NON-FINANCIAL REPORTING AGAINST NEW OBLIGATIONS HINDERING THE GROWTH OF BUSINESSES

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2 NON-FINANCIAL REPORTING AGAINST NEW OBLIGATIONS HINDERING THE GROWTH OF BUSINESSES Report by Mr Jean-Claude HANUS on behalf of the Corporation Law Committee and adopted by the General Assembly on 21 November 2013 With the collaboration of Mr Matthieu ZOLOMIAN, Legal Expert, Civil and Commercial Law Department, Deputy Directorate general of Studies, Public Affairs and Policy Paris Ile-de-France Regional Chamber of Commerce and Industry 27, Avenue de Friedland F Paris Cedex 8 European Union Transparency Register N

3 CONTENTS MAIN PROPOSALS 3 INTRODUCTION 4 TOUGHER REQUIREMENTS PROPOSED BY THE EUROPEAN COMMISSION 6 TOUGHER REQUIREMENTS PROPOSED BY THE EUROPEAN COMMISSION 7 1. REINFORCED SCOPE OF NON-FINANCIAL REPORTING Scope ratione personæ of non-financial reporting Scope ratione materiæ of non-financial reporting 7 2. A SPECIFIC DIVERSITY POLICY REQUIREMENT FOR LISTED COMPANIES 8 REMARKS AND PROPOSALS 9 REMARKS AND PROPOSALS COMPULSORY DISCLOSURE OF NON-FINANCIAL INFORMATION Thresholds should be modified The generalisation of information on respect for human rights, the fight against corruption and fiscal matters is inappropriate Information on business partners should be excluded from the scope of application of compulsory non-financial reporting The welcome introduction of a reference framework More flexible entry into force for unlisted companies DIVERSITY POLICY FOR CORPORATE BODIES 13 ANNEX: REVIEW 14 ANNEX: REVIEW POSITIVE LAW OF THE EUROPEAN UNION FRENCH POSITIVE LAW A general non-financial reporting obligation that is not particularly binding Introduction of binding non-financial reporting for certain SA, SCA and SE Promotion of diversity within management bodies in particular 17 2

4 LEMAIN PROPOSALS On the scope of application - Raise the net turnover and balance sheet thresholds to EUR 100 million ; - Restrict the obligation to disclose information on the respect for human rights and the fight against corruption and bribery solely to public-interest entities within the meaning of Directive 2013/34/EU, Article 2 paragraph 1 point a), with over 500 employees and a balance sheet total or net turnover exceeding EUR 100 million, and encourage unlisted undertakings to develop best practices in such matters; On the content - Drop any idea of publishing fiscal strategies in the annual report, as long as there has been no European fiscal harmonisation; - Avoid any binding obligation for undertakings to include their commercial partners in their nonfinancial reporting, but leave them the choice of providing information on this point if they so wish; - Delete any reference to disability in disclosure relating to the composition of the administrative, management and supervisory bodies; On the implementation timescale - Provide the possibility for Member States to consider a later effective date for unlisted companies. Adopt a period of at least four years between application for listed companies on the one hand and unlisted companies on the other. 3

