Posted By Paul Marsland, Manifest, On 23rd January, 2015

Reporting of the abuse of corporate jet use by top management at Sweden’s largest companies has focused attention on the internecine links between Sweden’s top investors and largest public companies Svenska Dagbladet the Swedish newspaper has reported that Swedish forestry company SCA has been using several private jets to fly top managers and wives and children to an SCA-owned hunting lodge in northern Sweden, the Olympics in London and the European football championships in Kiev. It is reported that some directors of other big Swedish companies such as Nordea and Swedbank have also accepted trips in the jets. One hapless participant in a hunting trip even sent a jet back to Stockholm to pick up the wallet he had forgotten.

Influential shareholders at the centre of an intricate web of ownership amongst top Swedish companies have voiced their concerns and board room changes will follow however this is not a clear out and the changes risk creating new governance tensions that will need to be addressed.

At the annual general meeting of Novartis, to be held on February 27 in Basel, the shareholders are called to approve important amendments to the articles of association linked to the implementation of the Minder Initiative. In this context, Novartis proposes that the maximum total remuneration of the executive management (fixed and variable) be voted in a prospective manner. Ethos opposes this practice which gives the board a blank check. In fact, the variable remuneration should be voted retrospectively, when the financial results are known.

Like all Swiss listed companies, Novartis must implement the Minder Initiative. In particular, the articles of association must be adapted as a consequence. One of the essential points is to specify the modalities of voting for the remuneration of the executive committee. Common sense would have it that the fixed salary be voted prospectively at the beginning of the concerned period. In contrast, the variable remuneration should be voted retrospectively at the end of the financial year, when the financial results are known. This allows shareholders to assess the connection between the variable remuneration and the performance achieved.

The articles of association go against the will of the Federal Council

Unfortunately, in article 29 of the amended articles of association, Novartis foresees that shareholders vote on the total amount of remuneration for the 9 members of the executive committee in advance, including the variable part. This leads to the troubling situation wherein the maximum amount of the 2016 remuneration must be already voted, including:

Proxinvest released its new survey “The audit of French listed companies: a shareholder’s point of view”.

The research confirms that the insufficient rotation of audit mandates is a lasting problem: the length of audit mandates among the CAC 40 companies kept rising in 2013 up to 15 years on average. Proxinvest’s recommendation of a maximum tenure of 18 years or three mandates of six years is also ignored in 34% of the of the CAC 40 companies. A record tenure is observed at Carrefour where KPMG has been auditing the accounts for 46 years. Hopefully, thanks to the European Directive on Audit, such excessively long relationships should be avoided in the future.

While it isn’t as much the case as in other European countries, the statutory audit market in France is overly concentrated as only five firms literally “own” all the audit mandates of the CAC 40 blue chip companies index. These same firms: E & Y, KPMG, PwC, Deloitte and Mazars, also hold 72% of the mandates in Proxinvest’s panel,of 250 companies reflecting the massive concentration of the audit service industry.

SANOFI has just released the conditions of employment of its new CEO, Olivier Brandicourt, and Proxinvest, the French partner of ECGS, was invited by the press to comment the news.

A welcome gift, or ‘Golden Hello’, partly conditional and paid over three years  and estimated by Proxinvest € 6 million was made to the signing of the contract that binds the former Executive Board member  and boss of the pharmaceutical division of German group Bayer to the French top pharma player Sanofi. The company also communicated the generous remuneration terms agreed with its new CEO: a EUR 1.2 million base salary, an annual bonus of up to 250% of the fixed plus the annual grant of 220,000 stock options and of 45,000 performance shares: an expectation, according Proxinvest for about EUR 6 million per year as estimated under the generous performance conditions generally used by Sanofi.

Through the so-called “Investment Compact” Law Decree, approved on January 20^th, the Italian Government aims at deeply reforming the biggest Italian cooperative banks, i.e. the “popular banks” (banche popolari). Pursuant to the new rules, all “popular banks” with more than 8 million Euros of total assets shall change their status from cooperative to public traded corporation (Società per Azioni, or SpA). The transformation shall be proposed at the EGM, to be held within 18 months, and it will require a supermajority vote of at least two-thirds of voting members.

At the announcement of EDF's results, the new Chairman-CEO, Jean-Bernard Lévy, seems to be discovering or at least worries about financing the dividend through debt (see Les Echos and Agefi). The same day, ERAFP, a civil servants' pension fund, announces its voting policy and commitment for 2015 focusing on "the implementation of responsible policies regarding the distribution of dividends".

At EDF, the issue of reasonable dividend levels had already been discussed during the 2014 General Meeting: facing the proposal of the Board of Directors of a dividend of €1.25 per share, the employee share ownership fund “Actions EDF” for its part suggested €0.80 per share. In the end, the resolution of the Board offering € 1.25 per share was adopted at 98.4% of the votes against only 2.1% in favor of the second proposal of € 0.80. The state, in desperate need of this dividend because of short-term budgetary constraints, weighed 93% of the votes of the GA, but one wonders why so few of EDF’s minority shareholders questioned this policy of funding dividend through debt.

The just released AMF implementation report on general meetings, is a welcome revision of the working report chaired by Olivier Poupart Lafarge commented several times on this site.

This “implementation” has receives little critique from Proxinvest because the French market regulator has consulted and ultimately took into account many amending suggestions from the investor side. These debates have demonstrated the power of the business lobby braced on all possible comfort arrangements for issuers at the expense of the interests and equality of shareholders as of corporate integrity.

An unprecedented initiative was launched last month by a group of independent directors, aimed at blocking any attempts to extend the temporary exemption to the supermajority vote, required to approve the introduction of multiple voting rights. In few days, 140 individuals (academics, journalists, professionals and independent NEDs of more than 30 listed companies), 20 institutional investors (representing more than US$ 7.5 trillion of assets under management), and 9 advisers, including ECGS’s partners Frontis Governance and Manifest, signed an open letter to the Italian Government, the Parliament and market authorities. Many other investors expressed their intention to subscribe the letter, but they could not make the strict deadline. ICGN and the association of Italian asset managers (Assogestioni) also supported the initiative, sending a separate letter to the Government.

On February 5, only 3 days after the letter was sent, the Minister of Economy Carlo Padoan formally replied that the exemption period expired, and that the Government will not propose any extensions. A great result that proves that committed investors and (really) independent directors can work together to make changes happen.