Corporate governance code for listed companies – publication by the High Committee for Corporate Governance of a guide on the ‘say on pay’ rule

As mentioned in the 2013 international corporate governance newsletter (section 3 - France), the French association of private companies (Association Française des Entreprises Privées - the AFEP) and the largest French union of employers (Mouvement des Entreprises de France - the MEDEF) published a revised version of their corporate governance code for listed companies (the Code) which introduced in particular the ‘say on pay’ rule.

The High Committee for Corporate Governance (Haut Comité de gouvernement d’entreprise) (the CG Committee) published a guide on 12 January 2014 which sets out the AFEP and MEDEF’s interpretation of certain recommendations contained in the Code, in particular with respect to the ‘say on pay’ rule. 

Content of the presentation to shareholders on executive officers’ compensation

The CG Committee notes that the shareholders’ vote on executive officers’ compensation as provided by the Code is ‘an ex-post vote on the amount or valuation of the elements of the compensation payable or allocated during the last closed financial year’ and not an ex-ante vote on the compensation policy for the current financial year.

The shareholders’ meeting must give its opinion on (i) the elements of the compensation payable or allocated during the last closed financial year to each executive officer by all the companies in the group and (ii) the amounts invoiced under service contracts. 

In practice, it means that the following elements of compensation are subject to the opinion of the shareholders: (i) the fixed compensation, (ii) the variable annual compensation, (iii) the variable annual deferred compensation, (iv) the variable multi-annual compensation, (v) the exceptional compensation, (vi) the stock options, performance shares and ‘any other element of long-term compensation’, (vii) the benefits linked to taking up office, (viii) severance and non-competition pay; (ix) supplementary pension plans, (x) attendance fees and (xi) benefits of all kinds.

Form of the presentation to shareholders on executive officers’ compensation

The Code does not recommend any particular form for presenting the elements of compensation to be put to a consultative vote. Companies are therefore free to determine the form of their presentation, as long as it is ‘complete and understandable’. However, the CG Committee suggests the following options:

  • a specific paragraph on the elements of remuneration put to a vote is provided in the annual report / reference document, which can also take the form of a summary table (the user guide provides an example of a summary table); or
  • a clear and consolidated presentation of the board communications which decided the elements of the executive officers’ compensation is provided in the annual report / reference document; or
  • a specific report is drafted in this respect.

Specific resolution on compensation of the president of the board of directors who does not also act as managing director

As no specific resolution is recommended by the Code with respect to the compensation of the chairman of the board of directors who does not act as managing director (who is, however, considered as an executive officer by the Code), while the Code recommends a specific resolution related to the compensation of the other executive officers, the CG Committee recommends that a specific resolution is added in this respect.

Impact of the proposed revision of the Shareholder Rights Directive on the French 'say on pay' rule

The European Commission published in April 2014 a proposal of revision of the Shareholder Rights Directive (directive 2007/36/CE).

This proposal introduces a ‘say on pay’ rule which would oblige companies to (i) disclose clear and comprehensive information on their remuneration policies and their implementation, (ii) put their remuneration policy to an ex-ante binding shareholder vote at least every three years and (iii) consult their shareholders each year on an annual report describing the executive officers’ compensation during the last financial year (ex-post vote).

The proposed changes, if adopted, will have a real impact on the French ‘say on pay’ rule which will no longer be part of ‘soft law’ (unlike the recommendations contained in the Code) and will have to be revised (in particular to introduce the ex-ante vote). 

The French National Association of Limited Liabilities Companies (ANSA), the AFEP, the MEDEF and Middlenext have expressed their disagreement with the proposed changes. They notably consider that a binding ex-ante vote on this topic would have the effect of transferring the responsibility for determining the remuneration policy to the shareholders while it should remain within the scope of the board’s powers.

AMF 2014 report on corporate governance and executive officers’ compensation

The 2014 AMF report on corporate governance and executive officers’ compensation was published on 24 September 2014.

The analysis in the report is based on the practices of 60 companies listed on compartment A of NYSE Euronext and refers exclusively to the Code. This report sets out AMF’s observations, recommendations and thoughts related to corporate governance and executive officers’ compensation.

Corporate Governance

The AMF makes the following recommendations in its report.

  • Prevention of conflict of interest: in its reference document or annual report a company should present the extracts of its internal regulations or ethics charter on the specific rules related to the prevention of conflicts of interest which must be complied with by its board members. In addition, the internal regulations or the ethics charter of the board should be available on the company’s website.
  • Sale of major assets: given the recent transactions concerning the sale of a major part of the assets of a listed company (ie sale of SFR by Vivendi and sale by Alstom of its energy activities) which provoked some debate, the CG Committee should clarify its interpretation as to the conditions for calling a general meeting in those circumstances. Indeed, the current provisions contained in the Code in that respect leave room for interpretation as to the necessity for a general meeting to pass a binding vote on the concerned transaction. In that context, it should be noted that the French senator Mr. Marini submitted a legislative proposal in June 2014 to require the purchaser of the major asset(s) of a listed company to launch a takeover bid on the shares issued by the company.
  • Board members’ nationality: the nationality of board members should be presented more explicitly in order to be in a position to understand the diversity of the composition of the boards. 

Executive officers’ compensation

The AMF notes that the 2014 resolutions submitted to a shareholders’ vote pursuant to the new ‘say on pay’ rule have all been approved with a high percentage (more than 90%) and 90% of the sampled companies have drafted a specific heading on this matter in their reference document or annual report.

The AMF makes the following recommendations in its report.

  • Fixed compensation: companies should (i) indicate the frequency of the review of fixed compensation granted to their executive directors and (ii) present any increase in fixed compensation, indicating the percentage of increase compared to the previous financial year and detailing the reasons of such increase in case it is significant.
  • Deferred compensation in the context of a director’s departure: companies having put in place a deferred variable compensation mechanism or multi-annual compensation should provide for the consequences of the departure of a director entitled to payment of such compensation (in case of (i) retirement, disability or death or (ii) dismissal, non-reappointment or resignation; in such case, any payment should in principle be excluded, except when the board can justify exceptional circumstances which are made public).
  • Condition of presence in shares plan or option plans: when a board decides to exempt a leaving director from a condition of presence pursuant to a shares plan or stock option plan, the company should recall exactly the number of options or shares to which the directors are entitled under these plans and assess the amount of the benefit granted.

Representation of female directors – Act of 4 August 2014 for ‘the real equality of men and women’

In 2011, the French Commercial Code introduced a quota applicable to the composition of the board of directors and supervisory board of (i) French listedsociétés anonymes (SA) and (ii) French non-listed SA which, for the third consecutive financial year, employ an average of at least 500 permanent employees and report a net turnover or balance sheet total of at least EUR 50 million. According to this quota, the proportion of board members of each sex shall not be less than 40.

The Act n°2014-873 dated 4 August 2014 for ‘the real equality of men and women’ clarifies the entry into force of the 40 per cent quota in non-listed SA employing at least 500 permanent employees. This provision will now become effective as of 1 January 2017. The law also extends the scope of this requirement from 2020 to non-listed SA employing between 250 and 499 employees, subject to the threshold of turnover or balance sheet total of €50 million. These new provisions are also applicable to companies limited by shares (sociétés en commandite par actions).

It should be noted that the 40 per cent quota applicable to the board of listed companies will also enter into force on 1 January 2017. However, some compulsory provisions are already in force. Since the first general ordinary meeting of this year, the proportion of board members of each sex in listed companies shall not be less than 20 per cent.