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Phitrust

The separation of powers, a key issue in 2018?

While most investors are in favour of a separation of powers for listed companies, for over ten years they have made the best of an undesirable situation by accepting the fact that most French companies centralise their powers around a combined Chairman and CEO. To such an extent that a “lead” director is appointed to ensure a minimum counterweight…

Note that if this appointment is not included in the articles of association, the French Civil Code grants no such powers. Most French companies propose a “temporary” separation of powers to ensure a managerial transition (while in the UK, for example, institutional investors refuse this). This is the case of Legrand, for example, where Gilles Schnepp has just announced he was becoming Chairman of the Board and giving up his executive functions.

What a surprise it was to see that the Board of Directors of ENGIE, probably encouraged by the French State, the reference shareholder, decided to appoint a non-executive Chairman following the departure of Gérard Mestrallet, as the CEO Isabelle Kocher had visibly advocated for a recombination of the positions. It is also interesting to note that the new Chairman who will be proposed to the General Meeting of Shareholders, Mr Clamadieu, is currently the CEO of Solvay, but would never have been able to become Chairman (even non-combined).

The same debate applies to RENAULT, for example, where the position of Carlos Ghosn appears to be under discussion, while he combines the functions of Chairman and CEO at Renault, and Chairman at Nissan and Mitsubishi, with no current successor or clearly defined deputy, having parted with his presumed successors…

However, if we look at just the two companies ENGIE and RENAULT, what a contrast when we analyse the companies at the time of the appointments of Mr Mestrallet and Mr Ghosn as Chairmen and CEO… In other terms, how could the shareholders of ENGIE continue to give their support to a CEO who has been unable to create value over several terms of office, without being any more critical by simply looking at the trend in the share price… Likewise, how could RENAULT’s directors accept the current governance of the Alliance, notably with the 2014 protocol, by which RENAULT, holding 40% of NISSAN, could not oppose the appointment of NISSAN’s directors or the remuneration of its CEO (Mr Ghosn himself…).

These two examples highlight poor governance, with the directors and the Board not doing the necessary work in terms of control, or in mirroring the executive managers to validate the strategy and report to the shareholders and employees of the company. This is why institutional investors want the separation of functions with well-defined roles for the Chairman of the Board and the Chief Executive Officer.

This requires a change in culture. At the time of his appointment as CEO of RENAULT, Charles Ghosn gave himself the title of Président de la direction Générale (“Chairman of the executive management”), a sign that in French culture the Chairman holds all the powers, while an executive officer does not (like in politics for that matter…). Maybe we should use this title for all CEO’s, which would enable the separation of powers to be restored in all large listed companies, which is certainly not an end in its own, but a tool that can be used by each company to adopt a governance that will allow it to meet all of its economic, financial, social and environmental challenges.

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