“Say on Pay” Soon in France?

After targeting executive remuneration at state-controlled companies with new regulation introducing pay caps for CEOs, France’s new government is now considering potentially sweeping reforms for all public companies. In a recent consultation paper released by the Finance Ministry (see Glass Lewis’ response), market participants were asked to comment on numerous questions mainly focused on the approval and structure of executive pay. While shareholders at French companies are currently entitled to resolve on equity-based incentives and severance payments, a vote on a company’s pay practices is either recommended by the AFEP-MEDEF Code (the reference corporate governance code for the majority of French issuers) or required by law. However, France could soon enlarge the number of European countries introducing say-on-pay proposals. The consultation inquiry, in fact, seeks comments on whether such mechanism allowing shareholders to voice their concerns over poorly designed pay policies should be envisaged and whether it should be binding or advisory in nature.

Regarding certain components of variable remuneration such as stock options and restricted shares, the French government goes so far as to consider a ban among the possible policy options. Moreover, the introduction of deferral mechanisms and claw-back provisions is considered in the Finance Ministry’s inquiry together with a requirement for French issuers to allow employee representatives to serve on remuneration committees. Interestingly, the consultation paper also raises some preliminary issues over the scope and nature of any new proposed measures, with the debate centering on the choice between binding legal provisions or “comply-or-explain” best practices.

During his presidential campaign Mr. Holland promised to curb excessively generous pay packages with the French government opposing the severance pay for Safran’s CEO and an indemnity pursuant to a non-compete agreement paid to Air France-KLM’s former CEO. The extent to which the government will be successful in forcing changes at companies where it does not hold a controlling or majority stake will be soon clear as the new measures are expected to be announced in the fall.