Author: | Published: 9 Oct 2003
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Since 1995, various French private and public institutions have been developing recommendations and requirements pertaining to corporate governance practices and monitoring their implementation. These principles have been set out in a series of private reports and many have been incorporated into Law No 2001-420 of May 15 2001, on New Economic Regulations and Law No 2003-706 of August 1 2003, on Financial Security.

The Viénot I Report was published in July 1995. It was prepared by a panel composed of the chief executive officers of 14 leading French pubic companies assembled by two French business associations, the Association Française des Entreprises Privées (AFEP, an association of French private-sector companies) and the Mouvement des Entreprises de France (MEDEF, a leading French business confederation). The report concentrated on the role of the board of directors of publicly-traded companies and included non-binding recommendations on the composition, duties and functioning of boards of directors.

In July 1999, the AFEP and MEDEF requested the same group of CEOs to assess the implementation of the recommendations of the first Viénot Report. In its second report, aptly named, the Viénot II Report, the panel re-emphasized its original recommendations and developed new non-binding principles covering director independence and compensation and stock options. (The Viénot Reports can be found at

Following the two Viénot Reports, the French parliament adopted the Law on New Economic Regulations which provided for greater shareholder protection by increasing the transparency of the management of a company towards its shareholders.

Since 1966, a French publicly-traded company (société anonyme) has been governed by either a board of directors (conseil d'administration) led by a single chairman-president or a dual board structure with a supervisory board (conseil de surveillance) with a president and a management board (directoire) with a director general. The Law of May 15 2001, introduced a third option which permits a corporation with a single board of directors to separate the functions of chairman of the board (president) and chief executive officer (director general). This alternative creates a structure similar to public companies in the US.

Following the extensive adverse publicity and consequences of a number of business scandals involving international companies such as Enron, the panel of CEOs, chaired by Daniel Bouton, chairman and CEO of Société Generale, was again asked by the AFEP-AGREF (Association des Grandes Entreprises Françaises, an association of major French corporations) and MEDEF to assess the effectiveness and application of the principles contained in the Viénot Reports and the Law of May 15 2001. The Bouton Report was issued on September 23 2002. (The Bouton Report can be found at

The Viénot I and II Reports and the Bouton Report emphasize the importance of the role of specialized committees in the operation of the board of directors. The reports recommend that companies should have, at least, audit, compensation (including stock options), and nominating committees. The Bouton Report goes further by suggesting that boards should consider establishing audit sub-committees for risk management and financial statements and other types of specialized committees, such as a strategy committee.

The Bouton Report is divided into three parts entitled: 'Further Improving Corporate Governance Practices', 'Strengthening the Independence of Statutory Auditors', and 'Financial Information Accounting Standards and Practices'.

The first part on governance practices discusses in Section I the 'Role and Operation of the Board of Directors', including the importance of specialized committees to review the financial statements, monitor the internal audit function, select statutory auditors, establish policy on remuneration and stock options, and the appointment of directors and corporate officers (mandataires sociaux), and reiterated the board's role in setting strategy and the need for directors to have access to all information needed to fulfil their duties. Section II addresses the 'Composition of the Board' (based on the principle of collegiality) and the need for independent directors thereby restricting any potential conflicts of interest between directors and the company. Section III, the 'Evaluation of the Board of Directors', stresses the importance of assessing board performance while noting that very few boards have carried out formal evaluations of their own operations. Sections IV, V and VI discussed the roles and responsibilities of the 'Audit, Compensation and Nominating Committees'. It was recommended that the annual report of each public company should include a description of the work of each committee for the given year and that the committees should not be used for the purpose of shifting responsibility for good corporate management from the board onto these committees.

The Second Part, 'Strengthening the Independence of Statutory Auditors', contained little discussion, but noted that the Le Portz Reports issued in 1992 and 1999 established French audit practices "well ahead of US practices" and that "the same applies to the work on professional ethics undertaken by the Compagnie Nationale des Commissaires aux Comptes" (the National Council of Statutory Auditors, the French governing body of statutory auditors) (this report can be found at The report sets out five recommendations that are considered as means of strengthening the independence and responsibility of statutory auditors.

