of Mr. Montezemolo, this could be interpreted as a lack of support to Mr. Morchio. If he loses the support of the major shareholders, nobody will support him anymore. Fiat Group has hundreds of thousands of employees, millions of customers and a huge and barely sustainable bank debt; our CEO must be absolutely reliable and needs the maximum support of the shareholders, especially now. Moreover, do not forget that the Group has had four CEOs in the last four years. We must stabilize the situation and execute the turnaround once the management is stable.

“We are not destabilizing the management or diminishing support to the CEO,” another participant said. “We are giving the proper support to Mr. Morchio in accordance with our tradition. In such a difficult situation why shouldn’t Mr. Morchio accept this proposal? He will continue to have our support and he will also be helped by an outstanding chairman in Mr. Montezemolo. Why should he prefer to be alone in a tough moment like this?”

That led to a new objection: “We have to consider another scenario: we are trying to find the best chairman, but if Mr. Morchio doesn’t agree to the proposal, we risk losing the best CEO we have. Mr. Morchio could leave the company without a leader; that is something we cannot afford. By trying to salvage tradition, we could find ourselves with a company in distress in the middle of a turnaround with nobody in charge. Finding a CEO is at least as difficult as finding a chairman, and without an option for this role we cannot even consider taking the risk of losing Mr. Morchio.”

This last opinion was widely shared. A number of attendees asked John and Gabetti if they had another option for the role of CEO. They answered that they had a candidate but declined to reveal the person. If Morchio agreed to stay as CEO, they said, this other person would be in a difficult position as he would remain a possible option, weakening Morchio in the future. If Mr. Morchio refuses to accept Mr. Montezemolo, they will propose this candidate to the board as CEO.

Time was running out and the board meeting was approaching. A decision had to be made. How should John and the family answer Morchio’s proposal?

12 The Agnellis and Fiat: Family Business Governance in a Crisis (A) 812-128

Exhibit 1 The Agnelli Family, 2004

Source: “Gli Agnelli”, Giancarlo Galli 1997 and “La Stampa” http://www.lastampa.it/redazione/cmsSezioni/infografica/200706articoli/22250girata.asp, accessed March 2012.

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Exhibit 2 Leadership of the key Agnelli companies 1899-2004

FIAT Group FIAT Group FIAT Auto Years Chairman Years CEO Years CEO 1920-1945 Giovanni Agnelli Sr 1920-1928 Guido Fornaca 1976-1988 Vittorio Ghidella 1945-1966 Vittorio Valletta 1928-1966 Vittorio Valletta 1988-1990 Cesare Romiti 1966-1996 1966-1971 Gaudenzio Bono 1990-1996 Paolo Cantarella 1996-1998 Cesare Romiti 1971-1976 1996-2001 Roberto Testore 1998-2003 Paolo Fresco 1976-1996 Cesare Romiti 2001-2003 Giancarlo Boschetti 2003-2004 Umberto Agnelli 1996-2002 Paolo Cantarella 2003-2004 Herbert Demel 2002 Galateri di Genola 2002-2003 Alessandro Barberis from 2003 Giuseppe Morchio

Giovanni Agnelli e C. S.A.p.A. IFI (now Exor Group) Years Chairman Years Chairman 1986-2003 Giovanni Agnelli 1927-1946 Giovanni Agnelli Sr 2003-2004 Umberto Agnelli 1946-1959 Annibale Vola 1959-2003 Giovanni Agnelli 2003-2004 Umberto Agnelli

Source: “Fiat 1899 - 1999. Un secolo di storia italiana” Castronovo, Rizzoli 1997 and “Fiat: le fasi della crescita. Tempi e cifre dello sviluppo aziendale”, Musso/Nardi , Scriptorium, 1996.

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Exhibit 3 The Agnelli holding company structure in May 2004

Source: Financial statements of IFI/IFIl.

