presentation to the united nations economic commission for

Focus on recent trends in French Corporate Governance

Geneva, February, 9th 2005

Presentation to the

United Nations Economic Commission for Europe's Round Table on Corporate

Governance

Alain-Xavier BRIATTEAvocat au barreau de Paris

General Secretary, French Corporate Governance Association

United Nations Economic Commission for Europe's Round Table on Corporate Governance




General Secretary, French Corporate Governance Association

3©9 Feb 2005 Haarmann Hemmelrath & PartnerDateiname / Datum

Alain-Xavier Briatte - France’s recent trends

1. The Board of Directors‘ leadership

2. Work in progress in the boards of directors

3. Information delivered to the shareholders

4. Shareholders‘ commitment

Map




Since 1996, France has engaged into major reforms to follow the international trends of corporate governance :

• Report Vienot I in 1996, Vienot II, and Bouton in 2002;

•AFG ASFFI (UCITS’s Management and Investment companies representativeassociation)’s corporate governance recommandations; (fourth assetmanagement market 1,5 Trillion EUR AUM and first mutual fund market in Europe 850 Billion EUR );

• The Law ‘NRE’ in 2001 and the Law of ‘Sécurité Financière’ in 2003.

•A resilient capacity for reform.




A comply or explain approach left to the Market’s assessment

• Corporate Governance in France : a « Comply or explain », approach initiated by the business unions (AFEP/MEDEF) in line with certain OECD’s recommandations;

• The French Market Authority (AMF) : an independant regulatory body in charge of summarizing the best practices set forth by the issuers themselves(article 117 of the 2003 Law LSF);

• AFG ASFFI, industrial union, promotes additional corporate governance reforms with better information given to management companies on debts and out of balance sheets liabilities; use of vote with internet in assemblies; ease of foreign institutional investors votes.




Features to be underlined:

• At least one single internal Directors Committee has been created in 75% of the Boards of the listed companies (either remuneration, nominating, audit Committee) but such Committees have no direct responsability before the Assembly;

• ‘Audit committees’ are still lacking in most companies;

• Free choice of mono/dual Chairman/CEO organization by the 2001 NRE Law;

• ANSA (Association Nationale des Sociétés par Actions) and French Instituteof Directors (Institut Français des Administrateurs) proposes a standard Director’s Charter.





• Law NRE of 2001 has implemented a sophisticated system to prevent risks of conflicts of interests and independence of Directors;

• French Company Reports remain silent on shareholder structure disclosure because of the Conseil des Marchés Financiers (CMF) regulations on tresholds disclosures;

• The « one share, one vote » principle is implemented all throughout the marke safe a few companies and the remaining practice of double voting rights.




Financial Disclosure is a major trend:

• The 2002 « AFEP MEDEF » Bouton report promotes convergence between US GAAP and IAS/IFRS accounting systems;

• The French « true and fair view » principle is supposed to superseed the form of reports;

• The French Financial Analysts Society (Société Française des Analystes Financiers – SFAF) published ist Code of Ethics.




Financial Disclosure is a major trend: Directors compensation

• Article 225-102-1 of the Commercial Code imposes disclosure of the overall Directors’ compensation;

• Such disclosure only applies to companies listed on a regulated market;

• Article 225-184 of the Commercial Code imposes additional disclosure relating to stock options;

• Article 225-45 of the Commercial Code grants the authorization power of delivering the ‘directors’ fees’ to the Shareholders assembly.




Director’s* compensation and the French feature : a major debate in corporate governance

• French feature shows variable part of the Director’s compensation (Bonus and stock option) as a major part of Directors’ compensation (see Ethical Comittee of the Medef’s report on directors’ compensation)

• The new type of compensation promotes the Directors’ willing to have thecompany’s stock raise in any circumstances;

• Directors’ compensation is not enough linked to the company’s underperformance.

* Director means both Board Directors and Senior Corporate Executives




Director’s* compensation and the French feature : a major debate in corporate governance

Question 1 : is this an additional reason for companies to have recourse to massive « stock repurchase plans » in order to maintain the stock’s price?

Question 2 : How to promote a long term vision ?




Financial disclosure: Director’s compensation : developpements to be expected:

• Directors compensation; sanctions for the lack of disclosure ?

• Very few auditors committee with no independent power vs. Board of directors?




