Directors' remuneration: has the 2017 Sapin Law changed the game?

From a consultative Say on Pay to a binding Say on Pay...

Company management is often likened to the government of a nation in which the people, made up of shareholders, participate in decision-making through their representatives [1]. Until recently, this representative-democratic approach was applied to the determination of executive remuneration, insofar as the board members, elected by the shareholders, were the only ones competent to set the amount of such remuneration. However, because of the conflicts of interest that could arise between shareholders and directors, leading to excessive remuneration for the latter, the procedure for determining remuneration was rejected in favour of direct democracy.[2]. The so-called "Say on Pay" vote has been introduced into French law.

As a first step, the AFEP and MEDEF revised their corporate governance code in 2013, introducing the Say on Pay mechanism in the form of a consultative, ex-post vote by shareholders on the individual remuneration of executive directors. The corporate governance code is applied voluntarily by companies without any legal obligation. However, a heated debate erupted in 2016 over the effectiveness of this consultative vote following the payment, against the advice of shareholders, of executive remuneration at Renault and Alstom [3].  The lack of reaction from the Board of Directors led to public opprobrium and prompted politicians to take up the issue. It only took one or two scandals to call into question the effectiveness of this soft law.

The Sapin II Act of 2017 provided an opportunity to make Say on Pay binding. The executive remuneration policy must now be subject to an annual ex ante vote by shareholders as part of the presentation of the financial statements and the management report. In the event of a negative vote, the boards provisionally set remuneration for the next financial year on the basis of the current remuneration policy, pending submission of a new proposal to the next general meeting. The reform also introduced an ex post vote by the General Meeting, the purpose of which is to approve payments made on the basis of the remuneration policy previously voted by shareholders. This vote, applied in full in 2018 for the first time, is a binding vote insofar as the shareholders' unfavourable opinion means that the variable and exceptional remuneration awarded in respect of the previous financial year cannot be paid to each corporate officer concerned; only the fixed part of the remuneration continues to fall under the Board's sovereignty insofar as the shareholders' disapproval does not prevent it from continuing to be paid.

Votes still in favour...

A review of voting results since the introduction of Say on Pay in 2013 shows that shareholders' meetings largely vote in favour of the remuneration already set by the Boards, with an average approval rate of over 85% of votes in favour[4]. In 2018, this rate was even 2.2 points higher than last year [5]. In only two cases, Renault and Alstom in 2016, did the remuneration resolutions receive a negative opinion. These results could be justified by the deterrent effect of Say on Pay. However, this argument does not hold if we take into account the fact that average executive pay has increased in recent years: it was €4.5 million in 2017 compared with €4.2 million in 2016 [6]. What is the purpose of the Sapin II Act? Isn't this law supposed to combat excessive remuneration? Voting, whether mandatory or voluntary, consultative or binding, always leads to the same consequences.   

We should ask ourselves whether the low rate of contestation of executive remuneration via the Say on Pay mechanism does not demonstrate a lack of consensus between shareholders and politicians or public opinion on what constitutes "excessive remuneration". It is also possible to doubt the merits of involving shareholders in the control of remuneration, since ultimately they do not feel concerned by the issue; their expectations are essentially linked to the return on investment and the profit generated by the company. Say on Pay could even have perverse effects, since if we consider that remuneration is indeed abusive, the shareholders' vote only becomes a means of legitimising this abuse by the absence of a negative vote.

A system that does not aim to reduce the remuneration of company directors...

In concrete terms, if we believe that executive remuneration should be reduced, it is not certain that the Sapin II law, and more specifically the Say on Pay principle, can achieve this. It should not be forgotten that the increase in executive pay over the last thirty years has coincided with a steady increase in shareholder power[7]. On the other hand, this principle has the virtue of reflecting the image of good corporate governance and boosting market confidence. As one author explains, "the aim of say on pay is not to reduce executive pay as a matter of principle, but to force boards of directors and remuneration committees to explain their decisions better"[8]. In this case, there was no need to make the legislation more cumbersome and to impose a decision-making vote by shareholders, as the consultative or binding nature of the vote was not a determining factor.  

In the end, while there is no question of opposing the implementation of a degree of democracy within companies [9], the shareholder, like the citizen, "is not interested in the direct exercise of power. They simply want to make sure that those who exercise it on their behalf do not abuse the power delegated to them"[10].