To the surprise of some, French financial markets regulator AMF (Autorité des Marchés Financiers) published a report on 30 March that compared the French corporate governance code, the AFEP/MEDEF code, with nine codes from other European countries: Belgium, Finland, Germany, Italy, Luxembourg, the Netherlands, Spain, and the United Kingdom. The AFEP/MEDEF code was set up by two French business associations—the Association Française des Entreprises Privies and the Mouvement des Entreprises de France.

While the AMF has published a report on corporate governance and executive pay—which sets out recommendations for French companies and industry bodies—this is the first time it has published a study of this kind, especially one that is relatively critical of the AFEP/MEDEF code—which, incidentally, is the only one of the 10 codes that was drawn up by the companies themselves and their representatives, without the involvement of a key stakeholder such as investors. In contrast, for example, the group that wrote the German code is made up largely of academics, followed by companies, then equal portions of trades unions, followed by small and large investors.

AMF spokeswoman Christèle Fradin says of the report’s genesis: “Our aim was to have an overview of the practices in place in Europe on the development process, the monitoring of implementation of codes and topics related to corporate governance and executive directors’ remuneration and identify best practices to fuel our thinking. Our objective was to assess the AFEP/MEDEF code compared to others codes in Europe and the AMF report (that we publish annually) as well. We decided to undertake this comparative study because there was no recent study already available covering all these topics.”

Key findings include the following:

With the exception of France and the United Kingdom, each of the countries in the sample has only one code. Most are drawn up by a commission, a private or public-private working group, the regulator, or the market undertaking.

In five countries (Belgium, France, Italy, Spain, and the United Kingdom), the market regulator produces a report on the implementation of such codes. In the remaining countries, the report is prepared by one or more private entities; in six of the countries in the sample, the body that draws up the code also monitors its implementation.

The AMF has studied 15 monitoring reports, more than two thirds of which are based on purely statistical findings. However, eight of them, including the AMF report, provide a more qualitative assessment of the “comply or explain” principle. Two countries (France and Belgium) issue recommendations for companies on the implementation of the codes.

Only France, via the AMF report, practices “naming and shaming” (citing companies by name which have not implemented the code’s recommendations). 

How do they differ?

The AMF has also compared different recommendations from the various codes. Its conclusion is that the AFEP/MEDEF code is relatively “precise,” particularly as regards board assessment, the proportion of female board members, and the criteria for awarding variable pay. Other codes focus on such issues as the independence of the board chairman and his/her pay, the role and duties of the lead director and his/her independence, the methods used to calculate the maximum severance benefits, and the use of clawback clauses. Below are more distinctions.

“France and the U.S. stand out, because France’s code is administered by issuers and the U.S. has no code. Wall Street is from Mars. Europe is from Venus.”

Sarah Wilson, CEO, Manifest

Amendments: In regard to amendments, most of the countries surveyed, though not France, said changes are subject to a prior public consultation.

Regulation: In three countries—France, Spain, and Italy—implementation of the code is voluntary. In the other six countries, the codes are mandated through market rules or by law. In terms of adjustments for small- and mid-caps, only France and the United Kingdom have developed a specific corporate governance code such companies. In addition to the reports on implementation in the countries noted in the second key finding, a second report is prepared in France by a private entity, the High Committee for Corporate Governance (Haut Comité de Gouvernement d’Entreprise — HCGE). The AMF and the Belgian Financial Services and Markets Authority are the only public authorities that made recommendations to companies about compliance with code.

Management roles: In Italy, Spain, and France, the report found, the roles of chairman and CEO do not have to be separated, thus in Italy and Spain the codes comment on the appointment of a lead director. The AFEP-MEDEF code is an exception in that it makes no recommendation that a lead director be chosen from among non-executive directors, nor does it define a lead director’s duties. Director independence criteria are incorporated into governance codes under the “comply-or-explain” principle. Only in Spain and Belgium have the criteria been made legal requirements. The report notes that the definition of independence varies significantly, although most are based on the definition found in Annex II of the European Commission's recommendation. Here, however, the AMF makes a recommendation that the French code should require a clarification of whether a chairman is executive or non-executive. In addition, the AMF has published a discussion paper which states: “the appointment of a lead director … aims to prevent potential conflicts of interest, in particular should the positions of chairman and CEO be combined ... In addition, it is necessary that the lead director be independent and that the company takes stock of his/her actions in order to assess on the one hand the nature of the due diligence and tasks performed as a lead director and, on the other hand, how he may have used the powers given to him.”

Diversity: Most countries in the sample have imposed gender diversity quotas on boards through legislative action. Compliance with the quota system is high, especially where there are penalties for failing. France’s boards are the most diverse, with an average of 32.4 percent in 2014 according to a European Commission study.