5 INTRODUCTION In the wake of the conclusions of the Rio+20 1 Sustainable Development Summit in June 2012 and the UN, 2 reasserting the importance of social and environmental reporting, the European Commission published a legislative proposal on 16 April last to amend European legislation on the disclosure of non-financial information by undertakings (non-financial reporting hereafter), 3 eliciting a number of reactions from several committees of the European Parliament, including the Development Committee, 4 the Committee on Employment and Social Affairs, 5 the Committee on the Internal Market and Consumer Protection 6 and the Committee on Economic and Monetary Affairs. 7 The draft of the Committee on Legal Affairs putting the different draft opinions together was published on 17 October of this year. 8 Noting the great variety of national practices and the lack of clarity of the current regime, in its Communication of 25 October 2011, 9 the Commission announced its intention of reforming the Fourth Directive 10 and Seventh Directive, 11 which had since become Directive n 2013/34/EU 12 by consolidation. After consulting the various stakeholders, and notably the CCIP, 13 it reasserted its intention on the occasion 1 Paragraph n 47 of the Final Declaration of the Rio Summit, June In September 2013, the UN organised a summit on the Global Compact with the objective of unveiling a new global architecture for the private sector on sustainability and outline a path for business to contribute to global priorities and the public good. BAN KI-MOON, UN Secretary General, The summit was held on 19 and 20 September 2013 in New York. 3 European Commission, Proposal for a directive of the European Parliament and of the Council amending Council Directives 78/660/EEC and 83/349/EEC as regards disclosure of non-financial and diversity information by certain large companies and groups. 4 Committee on Development, Draft opinion on the proposal for a directive of the European Parliament and of the Council amending Council Directives 78/660/EEC and 83/349/EEC as regards disclosure of non-financial and diversity information by certain large companies and groups, 30 September Committee on Employment and Social Affairs, Draft opinion on the proposal for a directive of the European Parliament and of the Council amending Council Directives 78/660/EEC and 83/349/EEC as regards disclosure of nonfinancial and diversity information by certain large companies and groups, 2 October Committee on the Internal Market and Consumer Protection, Draft opinion on the proposal for a directive of the European Parliament and of the Council amending Council Directives 78/660/EEC and 83/349/EEC as regards disclosure of non-financial and diversity information by certain large companies and groups, 12 September Committee on Economic and Monetary Affairs, Draft opinion on the proposal for a directive of the European Parliament and of the Council amending Council Directives 78/660/EEC and 83/349/EEC as regards disclosure of nonfinancial and diversity information by certain large companies and groups, 4 October Committee on Legal Affairs, Draft report on the proposal for a directive of the European Parliament and of the Council amending Council Directives 78/660/EEC and 83/349/EEC as regards disclosure of non-financial and diversity information by certain large companies and groups, 17 October European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, A renewed EU strategy for Corporate Social Responsibility, 25 October Fourth Council Directive 78/660/EEC based on Article 54 (3) (g) of the Treaty on the annual accounts of certain types of companies, OJEC L. 222 of 18 August 1989, p Seventh Council Directive 83/349/EEC of 13 June 1983 based on the Article 54 (3) (g) of the Treaty on consolidated accounts, OJEC L 193 of 18 July 1983, p Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC, OJEU L 182 of 29 June 2013, p CCIP, Non-Financial Disclosure Response of the CCIP to the Consultation of the European Commission, January

6 of its action plan on European company law last December. 14 A resolution of the European Parliament of 6 February 2013 also called upon the Commission to present a legislative proposal in this domain. 15 It should be remembered that non-financial reporting is part of the broader notion of corporate social responsibility (CSR hereafter) which calls upon companies to go beyond their legal obligations towards society and the environment. 16 It is a positive process consisting in enhancing transparency and providing incentives to define long-term policies taking account of aspects other than those of a purely financial nature, and notably the employees of the undertaking, its clients, suppliers, subcontractors, the environment, human rights and the fight against corruption. However, after being purely voluntary in the beginning, CSR has become a binding disclosure obligation and one that applies to an ever-increasing number of companies, without always taking account of their specific features. Ultimately, the measures that have been adopted have resulted in obligations to draft ever-increasing numbers of detailed reports, at the risk of harming the intended aim, which is to encourage rather than to dissuade, as well as running contrary to the key objectives of administrative simplification and competitiveness in these times of crisis. The risk that then arises from these binding obligations is that of green-washing, leading companies to comply with the legal rules, at least in appearance, while hiding those activities that do not comply with the obligations imposed by these measures. The central issue in CSR, however, is to find the right balance between the wish, on the one hand, not to place a disproportionate burden on undertakings in relation to their financial capacities or size and, on the other, the desire to encourage them to develop policies to increase awareness of the issues inherent to CSR and make improvements to these aspects. After going through the Commission s proposals to revise European Union law (1), a number of remarks will be made and some amendments suggested (2). An annex then reviews positive law on the disclosure of non-financial information. 14 European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Action Plan: European company law and corporate governance a modern legal framework for more engaged shareholders and sustainable companies, 12 December European Parliament, Resolution of the European Parliament of 6 February 2013 on Corporate Social Responsibility: promoting society's interests and a route to sustainable and inclusive recovery. 16 The European Commission defines CSR as the responsibility of enterprises for their impacts on society since its Communication to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, A renewed EU strategy for Corporate Social Responsibility. 5

