Frank J. Cifarelli, Director, Global Shareholder Communications
Positive Trends in French Corporate Governance Practices
One of the trends we are watching with increasing interest is the growing number of French companies adopting improved corporate governance principles. As the world’s economy is becoming increasingly more integrated, French companies are grappling with the arrival of the “Anglo-Saxon” model to their country. Today in France, there is a greater corporate concentration on profitability, transparency, and shareholder accountability. However, the newer goals of activist shareholders and the interests of minority shareholders can be in conflict with the traditional French corporate model of state intervention, cross-holdings and economic nationalism. (1)
While France ranks as one of the world’s most advanced economies, with a significant GDP and equity market, the development of shareholder rights is lower than one might expect. (2) Compared to its peer Western European countries (such as the United Kingdom and Germany), public and institutional shareholders investing in France have been at a competitive disadvantage, due to entrenched insider voting blocs exercising their voting power at Annual General Meetings on disputed agenda items.
There is a great deal of evidence that this behavior in France is changing however, and many French companies are taking the topic of corporate governance and shareholder accountability very seriously. They are now more likely to seek independent directors for their boards. Although most French companies still have a unified President-CEO / Chairman of the Board structure, (3) those that wish to send a message to the equity markets, that they are interested in improving their corporate governance practices, are now more likely to split this role into two different positions.
In addition, more French companies are taking seriously the recommendations of several authoritative organizations, which have written articles on corporate governance “Best Practices”. The 2003 and 2008 AFEP-MEDEF reports outline recommendations for companies to follow. (4) The AFEP-MEDEF is a joint association consisting of two bodies – the AFEP, an association of large-cap companies (most of whom are CAC-40 constituents) which promotes the principles of private enterprise, and the MEDEF, which is the largest union of French employers, and which among its other duties conducts industry association surveys and takes action based on the survey results. (5) The AMF, a regulatory body that is responsible for: i) overseeing the French securities market and listed companies and ii) enforcing insider trading and corporate takeover laws, produced a report in 2005, regarding corporate governance and proper internal control channels.(6) The AFG (a French asset management association) has been producing guidelines on corporate governance “Best Practices” since 1998 and discusses such topics as legal and tax issues, proper corporate management behavior, and business conduct rules. (7)
Historically, the French government has had a great deal more influence on the management and capital creation of French companies than what has been commonly experienced in the United States. The power of the French government sometimes crowded out the full pursuit of shareholder activism previously. Interestingly, with the French government having a significant influence over French company management, this government involvement has been a factor in improving corporate governance in France now. (8) Major French political parties, across the ideological spectrum, are in favor of improving corporate governance and have given the power to the AMF to monitor French companies as to their compliance with the AFEP-MEDEF guidelines. Under a “comply or explain” system, the onus is on French companies to explain why they have not complied with the AFEP-MEDEF guidelines. (9)
One corporate issue that has received a great deal of attention in France is the topic of executive pay and its sister issue, severance packages issuance. Under French law, companies are required to submit compensation packages to a shareholder vote. (10) There have been numerous high-profile severance package proxy fights in France (11) (e.g. Alcatel-Lucent, Valeo SA, Total SA) during the past few years. These severance packages were considered excessive by activist shareholders.
In summary, we see an increasingly improving corporate governance environment in France, which will make investing in France a more attractive option for institutional investors, who wish to exercise their shareholder rights and demand better transparency, accountability and performance from French company management.
Bibliography
1) CFA Institute - Shareholder Rights Across the Markets: A Manual for Investors 2009, France Section, Summary of Current Shareholder Rights, Schacht, Kurt, Allen, James, and Orsagh, Matthew, p. 21.
2) Ibid., p. 21.
3) RiskMetrics Group - France 2009, Corporate Governance Profile, p. 4.
4) Ibid., p. 2.
5) Ibid., p. 3.
6) Ibid., p. 3.
7) Ibid., pp. 2-3.
8) RiskMetrics Group - France 2009, Corporate Governance Profile, p. 2 and RiskMetrics Group - 2009 Postseason Report: France, d’Alboy, Orsolya, pp.1 - 2.
9) RiskMetrics Group - France 2009, Corporate Governance Profile, p. 2.
10) CFA Institute - Ibid., p. 21.
11) RiskMetrics Group - 2008 Proxy Review: France, Tassin, Guillaume, p. 1.
James F. Burke, Managing Director, Special Studies
Modernizing the Proxy Voting System: Setting Priorities
The Altman Group submitted a new position paper to the SEC on March 1, 2010, titled “Modernizing the Proxy Voting System: Setting Priorities.” In the paper, Kenneth L. Altman (President, The Altman Group, Inc.) argues that: “reforms of the OBO/NOBO distinction and other aspects of the current proxy voting system are not simply about addressing a range of particular needs, but rather an imperative for sustaining a ‘workable’ system….Chairman Schapiro commented on Sept. 17, 2009, that she wants to ensure that ‘the shareholders' vote is both meaningful and freely exercised.’ ‘Freely exercised’ is a very high standard: one that can only be reached, in our view, through the reform of processes that currently result in historically low retail voting participation rates and the lowering of barriers to engaging more shareholders in the voting process (including reform of the OBO/NOBO [Objecting vs. Non-Objecting Beneficial Owner] system).”
The position paper expands on Altman’s proposal for a limited event-based All Beneficial Owners (ABO) option for companies and soliciting shareholders to obtain comprehensive lists of the names of all beneficial owners (for annual and special meetings, and a limited number of other events that are detailed in a position paper submitted by Altman to the Commission in October 2009 [and available at the link provided below]). ABO, Ken writes: “is a process designed to fix a proxy plumbing problem. ABO will enhance the integrity of the overall system by increasing engagement with individual investors holding in Street name, and enable direct communications between smaller investors and both companies and shareholders using ABO lists to conduct mailing and solicitation campaigns. Without ABO, it will also be extremely difficult, if not impossible, to create a modern system that marginalizes uncertainty about the accuracy of votes and provides a workable audit trail.” ABO will not eliminate the current OBO/NOBO system. However, this new position paper does advance a new proposal from The Altman Group to create “a process that will fully inform all investors about their OBO/NOBO status and clarify which account holders truly want to maintain their OBO status: “That process would involve conversion of all accounts to a NOBO ‘default’ status, while providing time before the effective conversion date (e.g., for 6 months or longer leading up to that date) for all existing OBOs to renew their OBO status. All account holders choosing to maintain their OBO status could be required to pay a small fee…Brokers must also be prohibited from making an OBO selection on behalf of an account holder unless explicitly directed to by the account holder (with the account holder’s signature) after the latter has been ‘fully informed’ of the consequences of an OBO designation, including any associated fees.”
The full text of the new position paper, written by Kenneth L. Altman, is posted on our website at the following address:
http://www.altmangroup.com/pdf/ProxyMechanicsTheAltmanGroup.pdf
A related position paper was submitted to the SEC in October 2009, and is posted at:
http://www.altmangroup.com/pdf/PracticalSolutionTAG.pdf
