Call for Evidence: Impact of the Best Practice Principles for Providers of Shareholder Voting Research and Analysis

Call for Evidence: Impact of the Best Practice Principles for Providers of Shareholder Voting Research and Analysis Contribution of the (Afep) GENERAL QUESTIONS Q1: What is the nature of your involvement in the proxy advisory industry (proxy advisor, investor, issuer, proxy solicitor etc.)? To facilitate the comprehensibility of your response to this Call for Evidence, please describe your role in and your interaction with the industry. Afep, the, represents large issuers operating in France. Afep has regular direct contacts with proxy advisors ( PAs ). For instance, each year and ahead of the AGM season (generally in November/December), Afep organises meetings with its members which give them the opportunity to meet the main proxy advisers (ISS, Glass Lewis, AFG). During these meetings PAs present their voting policy updates and answer questions raised as regards: the content of the voting policy, the methodologies they apply, their opinion on new legal developments (e.g. the Florange Act), contentious issues on corporate governance matters From the issuers perspective, these meetings are useful in order to enhance dialogue with proxy firms. Afep has also been entrusted by its member companies to propose solutions to improve their relations with PAs and PAs oversight. Q2: Have you previously had concerns with the functioning of any areas of the proxy advisory industry? If yes, please specify. Afep has been working on the subject of proxy advisors for about ten years. Their role and the relationship they have with issuers has raised issues for Afep members. This is probably due to the characteristics of large issuers in France: some companies are controlled by a majority shareholder but many are widely-held companies. In addition, more than 50 % of the capitalisation of French companies is held by foreign investors (mostly from the US and the UK). As it is impossible for foreign investors to analyse the draft resolutions of all companies in which they invest, only the general meetings of their main portfolio investments are analysed in detail. For the other AGMs, they often tend to rely on the voting instructions issued by proxy advisors. It cannot be denied that PAs provide a useful service to investors. However, the way some of them are performing their tasks raises several concerns, in particular: contradiction between their influence over shareholder voting and the lack of oversight of their activity; contradiction between their significant political influence and the fact they are not bearing any economic risks for their recommendations. The market structure is also potentially problematic. Two PAs, Institutional Shareholder Services (ISS) and Glass Lewis (GL) hold an ultra-dominant position both in the US and in Europe. This lack of competition means there are limited incentives to address such concerns. This is particularly alarming given the weight of non-resident investors in the capital of companies listed in Paris. 1

More concretely, if some efforts have been made, issuers are still faced with several issues in their relations with proxy advisors. There remains room for improvement: the formulation of PAs policies should be better suited to the local legal context of the country in which the company is operating; voting recommendations should be better suited to the individual situation of the company concerned; the quality of dialogue with issuers should be improved in order to prevent errors or use of outdated or misinterpreted corporate data; conflicts of interests should be better managed, in particular with regards to issuers to which they sell various services such as advice to improve their governance rating. Q3: Did you become aware of the BPP at the time of their publication, i.e. March 2014? If yes, how did you become aware of the BPP? If no, when did you become aware of the BPP and how? We became aware of the BPP at the time of their publication and even before, because we have participated in the consultation process. However, we regret that this consultation has not given any opportunity to reinforce some key principles such as dialogue with issuers. Indeed, when the final document was released, we realised that only minor changes occurred and the content remained almost identical to the initial draft. The usefulness of the consultation exercise was therefore doubtful. It also shows that self-regulation of the proxy advisor industry might be insufficient to tackle issues. Q4: What is your view on the width and clarity of the scope of entities covered by the BPP (i.e. do you consider that the BPP cover the European Proxy advisory market appropriately?) Please explain. We generally do not have problems with the definition of scope in the BPP. We think the main field of activities of PAs is covered. Q5: In your view, are the BPP drafted in a way so that they address the following areas identified in ESMA s 2013 Final Report? Please provide examples to support your response. a. Identifying, disclosing and managing conflicts of interest; b. Fostering transparency to ensure the accuracy and reliability of the advice; c. Disclosing general voting policies and methodologies; d. Considering local market conditions; e. Providing information on engagement with issuers. Generally speaking we do not consider that the BPP are really effective as they are very general and therefore not really prescriptive. In addition, we can notice a gap between the principles themselves and the way they are applied. a) Identifying, disclosing and managing conflicts of interest Problems may arise when PAs develop consulting services at the same time as they offer voting recommendations or as they sell reports. Issuers may rightly feel at disadvantage if they do not subscribe to these consulting services or do not buy these reports. Yet, issuers receive from PAs numerous solicitations for services that may potentially give rise to conflicts of interests. 2