7 TOUGHER REQUIREMENTS PROPOSED BY THE EUROPEAN COMMISSION 6

8 TOUGHER REQUIREMENTS PROPOSED BY THE EUROPEAN COMMISSION The proposals of the European Commission are organised around two main themes. 1. Reinforced scope of non-financial reporting Not only the content, but also the scope of application of non-financial reporting are specified. However, it does not introduce any specific oversight of the non-financial information indicated in the annual report, 17 as is required in French law Scope ratione personæ of non-financial reporting Non-financial reporting would be compulsory for all undertakings 18 or consolidated groups having over 500 employees and a balance sheet total exceeding EUR 20 million or net turnover exceeding EUR 40 million. This position is also confirmed by the draft report of the Committee on Legal Affairs of the European Parliament of 17 October Small and medium-sized companies would be exempted from this obligation, as would subsidiaries when they are consolidated with the parent company and the latter draws up a consolidated annual report containing this information Scope ratione materiæ of non-financial reporting As a general rule, the annual report should describe CSR policy, the results of that policy, the risks related to these questions and the way in which the undertaking manages these risks. There is also a list of the five main items of information on which each undertaking should provide information at the very least. These are the environment, social and employee-related matters, respect for human rights and the fight against corruption. Each company may mention, if necessary, non-financial performance indicators relating to its activity. The draft report of the European Parliament Committee on Legal Affairs emphasises one important objective, the comparability of their publications. To this effect, it suggests that companies base themselves on the guidelines of the UN, OECD and ILO. The draft also mentions other texts to which companies may refer, such as the European Union reference frameworks (Eco-Management and Audit Scheme), or international frameworks (UN Global Compact, ISO standard of the International Standardisation Organisation, the Global Reporting Initiative and the Carbon Disclosure Project and Climate Disclosure Standards Board projects). Finally, those companies that are concerned by the obligations but do not apply a policy for all or part of these questions, would have to explain themselves in accordance with the comply or explain principle. 17 Article 51 of the 4 th Accounting Directive required an audit of the annual accounts (balance sheet, profit and loss accounts and notes on the accounts) and an opinion on the consistency of the annual report with the annual accounts, without going as far as requiring an audit of non-financial information. Nevertheless, Article 34 of the new Accounting Directive of 26 June 2013, which reprises and amends Article 51 of the 4 th Directive, results in a requirement to audit all the information that must be disclosed in the annual report, including non-financial information. 18 It should be specified, however, that the 4 th Directive does not apply to all French companies, but only to SA, SCA, SARL, SCS, SNC 19 Mentioned above. 7

9 2. A specific diversity policy requirement for listed companies Large listed companies 20 would also be required to supply information in the declaration 21 on corporate governance in their annual report on their diversity policy (age, gender, geographical origin, educational background, professional experience and even disability), and more precisely on its objectives, the way in which it is implemented and, finally, the results obtained. Failing this, the companies concerned should explain the reasons for not applying a policy in the area in question. 20 Undertakings which on their balance sheet dates exceed the limits of at least two of the following criteria: a balance sheet total of EUR 17.5 million; a net turnover of EUR 35 million and a number of employees of over 250. These thresholds were raised slightly by the new Accounting Directive 2013/34/EU of 26 June 2013, which must be transposed by July 2015 (EUR 20 million for the balance sheet total, EUR 40 million for net turnover and 250 employees). 21 This specifies notably the Code of Governance to which the company refers and all the practices of the company that exceed national legal requirements. 8