Compensation and incentives: Only four of the governance codes, including the French one, recommend that companies take non-financial criteria into account when measuring performance for incentive payments. France and Spain both state specifically that share price and “overall market or sector trends” cannot be the only performance criteria. More interestingly, five countries, Germany, Italy, Luxembourg, Spain, and the United Kingdom also state that performance measurement must take into account “internal control and risk management procedures.” Only five codes, Italy, the Netherlands, Spain, Sweden, and the U.K. require incentives to be subject to clawback arrangements.

What’s not changing?

Beyond the two recommendations of changes to AFEP/MEDEF regarding the status of the chairman and lead director, the AMF report does not make any specific recommendations to change the current French code. The report, however, was set out to “identify best practices highlighted in one or more of the codes considered to inform the avenues of discussion the AMF has suggested to the AFEP and the MEDEF.”


Below is a list of countries and corporate board governance codes included in the AMF report.

Source: Autorité des Marchés Financiers

Sarah Wilson, CEO of UK proxy advisory group Manifest, says the AMF’s decision to undertake this study was very interesting in itself, though its publication “came out of the blue; but I hope it may presage a change. “French companies, like their U.S. counterparts, do not like proxy advisors and have a lower opinion of corporate governance than anywhere else in Europe. They also have a reputation for not engaging with shareholders. France and the U.S. stand out,” she says, “because France’s code is administered by issuers and the U.S. has no code. Wall Street is from Mars,” Wilson quips, “Europe is from Venus.” With the revision of the EU’s Shareholder Rights Directive (SRD) last year, Wilson says: “I hope the AMF is about to propose changes to governance best practices in France.” She also notes that, unlike many other codes that require companies to comply or explain, French companies can “just say nothing.” Another policy she hoped would change.

“The French have mandatory CSR [corporate social responsibility] reporting, which is actually very good, probably better than anywhere else in Europe,” she comments, “I just wish the governance reporting would catch up. But many companies—Michelin is an exception—have a reputation of not wanting to change and generally being dismissive of good, progressive corporate governance. French issuers claim that investors don’t take account of local peculiarities. This isn’t true, they do take account of them, they just don’t like them.” Wilson was also disappointed that the study had not made any comments on differing voting practices across the European Union. “France really needs to make inroads into policies on cross-border voting, mechanising of voting, and other SRD issues.” Wilson was pleased that the study had flagged up the insularity of the French system and was hopeful that it might signal a revised code “with a wider sense of ownership, including proxy advisors and shareholders as well as issuers.”

Cedric Laverie, head of corporate governance at French asset manager Amundi, indicates that he thought the AMF report was an attempt to put pressure on AFEP and MEDEF prior to its announced revision of the code this year. “The report focussed on the two main weaknesses of the current code. First is that the code is written, administered and controlled by issuers. For the code to work properly, it has to be written in consultation with investors,” he says. Many investors had been critical of the code when it was first issued in 2013. “We provided many comments for improving the code, for example that the lead director and the chairmen of committees should all be independent. The second weakness is the ‘comply and explain’ basis of the code. While the situation regarding this is improving slowly, there are still some companies who ignore the code, though most choose to comply with some of the recommendations and then give a brief explanation as to why they don't comply with others. Another problem is that the code is not clear about what is and what is not a recommendation, and this also needs to be clarified,” says Laverie.

Asked if he thinks that AFEP and MEDEF would include investors and other stakeholders in the next iteration of the code, Laverie says: “Including investors would be the first step, but I am not sure if they [AFEP and MEDEF] are ready to take that first step. Other stakeholders such as NGOs and unions are even less likely to be included, though the AMF and the French government will likely be involved.” The French government was very active during the code’s formulation, notes Laverie, and it pushed for huge modifications. “The government threatened AFEP and MEDEF that they would legislate if they did not get the code ready for implementation.” A law, of course, would be far more compelling than a comply and explain set of recommendations, he confirms.

But does the report seek to rewrite the French governance code? AMF’s Fradin says: “The AMF does not want to contribute directly to the drafting of a revised governance code in France, but it would like that the areas for discussion it suggests in its annual reports are more systematically taken into account when the associations in charge are drafting the code. This study shows that on specific topics, some codes are going further.” She points to the AMF’s recommendations on chairmen and lead directors, but stressed that the AMF was not trying to set up its own code in opposition to the existing recommendations. However, she adds, “the AMF has been supporting for many years now the principle of stakeholder involvement (for example institutional investors) in the development or revision of the code. The Code de Commerce provides that public companies can refer to a code drafted by associations representing issuers, but a public consultation would be preferable in case of revision.”

It looks like the pressure is on for the French governance code to become more investor-friendly.

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