The Transformation of Corporate Governance in France

Corporate governance first appeared as a topic of conversation in France in the mid-1990s in the wake of two quasi-simultaneous developments: the growing importance of foreign ownership (i.e. Anglo-Saxon institutional investors) and the succession of spectacular financial losses resulting from unmonitored managerial initiatives (e.g., Credit Lyonnais, Michelin, Paribas, Suez, Union des Assurances de Paris). As one might have expected, the reception was rather cold if not openly hostile to this new American export. In France, the terms “corporate governance” and “shareholder value” have generally been associated with lay-offs and short-term thinking that privileges the next quarter’s financial results over the long-term health and social responsibility of the corporation. The contempt shown by managers, state officials, trade unionists, and the general public toward foreign mutual and pension funds was not a surprise. After all, France has been on the forefront of the anti-globalization discourse despite fully embracing most of globalization?s consequences.

Behind the seemingly stable discourse on corporate governance, however, lies a changing assessment of its centrality for the French economic system. The impressive performance of the American economy in the 1990s meant that its model of corporate governance came to serve as a benchmark for other countries to emulate throughout the decade. Moreover, access to international equity capital was seen as contingent on the adoption of good governance practices and an emphasis on shareholder interests. By contrast, the current decade—which has seen the bursting of the Internet bubble and the proliferation of corporate scandals in the United States—has the French gloating with joy. The recent misfortunes of American firms—most notably Enron and Worldcom—have been seen as a vindication of the French model. Commentators point to the opposition of management at Suez (utilities group) to adopt Enron-style off balance sheet accounting in order to dress up its financial ratios despite the pressures of its auditors, as well as to the refusal of the Commission des Operations de Bourse (the French securities regulator) to give into Vivendi Universal’s demands on the use of questionable methods for reporting financial results as examples of the success of the French system in curbing corporate greed.

The French schadenfreude over problems in the American system of corporate governance should not mask substantial changes in the way French firms are doing business at home and abroad. The old model of corporate governance has changed beyond recognition. Its transformation is most prominent in three areas. First, the ownership structure of companies underwent a major transition in recent years from concentrated cross-shareholdings in the hands of friendly fellow domestic companies to high levels of foreign ownership. Foreign investors—composed primarily of Anglo-American mutual and pension funds, now own a little over 40 percent of the equity capital of blue-chip CAC 40 firms. This was a result, in large part, of the deliberate strategy of firms to sell their cross-shareholdings in an effort to convince foreign investors that they would be responsive to shareholder concerns. Second, large French firms have reversed their strategy of corporate diversification in many business areas and have dismantled their conglomerate structure. Blue-chip companies, with the notable exception of some traditional family-owned firms, are currently focusing on a limited set of core competencies. As a result, employees of French companies can no longer enjoy the employment protection offered by the internal labor market of conglomerates and the cross-subsidization from fast growing units to poorer performing counterparts. Their employment tenure is increasingly dependent on the financial performance of the firm. Third, French firms have adopted managerial performance incentives. A little over half of the total remuneration of French CEOs and top managers now comes in the form of variable pay based on some performance measure as opposed to a fixed salary. As a result, large French firms now pay out the biggest stock options packages among continental European companies.