Corporate governance rules are mainly set out in statutory provisions contained in the French Commercial Code and in recommendations contained in corporate governance codes (such as the French Association of Private Enterprises (AFEP) – Movement of French Enterprises (MEDEF) Code) – or in positions expressed by various professional bodies and associations.
Indeed, the AFEP-MEDEF Code has become a reference in matters of corporate governance. It is based on recommendations issued over the past 21 years and sets the corporate governance standards for listed companies.
ii Enforcement of the listed company regime
Besides compulsory rules, the implementation of corporate governance principles is also monitored by the French Financial Markets Authority (AMF), which publishes an annual report assessing corporate governance practices and executive directors’ compensation in listed companies.
Moreover, although corporate governance codes and the positions expressed by professional bodies or associations do not have any legal authority and are considered to be ‘soft law’, these rules are generally applied by companies. This can be explained by market pressure, since compliance with these rules is a criterion used by proxy advisers in their recommendations on how to vote on shareholders’ resolutions. Almost all large listed companies have selected the AFEP-MEDEF Code and, since its amendment in June 2013, application of the AFEP-MEDEF Code’s provisions has been monitored by the High Committee for Corporate Governance, which issued its first annual report in October 2014,2and a guide on the application of the AFEP-MEDEF Code in December 2014.3
iii Recent developments of the corporate governance regime
In 2016, three years after the ‘say-on-pay’ procedure was added to the AFEP-MEDEF Code – and although the average rate of approval by shareholders of say-on-pay resolutions has increased from 86.7 per cent in 2015 to 90.6 per cent in 2016 for CAC40-listed companies – shareholders voted against executives’ compensation for the first time, in two companies. The decisions to reject the relevant resolutions were justified not only by the high level of remuneration granted, but also by the poor quality and insufficiency of the information provided. These negative votes and the subsequent lack of reaction from the boards of directors of the companies concerned gave rise to much debate, notably regarding the consultative nature of the say-on-pay vote, and caused the legislator to introduce, in December 2016, a say-on-pay procedure that is both mandatory and binding (see Section V.iii, infra).
Further progress has also been made in the revised AFEP-MEDEF Code of November 2016, in particular with provisions aimed at reinforcing the role of the strategy committee in listed companies, improving directors’ independence, increasing the role of corporate social responsibility (CSR) – especially concerning the environment – and laying down or clarifying the principles that apply to executive compensation (the new code now provides that the quantifiable criteria for variable remuneration must be preponderant).
In 2016, the absence of whistle-blowing procedures per se in French law led the legislator to implement a regime to protect whistle-blowers (see Section IV.ii, infra).
On 17 June 2016, new EU rules on statutory audits aiming at improving audit quality and restoring investor confidence in financial information became applicable in France.4
iv Distinctive aspects of the corporate governance regime in France
Corporate governance in France has changed considerably during the past 17 years as a result of the increase of foreign shareholdings in CAC 40-listed companies. Regulations have also been used to address market failures and restore public confidence, in particular regarding executive compensation.
In core areas, such as director independence and board committees, the French corporate governance regime is converging with existing best practices. Differences in governance structures can still be found, although the one-tier system is prevalent in France, with approximately 85 per cent of major listed companies adopting this structure.
v Recent trends
The practice of extra-financial analysis and rating has developed considerably to enable investors to include extra-financial performance of companies in their investment criteria. Extra-financial analysis organisations assess companies’ sustainable development policies to evaluate how listed companies take into account environmental, social and governance issues.
Although extra-financial analysis organisations are not regulated, a Voluntary Quality Standard for Corporate Sustainability and Responsibility Research5 has been drawn up, setting out guidelines, rules and commitments regarding the transparency, accountability and verifiability of the processes involved in extra-financial analysis. The AFEP-MEDEF Code now takes into account information on non-financial issues (see Section IV.iii, infra) while Directive 2014/95/EU dated 22 October 2015, which will soon be transposed into French law, introduced an obligation to disclose non-financial and diversity information for large companies (see Section III.iii, infra).
The level of disclosure of financial information has been increasing, particularly regarding remuneration policy, under pressure from shareholders and proxy advisers, and after several controversies concerning executive compensation and severance packages.
Another notable trend is the preference among listed companies for the one-tier governance structure (i.e., with a single board of directors).6 Companies with a one-tier board tend to combine the positions of chair of the board and CEO. An increasing number (42.9 per cent) of CAC 40-listed companies have appointed a lead director, notably to counterbalance the concentration of power in the CEO’s hands (when he or she is also the chair of the board).7 The AFEP-MEDEF Code now provides that lead directors should be independent directors.8
More detailed information regarding corporate governance rules applicable to listed companies in France is available at https://thelawreviews.co.uk/edition/the-corporate-governance-review-edition-7/1140912/france
For developments from the French Financial Markets Authority (AMF): https://www.amf-france.org/en_US/
In 2018 The AMF published their report on corporate governance and executive compensation in listed companies (available here)
For developments from the French Association of Private Enterprises (Afep): http://www.afep.com/
The Autorité des Marchés Financiers (AMF)
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