Does the recent spate of voting rights restrictions imposed by high profile French companies signal that corporate governance reform is on the back heel in France? Jessica Freedman asks the experts
Governance reform in Europe has been moving at a rapid pace. Driven by a whirlwind of privatizations, the unwinding of cross-shareholdings and an end to the reliance on state ownership, foreign capital flooded into the continent in the 1990s bringing with it demands on companies to improve transparency and accountability in the boardroom. France has been no exception. Over the past few years foreign institutions have poured money into Paris-listed stocks to the point that they now own almost 40 percent of total market capitalization. The 1995 Vienot report brought modernization to French boards in the form of independent directors and committees. And last year, Vienot II was published promising further change (see Viennot II, Key Recommendations, page XXX). The announcement by the head of France’s leading employers’ association Medef, Ernest-Antoine Seilliere, that he took home nearly $450,000 after tax last year, pointed further to the opening up of France’s traditionally closed corporate culture. But this year, some of the ground won seems to have been clawed back – certainly by three companies who have succeeded in putting voting limits in place. Firstly, Credit Lyonnais stripped one of its largest shareholders, Germany’s Dresdner Bank, of its votes by invoking an obscure clause in its statutes specifying that investors need to inform the bank when they increase their stake about 0.5 percent of its capital. Next was Societe Generale, which said it would cap the votes of any investor at 15 percent regardless of the size of their stake. And finally, Vivendi, at its April annual meeting, passed a resolution limiting voting rights above a two percent threshold in line with total turnout.
Legal loopholes
But does this constitute a backlash? Remon Fabrice of Brussels-based proxy advisors Deminor says it’s not as simple as that. ‘In the last ten years we’ve seen a huge change in the shareholding structures of French groups with less and less companies having core shareholders with agreements on how to run the companies. We’ve also seen very low participation at AGMs. People don’t even vote by proxy,’ says Fabrice. This low voter participation creates real problems for management, he adds. ‘On the one hand its problematic because legally a company needs to meet a quorum to get anything passed. On the other hand, someone who owns 5 to 6 percent of equity can potentially do whatever they want.’ Consequently management are increasingly looking for ways to protect themselves. ‘They’ve got two options really,’ says Fabrice. ‘Either they can do everything in their power to encourage more people to vote or they can limit shareholders rights.’
Pierre Henri Leroy, director of corporate governance research agency Proxinvest, says that the French custodial community is also culpable in bringing voting levels down, by interpreting the law pedantically. ‘There is a law which says that the only person who can vote, or sign the proxy card, is the company’s director generale,’ says Leroy. This legal hurdle mostly affects international investors who want to vote. ‘It doesn’t matter so much for French companies but for foreign firms, who tend to use custodians to process their proxy cards, it’s a real issue. Companies can legally choose to throw foreign investors’ proxy cards out because they are not signed by the so-called real owner.’
Pierre Bollon, director general of AFG-ASFFI, the French fund management association, agrees adding that companies’ interpretation of the rule is often dependent on the result they want. ‘If they need the foreign votes because they need to get a quorum together so a resolution will pass, then they’ll choose to ignore the fact that it is signed by a custodian. But if the vote goes against a resolution they might choose to throw it out.’ According to Bollon, Paribas and other French custodians have been writing to foreign shareholders for several years warning them about the issue but it is only recently that they have been sitting up and taking notice. Earlier this year, for example, Chase Manhattan announced that it would no longer provide proxy services for companies’ investments in France.
Culture clash
According to corporate governance consultant Sophie L’Helias, the US custodian community has completely misrepresented the issue. ‘This is not just about corporate governance. It’s not a simple matter of bad French companies taking votes away from the good US investors, it’s a regulatory issue, a legal issue but most of all a cultural issue.’ L’Helias explains that the law dates back to the 1960s when it was written for a shareholder structure that was purely domestic. ‘In French law there isn’t such a thing as an investment trust. All of a sudden French companies find themselves with shareholders that are foreign and the law just doesn’t cater for their kind of shareholder structure. It’s completely outdated.’ L’Helias adds that it has only become an issue in recent years because people have started taking their voting much more seriously, especially foreign shareholders. ‘Before no-one voted so it just didn’t matter.’ L’Helias admits that of course some companies are taking advantage of the loophole. ‘You will find some companies using it to entrench themselves and some investors thinking why should we facilitate or modernize this process if it only helps foreign shareholders but that kind of bad faith represents only about 10 percent of the problem.’ L’Helias puts a greater proportion of blame down to inadapted regulation and cultural issues on both sides. ‘The French government don’t want to address the issue because they don’t understand the notion of trusts and the U.S.
