French website/database Hebdo des AG organized its annual roundtable this week to discuss the fast approaching 2017 proxy season.
The roundtable brings together representatives of leading proxy advisors to voice their concerns and expectations in front of an audience that includes representatives of several corporations that they would be covering during the season. More importantly, it gave Proxinvest the pulpit to set the bar high on corporate governance and hopefully entice companies to adjust their policies accordingly.
Executive compensation, as indicated by financial journal AGEFI, will remain at the heart of the 2017 proxy season when France will become the latest test ground for compensation legislation. Recall that CEO compensation made headlines in France and around the world following the first rejection of a Say-on-Pay resolution since the advisory vote on remuneration was introduced in 2013. The historic vote fell on deaf ears and a defiant Renault upheld the compensation of its controversial chief, Carlos Ghosn.
The ensuing shareholder revolt compelled France’s opportunistic politicians to act prior to a crucial election year. Named after Economy Minister Michel Sapin, the “Loi Sapin 2” was born at the end of 2016 and stipulated a binding ex-ante vote on compensation for companies listed on regulated markets, starting from proxy season 2017. The objective of the law is for shareholders to give their explicit approval of fixed, variable and exceptional sums that may be granted to corporate officers going forward.
It is, as of yet, unclear how large foreign institutional investors will adapt to this ambitious legislative effort to render CEO compensation more socially acceptable in France. Assuaging fears is the recent approval of CEO Thierry Breton’s ex-ante compensation, when Atos became the first company in the country to put forth a vote along the lines of Sapin 2.What is nevertheless becoming increasingly clear is the failure of Anglo-American investors and their proxy advisors to adapt to market practices in France, whether that be on the subject of compensation or other governance issues.
Case in point is how one in two CEOs earn less than €2.6 million per year, including shares and options. While this figure is considered excessive in France and capped off three decades of steady increases, it is by and large dwarfed by compensation in the US and UK. The huge pay disparity between French executives and their Anglo-American peers demonstrates the very different standards that French society and shareholders hold their top executives to. Non-French investors collectively hold 60% of the biggest listed French companies, giving them considerable power at general meetings and large responsibilities and duties.
Naturally, what startles French society does not bat the eyelashes of these overseas investors and their proxy firms alike. Paradoxically, in recommending shareholder approval of remuneration policies exceeding largely the local practice (generally speaking compensation packages awarding between €5 million and €15 million are generally considered excessive in France), US proxy advisors have contributed to support and legitimize outsize compensation that took French society, politicians, and even some CEOs by storm. The legislation that heralded the Say-on-Pay vote in 2013 as a means to empower shareholders and curtail excessive pay inadvertently became an instrument to the contrary (+20% in CEO’s total pay in 2015 according to Proxinvest annual study on french CEOs pay).
The considerable weight of foreign investors in France’s capital markets can be viewed as a testament to the country’s lack of local sources of fresh capital. In a cruel twist, France’s dearth of funded schemes as a modus operandi for its retirement plans renders it dependent on these very same foreign pension funds that champion such schemes. Faced with such a daunting challenge, it is incumbent upon France to consider the benefits of adopting funded schemes as such structures have a history of investing locally and adopting long-term investment objectives. Not only would such a solution stem the dependence on foreign capital, it would greatly contribute to aligning corporate governance policies with the spirit and letter of the laws intended to promote them in the first place. Indeed, the few French pension funds (ERAFP, Ircantec) seem to be ready to tacle executive compensation issues (83% of votes against at French general meetings by ERAFP, a 100% SRI pension fund with €26bn in assets and 4.5m beneficiaries).
True to form, Proxinvest will be closely monitoring the evolution of the new binding vote on remuneration throughout the upcoming season, with an eye to to extolling the virtues of moderate pay, transparency and alignment with performance. With the new Sapin 2 Law, France is becoming a laboratory of new shareholder rights to curb excessive executive pay. Time will tell whether global investors be ready to use efficiently those new shareholder rights and to finally stop any support to executive pay inflation.
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