Views on improving the integrity of global capital markets
01 June 2012

Corporate Governance Roundup: EU Pay Caps, French CEO Pay Cuts, Class Action in Hong Kong

Proposed restrictions on executive pay in Europe, new shareowner litigation rules in Hong Kong, and previewing proxy access in the United States.

European Union

Michel Barnier, European commissioner for Internal Market and Services, has proposed a binding vote on pay for EU-listed companies. The draft rule includes a right for shareowners to cap bonus levels that will have bankers from Madrid to Berlin looking for flats (that’s apartments to you Americans) in New York, Zurich, Hong Kong, or Singapore.

Under the Barnier plan, shareowners would vote to set the maximum ratio of bonus to salary and the pay ratio of the lowest and highest paid employees. Such a rule would place investor hands more directly on the levers of pay, something that most say-on-pay rules have avoided up until now (most votes simply approve or disapprove of the overall pay plan). It remains to be seen if such a pay plan will gain support over a summer in which the EU will face much bigger macro issues.


Say-on-pay voting has been the main event of proxy seasons on both sides of the Atlantic, with “no” votes on pay grabbing headlines in both the United Kingdom and the United States. CEOs at companies on the losing ends of those votes may take heart that they don’t run a firm owned by the French State.

Soon after his election victory, French President Francois Hollande is planning to follow through on a campaign promise to slash the pay of corporate CEOs at firms with a controlling government ownership. The French government plans to institute a new pay scheme for public sector companies majority owned by the state that would mandate a CEO cannot earn more than 20 times the wage of the firm’s lowest-paid worker. The proposal will affect “current” contracts, meaning some CEOs would face steep and sudden pay cuts.

We know you are curious, so here are some of those who would be most affected:

  • Henri Proglio, chairman and CEO of energy company EDF (Électricité de France), who currently earns a reported €1.55 million euros per annum — 64 times that of EDF’s lowest-paid employee.
  • Luc Oursel, president and CEO of nuclear company Areva, who would suffer a 49 percent cut to his salary from €679,000 to €335,000.
  • Jean-Paul Bailly, the CEO of La Poste, who earns 34 times more than the lowest-paid employee at his company.

The government also points out that that French President Hollande and all government ministers have cut their own salaries by 30 percent.

Hong Kong

As I’m sure you’re familiar with the CFA Institute Shareowner Rights Manual, you’ll remember that shareowners in Hong Kong do not currently enjoy the right to participate in class-action lawsuits against the companies they own. Well that may change … eventually … in a way.

Hong Kong’s Law Reform Commission recently recommended legislation that would allow a group with a common complaint to sue through a representative. The plan for the new rule is to introduce the ability for class action incrementally. The new rule will not apply to equity securities shares at first, but instead focus on product liability and consumer fraud cases. The lack of class-action rights in Hong Kong came to a head in 2009, following large losses by retail investors on bonds guaranteed by failed Lehman Brothers Holdings Inc.

A report containing the reform proposals was published on 28 May. The mechanics of such class action will not be based on the western model many are used to. Instead, investors who have purchased securities through banks or brokerages will have to ask permission to sue as a class under the proposed new rule. Such lawsuits would have to be allowed by the government, and if approved, could be financed by the city’s Consumer Legal Action Fund. Perhaps not the class action status some investors would want, but an improvement over the current practice.


With the fallout of the Olympus scandal still fresh in people’s minds, investors might be in the mood for some better corporate governance news out of Japan.

Well, we might just have some. First, the TMAM-GO Japan Engagement Fund was recently opened by Tokio Marine Asset Management and London-based Governance for Owners. The fund plans to work with Japanese companies to improve governance.

Also, in the wake of the Fukushima disaster at Tokyo Electric Power Company (Tepco), the company and its board have been forced to reform. A government bailout of Tepco requires that the company bring in a board comprised of a majority of independent directors — unfortunately a rare sight in Japanese corporate governance, but one that should be welcomed if it influences other corporations.

United States

Expect more in this space on proxy access (shareowners able to list their own candidates for director on the corporate proxy) soon, but for now, here is a brief summary of what we have seen thus far.

In 2011, an appeals court rejected an SEC proposal that aimed to set the bounds by which shareowners would be allowed to list their own director candidates on the corporate proxy.

As of this writing, only three proxy access shareowner proposals have gone to a vote. The SEC is not expected to take up the cause of proxy access anytime soon, so private ordering, or shareowners (and in some cases companies) asking that proxy access be added to a company’s bylaws, has become the only proxy access game available to U.S. shareowners.

This has resulted in a cornucopia of different plans, each with different holding-period (a number of years usually) and percentage-ownership (1 to 5 percent is the norm) requirements.

Some companies have offered their own plans to blunt the force of shareowner proposals, the most noteworthy being Hewlett-Packard, which negotiated with shareowners before agreeing to put a proxy access bylaw up for a vote at the 2013 annual meeting. To qualify for such access, shareowners would have to hold 3 percent of the company’s shares for three years, and it would be limited to 20 percent of the board.

Expect a more thorough review of this topic here in the coming weeks as proxy season winds down in the United States and we can make a more informed review of this first year of private ordering.

On a final note, good luck to all of you taking the CFA Program exam this weekend.

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a director of capital markets policy at CFA Institute, where he focuses on corporate governance issues. He was named one of the 2008 “Rising Stars of Corporate Governance” by the Millstein Center for Corporate Governance and Performance at the Yale School of Management.

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