On 6 October, Laurence Parisot, chairman of MEDEF, presented an updated version of the “code de gouvernement d’entreprise” for the self-regulation of companies relating to executives’ remuneration and the terms under which they exercise their corporate duties.

MEDEF and AFEP intended to set the tone in response to the request of the President of the Republic of France who stated, last September, that “either professionals agree on acceptable practice or we will solve this problem by introducing a law to this effect before the end of the year.” It is for this reason that the MEDEF-AFEP code encourages companies to establish, and, for a large number of them, improve upon, policies as to the transparency of executive remuneration and the consistency of amounts paid, in accordance with the company’s objects.

To provoke the appropriate response from, and adherence by, “CAC 40” companies, it is proposed that a representative of the majority shareholders in each establishes an information committee. The 2008 annual accounts, in particular, will be carefully scrutinised by Parliament. L’Autorité des Marchés Financiers (AMF, the French Market Regulator) announced that it would publish, at the beginning of 2009, a list of “compliant” companies, as well as new recommendations for the drafting of registration documents by companies listed on Euronext Paris.

AMF “encourages companies to implement the recommendations made by AFEP and MEDEF, on 6 October 2008, relating to the remuneration of corporate executives…. AMF has also issued a letter inviting companies to electronically announce all related decisions taken by their respective boards of directors, and to make the information available on their websites, before 31 December 2008 ” (AMF press release, 27 November 2008).

The message is clear: the “code de gouvernement d’entreprise” should become the minimum standard of corporate governance. A number of listed companies, including Group France Télécom/Orange, responded quickly to the request. In a press release, the Board of France Télécom announced, on 3 December 2008, that “France Télécom will comply with the AFEP-MEDEF code as amended in preparing the report required by article L. 225-37 of the French Commercial Code, and incorporate it into the report which it has already prepared”.

At the same time, companies should probably anticipate the implementation of the measures announced by MEDEF and initiate legal audits as to the position of their corporate executives. To ensure the legal compliance of financial information it would be appear necessary to adopt adequate remuneration strategies.

Hereafter, no one can ignore the MEDEF-AFEP “code de gouvernement d’entreprise”. It comprises four overarching principles:

Corporate Mandate and Employment Contract cannot coexist

The only people affected by this recommendation are presidents, managing directors and executive directors of “Sociétés Anonymes” (limited liability companies), the president of the executive board or CEO of a “Société Anonyme” which has an executive board and a supervisory board and, finally, the managers of joint stock companies nominated after the publication of this recommendation.

Regulation of Performance Criteria and Termination Payments (“Golden Parachutes”)

The recommendations set out the performance criteria for such payments and their valuation. A Golden Parachute will not be payable to a corporate executive who decides to leave the company voluntarily in order to pursue a new job or to change position within the group. With regard to quantum, the maximum payment may be a sum equal to two years’ remuneration (including both the fixed and variable elements thereof).

This threshold is strongly encouraged by tax legislation currently being discussed in Parliament.
The new “ Loi de Finance ” for 2009, which makes amendments to article 39-5 of the “ Code Général des impôt ” was adopted by the Sénat. This amendment seeks to “ limit the tax advantages of a “ golden parachute ”: any amount in excess of 6 times the social security limit (approximately €200,000) for the same employee, will no longer be tax deductible for the company ”.

The amendment provides that these payments can be “deduced from profit, up to 6 times the annual social security limit per employee”.

Provisions concerning Additional Pensions

In order to benefit from an additional pension, the beneficiary must be a corporate executive or employee of the company at the time he wishes to exercise his retirement rights. In addition, the board or the executive board must determine the conditions to which the exercise of these rights are subject, for example as regards seniority.

The amount of rights granted to the beneficiary should, annually, only represent a limited proportion of his salary. This limit has not yet been determined, and it is difficult to estimate it as the implementation of this requirement will be monitored retrospectively by the judges.

Provisions concerning the Allocation of Share Options

The distribution of share options should result in an actual participation in the capital of the company and should not amount to additional remuneration.

Similarly, distribution of share options to corporate executives should be effected concurrent with the extension of an employee participation plan, linked to the performance of the company. Furthermore, the distribution of shares to directors should be conditional upon performance.

In addition to this AFEP-MEDEF Code recommendation, the law relating to employment income sets out specific provisions relating to share options. There can be no distribution authorised by future boards unless this allocation is also for the benefit of employees of the company and of 90% of the employees of any subsidiary. Furthermore, these employees must also benefit from a profit sharing arrangement. The inclusion of employees is, therefore, a condition that must be satisfied before a share option plan can be put in place.

These developments relating to remuneration move away slightly from the principles of corporate governance supporting remuneration linked to the performance of the company. The solution could prove to be counterproductive in terms of remuneration. Paradoxically, where the finances of the company are deficient, such recommendations will result in the directors becoming the victims. It will not be good for the dynamism of the economy as a whole. Perhaps it is time to rediscover the joys of not being a quoted company, of, rather, being a closed company not subjected to regulatory constraints, as long, that is, as such flexibility continues to exist.