10 REMARKS AND PROPOSALS 9

11 REMARKS AND PROPOSALS 1. Compulsory disclosure of non-financial information 1.1. The thresholds should be modified The Commission has chosen to apply non-financial reporting obligations solely to those companies 22 that exceed the following thresholds: 500 employees and a balance sheet total of EUR 20 million or net turnover of EUR 40 million. To begin with, the origin of these thresholds raises questions. It could be said that in the interests of harmonisation, the thresholds taken in the proposal for a directive as set out in the draft report of 17 October take account of those determined by the Directive of 26 June 2013 defining large undertakings. 23 They would therefore be set in stone to some extent. This initial analysis can be challenged, however. On the one hand, it must be noted that the number of employees differs greatly: 250 in the Directive of 26 June 2013 and 500 in the proposal for this directive. In so doing, this draft text creates a new sub-category that would be specific to CSR matters. This might be perceived as a wish to dispose of the large undertaking criterion and leave the possibility open to set other disclosure criteria. In addition to this and on an economic level, do we really want to draw into those new obligations all these undertakings? In this respect, Paris Ile-de-France Regional Chamber of Commerce and Industry points out that French legislation, which is a forerunner in such matters, has chosen to apply higher thresholds for unlisted companies. This results in a scope of application that is very, and perhaps even too broad. Therefore, in order to avoid new heavy burdens bearing on companies 24, the European balance sheet and turnover thresholds should be raised. It would therefore be unreasonable to go below the French threshold of EUR 100 million. PROPOSAL N 1 Raise the turnover and balance sheet total thresholds to EUR 100 million The generalisation of information on respect for human rights, the fight against corruption and fiscal matters is inappropriate Undertakings of the European Union, like any other entity of civil society, have a responsibility to respect, promote and guarantee the human rights set out in the Universal Declaration of Human Rights and the many international conventions. Also, any global approach to sustainable development necessarily encompasses a focus on ethics in conducting business dealings and the implementation by undertakings of means of ensuring that their practices comply with requirements in terms of integrity, transparency and respect for the various standards in the countries in which they do business. However, the question of promoting human rights and fighting against corruption concerns mainly large listed multinational companies. This is why French legislation, which requires very strict, detailed nonfinancial reporting, only demands this information for listed companies. 25 In addition to this, given the 22 This applies to companies limited by shares (public and private limited liability companies) and to partnerships and limited liability partnerships in which all the capital is held by public or private limited liability companies. 23 Large undertakings shall be undertakings which on their balance sheet dates exceed at least two of the three following criteria: a) Balance sheet total: EUR b) Net turnover: EUR c) Average number of employees during the financial year: Thinking notably of intermediate-sized enterprises. 25 By the terms of Article R of the Commercial Code, unlisted companies must disclose only the following information on their social commitments in favour of sustainable development: 10

12 sensitive nature of the question of the fight against corruption and bribery, companies should be allowed to judge what they disclose in this respect. It would therefore be preferable that only those companies that are of public interest, as defined in Article 2, Paragraph 1, Point a) of Directive 2013/34/EU, 26 should be required to disclose this information relating to respect for human rights and the fight against corruption. PROPOSAL N 2 Restrict the obligation to disclose information on the respect for human rights and the fight against corruption and bribery solely to public-interest entities within the meaning of Directive 2013/34/EU, Article 2 paragraph 1 point a), with over 500 employees and a balance sheet total or net turnover exceeding EUR 100 million, and encourage non-listed undertakings to develop best practices in such matters. The idea put forward in the last version of the text to make provision, in the revision of the Accounting Directive, for multinational companies having activities in different Member States to disclose notably their fiscal planning, also raises questions. In the absence of fiscal harmonisation, it is clear that this is a matter of strategy for each company and should not be disclosed. PROPOSAL N 3 Drop any idea of disclosing fiscal strategies in the annual report, as long as there has been no European fiscal harmonisation Information on business partners should be excluded from the scope of application of compulsory non-financial reporting The activity of a large company, especially when it is conducted in several states, necessarily requires the involvement of more locally-based business partners, such as suppliers or sub-contractors. Ultimately, this possibility might be detrimental to the company when the supplier or sub-contractor does not comply with the same CSR standards it complies with itself. However, it would seem excessive to place the burden upon a) Territorial, economic and social impact of the activity of the company: - in matters of employment and regional development; - on neighbouring and local populations; b) Relations with persons or organisations interested by the activity of the company, notably integration associations, teaching institutions, environmental protection associations, consumer associations and neighbouring populations: - the conditions of the dialogue with such persons and organisations; - partnership and patronage actions; c) Subcontracting and suppliers: - consideration of social and environmental issues in purchasing policy. In addition to this initial information, listed companies must disclose the following information on their social commitments in favour of sustainable development: c) Subcontracting and suppliers: - the importance of subcontracting and the consideration in relations with suppliers and subcontractors of their social and environmental responsibility; d) Fair practices: - actions taken to prevent corruption; - measures in favour of consumer health and safety; e) Other action taken, pursuant to the present paragraph 3, in favour of human rights. 26 1) "public-interest entities", enterprises within the scope of application of Article 1 that are: a) governed by the law of a Member State and whose securities are admitted to trading on a regulated market of a Member State within the meaning of Article 4, paragraph 1, point 14), of Directive 2004/39/EC of the European Parliament and Council of 21 April 2004 on markets in financial instruments; b) credit institutions as defined in Article 4, point 1), of Directive 2006/48/EC of the European Parliament and Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions, other than those referred to in Article 2 of said directive; c) insurance undertakings within the meaning of Article 2, paragraph 1, of Council Directive 91/674/EEC of 19 December 1991 on the annual accounts and consolidated accounts of insurance undertakings, or d) designated by Member States as public-interest entities, such as companies of significant public importance on account of the nature of their activities, their size or the number of their employees. 11

