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Corporate leadership

i Board structure and practicesStructure

Listed companies in France may have either a one-tier governance structure comprising a board of directors in charge of the company's general management together with a CEO (who may or may not be a director) who is the legal representative of the company; or a two-tier structure comprising a management board, whose chair is the legal representative of the company, and a supervisory board that supervises the management board and must not interfere in the management of the company.

Composition of the board

Under the one-tier system, the board of directors is composed of a minimum of three and a maximum of 18 members. Under the two-tier system (i.e., with a management board and a supervisory board), the supervisory board is also composed of between three and 18 members.

As a statutory requirement to have no less than 40 per cent of women (or men) on boards of directors or on supervisory boards as from 1 January 2017, the percentage of women on the boards of CAC 40-listed companies has continued to rise from 44.1 per cent in December 2017 to 46 per cent in 2018.

While French law does not provide for specific details concerning the presence of independent directors, corporate governance codes strongly recommend the appointment of a certain proportion of independent members. According to the AFEP-MEDEF Code, independent directors should account for half of the members of the board in widely held corporations that do not have controlling shareholders. In other corporations, at least one-third of the board should be composed of independent directors.

Election of board members representing employee shareholders is an obligation in state-controlled companies, in listed companies where the employees hold more than 3 per cent of the share capital and in companies that employ, jointly with their subsidiaries, more than 1,000 employees in France or more than 5,000 employees worldwide, except for those that already have employee representatives on their board. There should be one employee shareholder representative on any board with fewer than 12 members and two on boards with more than 12 members. The Action Plan intends to reduce this threshold to eight members in order to increase the role of employee shareholder representation. The revised AFEP-MEDEF Code also provides that the directors representing employees within a group must sit on the board of the company that takes strategic decisions for the group.

Representation and management of the company

In companies with a one-tier structure, the board of directors decides whether the management of the company is carried out by the chair of the board or by a separate CEO. The CEO has the broadest powers to represent the company and act on its behalf in all circumstances. Limitations on the CEO's powers can be set out in the articles of association or decided by the board, but are not enforceable against third parties.

In companies with a two-tier structure, the management board is vested with the broadest powers to act in any circumstances on behalf of the company, which is represented by the chair of the management board.

Legal responsibilities of the board

In companies with a one-tier structure, the board of directors is responsible for determining the corporate strategy and supervising its implementation. It is also responsible for controlling the management of the company, for appointing and removing the chair, CEO and deputy CEOs and determining their remuneration, and for convening the shareholders' meetings.

In companies with a two-tier structure, the supervisory board supervises the management board and carries out the verifications and inspections it considers appropriate. The supervisory board also has specific attributions, which are similar to those attributed to the board of directors.

Delegation of board responsibilities

Decisions taken by the board of directors are collective decisions and cannot be delegated to one or more specific directors or to third parties.

The board of directors or supervisory board may give specific mandates to certain members to study identified issues.

Separation of roles of CEO and chair

The chair organises the work of the board of directors and chairs the meetings. He or she also ensures that the different decision-making bodies of the company operate properly. Although it is not expressly specified as being one of his or her responsibilities, the chair can communicate directly with shareholders but will remain bound by an absolute duty of confidentiality and is thus prohibited from disclosing privileged information.

Remuneration of directors and senior management

Non-executive directors' remuneration consists exclusively of attendance fees. Any other remuneration is prohibited, except that resulting from either an employment contract non-executive directors may otherwise have with the company for separate functions, or a special temporary assignment. The shareholders' meeting decides the total amount of the attendance fees, but the board determines the amount allocated to each director. In accordance with the duty of care imposed on board members, which requires assiduity and involvement, such fees usually include a variable portion that depends on attendance at board meetings and, as the case may be, committee meetings. Non-executive members may not be granted shares or share options free of charge.

Executives' remuneration generally includes fixed and variable components, and stock options or performance shares, or both. The AFEP-MEDEF Code provides that variable remuneration must be capped at a specific percentage of the fixed part, and that the non-executive chair of the board should not receive any variable remuneration, stock options or performance shares. The board must ensure that executives' compensation aims to improve the medium and long-term performance and competitiveness of the company, in particular by incorporating one or more criteria related to social and environmental responsibility.

When determining the overall compensation of an executive, the board of directors takes into account all components such as bonuses, stock options, performance shares, directors' attendance fees and pension schemes.