The Third Part contains sections on 'Financial Information and Accounting Standards and Practices'. The first section addresses communication policies and the need for transparency (such as a prohibition of the selective disclosure to financial analysts), off-balance-sheet commitments and risk exposure. The report reiterates the need for the true and fair application of the principles of prudence and substance over form and the timely communication to shareholders and investors of relevant information on these matters. In order to do so, it is underlined that each company must have in place reliable in-house procedures implemented to identify and control off-balance commitments and to assess the company's material risks.

In its conclusion, the working group recommends that its proposals be implemented by the end of 2003 and that each company's annual report should include a discussion of the extent the recommendations of the Bouton Report have been implemented.

In addition to the above-listed reports and laws, the French market authorities, the Commission des Operations de Bourse (COB) and Conseil des Marchés Financiers (CMF), have issued regulations governing publicly-traded companies. For example, the COB has issued rulings on the independence of statutory auditors (Regulation No 2002-06) and fair disclosure of information to the markets (Regulations No 98-02, n° 2001-01 and No 2002-04) (available at In 2002, the CMF issued rules relative to the independence of analysts from investment banking services (available on

Other professional associations such as the Association Française de la Gestion Financière (AFG-ASFFI, the French Asset Management Association) representing investment funds and individual portfolio managers have also issued a report and recommendations on corporate governance (available at The AFG-ASFFI Report states that its "recommendations apply to publicly-traded French companies and constitute company selection and shareholder voting criteria for use by firms belonging to AFG-ASFFI". The report further states "that it would be advisable that discussion of these issues begin rapidly at the European level so that its recommendations constitute minimum corporate governance guidelines for all listed companies in the euro zone".

In large part because the Viénot and Bouton Report recommendations are non-binding, the French parliament has adopted Law No 2003-706 dated August 1 2003 on Financial Security (available at This law creates binding rules on corporate governance and provides for increased independence of statutory auditors and the empowerment of the shareholders at corporate assemblies to act as checks and balances to the role of the board of directors. The implementation decrees of the law are expected to be published in the autumn of 2003.

The law has also provided for the merger of the COB and the CMF, which should allow a strengthening of the means of investigation and control of issuers. The new authority, the Autorité des Marchés Financiers (AMF), is expected to be constituted during autumn 2003.

The new law has introduced new legal requirements regarding the independence of statutory auditors, the obligations of directors, and granted additional rights to shareholders at company assemblies.

The law created article L.821-1 in the French Commercial Code (the "Code") which provides for the creation of a high council of statutory auditors (Haut Conseil du Commissariat aux Comptes) to be in charge of monitoring the auditing profession, ethical rules, independence of the statutory auditors, and the implementation of the related legal regulations. A French Federation of Auditors (Compagnie Nationale des Commissaires aux Comptes) is to be created which will represent the statutory auditors with regard to the public authorities (article L.821-6 of the Code).

Under the law, statutory auditors are subject to the following prohibitions on non-audit services:

  • they cannot hold, directly or indirectly, an interest in the audited company or with any person who holds a controlling interest in the audited company;
  • they cannot provide to the audited company, or any controlling or controlled company, any services not directly linked to the audit services; and
  • they cannot audit a company already benefiting from the services of another affiliate of the statutory auditor if these services are not directly linked to the audit services (article L.822-11 of the Code).

Statutory auditors are to be proposed for appointment by the board of directors, not the corporate officers, and approved by the shareholders (article L.225-228). The AMF is to review and can oppose the appointment or renewal of statutory auditors. Shareholders must be informed of the AMF's comments (article L.621-221 of the Monetary and Financial Code). Statutory auditors must attend each board of directors' meeting relating to the closing of accounts and each shareholders assembly (article L.225-38 of the Code).

Statutory auditors must disclose in writing their affiliation with multidisciplinary networks and the aggregate fees paid for non-audit services. This information must be given to the shareholders at the time of their appointment or renewal, and the information must be updated annually (article L.820-3 of the Code).

