Corporate governance focuses on the division of powers between various stakeholders, including a company’s governance bodies (board of directors or supervisory board) and shareholders, with the aim of ensuring a balance of power within a company.
Corporate governance encompasses the rights and obligations of corporate management with regard to the others takeholders, as well as the mechanisms that the other stakeholders’ can use to control the activities of corporate management.
The amount of assets under management gives asset management professionals a large share of market capitalisation. When investors delegate the management of their investments to a management company, they are also delegating the voting rights attaching to the shares under management.
In accordance with the asset management companies’ code of good practice, managers must conduct their business with complete independence vis-à-vis the issuers and solely in the interest of their customers.
Management companies are ready to exercise all their rights and perform all their duties as shareholders, because they have been quick to realise that good corporate governance practices increase the value of their customers’ investments and that they have an important role to play in this area. Therefore, they have become active participants at the AGMs of listed companies.
A strong incentive for management companies to vote
Up until the end of the 1990s, the concept of corporate governance was ill-defined in France, except in COB Recommendation 88.03, which stressed the importance of voting by management companies, stipulating that, “the management companies’ exercise of voting rights solely in the interest of their customers must be a fundamental rule”.
After that, fund managers’ exercise of voting rights was strongly urged by the industry code of good practice, at first, and later became a regulatory requirement:
- The scope of the Code was extended by the 2003 Financial Security Act and the AMF General Regulation.
Article L533-22 of the Financial and Monetary Code requires management companies to exercise the voting rights attaching to the shares held by the investment funds that they manage or to explain why they have not exercised the voting rights.
Articles 314-100 and 314-102 of the AMF General Regulation require management companies to produce a “voting policy” document explaining how the company intends to exercise the voting rights attaching to the shares held by the investment funds under management, along with a report giving an account of how it voted.
The AFG has been strongly committed to corporate governance since 1997
- 1998: The AFG Corporate Governance Commission, chaired by Jean-Pierre Hellebuyck, publishes its corporate governance recommendations for the first time. The recommendations deal with the annual general meetings and board meetings of publicly listed French companies.
- 1999 – 2000: The AFG institutes an alert programme to warn its members of resolutions being presented at AGMs that are contrary to its recommendations and to urge them to vote at the AGMs of companies in the blue-chip CAC 40 index.
- 2002: two new advances are made in the alert programme:
– The alerts sent to AFG members are made public on the AFG website.
– The AFG alerts programme is expanded to cover companies in the SBF 120 index.
Each year, AFG members fill out a questionnaire on how they voted, which shows that management companies vote at more AGMs each year and increasingly vote against resolutions that are contrary to their voting policy. The AFG publishes also a report on the alert programme and the resolutions identified as being contrary to its corporate governance recommendations.
- The OECD has set out a number of corporate governance principles that are widely regarded as benchmarks.
- The International Corporate Governance Network (ICGN) is a worldwide organisation for promoting corporate governance and a forum for exchanging views and information on the topic, as well as a clearinghouse for corporate governance practices.
Management companies’ voting and reporting on voting
Articles 314-100 to 314-102 of the AMF General Regulation govern the management companies’ obligations with regard to voting and reporting on their voting.
In accordance with Article 314-100 of the AMF General Regulation, management companies must produce a “voting policy” document. The document must be available to the AMF and must be available for inspection at the management company’s registered office or on its website in accordance with the procedures explained in the simplified prospectus of the relevant investment fund.
The management company is free to amend its voting policy document.
The document contents are organised into 5 topics:
- The organisation of voting
- Cases where votes are cast or note
- Voting policy principles
- Conflicts of interest
- Voting procedures
Article 314-101 of the AMF General Regulation stipulates that the management company must then give an account of how it voted in a report appended to the Board of Directors’ management report.
The report is produced within four months of the end of the company’s financial year. It is made available to the AMF and can be viewed at the management company’s registered office or on its website in accordance with the procedures set out in the prospectus.
The report must first indicate in how many companies the management company voted, compared to the number of companies in which it had voting rights.
The management company must also specify in the report the cases where it deemed itself unable to comply with its voting policy principles, along with the conflicts of interest that it had to deal with when voting.
Management companies have two types of disclosure obligations. They are required to disclose how they voted at the request of the AMF or at the request of any investor, in accordance with Article 314-102 of the AMF General Regulation.