Election of Censors (France)

Background and Overview

In France, certain boards of directors include "censors," who are essentially advisers to the board without voting rights. Censors are not defined under French law and bear nolegal responsibility toward shareholders, and their duties are oftentimes not clearly disclosed and may vary from company to company.  Despite a lack of voting rights or any legally defined responsibilities, censors oftentimes receive remuneration on par with that of the company's non-executive directors, and because in practice many are ex-senior executives or directors, their influence on the board may be considerable.

There is concern that companies have started to classify persons as censors in order to circumvent certain conventions of good governance, thereby allowing the company  to comply with "the letter of the code" if not the spirit. For example, reclassifying a non-independent or overboarded director as a censor may allow a company to comply with best practice recommendations on board independence or overboarding. In addition, consulting services provided by censors are not subject to shareholder approval as a related-party transaction, whereas analogous services provided by directors are subject to shareholder approval. ISS has observed concrete examples in the French market that have given rise to these concerns, whereas in other markets where similar advisory positions exist (such as in Italy or Japan – both countries where the role has legally defined responsibilities), such instances have not been observed.   

Furthermore, according to ISS' 2011-12 policy survey, a majority (a combined 64 percent) of institutional investor respondents stated that the nomination of censors or modification of bylaws to appoint censors was either "never appropriate" or appropriate "only if the appointment is temporary."

Key Changes Under Consideration

In recognition of the potential abuse of censor mandates in the French market, ISS is considering the following policy changes for France:

• ISS would generally recommend AGAINST the (re)election of censors, bylaw amendments to authorize the appointment of censors, or to extend the maximum number of censors on the board.

• ISS would, however, recommend on a CASE-BY-CASE basis when the company provides assurance that the censor would serve on a short-term basis (maximum one year) with the intent to retain the candidate before his/her election as director at the next AGM.

• In addition, ISS would count outside censor mandates the same as outside board directorship  mandates when applying the European overboarding policy to companies incorporated in the French market.

Intent and Impact

The policy change would address the issue of board censors in the French market and change ISS' policy approach on items relating to the election of censors, from "generally FOR" (given the lack of a specific policy position on censors) to "generally AGAINST." The proposal was prompted by concrete instances where companies were able to commit negative governance practices (e.g., overboarding, low board independence, failure to disclose conflicts of interest/related-party transactions) through the use of censor mandates. At the same time, the positive impact of censors remains questionable.

The proposed policy stance is expected to have a minor impact on negative vote recommendations, as the policy would only  be applied to the subsection of companies in the French market that have censors. From Jan. 1-June 30, 2011, there were a total of 16 voting items relating to either the election of censors or bylaw amendments concerning the appointment, term length, or remuneration of censors.

Request for Comment

Please feel free to add any additional information or comments on the proposed policy change.  In addition, ISS is specifically seeking feedback on the following:

• Does your organization believe censors should be entitled to remuneration, despite the fact that they do not bear the legal liability assumed by directors? If yes, under what conditions?

• Under what specific circumstances, if any, would a shift from a director role to a censor role be acceptable?

To submit a comment, please send via e-mail to policy@issgovernance.com.Please indicate your name and organization for attribution. While ISS will consider all feedback that it receives, comments will not be published without attribution.

All comments received will be published as received, unless otherwise requested in the body of the e-mail submission.