Individual statutory auditors and individuals certifying the accounts employed by audit firms cannot be employed by the audited company for a period of five years after their last audit (article L.822-12 of the Code). Individual statutory auditors and individuals certifying the accounts employed by audit firms cannot audit the accounts of a company for more than six consecutive years (article L.822-14 of the Code).

A company's two statutory auditors must analyze the conditions and establish the methods used in the preparation of the financial statements (article L.225-228 2 of the Code).

The statutory auditors must prepare a report for the shareholders' meeting with an overview of the company's methods and internal control procedures used for the preparation and presentation of the financial statements (article L.225-35 of the Code).

Non-publicly-traded companies must inform shareholders of the amount of fees paid to its statutory auditors (article L.820-3 of the Code).

The new law also imposes new legal obligations for directors and officers. The president of the board of directors and the director general must communicate all information to all directors in order to allow them to fulfil their duties (article L.225-35 of the Code). Moreover, article L.621-18 of the Monetary and Financial Code provides that each member of the board of directors or the supervisory board and the director general of a listed company must inform the AMF of any acquisition, sale, subscription or exchange of the company's securities. In addition, at the time of their appointment, corporate officers of a French-listed company who are members of a management or supervisory board or board of directors must put in a nominative form all securities except stock options held in the company.

The president of the board of directors or supervisory board must provide in the annual report information regarding the preparation and organization of board meetings, the company's internal control procedures, and the limitations on the powers of the chief executive officer (articles L.225-37 and L.225-68 of the Code). The board of directors or supervisory board must make a special report to the shareholders each time it approves a capital increase pursuant to a special power given to the board by the shareholders. This report must specify the practical modalities of the capital increase (for example, suppression of shareholders preferred subscription rights, classes of shareholders concerned by the capital increase, price of the shares to be granted and so on). The AMF will issue a report annually on the information in the annual report of the president of the board of directors or supervisory board (article L.621-18-3 of the Monetary and Financial Code).

The new law further provides for additional information to be provided at shareholders' meetings. Shareholders may propose amendments to the draft resolutions presented at shareholders' meetings and these amendments must be communicated to the shareholders (article L.225-105 of the Code).

French or foreign shareholders must notify the AMF and the market within five days when they cross the thresholds of 5%, 10%, 20%, 33.3% or 50% of the share capital or voting rights of a publicly-traded company and must disclose the total number of shares and voting rights (article L.233-7 of the Code).

French and foreign persons must also notify the AMF of any agreements with preferential terms for the sale or purchase of 0.05% or more of the share capital or voting rights of a listed company within five days from the execution of the agreement and provide the date at which the rights terminate (article L.233-11 of the Code).

Finally the management together with the financial analysts of a company issuing stock cannot take any action which may benefit the management's or shareholders' interests to detriment of the publication of full and fair information (article L.544-1 of the Monetary and Financial Code).

This description and summary of the Viénot and Bouton Reports and the Laws on New Economic Regulations and Financial Security provide only a brief overview of the principles and regulations that have been promulgated and recommended by French business federations and adopted into French law since 1995. The goals of these measures are to provide greater shareholder protection, more transparency in corporate governance, increased independence of statutory auditors, and greater public confidence in the French markets. With the publication of the implementing regulations to the Law on Financial Security and the creation of the AMF and the Haut Conseil du Commissariat aux Comptes, French corporations and their statutory auditors will be able to establish and monitor more effectively their internal compliance programmes, procedures and controls to achieve the goal of improved corporate governance. The new publication and disclosure requirements should permit shareholders to exercise their rights in relation to company management and to hold boards of directors more accountable for the decisions of management. Finally, as noted by the AFG-ASFFI, these French principles of corporate governance may provide a basis for the establishment of minimum corporate governance guidelines throughout the EU.

(This article was prepared with the assistance of Patrick F Murray, partner, and Karim Maalioun, associate, in the corporate department of the Paris office of Winston & Strawn.)

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