The Autorité des marchés financiers (AMF) published its annual report on corporate governance and executive remuneration at listed companies on 17 November. At the same time, it published its third report on social, societal, and environmental responsibility (ESR) information disclosed by a sample of listed companies. This second report discusses disclosure of non-financial information and makes recommendations on transparency and coherence. The sample of companies looked at was based on 60 listed companies (including 30 small and mid-sized companies). The main governance report analyses compliance with the French governance code, AFEP-MEDEF. This report covers 36 in the CAC 40 (the 40 largest stocks on the Paris exchange) as of 31 Dec. 2014, and 24 of the largest companies in the SBF 120 (Société des Bourses Françaises 120 Index). Data for both reports is based on 2014 information reported in 2015 annual reports, as well as remuneration and shareholder voting data for 2015.

The focus of the governance report is:

business relations with regard to directors' independence

salaried directors

managing conflicts of interest

evaluating board

consultative vote on executive remuneration (‘say on pay’)

multi-annual variable remuneration (long-term incentives)

information on service agreements

The report also includes a number of case studies. For example, Alcatel-Lucent was investigated at the AMF’s instigation by the High Committee on Corporate Governance regarding excessive severance particularly in regard to long-term incentives that were paid out based on periods in which he was not an employee. Lafarge was also investigated about the same issue of severance, particularly about the payment of, and inclusion in, calculating termination benefits of extraordinary remuneration.

As a result of these case studies, AMF asked for an investigation by AFEP and MEDEF, the large- and small-company industry associations respectively, into violations of the spirit of the code on excessive severance and a request that companies issue a full and transparent release that “exhaustively details the financial terms of that departure.” AMF felt that the rules regarding severance benefits could too easily be circumvented. Specifically, the code should specify how the ceiling on benefits should be calculated and how the funds paid out in shares should be valued. There is currently a cap on severance pay of two years of remuneration, but the report notes that the code must be made more specific on what can and cannot be included. It also requested that non-competition benefits be disclosed prior to the departure of a senior executive so shareholders can assess them prior to the payment and not just after the fact. Finally, the AMF also wants the code to regulate the removal of continued employment conditions for long-term incentives (LTIs); a removal that would allow LTIs that pertained to performance after the CEO had departed—as in the Alcatel case—to be paid out.

Five recommendations on pay disclosure and discussion

Present the elements of remuneration in the registration document or annual report for the year in question;
Differentiate each criterion used for the variable part of the remuneration;
Indicate the cap for variable remuneration with regard to the fixed part;
In the event of the application of adjustment clauses affecting the calculation or payment of certain elements of the remuneration, give clear and precise information on their implementation and ensure that the predetermined nature of the criteria used to determine these elements is not called into question;
Facilitate shareholder access to elements of remuneration put to the vote.
2015 Report by the AMF on Corporate Governance and Executive Remuneration


The report also notes an increase in the number of companies that state they do not follow certain provisions of the comply or explain governance code (75 percent as of 31 Dec. 2014 versus 68 percent in 2013). Five of these companies do not disclose all the recommendations they rejected, while 40 companies, compared with 28 in 2013, show a table summarising all the recommendations that were rejected by the company, with corresponding explanations.

Ongoing progress in board diversity was observed, specifically the proportion of women, with women making up 31.5 percent of boards as of 31 Dec. 2014, compared to 28 percent at 31 Dec. 2013. Other diversity remains stable: 90 percent of companies in the sample appointed at least one foreign director, 30 percent have an employee shareholder/director, and 17 percent have at least two employee directors.

Almost all companies (97 percent compared to 88 percent in 2013) report that they have specific rules governing directors’ conflicts of interest. In terms of best practices, Hermès, Safran, and Valeo very clearly set out the rules that directors must follow in terms of managing conflicts of interest on the boards of directors. However, few companies disclose fully how independence is affected by business relationships. The AMF has already “advised companies to state who the directors involved in these business relationships are and to describe in detail the qualitative and/or quantitative criteria for appraising the significance of the relationship with the company or its group ...” A percentage of turnover or sales realised that is associated with a director’s other company, it notes, sharply, is not always “relevant nor sufficient to illustrate the non-significance of a business relationship.” Thus, the report asks that companies perform “a qualitative analysis based on various parameters demonstrating that such a relationship is not significant and is exempt from major conflicts of interest.” The AMF also makes a recommendation that AFEP and MEDEF revise the code rules applying to determining independence for an independent chairman, as the current rules are confusing and contradictory.

Again, almost all companies state that they conducted a board evaluation but more than a third give no information about any follow-up to such evaluation. The AMF recommends that “issuers give sufficiently detailed information on the evaluation and its results.” And while more companies have set up procedures to review outside appointments taken up by senior managers, half of the sample is still not reporting on this topic.

The AMF also recommends that governance disclosures be centralised in the governance section of company reports and that “summary tables including the implementation of the corporate governance code's recommendations be used.”

A substantial portion of the report is dedicated to discussions of pay, as well as recommendations for changes to the code (see the first sidebar). Shareholder approval rates on ‘say on pay’ resolutions continue high, although lower than last year’s: 86.7 percent compared to 91.4 percent in 2014 for the CAC 40, and similar figures for the rest of the sample. In the pay discussions, transport company Bolloré is cited for many reasons: not providing a cap for its annual bonuses and not providing performance criteria, but also not disclosing a limit on the qualitative portion of the annual bonus and not giving any description of the distribution of the bonus based on different performance criteria.

Four ESR recommendations

Increase the relevance of non-financial information;
Better describe the role of ESR [Environmental and Social Responsibility] in the company’s strategy;
Reflect on ways to present financial and non-financial information in a coherent fashion. The AMF favours a more integrated approach when this enables investors to better assess the value creation strategy and overall performance of the company. Given the diversity of approaches, the AMF has chosen not to recommend a particular reporting format or reference framework, but it is in favour of such a report being included in the registration document;
Improve disclosure with respect to green bond issues, by notably ensuring the transparency of information given both when the bonds are issued and over the life of the bonds.
Third Report on ESR Disclosures

More than half of companies with long-term incentives are not in compliance with the code because they do not provide a cap for such payments, and the AMF requests AFEP and MEDEF to “discuss caps on multi-annual variable remuneration and clarify their position on this point.” It also asks these two bodies to discuss formulation guidelines for boards to amend performance criteria for LTIs that might occur as a result of enormous economic change. It also calls for a broad discussion on extraordinary compensation such as the signing bonus paid out by Sanofi to its new CEO: €2 million on signing, €2 million in January 2016, subject to continued tenure, and 66,000 performance shares as measured over three years.

The ESR report came to the conclusion that “companies could still adopt a more pragmatic approach” to prioritising the disclosure of ESR data. The amount of ESR data increased by 40 percent over that found in 2013, and companies made considerable effort to quantify targets, though monitoring them over the long-term could be improved. While no companies included non-financial data in their financial report in 2013, some had begun to do so for 2015. Most importantly, the AMF felt that ESR has increasingly been placed at the core of issuers’ strategy and considered a real driver of long-term performance. Its recommendations for improvement are given in the second sidebar.