L’Helias concludes that fundamental changes need to be made to the voting process in France. ‘It’s too costly, cumbersome and there is too short a timeframe in which companies can even vote. The whole system pushes shareholders not to vote and that’s got to change.’ The AFG-ASFFI’s Pierre Bollan sees the solution in electronic voting. ‘It would transform everything.’ Bollon is also anxious to stress that the outlook is not all bleak. ‘They have put a few hurdles in our way but we just have to learn to jump a little higher. They are hurdles, not a wall.’ Bollon even takes some comfort from companies’ efforts to restrict investor voting rights. ‘It’s evidence that they are aware that shareholders do have power, they are aware what a powerful tool the vote is. Before they just didn’t care. It was a kind of benign neglect.’ Pierre-Henri Leroy also sees progress on a whole raft of governance issues in France. ‘From our research over the last five years, we’ve seen voting increase steadily. More and more investors are keeping a critical eye on board members and in general have an increased awareness of corporate governance.’ Leroy also points to research by Deminor which conducts an annual corporate governance analysis of the Eurotop 300. Last year France came well above many of its European neighbors like the Netherlands and Belgium (although far behind the UK) on many governance issues.
Sending the right message
According to Colette Neuville, president of the minority shareholder rights group Association pour la Defense des Actionnaires Minoritaires (Adam), shareholders in France are also becoming increasingly activist. This summer, Adam launched a court action to block the poison pill Vivendi put in place. ‘The company has managed to delay the court action for a while; for obvious reasons they don’t want this to be in the public eye at the moment,’ says Neuville. But she is encouraged that her suit has made it this far. ‘They will not be able to stall things for ever and this action will serve as a real warning for other companies trying the same tactics.’ Indeed Neuville has already threatened similar treatment for Societe Generale and she has numerous other cases on the go as well, in some instances with 10-15 percent of a company’s shares behind her. ‘On previous occasions I’ve represented 30 percent of the shares,’ adds Neuville.
Neuville puts much of the growth in shareholder activism in France down to the influence of foreign investors. One shining example this year has been at apparel concern Group Andre where two foreign investors, NR Atticus and Guy Wyser Pratte, forced out the board. Their proposals called for a board that ‘reflects the shareholding structure’ and Wyser Pratte himself was among the new directors nominated to the board. He comments: ‘It was significant because for the first time in the commercial history of France, the corporate machinery of democracy – the proxy ballot – was used to get rid of an incompetent, inefficient management.’ Wyser Pratte believes that the action has sent a message to other companies. ‘They’ve got to learn to clean up their act because if they don’t they realize there are active shareholders who will do it for them.’ Most French shareholders have not adopted quite such a confrontational style. According to Deminor’s Remon Fabrice, although opposed to limitations on their rights, shareholders have traditionally not spoken out against companies and the stigma of doing so still plays a role in the proxy process. ‘In the Vivendi case you saw some funds who were against the resolution preferring not to vote at all rather than vote against. It’s still not correct to speak out against a company. But the turnout was incredibly low which shows what people really thought of it.’
Pierre Bollon says the AFG-ASFFI is doing its bit to help its members (who make up about a tenth of the Paris stock market) to exercise their voting rights. In 1998 it released its own corporate governance principles calling for fund managers to vote against common takeover defenses and for an end to double voting rights. ‘We first created a standing committee on corporate governance for our members which made its recommendations. Since then we have compared resolutions at the CAC40 to the findings of our report. If there is a discrepancy we write to our members saying that X company is out of line with our recommendations on X issue,’ Bollon explains. He adds that an investor still might vote for a company on a particular issue but at least they get the information they need to make an educated decision.
Jean Francois Jilles, who heads up the investment team at CCF, says his firm has been following corporate governance issues for the last eight years or so and uses a governance research firm to make recommendations on how to vote. He believes that corporate governance in France is very close to Anglo-American practice and there is certainly no antagonism to Anglo-American views on shareholder rights. Deminor’s Remon Fabrice agrees in principle but feels that French companies and investors still have some way to go. ‘When the Vienot report was published, a lot of companies were happy to follow its recommendations. It was something easily done, that made them look good. Corporate governance in France has come on now. The reforms being demanded are not simply cosmetic so its going to take a little more time for them to happen.’
Vienot II: Key recommendations
1. Companies should be able to opt for a single tier board with split CEO chairman roles (previously companies in France either had a single-tier board with combined chairman and CEO or a two-tier structure with a supervisory board and separate chairman)
2. Annual reports should include: – a detailed description of the policy for determining executive pay; the principles for the allocation of the fixed and variable proportions, criteria for determination of the basis for variable portions; rules for the awards of bonuses
– the aggregate amount of compensation of all kinds collected by executives, specifying fixed and variable portions
– the individual amounts of attendance fees paid to directors
3. Independent directors should account for at least one third of the board and make up at least one third of audit and nominating committees. The compensation committee should consist of a majority of independent directors.
4. Directors should serve for no more than four years before seeking re-election. Their terms of office should be staggered and the dates of a director’s term should be disclosed.
5. The makeup of each board committee should be disclosed as should each individual directors’ age, main executive position, other directorships, shares held.
6. Directors should limit the number of outside directorships they hold and definitely not hold more than five positions.
Source: Governance, September 1999