13 the company of publishing non-financial information concerning all its business partners in its annual report, as suggested in the draft report. This publication could soon become difficult, or even impossible to produce, with the company finding itself obliged to carry out audits of each partner. Such a measure, although understandable, would require the use of considerable resources. It would also imply revealing at least a part of the commercial strategy of the company, which would be highly prejudicial to the confidentiality required in business. Also, if a company were to publish information about its partners in its non-financial disclosure, and if such information should prove not to be compliant with the standards applied, it is the company making the disclosure that would ultimately have to assume the consequences and costs of the breaches committed by its partners. It would thus be sanctioned, at least economically, for practices it is not responsible for. It would therefore be inappropriate to require companies to disclose non-financial information about their business partners. On the contrary, on the basis of current best practice, those companies concerned by CSR reporting should be allowed the possibility of regulating the behaviour of their business partners themselves, without this being the subject of a binding disclosure requirement. There would be nothing preventing those companies that so wish from making the disclosure they deem fit in these matters. It might even provide them with a competitive edge, which could result, by emulation, in the same result as compulsory disclosure. PROPOSAL N 4 Avoid any binding obligation for undertakings to include their commercial partners in their non-financial reporting, but leave them the choice of providing information on this point if they so wish The welcome introduction of a reference framework The main pitfall at present in matters of non-financial information resides in the variety of data published by companies, notably on account of the variety of CSR standards to which companies refer. 27 Also, the range of different approaches and practices has shown that only common performance indicators can guarantee the comparability of the information and serve to evaluate progress made over time. The draft report of the European Parliament proposes an indicative list of reference frameworks for the disclosure of non-financial information. This should enable harmonisation of performance indicators, thereby improving the comparability of the data that is published. Paris Ile-de-France Regional Chamber of Commerce and Industry lauds this consideration, which corresponds to its position of January More flexible entry into force for unlisted companies The European Commission has provided the possibility for Member States to make entry into force of compulsory non-financial reporting gradual, according to whether it concerns listed or unlisted companies. However, the difference between the deadlines for these two categories of undertakings is just one year in the draft text as it currently stands. Paris Ile-de-France Regional Chamber of Commerce and Industry considers that the Member States should be authorised to allow more time for unlisted companies to comply with the new non-financial reporting obligations. These companies have much less experience of handling non-financial information than listed companies, and do not have the same structures or resources to do so. 27 Global Reporting Initiative (GRI), UN Global Compact, OECD Guidelines, CSR Europe, Diversity Charter, the ILO Tripartite Declaration of principles concerning multinational enterprises and social policy, etc. Not to mention such sectoral initiatives as Fibre-Citoyenne, Global Social Compliance programme, etc. 28 CCIP, Non-financial disclosure Response of the CCIP to the Consultation of the European Commission, January 2011, p

14 PROPOSAL N 5 Provide the possibility for the Member States to apply a later date of entry into force for unlisted companies. For example, it could be suggested that the period of time between application for listed companies on the one hand, and unlisted companies on other, should be at least four years. 2. Diversity policy for corporate bodies The draft report of the European Parliament proposes, for listed companies, a description of the diversity policy they apply to their corporate bodies as regards notably age, gender and disabilities. This latter aspect must be understood as meaning physical disability 29. Although the objective of including people with disabilities is a very laudable one, obliging companies to publish such data could ultimately set precise parameters, appearing to make provision for a specific form of policy on the composition of corporate bodies, with little regard for the competence of the persons appointed, no matter how important it might be to the accomplishment of their task. PROPOSAL N 6 Delete any reference to disability in disclosure relating to the composition of the administrative, management and supervisory bodies. 29 The English wording of the draft report uses the term disability which refers, according to the Oxford dictionary, to a [mainly] physical condition that limits a person s movements, senses, or activities. 13