For instance, ISS governance Quickscore is, according to the ISS website, a numeric, decile-based score that indicates a company s, governance risk relative to their index or region. A score 1 indicates relatively lower governance risk, and conversely, a score of 10 indicates relatively higher governance risk. Companies receive an overall Quickscore and are also assessed across four pillars: board structure, compensation/remuneration, shareholders rights, and Audit and risk oversight. Companies have access for free to their own evaluation which is provided by ISS Corporate Solutions (ICS, a wholly owned subsidiary of ISS) and based on the ISS voting policy. In addition, issuers can also subscribe to advice provided as well by ICS in order to improve their rating or to assess if their resolutions respect ISS voting policy. They can also subscribe to specific services which give access to databases such as Quickscore profiles of all covered companies from different markets. In order to avoid risks of conflicts of interests, the following rule should be added in the BPP: PAs should be required to disclose in their signatory statement the services they offer to issuers and/or investors and explain why they consider that these services may not give rise to conflicts of interests. In addition, it could be useful that an external independent study be made in order to list the numerous services offered by Proxies to issuers or investors in order to evaluate if some particular activities may give rise to such conflicts of interests. b) Fostering transparency to ensure the accuracy and reliability of the advice See c) below. c) Disclosing general voting policies and methodologies Preparation of the voting policies In order to prepare the updates of their voting policies, some PAs (but not all of them), organise a consultation process. Even if this consultation is open to stakeholders, the questions are mainly targeted to investors and there is no feedback on the replies and how they have been taken into account. Therefore, it is difficult to assess if the updates reflect market demands. Disclosure of voting policies Issuers consider that the disclosure of voting policies has improved. PAs generally disclose in advance of the AGMs their policy updates. This is the case for ISS and Glass Lewis. However, ISS does not disclose the updates in a consolidated format but only the updates compared to the previous version which is not consolidated either. Therefore there are ambiguities and it is not always clear if some provisions which were introduced several years before are still in effect. In addition, ISS FAQ concerning remuneration and say on pay was released this year very late at a time when many companies had already published their draft resolutions. As regards methodologies, some practices remain questionable: For instance, ISS refuses to transmit its draft report to issuers when a resolution has been tabled by a shareholder. The fact that they refuse to transmit their position concerning the said resolution could be understood, but they should not retain the whole report. There is no rationale for this. Another questionable practice is the use of voting recommendations to exert pressure inappropriately: for instance, a law adopted recently, the Florange Act, grants automatic 3

double voting rights to shareholders having held their registered shares for more than 2 years. Companies may opt out of these double voting rights in their bylaws. PAs are against double voting rights, reflecting the general investor position in favour of the one share one vote principle. However, instead of marking their opposition in their report, they have recommended in the voting policy for the next AGM season to vote against election or reelection of directors, including executive directors, or (if no renewal is required) against the company accounts. This behaviour is not acceptable. In our view, the appropriate behaviour would be to remind shareholders of the possibility to table a resolution in order to opt out of these double voting rights. Failing that, the consequences could be really harmful if shareholders relying on the PAs recommendations do not approve the accounts or the re-election of the executive directors. This retaliation procedure is not an exception. It has been put in place in other cases. For instance, PAs may recommend investors to vote against directors election or accounts approval to protest against the issuer not introducing a resolution on any contentious issue concerning a corporate governance subject, where the proxy advisor has a strong view. d) Considering local market conditions PAs do not take sufficiently into account the legal framework in which French companies operate. Most of the time they apply a uniform voting policy without checking whether the governance principles they apply are appropriate to the actual situation of the company or even applicable given the local context. Here are a few examples: Separation of the offices of Chairman of the Board and CEO: PAs consider that this is the only acceptable arrangement for the governance of Boards of directors. This dogmatic position is not in line with the French commercial code, which offers the possibility to choose between 3 equally acceptable formulae: o in the unitary system, there are two options: possibility either to combine or to split the function of chairman and CEO or, o the two tier system comprising a management board and a supervisory board. In addition, no study can be found showing that a company performs better when the offices of Chairman and CEO are separated. Indeed, no ideal governance structure can be replicated by all companies. The specific context of each company must be taken into account and the success depends more on the skills of executive directors at the top of the company than on a governance structure. Calculation of the proportion of independent directors: a recent law provides for directors to represent employees at board level. The French corporate governance code excludes them when calculating the proportion of independent directors. But despite the local market rule, some proxies systematically include them in the calculation. Votes on the components of the remuneration: whilst referring in an inappropriate way to the law, some PAs are asking for separate resolutions for an executive director benefiting for instance of payment on termination of office and non-competition agreement. However, according to the law (art. L.225-42-1 of the commercial code) a resolution has to be submitted to the approval of the AGM for each beneficiary, but not for each component of the remuneration of the same beneficiary. 4

