Parmalat’s Setup Raised Red Flags

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 beleaguered group very poor ratings, focusing on a lack of independence on the company’s board as well as failures in disclosure.

One, Institutional Shareholder Services, put Parmalat at the bottom of the 69 Italian companies it ranks and in the lowest 3% of about 1,800 European, Asian and Far East companies as far back as last spring.

The other, Governance Metrics International, 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 broke, but their focus was on finances rather than directly on the way the company was run.

The company was rated investment grade by rating firm Standard & Poor’s, although at the low end.

Parmalat has filed for bankruptcy protection and is struggling to survive after the discovery of a multibillion-dollar hole in its finances.

Founder and former Chief Executive Calisto Tanzi and eight others have been arrested as part of the investigation into the scandal.

Meanwhile, a spokeswoman for the Cayman Islands government said Monday that an investigation into local subsidiaries of Parmalat was continuing, and had so far uncovered no evidence of crimes committed in the Caribbean tax haven.