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Exhibit 4 Fiat stock 1994 to May 2004

Source: “Borsa Italiana S.p.A.” – Italian Stock Exchange

Exhibit 5 Fiat Group Financial Highlights (1993-2004)

(€ millions) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Consolidated revenues 28,176 34,005 39,092 40,244 46,257 45,769 48,123 57,555 58,006 55,649 47,271 46,703 Operating results -433 1,382 1,717 932 1,791 746 788 855 318 -762 -510 22 EBIT -20 1,276 1,878 1,876 2,103 1,321 1,482 2,073 528 -3,955 -319 -833 Cash flow (1) 865 2,624 3,501 3,867 4,184 3,226 2,86 3,63 2,089 -1,649 321 620

ROI (2) -2.7% 10.2% 12.3% 6.3% 12.2% 5.4% 4.8% 4.2% 1.5% -4.7% -4.4% 0.2% ROE (3) -10.1% 5.4% 10.3% 10.5% 9.9% 4.7% 2.7% 5.1% -3.5% -39.9% -26.3% -26.7%

(1) Net results before minority interest plus depreciation and amortization (2) Operating results/average net invested capital (3) Net results/group interests in average stockholders'equity

Sources: Fiat Group's financial statements

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References

Authors’ interview with Gianluigi Gabetti, February 19, 2010.

Giuseppe Volpato “Corporate Governance at Fiat SpA,” working paper for EU research project, 2001 (http://www.insead.edu/v1/projects/cgep)

Alan Friedman, Agnelli: Fiat and the Network of Italian Power, Harrap General Books, 1988.

Giuseppe Turani, L’Avvocato, Sperlin & Kupfer Editori, 2002.

Giorgio Garuzzo, FIAT- i segreti di un’epoca, by Fazi Editore, 2006.

V. Castronovo e P. Grifone, Capitalismo di Stato e imperialismo fascista, La Città del Sole, 2002.

Prof. Pierre di Toro, “IFI-IFIL-EXOR-FIAT,“ www.unitus.it/ditoro/Exor-Fiat.pdf

“Agnelli, via all'aumento della Sapa,” 25 March 2003, www.Il Sole 24 Ore.com

Ugo Bertone,“Scelta forte gestita male tra famiglia e banche”, 31 May 2004 [Source?]

Ugo Bertone, Gli Ultimi Agnelli, Milan: Perla Finanza Edizioni Vittoriane, 2004,

Enzo Biagi, Il signor Fiat. Una biografia, Milan: Rizzoli, 1976.

Piero Bairati, Vittorio Valletta, Utet-Torino, 1983.

Valerio Castronovo, Fiat 1899-1999. Un secolo di storia italiana, Rizzoli: Milan, 1999.

“Exor Group History”, 2010, from www.exor.com.

“Fiat (U): Another year, another restructuring plan”, Goldman Sachs, 30 June 2003.

“Fiat-Challenge Remains,” Deutsche Bank, 01 March 2004.

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Endnotes

1 As of 2011, out of 200 living descendants of Senatore, only six are currently involved with companies owned by the family, and only two are operating managers: John Elkann, chairman of Accomandita, EXOR and Fiat; Tiberto Brandolini-D’Adda, chairman of the Sequana paper company; , chairman of Juventus; Lupo Rattazzi, chairman of the aviation company Neos; Alessandro Nasi, head of US activities at Exor and manager at CNH and FIAT, Eduardo Teodorani-Fabbri, manager at CNH. The first three also sit on the board of Exor, which replaced IFI as the main holding company. 2 “What Mr. Fiat Learnt: Agnelli and Fiat,” The Economist, August 30, 1986. 3 Arrigo Levi, ed., Agnelli: Intervista sul Capitalismo moderno, Laterza, 1983. 4 Arrigo Levi, ed., Agnelli: Intervista sul Capitalismo moderno, Laterza, 1983. 5 The source for the meeting is our interviews with John Elkann and Gianluigi Gabetti on February 19, 2010. Since a detailed formal report of the meeting does not exist, we reenacted the situation illustrating opinions and comments of different participants.

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