As the UK is debating whether it should shift to a binding say-on-pay vote on an annual basis, France is pulling back from the principle. Following a heated AGM season, where for the first time two advisory votes on remuneration have failed at Renault and Alstom, the French parliament was planning to introduce a binding say-on-pay vote as part of a wider reaching law on economic transparency and modernisation, the so-called Loi Sapin II.
However, in the midst of summer, while everyone is basking in the sun at the country’s Riviera, within a long series of amendments, the high chamber of the French parliament came back with a revised, lighter version of the proposal. The proposals now resemble the existing, much debated UK system, consisting of a binding vote on the underlying pay principles and the structure of the remuneration policy every four years, an additional year on the UK’s three-year cycle.
Under the veil of simplification, another measure could have ramifications for the accountability of companies to their investors. Abstentions at French AGMs currently count as votes against management. However, under the new proposals, an abstention would no longer be considered a legal vote, and as such its removal from the count would lower the aggregated level of dissent. The thinking behind this is that if an investor cannot make up his mind, why take his vote into account? This view, which was previously debated in the industry and ruled out in the past, comes on top of widely implemented and state-sponsored double voting rights. In their combination, these measures may significantly disenfranchise minority shareholders by diluting the potential voice of dissent against a dominant shareholder.
At a time when other countries are considering stronger governance practices in an effort to re-build trust in the economic system and investors are increasingly taking into account governance matters to assess risks, say-on-pay presents an opportunity for the company to enhance transparency and improve the dialogue between stakeholders. However, it is a balancing act and one that needs to be seen in context in order to be meaningful.
By encouraging a formal presentation of the rationale behind the remuneration structure and payout, thus providing insights into the decision process, the links between policy and strategy and pay and performance, a vote on the policy would be a significant step forward for the French market. The update of the AFEP-Medef governance code, to be published later this year, is set to bring further transparency and details to the disclosure on remuneration, thus ensuring that France is on par with market leading practices.
The advisory annual vote on payout was only recently introduced and should be allowed time to bed in. Besides the legal consequences of a binding vote, the focus should be on the nature of the expected response from boards to a significant level of dissent, while boards should determine what a significant level is in the context of their share register. A useful benchmark could start at 20% considering the relatively low approval rate received on resolutions by a large number of French companies.
Public concern is real. As inequalities fuel societal debates challenging the resilience of the economic system itself, high pay will remain under close scrutiny, not only in France but all over the world. For companies and investors alike, value creation and, ultimately, the repartition of profits are an essential part of their social responsibility, which is why regulators are increasingly calling for greater accountability, for example through the introduction of a stringent binding say-on-pay vote in Switzerland, pay ratios between CEOs and the median compensation of their employees in the US, as well as gender pay gap reporting in the UK.
When the French regulator decides on the final bill after the summer pause, it will need to keep in mind that beyond legally binding pay structures, fostering trust derives from effective investor stewardship, company transparency and board directors evidently exercising their judgment.
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