The French Model

What Should You Know about French Corporate Governance?

Introduction

As explained to us in our interview with Professeur Eric Pichet (4), given the growing need for transparency by the management of listed companies and given the increasing weight of foreign minority shareholders, who hold approximately one third of the shares listed on the Paris Stock Exchange, France cannot escape considering the increasingly important issue of Corporate Governance. He reminded us that France is a country of Romans law. In other terms, France is much more regulated than the Anglo Saxon countries. Therefore, although French corporate governance has been highly influenced by the UK, such as the Cadbury Report, there are some differences, which we will detail below.

History of French Governance

Eric Pichet, in the above video, explains that French corporate governance only exists since the 1990s, whereas, in the UK it has been discussed for the past 100 years. Therefore, France is in its infancy but has made significant progress over the past years. The key codes of Best Practice in France are:

  • The Viénot 1 report (July 1995). This report sets out a number of recommendations regarding the boards of directors of listed companies in respect of their composition, their role, and the exercise of their powers. (5)
  • The Marini report (1996). This report focuses on the modernization of company law. (6)
  • The Viénot II report (July 1999). Report delivers a response to two issues for which the Ministry of Justice issued proposals on July 31, 1999, to wit, separation of the office of Chairman of the Board of Directors from the office of Chief Executive Officer, on the one hand, and disclosure of the compensation and options granted to corporate officers of listed companies, on the other hand. (7)
  • The Bouton report (September 2002).This report focuses on ethics, transparency and financial code. (8)
  • The Clément report (December 2003). This report on the results of a research mission by the National Assembly regarding company law reforms. (9)
  • MEDEF/AFEP code amends (2010). This report states that there must be a minimum of 20% of women on the Board in the next three years, and at least 40% in the next six years.
  • MEDEF/AFEP code amends (2013). This is the latest amends made to the above codes, and can be accessed here. In summary the amends are:
    • Establishment of a high committee on corporate governance
    • Introduction of an advisory vote on executive compensation
    • Reinforcement of the “comply or explain” principle
    • Restriction on the number of offices for executive directors
    • Transparency of multi-year variable compensation, following the same principles as annual variable remuneration
    • Reinforcement of recommendations relating to performance conditions applicable to stock options and performance shares (11)

French Model: Choice of Governance Formula

French law gives all limited companies, including listed corporations, the choice between:

  • A unitary formula with a Board of Directors
  • A two-tier structure with a Management Board and a Supervisory Board based on a distinction between management functions and the supervision of this management (similar to the German model below).

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Moreover, companies with a Board of Directors have a choice between separating and combining the offices of Chairman and Chief Executive Officer. In France, the majority of companies now have a one tier or unitary board.

The choice of governance formula is based on the fact that:

1. The board of directors must be able to decide in the best interests of the company according to its specific characteristics, particularly its business sector, shareholder composition and even the characteristics of its executive management team. (12)

2. Major differences exist between French law and British law that must then be underlined. In France, the Board and the executive management have different tasks. According to the Commercial Code, the Board’s task is to decide the broad guidelines and strategy of the company. The executive management, which is generally assisted by an executive committee whose membership is strictly different from that of the Board of Directors, is responsible for the day-to-day management of the company. No company can bring together these tasks within an executive body without significant risks as regards responsibility and the risks of certain decisions being void. Furthermore, the Commercial Code prohibits the number of directors bound to the company through a contract of employment exceeding one third of the Board’s members. Moreover, Boards are almost exclusively made up of non-executive directors (unlike in the United Kingdom). As a result of the significant powers conferred on it by law, the Board of Directors in its entirety must guarantee the balance that is essential for good governance.

As a consequence:

  • Any decision by the Board of Directors must be voted for by a majority of the Board’s members, meaning that the executive directors represented on the Board cannot carry the decision on their own
  • If it has not met for more than two months, at least one third of the directors may ask the unified Chairman/CEO to call a meeting of the Board of Directors regarding the agenda determined by these directors; in the Chairman’s absence, this power is sometimes conferred on another director by the by-laws.
  • The Board of Directors may dismiss the unified Chairman/CEO at any time without having to give grounds.
  • It sets the compensation of the unified Chairman/CEO.
  • It may place limits on the powers of the unified Chairman/CEO.
  • It has the power to call shareholders’ meetings, prepare the company accounts and the annual management report, authorize agreements made between the company and one of its executive officers, directors or shareholders with more than 10% of the voting rights, allocate directors’ fees, approve the chairman’s report regarding internal control, and so on.