15 ANNEX: REVIEW 14

16 ANNEX: REVIEW 1. Positive law of the European Union The Fourth and Seventh Accounting Directives of 25 July 1978 and 13 June respectively were amended in 2003 to require enterprises, as of 1 st January 2005, where appropriate, to include information (key performance indicators) in their annual report, relating to environmental and employee matters to the extent necessary for an understanding of the company's development, performance or position. This obligation is now featured in the new Accounting Directive 2013/34/EU of 26 June 2013, which combines the provisions of the Fourth and Seventh Accounting Directives, which are now abrogated. European law establishes an obligation to disclose non-financial information. Nevertheless, this measure is not very precise and its binding nature remains ambiguous on account of the terms that are used. 31 This obligation concerns public and private limited liability companies, plus SNC and SCS when all their associates are public and private limited liability companies. Member States do however have the possibility to exempt small and medium enterprises from this disclosure obligation, 32 and they have all done so French positive law French law has transposed European law on non-financial reporting with a very broad scope of application as regards the types of companies that are concerned (1), while also introducing a parallel obligation, although only for SA, SCA and SE, of much more precise, binding non-financial reporting on the one hand (2) and an obligation of transparency around the undertaking s diversity policy for directors on the other (3) A general non-financial reporting obligation that is not particularly binding Article 46 of the 4 th Accounting Directive was transposed in the third paragraph of Article L of the Commercial Code by Order n of 20 December It has been applicable since 1 st January 2005 to public and private limited liability companies, and to certain SNC and SCS (when all their associates are public or private limited liability companies - SA, SARL or SCA). 34 However, Article L of the French Commercial Code provides an exemption for unlisted companies that do not exceed certain thresholds set by a decree of the Conseil d Etat. As this decree has never been published, a debate has arisen around the implementation of the system. While the Compagnie Nationale des Commissaires aux Comptes considers that the non-financial reporting obligations under the terms of this article are applicable solely to listed companies, in the absence of a decree, 35 others consider that they apply to all the companies concerned, listed or not Article 46 of the 4 th Accounting Directive, referred to above in note 10, is now codified in Article 19 of the new Accounting Directive and Article 36 of the 7 th Accounting Directive, mentioned above in note 11, is reprised in Article 29 of the new Accounting Directive. 31 The use of the expression where appropriate raises questions as to the compulsory nature of the reporting being introduced. 32 An undertaking which does not exceed the limits of two of the following criteria under the terms of Directive 2013/34/EU mentioned above in note 12: a balance sheet total of EUR 20 million; a net turnover of EUR 40 million and 250 employees. 33 European Parliament, Report of the DG for Internal Policies Citizens Right and Constitutional Affairs, Corporate Social Responsibility: identifying what initiatives and instruments at European level could enhance legal certainty in the field of CSR, June 2012, p Art. L , paragraph 4 of the Commercial Code applicable to SNC and to SCS by reference to Article L of the Commercial Code. 35 Letter from the President of the CNCC of 27 February Francis Lefebvre, Mémento Sociétés commerciales, 2013, n ; Lamy, Sociétés commerciales, 15