e) Providing information on engagement with issuers We can notice that some proxies have improved their engagement policy while others are going backwards. According to our members, in theory, ISS establishes dialogue with companies before AGMs and commits to handling its preliminary report for comments. Several issuers praise the benefits of these exchanges since sometimes they lead to changes in voting recommendations. However, complaining about a non-demonstrable lack of time, ISS occasionally does not transmit any preliminary report; or does but only accepts issuers comments within a very limited period of time. In some cases, the drafts are issued as late as the morning of the general assembly, making impossible any kind of communication. Usually, ISS prefers written comments rather than conference calls. This method cannot efficiently replace in-depth dialogue, especially regarding complex topics that require an extensive understanding of companies. Moreover, one may question their recent rule of procedure which provides that the preliminary report should not be transmitted when a dissenting resolution is tabled. The need for dialogue and understanding remains the same here. This matter should be reassessed by ISS. Glass Lewis is changing its policy as regard communication: Glass Lewis has given access to CAC 40 companies for the first time (the process will be extended to SBF 120 companies later) to an Issuer Data Report. In this report, GL collects data regarding the main corporate governance issues such as composition of the board, related-party transactions, directors remuneration, say on pay At this stage, GL gives issuers the opportunity to check the accuracy of the data but does not indicate its voting recommendations. Companies regret Proxinvest s decision to stop consulting companies prior to the publication of its report. The only potentially available document is a one-page-summary of voting recommendations that is usually unclear and poorly argued. Therefore their advisory letter is sent directly to their investing clients without any prior dialogue with issuers. The only way for companies to obtain this advisory letter is to pay a bill. Consequently Proxinvest may be brought to publish warnings based upon inaccurate information. Issuers can only refute or correct that information retrospectively. PAs should be required to engage in dialogue with issuers. This is key to prevent proxies from sending inaccurate reports to their clients. Indeed, it is essential to avoid factual errors and misunderstandings. As the AGM season is concentrated on a very short period, the proxies usually employ trainees or temporary employees. Errors are very frequent and may lead to serious consequences. Q6: What is your overall assessment of the quality of the signatory statements? Please provide examples referring to the areas identified under Q5. Afep has examined the signatory statements of ISS and Glass Lewis. Signatory statements are much more detailed than the BPP and bring useful information. However, they do not solve the issues raised in Q5. 5

