France is about to become the latest European country to try curbing generous executive severance packages, in a trend that underscores a growing public scrutiny of the continent's managers.
French Finance Minister Thierry Breton has pledged to introduce legislation this month to give investors the final say over any severance deals through binding votes by shareholders. The rule change would be part of a broader bill to liberalize the economy that also would require companies to fully disclose executive remuneration, including golden parachutes, and not just their salaries.
Breton is reacting to the media frenzy over a $47.7 million severance package awarded by the board of Carrefour SA, the world's second-largest retailer, to its former chief executive after he left following poor results and a 30 percent plunge in its stock over the past two years. Rhodia SA further stirred popular ire when it disclosed last month it was paying its former CEO an additional $6.5 million in retirement money, on top of a $2.6 million severance package, despite mounting losses on his watch before he departed in 2003.
"As a citizen, I understand this emotion," Breton said when he announced the compensation bill. "Faced with such extravagant amounts, concerning a single individual, obviously France is upset."
In going after CEO severance packages, France is joining a broader public backlash in Europe against generous executive severance deals in the United Kingdom, Germany, Spain and other European Union countries. So far, that backlash has mostly taken the form of tongue-lashings in the media and minority-shareholder legal suits. But the French would be the first to act by specifically regulating golden parachutes.
The French electorate's rejection of a proposed E.U. constitution isn't expected to affect the legislation. The package is seen as a populist measure of the sort sought by critics of the constitution, many of whom opposed the document for fear it would unleash greater free-market forces in France.
In Britain, the outgoing chief executive of United Business Media PLC turned down a board-awarded "successful handover" bonus last month after 76 percent of shareholders who cast ballots objected to the payout in a nonbinding vote. In Spain, a court acquitted the chairman of Spanish bank Banco Santander Central Hispano SA in April of "irresponsible management" in connection with $183.5 million in retirement packages the bank paid to former top executives.
Germany's Mannesmann AG trial in 2004, which resulted in the acquittal of Deutsche Bank AG's chief on criminal charges relating to a bonus and pension payment totaling $69.7 million, set off a campaign for more-transparent corporate governance in Germany. The movement eventually led the government to introduce legislation last month that will compel executives to publish their salaries starting in 2007.
"Too many European companies have paid treasure chests to CEOs who have failed. The clock is ticking on those days," said Stephen M. Davis, president of Davis Global Advisors, a suburban Boston-based consulting firm specializing in global corporate governance and publisher of the Global Proxy Watch. Historically, Europe's severance packages have been dwarfed by those in the United States, mainly because of stock options, but those packages also are coming under scrutiny following a slew of corporate scandals.
Companies say giving shareholders a say on severance packages will limit their ability to recruit executives. Because stock options are taxable in most European countries, companies rely on hefty severance packages to attract executives.
Shareholder-rights advocates argue that more transparency over such deals is necessary to ensure investors get a fair deal. "You want to marry CEO interests with those of the shareholders," Davis said. "What you don't want is to pay for failure."
While European executives have resisted further disclosure as an invasion of privacy, the pressure for greater shareholder power is rising as the salary gap across the Atlantic narrows.
Britain and the Netherlands are the only countries in the E.U. where public companies are required to disclose severance packages as part of overall remuneration, according to Kristof Hopiu, a governance specialist at the shareholder advocacy group Institutional Shareholder Services Europe. Italian, Spanish, Portuguese, Austrian and German companies are the least transparent, he said.
France would be following in the footsteps of Britain. In 2002, Britain pioneered a set of laws giving shareholders the right to a nonbinding vote on executive remuneration, including severance packages, and limited golden parachutes to one year's worth of salary. In 2004, the Netherlands modeled a new regulation after the British codes and capped standard parachutes at one year's worth of salary, while giving shareholders the right to vote on overall executive remuneration.
Tougher European regulation would partially mirror standards in the United States, which doesn't cap severance packages but requires companies to divulge details of executive pay packages. U.S. companies aren't required to put severance packages or remunerations up to shareholder vote, despite recent public pressure to do so.
Any French move against golden parachutes could help prompt similar action in Germany and the rest of Europe, where family-controlled boards and large shareholdings by friendly banks are seen as obstacles to disclosure, said Theodor Baums, a former chairman of the German commission on corporate governance. He was appointed in April to an advisory group to the European Commission that will update corporate-governance guidelines for the E.U. "If you think of regulation, you look at your neighboring states," Baums said.