Middlenext, the independent French association representing mid-cap listed companies, published an updated version of its corporate governance code (the Code) in September 2021.

Corporate governance best practices in France are primarily defined by the AFEP-MEDEF Code of Corporate Governance, the country’s most followed set of governance guidelines. The Middlenext Code is an alternative tailored specifically for small- and mid-cap companies, as well as for companies of all sizes with a major or controlling shareholder. Originally published in 2009, Middlenext takes a medium- to long-term perspective and was last updated in 2016.

The updated Middlenext Code outlines 22 recommendations; 58% of the recommendations present in the 2016 version were either clarified or strengthened in 2021. Three brand-new recommendations were introduced, focusing on (i) the creation of a CSR committee, (ii) gender diversity balance at all levels of the company, and (iii) the promotion of directors’ continued training. Moreover, the updated Code puts emphasis on the use of extra-financial metrics for executive variable pay, which may facilitate the inclusion of environmental and social measures.

The 2021 Code states that, when assessing governance matters, companies should be accountable not just to employees and shareholders but to all stakeholders in the whole ecosystem. In addition, Middlenext specifies that long-term vision should be a priority for all stakeholders, including shareholders. For example, the Code notes that certain shareholders, e.g. short sellers, can have an overtly opaque behavior.

Notable updates for 2021 include:

Governance & Oversight

Corporate Social Responsibility (CSR) Committee

The updated Middlenext Code is the first French corporate governance code to explicitly recommend the board to either set a CSR committee or have the board serve as a whole in the functions of CSR committee, depending on the board size. By contrast, the AFEP-MEDEF code states that directors may be provided with supplementary training on CSR and that the board should monitor the state of the company’s CSR.

Gender Diversity Balance

In 2020, the AFEP-MEDEF code recommended that boards determine gender diversity objectives for senior management and report on the implementation of the company’s gender diversity policy. Middlenext has followed suit and gone further.

In addition to stating that companies must ensure the absence of discrimination and diverse representation (e.g. gender, ages, disabilities, qualifications and professional experience), the updated Code also addresses the lack of gender diversity at all levels, not only within senior management. The board must outline its approach, and the results, in the corporate governance report.

Middlenext acknowledges that some industries do not have a balanced representation between women and men, and specifies that this context should be taken into consideration when assessing the diversity policy.

Directors’ Continued Training

Middlenext argues that maintaining or upgrading skills is an ethical necessity for every board member, and the updated Code requires regular training: companies must set up a three-year training plan, including 4 to 6 days of training for each director over the period. The board should review the training plan and disclose its progress in the corporate governance report.

Directors’ Skills

At least one independent director must be a financial/accounting expert if companies decide not to set up a separate audit committee and instead let the whole board serve as audit committee.

Board Evaluation

While a formal external evaluation is not required, the updated Code specifies that when conducting its annual self-assessment, the board may request the presence of a third-party if it wishes.

Other Committees

If companies choose to set up committees, executives cannot be committee members. Further, all committees must have an independent chair, except in very specific cases that must be duly justified.

Conflicts of Interests

Under the updated Code, directors must declare their possible conflicts of interest before each board meeting, and must refrain from participating in the deliberations or voting on any subject where they have a conflict. The updates also clarify that the board is responsible for monitoring conflicts of interests, and that the chair of the board holds primary responsibility for managing board conflicts.

Auditors

The updated Code recommends that companies do not use their auditors for non-audit-related services.

Discussion of Shareholders’ Dissent

The updated Code recommends that where companies have a significant shareholder, the board should pay particular attention to minority shareholder voting when assessing overall opposition. The board should then consider whether there is a need to change what triggered shareholders’ opposition, and whether the company needs to communicate to shareholders on this topic before its next general meeting. Further, the company’s corporate governance report should specify that this review occurred.

Executive Remuneration

Variable Pay

When included as a component of executive remuneration, the updated Code states that variable remuneration should be based on financial and extra-financial quantitative metrics, as well as on qualitative metrics, specifying that at least one extra-financial metric must be included in the executives’ incentive plans.

In addition, the updated Code urges companies to disclose the weighting of the metrics included in executive incentive plans.

Further, when shares or stock options are granted to executives under incentive plans, their performance period should be at least three years (clarifying the prior 2016 Code, which stated that performance conditions should be measured for a ‘significant duration’).

Disclosure on Remuneration

The updated code states that communication to shareholders regarding corporate officers’ remuneration must be exhaustive.

Pay Ratio

The European Directive on Shareholder Rights Directive (SRD II) requires listed companies to disclose a comparison between the CEO’s remuneration and the median and average remuneration of employees over the previous five years, along with a five-year comparison of pay and performance.

The updated Code acknowledges these requirements and goes beyond by recommending all companies, regardless of their listing segment, to publish an additional comparison between the executives’ remuneration and the French minimum wage, which Middlenext considers to be an independent reference value and a fixed denominator for all companies. Further, each company is invited to disclose its lowest salary, if higher than the minimum wage.

Non-Compete Indemnity

The updated Code recommends that non-compete payments must be included in executives’ overall severance pay, which cannot exceed two years of fixed and variable remuneration – including any compensation paid under an employment contract. Exceptions to this rule can only be made if the executive’s remuneration is significantly below the market median, which could be the case for growth-stage companies.

The updated Middlenext Code illustrates the rapid evolution of expectations on ESG and gender diversity, and the perennial importance of governance fundamentals like transparency and independent financial controls.

Glass Lewis’ policy guidelines for France are currently being updated to reflect these changes, and other developments in market practice and regulation. The 2022 policy guidelines will be available in November 2021.

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GROW@glasslewis.com (Institutional Investors) | ENGAGE@glasslewis.com (Public Companies)