Areas identified in Q5 a. Identifying, disclosing and managing conflicts of interest; b. Fostering transparency to ensure the accuracy and reliability of the advice; c. Disclosing general voting policies and methodologies; ISS The statement brings clarity about certain conflicts of interest. ISS acknowledges that services provided by its subsidiary ICS to issuers might give rise to potential conflicts of interests, but that they are mitigated by firewalls. It states that a law firm hired by ISS confirms that those measures effectively manage the potential for conflict. However, the compatibility of ICS and ISS services is not put into question, although for instance, ICS proposes to issuers to assess if their resolutions respect ISS voting policy. As suggested in our reply to Q5, an independent study would be welcome on that aspect. The statement brings useful information about the relations of ISS with its clients. ISS covered in 2013 34,200 AGMs and provided 6,634,831 recommendations with a team of 250 researchers. This represents an average of 137 meetings and 26,539 recommendations per researcher. One may wonder how this team is able to provide an accurate and reliable analysis of each resolution tabled by each issuer. Controls designed to ensure the quality of the advice are listed but no statistics are provided. The statement gives more details about ISS methodologies. Its research coverage and delivery methods show a very mechanical approach to recommendations and the lack of company-specific considerations. It does not reflect ISS retaliation procedures (see Q5). ISS policy updates (by regions and not by country) are disclosed on its Glass Lewis The statement brings clarity about conflicts of interest. Unlike ISS, Glass Lewis does not offer consulting services to issuers. GL discloses statistics about its conflicts of interests. The statement brings useful information about the relations of Glass Lewis with its clients. ISS issued in 2013 20,610 reports with a team of about 200 researchers. 1 This represents an average of 103 reports per researcher. One may wonder how this team is able to provide an accurate and reliable analysis of each resolution tabled by each issuer. The statement is very vague about controls designed to ensure the quality of the advice. The statement gives more details about GL s methodologies. It insists on the fact that each company should be evaluated on its unique facts and circumstances. GL policies for each market are disclosed on its website. 1 AFEP approximate evaluation, according to Glass Lewis website : 360 employees, more than half of whom are dedicated to research 6

d. Considering local market conditions; e. Providing information on engagement with issuers. website. ISS claims to take into account local regulation and soft regulation, but the reality may be different (see Q5). The statement shows that ISS may undertake dialogue with issuers for two purposes: improving quality and transparency. ISS generally allows issuers in France to comment on draft reports. However, the statement does not show the reality of these limited contacts with very tight time constraints (see Q5): the claimed timely delivery of research, 19 days prior to the AGM, does not reflect the timing of consultations with issuers in France, which is valuable but too late and short (around 24 hrs). GL claims to take into account local regulation and soft regulation, but the reality may be different (see Q5). The statement explains that GL is developing data-only version of its reports for subject issuers. It is stated that GL also reaches out to companies to require clarifications, but refrains from meeting with issuers during the solicitation period, which is consistent with reality. Q7: In your view, are there proxy advisors which possibly fall within the scope of the BPP and have not signed the BPP? If yes, please: a. identify such entities; b. explain why you consider them to be within the scope of the BPP; and c. indicate their size and the coverage of their operations within the European market. We consider that the proxy advisors which cover the French market are within the scope of the BPP. Q8: How would you describe the impact which the BPP have had on the proxy advisory industry in practice? Please provide examples to support your response. We believe that due to the BPP, proxy advisors are more aware of the necessity to be more transparent about their business practices and the way they operate. For instance, their websites have been seriously improved. Q9: Have you observed any changes in signatories practices in the areas mentioned under Q5 since the publication of the BPP in March 2014 and specifically during the 2015 proxy season? Please provide examples to support your view and specify whether these changes addressed the concerns you mentioned in response to Q2, if any. See our comments in Q5 7

Q10: To what extent do you consider the conduct of BPP non-signatories in relation to the areas identified under Q5 to be different from that of BPP signatories? Please provide examples to support your view. No comments. Q11: Do you consider other measures than the BPP necessary to increase understanding of and confidence in the proxy advisory industry? If yes, please explain why and specify the measures which would in your opinion be suitable. Any self-regulation system requires adequate monitoring. So far, only a very weak monitoring of the BPP by the BPP group has been put in place. A stronger and more independent monitoring must be implemented as soon as possible to ensure credibility of the principles and actual improvements on the ground. We propose the following: The implementation of the Principles should be monitored by a separate entity. In Afep s view, the best placed entity to ensure monitoring is ESMA or the national regulator. Alternatively, monitoring could be done by an ad hoc dedicated body, the Monitoring Board, which should be composed of independent personalities representing various stakeholders such as national regulators, issuers, shareholders. ESMA or the Monitoring Board should be in charge of monitoring the code s implementation by making an annual report. It should assess the explanations in case of deviation from the Principles and make recommendations in order to improve their quality. In addition, in order to prepare future developments of the Principles, it should highlight best practices. Issuers or their representatives as well as shareholders should have the possibility to submit to ESMA or the Monitoring Board issues that relate to their relations with signatories (dialogue, erroneous data, content of voting policies ). ESMA or the Monitoring Board should have a website where its report, recommendations and warnings should be published. Proxy advisors should register themselves with ESMA or national competent authorities. In the latter case, this information should be communicated to ESMA. This information should be made available by ESMA to allow continued monitoring and transparency of the industry at EU level. In addition to self-regulation, we believe that at least some key principles should be enshrined in legislation. We therefore support the provisions included in the Shareholder Rights Directive (SRD) which is now being discussed in trialogue, although some of them should be reinforced: Disclosure of reference to a code of conduct which proxy advisors apply and obligation to report on the application of this code of conduct, on a comply or explain basis: this reference should be mandatory, as proposed by the Parliament. Disclosure of information in relation to the preparation of the voting recommendations: the main information sources they use; how they take national market, legal and regulatory conditions and company-specific circumstances into account; the essential features of the voting policies they apply for each market; procedures put in place to ensure quality of the research; qualifications of staff involved in the preparation of the voting recommendations. Dialogue with issuers which are the object of their voting recommendations: it should be mandatory and not only optional as proposed by the Council and Parliament. 8

