Say On Pay: The New French Legal Regime in light of the Shareholders’ Rights Directive II

Top executives’ compensation (TEC) is a topical and sensitive corporate governance issue. This issue has probably been one of the most publicised along with the rise of shareholder activism, which is not coincidental.

The matter has economic substance, since the end-goal is to shape TEC in ways that best serve the interests of the company or even broader interests. This instrumentalisation of compensation as a minimiser of agency conflicts has led to a tremendous change in the structure of TEC in listed companies, although the outcomes of this instrumentalisation do not seem to be quite satisfactory. Hence the growing calls for regulation.

This issue is interesting from a regulatory policy standpoint. As a minimum we can say that the approach usually followed by regulators in this area does not always conform to ‘better regulation’ standards.

For one thing, the matter is prone to the so-called ‘Macedonian effect’, consisting of regulators drawing general rules from quite exceptional but often widely publicized situations, at the risk of creating excessive constraints in the great majority of cases. Regarding remuneration, this Macedonian effect is formidable, especially in a country like France, which is characterised by its longstanding passion for equality, where there is not a single controversial remuneration case that is not the subject of widespread media coverage, immediately accompanied by some proposal for legal reform.

In this context, self-regulators, in a common defensive move, often try to change the corporate governance rules, hoping to discourage the public authorities from stepping in. But even when this pre-emptive effort works, the result is only achieved at the expense of the very distinctive nature of self-regulation, which is now on probation and turns into a government-controlled laboratory for hard legislation.

It is precisely through such a pre-emptive move that an ex post say on pay (SOP) vote appeared in 2013 in the main French corporate governance code, named the AFEP-MEDEF code.

Although this system seemed to work well in most companies, with shareholders’ approval rates of about 90%, the initial positive perception changed in spring 2016, when the remuneration of Carlos Ghosn, CEO of Renault, only received a 45% approval vote, but was nonetheless confirmed within a few hours by the board of directors.

This time, despite a new attempt to pre-empt legislative intervention through a modification of the AFEP-MEDEF code, the French public authorities decided to intervene. The political context certainly played a role, since, in the case of Renault, the French State, a major shareholder of the company, tried unsuccessfully to defeat the resolution approving the CEOs’ compensation package. The legal context was also relevant, as the proposal for reform of the European Shareholder Rights Directive (SRD) included ‘say on pay’ provisions, to be implemented through national legislation.

An amendment (without any impact assessment) to an omnibus law relating to Transparency, the Fight against Corruption and Modernization of Economic Life (aka the ‘Sapin II Law’) was then introduced in order to impose, a ‘say on pay’ in French listed corporations.

As a result of the Sapin II Law, passed on December 9, 2016, France is said to have established one of the most, if not the most, stringent say on pay systems in the world.

This assertion is certainly true as far as the consequences of the shareholders’ votes are concerned, since the French legislator decided to institute, in French joint-stock corporations having their securities listing on a regulated market, two separate annual binding votes on remuneration:

• starting in 2017, an ex ante, forward-looking vote on the remuneration policy for the companies’ executives;
• as from the 2018 campaign, an ex post, backward-looking vote on the individual remuneration due in respect of the prior year. Should this vote be negative, the variable and exceptional remuneration would not be payable to the concerned executive.

France has thus decided to take the lead on this particular issue (apparently without a clear consciousness of doing so), by way of a pre-emptive over-implementation of the European SRD, so as to transform a mere ‘say on pay’ into a real ‘decide on pay’.

Indeed, this combination of an ex ante binding vote, on the UK model, followed by an ex post binding vote, on the Swiss model, is rather unique and has consequently raised concerns from corporate practice. The French SOP is accused of being excessively rigid and a new manifestation of needless red tape. Surely, the compulsory character of the ex post vote has been strongly criticised for weakening the remuneration packages offered by French listed companies, and as such creating a competitive handicap for them in the international market for top executives, and dispossessing the boards of their core legal power of setting the TEC.

After all, the strong stance taken by the French lawmaker expresses a political choice that is hard to challenge on the grounds of legitimacy; although the disputed evidence of the economic efficiency of the say on pay tool weakens the case for such a stringent legal regime.

What is more difficult to understand is the failure to comply with other say on pay requirements contained in the European SRD, as if the excessive focus on the legal nature of the ex ante / ex post votes had overshadowed aspects of the say on pay regime other than procedural. Such is the case for:

- the personal scope of application of the say on pay, the French one being more restrictive than the European one, which covers all members of the administrative, management or supervisory bodies of the company;

- the mandatory nature and the content of the remuneration policy, which is much more demanding, ambitious and results-oriented in the European directive;

- the ex post remuneration report, whose content is much more informative and meaningful in the SRD.

As a result of these discrepancies, the brand new French say on pay mechanism must be significantly revised by June 10, 2019, an obligation to reform that is likely to be ill-received by some vested interests. Optimists may however see it as an opportunity to think about reversing some of the options retained in the Sapin II Law and to soften it with flexibility and proportionality elements, which can only be based on a more coherent and general vision.

This post draws on the paper, ‘Say on Pay: The New French Legal Regime in Light of the Shareholders’ Rights Directive II’.

Alain Pietrancosta is Professor of Law at the Sorbonne Law School (University of Paris).