Under French law, the Chairman of the Board of Directors has an essentially administrative and leadership role. (12)

3. Other avenues may be explored for achieving the same balance of powers objective. In order to ensure balance within the Board, whilst combining the offices of Chairman and Chief Executive Officer, French companies have implemented the following practices:

  • The introduction by the Board of Directors of limitations on the powers of the Chief Executive Officer; these rules generally feature in the Boards’ internal regulations, which specify those cases where the prior approval of the Board of Directors is required.
  • The appointment of a significant proportion of independent directors to the Board.
  • The possibility for individuals other than the unified Chairman/CEO  to call a meeting of the Board of Directors regarding an agenda they have set and which is within the Board’s jurisdiction.
  • The establishment of specialist committees responsible for preparing the Board’s work in the fields of compensation, nominations and auditing.
  • The review of certain matters strictly without the presence of executive members.
  • Regular meetings of non-executive directors without the presence of executive or internal directors in order to assess the performance of the executive directors.
  • The appointment of a lead independent director who is sometimes called the deputy chairman. The role of this independent director, arising from practice, is to ensure the smooth operation of the governance bodies. (12)

Audit & Remuneration Committees

Audit committee – The French code expects all companies, even controlled companies, to have an audit committee comprised of two thirds of independent non-executive directors. A non-independent director may attend audit committee meetings by invitation but should not be a member of the committee. The function of the audit committee is very important as it a) reviews the accounts and ensures the relevance and consistency of accounting methods; b) monitors the process for the preparation of financial information and c) monitors the effectiveness of the internal control and risk management systems. (11)

Remuneration Committee – comprised entirely of independent non-executive directors. As explained by Professeur Pichet, in France, some elements of remuneration are already submitted to a shareholders’ vote in the auditor’s report on related party transactions. Indeed, they are able to vote on share plans and post-employment payments (e.g. severance payments). Since January 2014 shareholders of French listed companies are able to vote on the individual remuneration of the company’s executive officers – base salary, variable remuneration, pension, stock options and free shares. This will only be an annual advisory vote and the final decision will be the responsibility of the Remuneration Committee. Therefore, companies will have to include in their annual report a detailed description of the remuneration policy of their executives and non-executive board members. (4)

French Corporate Governance Implications

As in Sweden, there are fewer formal institutional constraints on managers in France than in the USA, and those that exist are very liberally defined. PDGs (President Directeur General) of the largest firms are usually employed by the state before assuming this top-level management position. Rarely having prior industry experience, their appointment is based more on the institution that they graduated from and their political affiliation.

A French board’s legal authority to monitor PDGs is severely weakened by the manner in which boards are assembled. Most members of French boards of directors are directly appointed by the PDG, rather than elected by the shareholders, and are either representatives of large family holdings, scientific or technical experts, or themselves PDGs of another large firm. Indeed, it is expected that when a chairman is nominated to the board of another company he will reciprocate: yet another example of centralization through personal relationships.

Moreover, French top managers from the elitist castes are rarely sanctioned or dismissed for reasons of poor performance. A manager is most likely to be appointed to the PDG post when their political party is in power, and as long as the party remains in power, it is unlikely for the board to dismiss him or her. Once their party is out of power, however, the PDG may be more vulnerable.

The costs of safeguarding against moral hazard are low due to the convergence of interests and linkages noted above, which is also demonstrated by the lack of formal sanctions that are used against top managers. Also managers’ decisions are closely monitored largely to evaluate employees’ performance and demonstrate that the stratification of functions and responsibilities is being respected. (13)

ATEP/MEDEF The French Gendarme of Corporate Governance

It is essential to know that these two organizations are jointly responsible for overseeing the implementation of the code. They have three objectives:

  • Promote soft law through the development of corporate governance codes
  • Avoid over-burdening companies;
  • Improve legal certainty.