Mandatory disclosure of conflicts of interests and implementation of a strong policy to prevent them: conflict of interests should be disclosed by proxy advisors both to their clients and to issuers. They should also implement policies and organisational structures that mitigate conflicts: Chinese walls should separate their proxy voting services from advisory or consulting services. Q12: Do you have any other general comments that ESMA should take into account for the purposes of its review? No comments. QUESTIONS FOR ISSUERS Q34: As regards your experience with proxy advisors before and after the publication of the BPP, please describe: a. whether proxy advisors have provided research, advice and/or recommendations on your company; b. whether you have used services from proxy advisors (please specify which services, e.g. research, consultancy). As we are an organisation representing large issuers, we are not directly concerned by this question. However, proxy advisors provide voting recommendations on most of our members. Part of our member companies also reported they are using services from proxy advisors, notably advisory and database services. Q35: In your experience, to what extent have the BPP enhanced clarity as regards the expectations issuers can have towards communication with proxy advisors? Please provide examples to support your response. The BPP are a first step, but the principles remain vague. In order to meet issuer s expectations, they should be supplemented by provisions according to which proxy advisors should be required to engage in dialogue with issuers. If issuers are informed of the reasons behind negative votes on shareholders proposals, they can reflect on the wisdom of future changes. This is the positive dynamic recognised by the UK Stewardship Code applicable to institutional investors. Without knowing the reasoning behind the negative votes, issuers cannot engage constructively with their shareholder base. This dialogue should take place both before PAs formulate their recommendations, and once a position has been taken, in order to avoid misunderstandings or factual errors. PAs should do so in a manner that maximises the ability of issuers to provide feedback prior to the general meeting. Even where proxy advisory firms do not make changes in their recommendations, the written positions and explanations provided by issuers should be sent along with the voting recommendations to the proxy advisor s clients. The rationale for the recommendation of the proxy advisory firm should be explained in light of those countervailing arguments. 9

