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22 April 2013
Over the past decade, a number of countries have introduced legislation on shareholder control over remuneration for corporate officers, or in common parlance, 'say on pay'.
The European Commission has been making recommendations for listed companies on say on pay since 2004. More recently, the focus has shifted to restrictions on bonuses in the banking sector. In its corporate governance action plan of December 12 2012, the commission announced plans to make legislative proposals during the course of 2013 for greater transparency and shareholder control over corporate executive remuneration
However, France has not been at the forefront of this trend. While legislation and the Corporate Governance Code of the French Business Confederation (AFEP-MEDEF) ensure that comprehensive information on corporate officers' pay and benefits is communicated to shareholders, they do not enjoy a general right to approve corporate officers' remuneration. This is despite the fact that in listed companies shareholders do have a vote on severance payments and a limited say, under the regulated agreements regime, on specific types of exceptional benefits that corporate officers enjoy when their office is terminated (eg, severance payments, enhanced pension benefits or stock options).
Executive pay has nonetheless been climbing the political agenda in France, particularly since the onset of the financial crisis. The government has introduced restrictions on remuneration for corporate officers of state-controlled companies and businesses that have been rescued using public funds. More widely, there have been increasing calls for stricter regulation of executive pay, which will perhaps bring the country into line with other European jurisdictions.
Sensing a gradual change in political and shareholder expectations, a number of listed companies, such as Publicis, have decided to apply the say-on-pay principle voluntarily, by giving this year's annual general meeting (AGM) a non-binding vote on the issue.
The government has now indicated that it will propose legislation later in the year, possibly before the summer, to modernise legislation on corporate executive pay. A parliamentary report recommends that in listed and other large companies, shareholders vote on pay policy every three years and vote annually on individual executives' pay packages. These recommendations could form the basis for future legislation. However, as the law currently stands, sociétés anonymes that are listed already have the means, albeit limited, to give shareholders an indirect vote on corporate officers' pay.
In a French société anonyme, the overriding principle of the separation of powers within the company is that the remuneration of the company's corporate officers is set by the board of directors, not the shareholders – shareholders cannot lawfully encroach on areas of decision-making that are reserved for the board. In a société anonyme with a single-tier governance structure (ie, a board of directors), the board appoints and sets remuneration for the president and general manager. If it has a two-tier governance structure (ie, a management board, which runs the company, and a supervisory board), the supervisory board appoints the members of the management board – including its president – and sets their pay.
Subject to the specific situations in a listed company where shareholders are required to approve severance payments and benefits that fall under so-called 'regulated agreements', the AGM plays no role in approving the company's executive pay policy (whether present or future) or the remuneration of individual corporate officers. This provides legal certainty and prevents decisions taken by the board of directors on the recruitment and remuneration of corporate officers from being overturned by shareholders at a later stage.
Even though it would be unlawful under the current regime for shareholders to have an explicit vote on the remuneration policy set by the board of directors or on individual pay packages, there are already indirect means for listed companies to give their shareholders a say on pay. For instance, shareholders of a listed société anonyme can be given a separate vote at the AGM on the part of the annual management report that describes the various components and criteria used to set the current pay of corporate officers (ie, current pay policy). Such a vote would not be unlawful for encroaching on the board's powers, on the grounds that the annual accounts and annual report are subject by law to shareholder approval. Shareholders could be given the opportunity to formulate reserves or exceptions on specific aspects of the relevant part of the annual management report, which would be recorded in the meeting's minutes. However, shareholders should not be asked to approve the company's future policy on executive pay, as only the board is competent to determine this.
Even though a negative vote would not be legally binding on the board, shareholder disapproval might have a persuasive effect on the board's policy on remuneration and could even lead to individual corporate officers accepting a reduction in pay or resigning.
Greater shareholder say on corporate executive remuneration will inevitably lead to more dialogue between management and shareholders, particularly institutional investors, as companies seek to secure the support of their major shareholders on pay policy. Proxy voting agencies, which are becoming increasingly influential, will inevitably gain greater prominence.
Forthcoming legislation on executive pay is likely to trigger a shift in the balance of powers within companies, away from the board of directors and towards shareholders. However, if the new rules - whatever form they take - encourage companies to link incentives to long-term value creation, they will have been worthwhile.
For further information on this topic please contact Rhidian David or Cyrille Gaucher at Cabinet Hughes Hubbard & Reed by telephone (+33 1 44 05 80 00), fax (+33 1 44 05 80 54) or email (email@example.com or firstname.lastname@example.org).
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