Main addenda from the 2021 Middlenext Code to consider in your corporate governance report
March 24, 2022
This OnPoint summarizes the main recent legal and regulatory changes in corporate law introduced by the update of the Middlenext Corporate Governance Code in September 2021 (the “Code”). This Code applies immediately for small and mid-cap companies listed in Paris that have chosen the Code. These companies must submit their universal registration document within four months of the end of financial year 2021.
The main addenda of the 2021 Middlenext Code
Companies listed in Paris must refer either to a corporate governance code or to a set of rules which they have adopted, in addition to the requirements of the law, and give reasons for their choice. The Autorité des Marchés Financiers carefully examines the reasons given by each listed company.
As a reminder, the corporate governance code developed by Middlenext is intended for mid-cap companies listed in Paris. As a guide to best practices, it is intended to facilitate governance and shareholders’ dialogue within such companies, providing a form of protection from possible reputational risk ("name and shame"). For example, in its annual report on corporate governance, the Autorité des Marchés Financiers sometimes directly names issuers that have adopted poor governance practices.
For companies that decide to refer to it, the provisions of this Code are only recommendations, but if they are not followed, the company must explain the reasons why it is not following them (the "comply or explain" principle).
Reinforced recommendations:
The procedure for disclosing conflicts of interest: the updated Code aims to extend the treatment of both actual and potential conflicts of interest to all levels of the group. The board will have to undertake “all reasonable investigations in order to assess the proportionate measures to be taken (…) to ensure that decisions are made in the best interests of the company”. Each board member should also declare, before each board meeting, any conflicts of interest and shall refrain from participating in the deliberations and voting on any matter on which he/she is in such a situation, in view of the agenda that has been communicated to him/her.
Ethical rules: the Code now specifies – in view of the requirements of the new wording of article 1833 of the French civil Code – that each board member is obliged to act in all circumstances in the corporate interest of the company and to take into consideration social, societal and environmental matters of its activity. In addition, a paragraph is added on the obligation for each board member to respect the legal and regulatory requirements in force with regard to the declaration of transactions and the blackout period for trading in the company’s securities.
Negative votes: the Code recommends that the board of directors analyzes negative votes at general meetings and votes by the majority of minority shareholders. The board should then consider whether the reasons for the negative votes should be changed for the next general meeting and whether this should be communicated on.
Executive compensation: the Code requires greater transparency and precision on the guiding principles of such compensation. It is thus recommended that companies compare executive compensation not only with the average and median of employees, as is already required by law for companies listed on a regulated market, but also with the minimum wage, which constitutes an "independent reference value and fixed denominator for all companies".
New recommendations:
Creation of a CSR committee:
- It is recommended that each board of directors set up a committee specialized in CSR (Corporate Social Responsibility), or meet as a CSR committee, depending on its size. The CSR committee may also be associated with the Strategic Committee.
- The CSR committee is chaired by an independent member. It may be accompanied by qualified persons, as needed.
- Role: One of the roles of this committee may be to report environmental, social and governance (ESG) issues to the board of directors. Similarly, it should consider the criteria for assessing the company's extra-financial performance and propose these criteria. This committee is also invited to examine the sharing of value and, in particular, the balance between the level of remuneration of all employees, the remuneration of the shareholder's risk-taking and the investments necessary to ensure the company's long-term survival.
Fairness and respect for gender balance at each level of the company's hierarchy: recommendation No. 15 of the Code provides that the board of directors should verify that a policy aimed at gender balance and fairness is implemented at each level of the company, taking into account the business context, and should specify in the corporate governance report what the policy that has been implemented is, and the results obtained during the year.
Training of directors: it is recommended that the board of directors provides for a three-year training plan adapted to the company's specificities, intended for both salaried and non-salaried board members. As an example, it is indicated that the plan may include four to six days of training per board member over the period. In addition, each year, the board will review the progress of the training plan and reports on it in the corporate governance report.