We can notice that some proxies have improved their engagement policy while others are going backwards. According to our members, in theory, ISS establishes dialogue with companies before AGMs and commits to handing its preliminary report for comments. Several issuers praise the benefits of these exchanges since sometimes they lead to changes in voting recommendations. However, complaining about a non-demonstrable lack of time, ISS occasionally does not transmit any preliminary report; or does but only accepts issuers comments within a very limited period of time. In some cases, the drafts are issued as late as the morning of the general assembly, making impossible any kind of communication. Usually, ISS prefers written comments rather than conference calls. This method cannot efficiently replace in-depth dialogue, especially regarding complex topics that require an extensive understanding of companies. Moreover, one may question their recent rule of procedure which provides that the preliminary report should not be transmitted when a dissenting resolution is tabled. The need for dialogue and understanding remains the same here. This matter should be reassessed by ISS. Glass Lewis is changing its policy as regard communication: Glass Lewis has given access to CAC 40 companies for the first time (the process will be extended to SBF 120 companies later) to an Issuer Data Report. In this report, GL collects data regarding the main corporate governance issues such as composition of the board, related-party transactions, directors remuneration, say on pay At this stage, GL gives issuers the opportunity to check the accuracy of the data but does not indicate its voting recommendations. Companies regret Proxinvest s decision to stop consulting companies prior to the publication of its report. The only potentially available document is a one-page-summary of voting recommendations that is usually unclear and poorly argued. Therefore their advisory letter is sent directly to their investing clients without any prior dialogue with issuers. The only way for companies to obtain this advisory letter is to pay a bill. Consequently Proxinvest may be brought to publish warnings based upon inaccurate information. Issuers can only refute or correct that information retrospectively. Q36: Has your approach to seeking or maintaining dialogue with proxy advisors within or outside the proxy season changed in any way as a result of the publication of the BPP (e.g. in terms of frequency, nature, circumstances)? If yes, please provide examples and quantitative evidence. Issuers continue to seek dialogue with issuers, but still encounter many difficulties. See detailed remarks in the answer to Q35. Q37: In your experience, to what extent have the BPP improved proxy advisors procedures for managing and disclosing conflicts of interest, and specifically the following two types? a. The proxy advisor provides services to both the investor and the issuer; b. The proxy advisor is owned by an institutional investor or by a listed company to whom, or about whom, the proxy advisor is providing research, advice and/or recommendations Please provide examples to support your response. Problems may arise when PAs develop consulting services at the same time as they offer voting recommendations or when they sell reports. Issuers may rightly feel at disadvantage if they do not 10

subscribe to these consulting services or do not buy these reports. Yet, issuers receive from PAs numerous solicitations for services that may potentially give rise to conflicts of interests. For instance, ISS governance Quickscore is, according to the ISS website, a numeric, decile-based score that indicates a company s, governance risk relative to their index or region. A score 1 indicates relatively lower governance risk, and conversely, a score of 10 indicates relatively higher governance risk. Companies receive an overall Quickscore and are also assessed across four pillars: board structure, compensation/remuneration, shareholders rights, and Audit and risk oversight. Companies have access for free to their own evaluation which is provided by ISS Corporate Solutions (ICS, a wholly owned subsidiary of ISS) and based on the ISS voting policy. In addition, issuers can also subscribe to advice provided as well by ICS in order to improve their rating or to assess if their resolutions respect ISS voting policy. They can also subscribe to specific services which give access to databases such as Quickscore profiles of all covered companies from different markets. In order to avoid risks of conflicts of interests, the following rule should be added in the BPP: PAs should be required to disclose in their signatory statement the services they offer to issuers and/or investors and explain why they consider that these services may not give rise to conflicts of interests. In addition, it could be useful that an external independent study be made in order to list the numerous services offered by Proxies to issuers or investors in order to evaluate if some particular activity may give rise to conflicts of interests. Another problem should be tackled, which derives from the use by investors of voting platforms. When institutional investors use ISS services to cast their votes, ISS votes by default according to its own voting recommendations. It is then extremely difficult for institutional investors to change their votes if they wish to support all resolutions tabled by the issuer. Q38: In your experience, to what extent have the BPP enhanced clarity as regards proxy advisors methodologies and the nature of their information sources, thereby allowing you to better assess the accuracy and reliability of the proxy advisors research, advice and/or recommendations as regards your company? Please provide examples to support your response. Preparation of the voting policies In order to prepare the updates of their voting policies, some PAs (but not all of them), organise a consultation process. Even if this consultation is open to stakeholders, the questions are mainly targeted to investors and there is no feedback on the replies and how they have been taken into account. Therefore, it is difficult to assess if the updates reflects market demands. Disclosure of voting policies Issuers consider that the disclosure of voting policies has improved. PAs generally disclose in advance of the AGMs their policy updates. This is the case for ISS and Glass Lewis. However, ISS does not disclose the updates in a consolidated format but only the updates compared to the previous version which is not consolidated either. Therefore there are ambiguities and it is not always clear if some provisions which were introduced several years before are still in effect. In addition, ISS FAQ concerning remuneration and say on pay was released this year very late at a time where many companies had already published their draft resolutions. 11