2. Work in progress in the Boards of Directors

3. Information delivered to the shareholders

4. Shareholders‘s commitment

Map



2. Work in progress in the Board of Directors


• Composition of Boards (source : AMF, Jan. 2005) : 80% of the listed companies have defined independence criteria; refer to the AFG ASSFI’s criteria;

• Composition of Boards (source : M. Bouton, May 2004) : 40% of the Directors of the largest French companies (CAC 40) are « independent » ie« have no relationship that is such as to colour his or her judgment »;

• Board’s self assessment is a minor trend (source : AMF, Jan. 2005) : only 25% of the companies have a Board self assessment program; only 12,5% give results of these programs;

• Disclosure of the CEO’s powers limitation vs Board is a minor trend (source : AMF, Jan. 2005) : only 30% provide informations on these limitations.

• Disclsosure of the risks and procedures by the Chairman is compulsory (article LSF 117) but new and limited at that time.




Market trend in the French Boards: Upgrade to be implemented and followed up on a number of issues:

• Description of the functionning of the Board of Directors;

• Disclosure on types of works undergone by the Board;

• Directors’ compensation;

• Board’s self assessment procedures;

• Board’s down sizing;




Market trend in the French Boards: Upgrade to be implemented and followed up on a number of issues:

• Building a « uniformed » external risks reference (which is absent today);

• Limitation of « crossed » Directors when no substantial equity stake;

• Implementing the future 4th and 7th Accounting EuropeanDirectives referring to a company’s « corporate governance declaration»;

• Implementing the Transparency Directive.



1. The French approach : a „comply or explain“ approach


3. Information to shareholders


Map



Market trend in the French Boards: Upgrade to be implemented and followed up :

• Disclsosure of the risks and procedures by the Chairman to the Shareholders assembly is compulsory ( article LSF 117) but limited at this time;

• According to article LSF 117, Chairman establishes a « descriptive » report, which (i) is not an « assessment » report as such, and (ii) does not cover controlled entities, and (ii) is not compulsory for several types of corporate bodies (SAS and SCA, as opposed to SA);

• Only 50% of the companies (source : AMF, Jan. 2005) point out their particular risks pertaining to their activities and give insight on their accounts checking procedures;

• Succession planning is weak; to be defined.

3. Information to the shareholders



Issues at stake:

Question 1 : When will there be a market standard practice/reference of risks analysis and disclosure?

Question 2 : When will there be an off-balance sheet threshold carrying out disclosure?

This is left to the sole company’s approach and assessment; under review by the French Market Authority (AMF)








Map




Issues : most companies have difficulties in achieving the quorum

___________

• The traditional French procedure of « blocking stocks » 5 days prior to the Annual General Meeting in order to be registered for voting has been replaced. Now shareholders are authorized to sell their stocks until 3 pm on the day preceeding the Annual General Meeting; how will market react ?

• Foreign investors have to renew their « voting mandate », with their original signature, for each Annual General Meeting;

• Lack of interest by the shareholders in the assembly’s debate;

•Identification of Foreign holders is still complicated; moreover Board has the power for cancelling the voting rights of « non adequately identified » investors.




The French choice : UCITs’ management companies should establish a report on their « voting policy », from March 2005

___________

• Article 322-75 of the AMF’s General Ruling imposes on management companies to establish a report showing their voting policy in regards with the listed companies’s shareholders assemblies;

• The UCIT’s management company should also implement procedures enabling the prevention of conflict of interests carried out when voting;

• Introduction of the long distance vote with internet by the Law of 2001.




Ideas to follow up – Market trend

(1)

• « Commitment duty » by the shareholders (« devoir d’implication ») to be developped ?

• Disclosure by Foreign institutional shareholders of their voting policy in Shareholders assemblies with low costs;

• Establishment of a report relating to the assembly’s functionning delivered to the shareholders;

• « Corporate governance » related questions brought before the shareholders assembly ? (See proposal Bouton, May 2004, OECD);




Ideas to follow up – Market trend

(2)

• Role of proxy providers is under review;

• Use of mandates in the shareholders’ assembly ie « blank mandates », is under review;

• Assessment of stakes of securities lending and voting rights attached is under review;

•Disclosure of stock options dilution impact to the shareholders;

• Stock repurchase plans’ consequences;

• AFG ASSFI recommandation that entire network of banks and other securities intermediaries be entitled to certify voting rights : see European Commission current proposals.



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