While it is recommended that the fixed part of the remuneration is reassessed only every three years, variable remuneration and stock options or free share awards should reward both short-term and medium-term performance. Quantitative performance criteria must be simple, objective, measurable and coherent with the corporate strategy and not solely determined by stock price. Four main categories of quantitative criteria can be identified: financial ratios (notably return on capital employed), revenue growth (as well as free cash flow, operating profit, and earnings before interest, tax, depreciation and amortisation growth), increases in the share price and performance in comparison with the company's main competitors. It also provides that quantitative performance criteria do not necessarily have to be financial criteria. Furthermore, the AFEP-MEDEF Code recommends that a specific cap be set for qualitative criteria.

Benchmarking with other companies operating in the same market is common, although proxy advisers tend to consider that it is not a sufficient justification.

Executives' remuneration is decided by the board of directors or supervisory board on the recommendation of the remuneration committee. Shareholders vote on such remuneration (see Section V.iii).

Any commitment by a listed company to pay a termination fee to a director in the event that he or she ceases to be a director and top-hat pension plans are subject to the procedure for related-party transactions and are subject to shareholder approval upon renewal of the relevant directors' terms of office. In addition, the pension amounts paid out must be linked to performance conditions, and the increase in the amount of the beneficiaries' rights must be capped. The revised AFEP-MEDEF Code now provides that any amount paid out pursuant to a supplementary pension scheme must also be subject to performance conditions, it being further specified that any form of compensation paid for pension purposes (e.g., a cash payment) and not only the supplementary pension scheme per se must be subject to performance conditions. The Commercial Code also prohibits remuneration, indemnities and any other kind of benefits to be paid in the event of termination of a director's term of office, if they are not subject to conditions based on performance.

The AFEP-MEDEF Code recommends capping termination fees at a maximum of two years' annual fixed and variable compensation, taking into account the non-compete compensation and any potential severance payment due as a result of the termination of the employment agreement, if any.

The revised AFEP-MEDEF Code recommends prohibiting any payment pursuant to a non-compete undertaking when an executive is over 65 years old, or when the executive claims his or her pension rights. The Code also recommends that a non-compete undertaking should not be entered into at the time the executive leaves when no such clause had previously been stipulated.


An audit committee is compulsory in listed companies, the powers of which have been reinforced since the European reform of audit quality. The AFEP-MEDEF Code also recommends the creation of a remuneration committee (headed by an independent director, and with one member being an employee representative) and a nomination committee (the two may be combined). Members of committees should be non-executives, and a majority of such members should be independent (two-thirds in an audit committee, which must include a member with accounting and finance skills). Most companies also have other specialised committees dedicated to strategy, internal control, CSR, ethics, science and technology, and risks.

Board and company practice in takeovers

During a takeover bid, the board of directors may adopt any provisions to thwart the takeover, without shareholder approval, subject to the powers expressly granted to general meetings and with due regard to the company's corporate interests. However, companies may amend their articles of association (with the shareholders' approval) to opt out of the ability to adopt anti-takeover measures without shareholders' prior approval.

ii DirectorsRole and involvement of outside directors

The AFEP-MEDEF Code emphasises the importance of having a significant proportion of outside directors (or independent directors) on the board to improve the quality of proceedings. Outside directors have the same rights as other directors, but they are encouraged to play an active role and protect themselves against possible liability.

Legal duties and best practice

Directors principally have the legal duty to act in the best interests of the company and to be diligent. Pursuant to case law, other specific duties, such as the duty of loyalty and the duty of care, are also incumbent upon directors.

Civil liability

In companies with a one-tier structure, the chair of the board, CEO and members of the board of directors can be held liable in relation to the company, shareholders or third parties for any breach of laws, regulations or the company's articles of association, as well as wrongful acts of management by directors in carrying out their duties. Breach of the duty of loyalty is also recognised by case law.

If a wrongful act is committed, the CEO and directors may only be held liable if it can be proved that a loss has been suffered, and that there is a direct causal link between such loss and the wrongful conduct. This civil action may be brought:

  1. by the company, either directly acting through its legal representatives, or through a derivative action called an ut singuli action, which is exercised by a shareholder acting on behalf of the company; or
  2. by a third party (e.g., creditors or employees) or shareholders (who are distinct from third parties) if the loss suffered is distinct from that suffered by the company. Whereas actions brought by third parties require that the wrongful act be deemed to be unrelated to the directors' duties (traditionally defined as wilful misconduct that is particularly serious and incompatible with the normal exercise of duties), actions brought by shareholders do not require, following a decision of the French Supreme Court, that such a condition be met.