As regards methodologies, some practices remain questionable: For instance, ISS refuses to transmit its draft report to issuers when a resolution has been tabled by a shareholder. The fact that they refuse to transmit their position concerning the said resolution could be understood, but they should not retain the whole report. There is no rationale for this. Another questionable practice is the use of voting recommendations to exert pressure inappropriately: for instance, a law adopted recently, the Florange Act, grants automatic double voting rights to shareholders having held their registered shares for more than 2 years. Companies may opt out of these double voting rights in their bylaws. PAs are against double voting rights, reflecting the general investor position in favour of the one share one vote. However, instead of marking their opposition in their report, they have recommended in the voting policy for the next AGM season to vote against election or re-election of directors, including executive directors, or (if no renewal is required) against the company accounts. This behaviour is not acceptable In our view, the appropriate behaviour would be to remind shareholders of the possibility to table a resolution in order to opt out of these double voting rights. Failing that, the consequences could be really harmful if shareholders relying on the PAs recommendations do not approve the accounts or the re-election of the executive directors. This retaliation procedure is not an exception. It has been put in place in other cases. For instance, PAs may recommend investors to vote against directors election or accounts approval to protest against the issuer not introducing a resolution on any contentious issue concerning a corporate governance subject, where the proxy advisor has a strong view. Q39: In your experience, have the BPP enhanced: a. proxy advisors level of awareness of local market, legal and regulatory conditions which your company is subject to? b. proxy advisors disclosure of the extent to which they take the above conditions into account? Please provide examples to support your response. PAs do not take sufficiently into account the legal framework in which French companies operate. Most of the time they apply a uniform voting policy without checking whether the governance principles they apply are appropriate to the actual situation of the company or even applicable given the local context. Here are a few examples: Separation of the offices of Chairman of the Board and CEO: PAs consider that this is the only acceptable arrangement for the governance of Boards of directors. This dogmatic position is not in line with the French commercial code, which offers the possibility to choose between 3 equally acceptable formulae: o in the unitary system, there are two options: possibility either to combine or to split the function of chairman and CEO or, o the two tier system comprising a management board and a supervisory board. In addition, no study can be found showing that a company performs better when the offices of Chairman and CEO are separated. Indeed, no ideal governance structure can be replicated by all companies. The specific context of each company must be taken into account and the 12

success depends more on the skills of executive directors at the top of the company than on a governance structure. Calculation of the proportion of independent directors: a recent law provides for directors to represent employees at board level. The French corporate governance code excludes them when calculating the proportion of independent directors. But despite the local market rule, some proxies systematically include them in the calculation. Votes on the components of the remuneration: whilst referring in an inappropriate way to the law, some PAs are asking for separate resolutions for an executive director benefiting for instance of payment on termination of office and non-competition agreement. However, according to the law (art. L.225-42-1 of the commercial code) a resolution has to be submitted to the approval of the AGM for each beneficiary, but not for each component of the remuneration of the same beneficiary. 13

About AFEP () Since 1982, Afep is the association which brings together large companies operating in France. The Association is based in Paris and Brussels. Afep aims to foster a business-friendly environment and to present the company members vision to French public authorities, European institutions and international organisations. Restoring business competitiveness to achieve growth and sustainable employment in Europe and tackle the challenges of globalisation is Afep s core priority. Afep s work relies on: - the direct participation of business leaders and their teams in defining economic and social policy directions, as well as in determining the actions to be taken for growth and employment; - direct and sound exchanges with public authorities, which are based on analyses and well-founded proposals; - active and constructive contributions to French and European public consultations. Afep is involved in drafting cross-sectoral legislation, at French and European level, in the following areas: economy, taxation, company law and corporate governance, corporate finance and financial markets, competition, intellectual property and consumer affairs, labour law and social protection, environment and energy, corporate social responsibility. Afep has 113 members. More than 8.5 million people are employed by Afep companies; their annual combined turnover amounts to 2,600 billion. Headquarters in Paris 11, avenue Delcassé 75008 Paris Tel: +33 1 43 59 65 35 Fax: +33 1 40 74 03 65 Brussels Office 4-6 rue Belliard Bte 1 1040 Bruxelles Tel: +32 2 219 90 20 Fax: +32 2 219 95 06 Contacts Odile de Brosses Director for Legal Affairs E-mail: o.de.brosses@afep.com Tel : +33 1 43 59 85 25 Jérémie Pélerin European Affairs Director Head of the Brussels Office E-mail: jeremie.pelerin@afep.be Tel: +32 2 227 57 23 14