France’s First Binding “Non” on Say-On-Pay

Irene Bucelli is an analyst at Glass, Lewis & Co. This post is based on her Glass Lewis memorandum. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

The 2019 season marked French shareholders’ second opportunity to cast retrospective binding votes on executive compensation—and for the first time, shareholder votes prevented the payment of a bonus award, as well as the implementation of a new pay policy.

Many markets offer a say-on-pay vote these days, but under Sapin II legislation, which came fully into effect in 2018, French shareholders get several “says” on remuneration arrangements. The variable payments due to each executive are subject to a series of “ex-post” binding votes (one for each executive) and there is an annual “ex-ante” binding vote on the intended remuneration policy for the current year. Shareholders also get forward-looking advisory votes on severance arrangements.

It’s the binding “ex-post” vote that has drawn the most attention—in particular, the potential implications of a rejection. How would an executive react to such a public rebuke from shareholders? To having the bonus they thought they had earned pulled back? Would the board take emergency measures—or would continued service prove untenable, prompting an immediate resignation? Several backward-looking compensation proposals in 2018 almost provided the answer, with Teleperformance, Vinci, Renault, Technicolor and Atos coming close to failing. But it wasn’t until this year’s shareholder meeting of CGG, a mid-cap company listed in the SBF120 index specialized in geophysical services, that shareholders got to see the implications of voting down a CEO’s pay. Well, sort-of.

After a CEO change early in the fiscal year, CGG had plenty of executive pay proposals on the agenda. Shareholders got two binding, backward-looking votes, covering the FY2018 variable remuneration due to both the current and former CEOs, as well as one binding, forward looking vote, covering the current CEO’s intended FY2019 remuneration policy, and one advisory forward looking vote on post-termination severance arrangements.

Shareholders expressed their dissent across the board. Support for executive pay proposals ranged from a high of just 56.65% to a low of 38.63%, with two voted down: the ex-post, binding vote on the remuneration due to the former CEO Jean-Georges Malcor for fiscal year 2018, and the ex-ante, binding vote on the 2019 remuneration policy for the current CEO, Sophie Zurquiyah.

Besides being historic, the ex-post rejection was somewhat surprising—Mr. Malcor’s variable package included no surprises and represented just a fraction of his total quantum for the year. Payment of a €75,000 extraordinary award in respect of a successful debt restructuring may have seemed somewhat questionable given that the company decided to pursue a new strategy after his departure in order to recover from a record of poor financial performance. However, the payment was fairly modest, particularly in comparison to the €1,626,673, that Mr. Malcor received in respect of fixed salary and a non-competition agreement (the ex-post votes under Sapin II do not cover fixed remuneration), and it was not unexpected—the award had been clearly disclosed as part of Mr. Malcor’s forward-looking binding remuneration proposal, which received 96.90% support at the 2018 meeting.

With 53.52% support, the binding proposal covering variable remuneration due to the current CEO, Sophie Zurquiyah, just barely avoided the same fate. The binding, forward-looking proposal covering the remuneration policy intended to apply for the current fiscal year was not so lucky, garnering just 44.3% support. The consequences of this vote are not nearly as uncertain, or potentially far-reaching, as that of the “ex-post” vote. Rather than the policy terms that had been proposed, Ms. Zurquiyah’s remuneration will instead continue to be determined by the company’s existing policy, which was approved by shareholders at the 2018 AGM. That may ultimately suit shareholders—while the company had not proposed any material changes to the existing policy, specific details of the 2019 iteration were not fully disclosed.

The company has issued a press release acknowledging the vote results and stating that the board “will consider the adjustments to be made to the Chief Executive Officer’s remuneration policy in order to obtain the shareholders’ approval at the next General Meeting.” It’s unclear if that consideration will include an engagement programme to garner feedback from investors—or what will happen if and when French shareholders reject the variable pay due to a current, rather than former, CEO.

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