In the case of insolvency of a company, directors who have committed acts of mismanagement can be held liable for all or part of the company's debts.

In companies with a two-tier structure, the same rules apply to members of the management board. While members of the supervisory board cannot be held liable for mismanagement, they can be held liable for negligent or tortious acts committed in the performance of their duties, and may be held civilly liable for criminal offences committed by members of the management board if, although aware of such offences, they did not report them to the general meeting.

Criminal liability

The chair of the board, CEO, members of the board of directors, or members of the management board and the supervisory board, can be sentenced to five years' imprisonment, ordered to pay a fine of €375,000, or both, for having:

  1. distributed sham dividends in the absence or on the basis of false inventories;
  2. published or presented to the shareholders annual accounts not providing, for each financial year, a fair representation of the results of the operations; or
  3. directly or indirectly used the company's assets, in bad faith, in a way that they know is contrary to the interests of the company, for personal purposes.
Appointment and term of office of directors

Members of the board of directors or supervisory board are appointed by the ordinary general meeting of the shareholders. Under certain circumstances, the board of directors may appoint new members by co-optation, subject to the shareholders' meeting subsequently ratifying such appointments.

Directors are appointed for a term set out in the articles of association, up to a maximum of six years (four years in the two-tier system). In practice, due to the influence of the AFEP-MEDEF Code, the four-year term of office is prevalent. Re-election is possible, and 93.3 per cent of the companies listed on the SBF-120 Index rotate renewal of the terms of office to avoid replacement of all directors at the same time. The office of members of the board of directors can in any event be terminated upon a decision by a shareholders' meeting at any time, without specific reason (ad nutum).

Specific requirements include the following:

  1. in the absence of an express provision in the articles of association, directors over 70 may not represent more than one-third of the members of the board;
  2. employees may be appointed as board directors only if their employment contract corresponds to actual duties performed for the company and for as long as the employee-director remains in a position of subordination in relation to the company. The number of directors with an employment contract cannot exceed one-third of the entire board; and
  3. to guarantee the availability of directors, French law prohibits members of boards of directors or supervisory boards of listed companies from simultaneously holding more than five directorships. The AFEP-MEDEF Code now recommends setting this limit at three directorships for executive directors. Furthermore, executives of credit institutions and investment companies cannot hold more than three offices as executive director and more than four offices as board member.

Members of boards of directors are no longer required to hold a specific number of shares, unless such a condition is provided for in a company's articles of association. The AFEP-MEDEF Code, however, provides that directors should be shareholders and hold a fairly significant number of shares fixed by the articles of association or the board's internal rules.

Conflicts of interest of directors

French law and corporate governance codes require that directors must inform the board of directors of any conflicts of interest, whether actual or potential, and should abstain from participating in the discussions and voting on such matters.

Under French law there are also some prohibitions or specific procedures for related-party transactions, which can create a conflict of interest: directors are prohibited from contracting loans from the company or arranging for the company to act as guarantor in respect of their obligations. In addition, to be valid, any significant transaction between the company and one of its executives or directors, a direct or indirect shareholder holding more than 10 per cent, or another company having executives or directors in common, must receive prior authorisation from the board (without the directors concerned voting), while grounds for approving related-party transactions must be detailed and reassessed annually. Related-party transactions entered into between a parent company and a wholly owned subsidiary are no longer subject to the authorisation procedure. Finally, specific information must be given to shareholders regarding agreements entered into between a subsidiary of a company and a director or major shareholder of this company. The AFEP-MEDEF Code provides that the internal rules of the board should set out provisions on the prevention and management of conflicts of interest. In accordance with the new Directive on shareholders' rights, the Action Plan, which has not yet been adopted, provides that information regarding transactions with related parties must be publicly disclosed on listed companies' websites at the latest on the day of their conclusion, and the related party must not participate in the board's discussions or take part in the vote on the relevant resolutions.

The auditors present a report on the authorised transactions to the shareholders' meeting, and the shareholders vote on them. If a transaction is not approved by the shareholders, the interested party and the directors can be held liable for any adverse consequences of that transaction for the company.