17 However this may be, like the European text, this text is not particularly binding as the terms that are employed largely mitigate the compulsory nature of the non-financial information being envisaged. It effectively states that the analysis contained in the annual report must include non-financial performance indicators relating to the specific activity of the company to the extent necessary for an understanding of the company's development, performance or position and where appropriate. In addition to this, no sanction is attached to the absence of this information from the annual report Introduction of binding non-financial reporting for certain SA, SCA and SE The NRE law of 15 May 2001 created an obligation solely for listed companies to conduct non-financial reporting. The Grenelle II law of 12 July 2010 substantially reinforced requirements in such matters by extending not only the scope of application, but also the content of non-financial reporting obligations, as well as introducing audits by a third party. Scope of application of compulsory non-financial reporting This applies to listed public and private limited liability companies and European companies 37 and those unlisted companies with over 500 employees and a balance sheet total or net turnover exceeding EUR 100 million. 38 The parent company that enters within the scope of application of this text and draws up consolidated accounts must provide consolidated non-financial information for all its subsidiaries, within the meaning of Article L of the Commercial Code, and the companies it controls, within the meaning of Article L of the same code. Correlatively, those of its subsidiaries that would have entered within the scope of application of this system are exempted from any non-financial reporting, provided that the reporting by the parent company is conducted in a detailed manner, which is to say subsidiary by subsidiary. Content of compulsory non-financial reporting The law requires formal, detailed reporting. The board must specify, in the annual report to the shareholders, the way in which the company addresses the social and environmental consequences of its activity, and its social commitments in favour of sustainable development. Article R of the Commercial Code specifies the information to be provided. It establishes two lists of items: a first one for all companies and a second one, coming on top of the former, solely for listed companies. All in all, no fewer than thirty or so items must be considered in the annual report of an unlisted company, plus ten or so more for listed companies. Audit of compulsory non-financial reporting The legislator has imposed an audit of the non-financial information delivered in the annual report by an independent, accredited third-party body. This audit gives rise to drafting of a report containing two documents: first, a declaration certifying that all the information required by the regulations is indeed present and, in the absence of any such information, the presence of explanations given by the company; second, a detailed opinion on the true nature of the information and explanations supplied by the company However, an SAS is not subject to the non-financial reporting pursuant to Article L of the Commercial Code. 38 Article R of the Commercial Code. It should be noted that these thresholds are those applicable as of 31 December For financial years commencing as of 31 December 2012, the thresholds are set at EUR 400 million for the balance sheet total and net turnover, and at for the number of employees. 39 Art. R , II, of the Commercial Code. 16

18 Entry into force Entry into force of the overall system established by the Grenelle II Law is gradual. Sanction For listed companies: the whole system comes into force for financial years commencing as of 1 st January For unlisted companies with over 5,000 employees and net turnover or a balance sheet total exceeding EUR 1 billion: Non-financial reporting and the certificate issued by an independent third party on the presence of the information are required for financial years commencing as of 1 st January The opinion from the third-party body on the true nature of the information disclosed by the company will only be compulsory for financial years ending on 31 December For unlisted companies with between 2,000 and 5,000 employees and net turnover or a balance sheet total exceeding EUR 400 million: Non-financial reporting and the certificate issued by an independent third party on the presence of the information are required for financial years commencing as of 1 st January The opinion from the third-party body on the true nature of the information disclosed by the company will only be compulsory for financial years ending on 31 December For unlisted companies with between 2,000 and 5,000 employees and net turnover or a balance sheet total exceeding EUR 100 million: Non-financial reporting and the certificate issued by an independent third party on the presence of the information are required for financial years commencing as of 1 st January The opinion from the third-party body on the true nature of the information disclosed by the company will only be compulsory for financial years ending on 31 December There is no provision for any particular sanction. However, in the absence of the information required in the annual report, any interested person may apply to the President of the Court to rule in interlocutory proceedings, demanding that the board disclose the said information subject to periodic penalty payments, it being stated that the penalty and procedural costs will remain at the expense of the board members once they have acceded to the request Promotion of diversity within management bodies in particular In addition to this reporting, Law n of 16 June 2011 made it compulsory to refer to the policy of the company in matters of diversity for those undertakings already subject to CSR obligations Final paragraph of Article L of the Commercial Code. 41 Article L , paragraph 5 of the Commercial Code. 17

19 It should also be pointed out that Article 6.3 of the AFEP MEDEF Code promotes diversity on company boards. 42 As the different texts stand at present, it should be emphasised that France goes far beyond the requirements of the European Union and is therefore one of the forerunners in this area. 42 Article 6.3 of the AFEP/MEDEF Code: Each Board should consider what would be the desirable balance within its membership and within that of the committees of Board members which it has established, in particular as regards the representation of men and women, nationalities and the diversity of skills, and take appropriate action to assure the shareholders and the market that its duties will be performed with the necessary independence and objectivity. With regard to the representation of men and women, the objective is that each Board shall reach and maintain a percentage of at least 20% of women within a period of three years and at least 40% of women within a period of six years from publication of the present guideline or from the date of the listing of the company s shares on a regulated market, whichever is the later. Directors who are permanent representatives of legal entities and directors representing employee shareholders are taken into account in order to determine these percentages, but this is not the case with directors representing employees. When the Board comprises fewer than nine members, the difference at the end of six years between the number of directors of each gender may not be in excess of two. In addition, those Boards on which there is currently no woman must propose the appointment of a female director no later than at the second general meeting following the publication of the guideline, either by appointing a new director or by replacing a director whose term of office has expired. 18

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