Big investors were warned about weaknesses in Italian milk conglomerate Parmalat's business style before its financial scandal broke, reports from corporate governance researchers show.
Two leading firms that investigate and rank for investors how traded companies are run gave the embattled group very poor ratings, focusing on a lack of independence on the company's board as well failures in disclosure.
One - Institutional Shareholder Services (ISS) - put Parmalat bottom among the 69 Italian companies it ranks and in the lowest three percent of some 1,800 European, Asian and Far East companies as far back as last spring.
The other - GovernanceMetrics International (GMI) - gave the company a below-average overall rating in June and scored it even worse for its board structure.
Some investment banks also expressed concern about Parmalat before the scandal but their focus was on finances rather than directly on the way the company was run.
It was rated investment grade by rating agency Standard & Poor's, although at the low end.
Parmalat has filed for bankruptcy protection and is struggling to survive after the discovery of a multi-billion euro (dollar) hole in its finances.
Founder and now-former chief executive Calisto Tanzi and eight others have been arrested as part of the investigation into the scandal.
Neither ISS nor GMI, both of which rate companies for pension funds and other large investor clients based on good governance criteria, suggested any fraud at Parmalat.
But their reports drew a picture of the kind of company structure that corporate governance and shareholder rights activists say can be danger signals for investors.
"This rating (shows) that this company is at risk because it did not have the proper checks and balances," Stanley Dubiel, ISS's senior vice president and director for global research, told Reuters.
GMI gave Parmalat an overall rating of four out of 10 and just 2.5 for board accountability. Company President Gavin Anderson said anything under 5.5 was considered below average and below 3.5 well below average.
The company said that when it began ranking Parmalat in June it had cited a lack of strong governance policies, disclosure and board independence as reasons for its low rating.
It classified only three of Parmalat's 13 directors as being independent, noted insider directors included majority owner Tanzi and two family members, and said the company was below average in terms of financial disclosure.
"The company also had not established procedures through which complaints about the company's accounting and audit functions could be brought to the attention of management," it said in a precis of its views.
ISS said that as well as being at the bottom of its Italian company rankings, Parmalat had a "dismal" rating across a more global horizon at the time that the scandal broke in December.
Parmalat outperformed only 2.8 percent of the companies on MSCI's Europe, Asia and Far East index, ISS said.
There were only 46 companies below it from the roughly 1,800 companies in the index, Dubiel said.
Like GMI, ISS cited Parmalat's lack of independent board structure and noted in its report such things as a lack of timely disclosure concerning executive and director compensation and directors' and officers' stock ownership.