The Board of Directors of Limited Liability Companies in France

For many years, the general public has been familiar with the general meetings of large corporations. It is these assemblies that appoint and dismiss the directors. The media reports on these gatherings in which the performance and remuneration of executives are approved, and now contested by minority shareholders, unions, and various activist groups. However, for many, the functioning of the Boards of Directors remains relatively mysterious.

In this article, we will examine the key principles of the functioning of the Board of Directors within the framework of anonymous companies in France. We will see that in most cases, different committees participate in the preparatory work for Board meetings. We will have the opportunity to revisit these committees in upcoming papers.

Role of the Board of Directors

The role of the Board of Directors, as a governing body, is to ensure the overall supervision of the company and to define, or at a minimum, validate its strategy. However, Boards are often too focused on control functions (primarily financial). They should be more oriented towards the future, allowing the management team to concentrate on the operational aspects of the company. The Board must monitor the key performance indicators of the company. This falls under the duty of vigilance of the directors. More than the day-to-day operations, the Board of Directors must ensure the sustainability of the company and its ability to perform over time. Ensuring that through its management team, the company can create sustainable value for shareholders should receive as much attention, if not more, than monitoring financial performance indicators. Too often, the review of accounts is too central to the agenda of Board meetings.

Synthetically, the action of the Board of Directors could be summarized as:

• Defining the company's strategy
• Determining its organizational structure
• Controlling the actions of the CEO
• Informing shareholders and markets (dissemination of annual accounts).

In recent years, Boards of Directors have given more importance to Corporate Social Responsibility (CSR), which is commendable. Seventy percent of companies in the SBF 120 have established a CSR Committee. However, care must be taken to ensure that the time spent on sustainable development issues does not come at the expense of strategic reflection.

Members of the Board of Directors

An essential mission of the Annual General Meeting (AGM), open to all shareholders and held once a year, is the election of members of the Board of Directors.

The Board of Directors is composed of three to eighteen directors, appointed by the Constitutive General Meeting and subsequently by the Ordinary General Meeting (OGM). It elects from among its members a Chairman, who can also be the CEO of the company, in which case he/she will have the status of President and CEO. It is increasingly common to separate the roles of Chairman and CEO. This seems to be a principle of good governance. The CEO is responsible for the operational management of the company. The Board of Directors and its Chairman ensure the control of the activities of the Executive Committee placed under the authority of the CEO, as well as the definition or validation of the long-term strategy of the company.

Directors are elected for a term not exceeding six years. They are re-electable (subject to a statutory age limit, and failing that, a maximum of one third of the directors may be over seventy years old). They can be dismissed at any time by the OGM. The number of terms for a director is a maximum of five for anonymous companies headquartered in France. In the absence of statutory provisions, the age limit for the Chairman is set at sixty-five years.

An important notion is that of an independent director. This is the case when he has no relationship of any kind with the company, its group, or its management.

Also, companies employing more than a thousand employees and having their headquarters in France must appoint one to two directors (when the Board has more than twelve members) representing the company's employees. These directors have the same obligations and responsibilities as other directors.

Risks and Obligations of Directors

Exercising a directorship requires diligence and prudence to avoid certain criminal and financial consequences. Directors must act in good faith and in the best interests of the organization. This function must be fulfilled with loyalty and honesty, ensuring the interests of the organization and not their own.

In recent years, directors have seen their role transform in the face of risks and, consequently, their responsibilities. Governance, internal control, and risk management are imposed with force. In the event of failures in internal control and the overall risk management policy (ERM - Enterprise Risk Management), the liability of directors may be engaged. This could be the case if misleading information taints the report of the CEO on governance, internal control, and risk management. This report must be approved by the Board of Directors, and therefore, it is the responsibility of all Board members. Beyond civil and criminal responsibilities, the sanction can be fiscal.

Directors and officers’ liability insurance provides financial protection to directors. It covers legal expenses, the cost of a settlement, or the payment of damages.

Remuneration of Board Members

Directors receive remuneration – commonly referred to as "director’s fees" – but they are not bound to the company by an employment contract. Remuneration is not based on the number of shares they hold. It is paid to each member in exchange for their presence at various Board meetings and work done on behalf of the company.

The total amount allocated to the remuneration of all directors, taking into account work done in specialized committees, is decided at the Annual General Meeting. There is therefore a criterion of attendance, workload, and level of responsibility. The rules for the distribution of director’s fees and the individual amounts paid to directors must be included in the annual report.

AFEP-MEDEF Code

Since July 1995, the date of the publication at the initiative of companies of the first report on the corporate governance of listed companies, AFEP and MEDEF have developed a set of recommendations that allow these companies to improve their operation and management in full transparency and thus meet the expectations of investors and the public. The code, adopted by almost all SBF 120 companies, offers a set of demanding and precise recommendations on corporate governance, especially on the remuneration of their executive and non-executive managing directors. The code plays a key role in the evolution of good governance practices.

The internal regulations are not legally mandatory, unlike the articles of association that materialize the company's contract. However, the AFEP-MEDEF Code recommends its establishment, describing its organization and operation. Indeed, certain points not included in the articles of association make the internal regulations indispensable, such as the participation in board meetings by means of videoconferencing or telecommunication.

From the Copé-Zimmeramann Law to the Rixain Law

Since 2011, the Copé-Zimmermann law has imposed quotas for women on Boards of Directors and Supervisory Boards. It applies to companies with an average number of employees of at least two hundred and fifty permanent employees or a net amount of turnover or a total balance sheet of at least fifty million euros. It is, therefore, a significant step towards feminizing control bodies. For these companies, the number of directors of the same sex must be at least 40%. Thus, for the CAC 40, the feminization rate now exceeds forty-five percent. In the event of non-compliance with this percentage, the remuneration of directors is suspended.

This measure is reinforced by the Rixain law, which since the end of 2021 extends the objective of balanced representation between women and men to executive bodies by setting new obligations for companies with at least a thousand employees. From March 1, 2026, these companies must have at least thirty percent of female executive managers. This percentage will be increased to forty percent by March 1, 2029.

Mandatory and Voluntary Specialized Committees

Although initially designed for listed companies, Committees are an essential tool for the proper functioning of all companies, regardless of their form or ownership. Significant preparatory work for Board meetings is carried out by appointed directors who often have recognized expertise.

Specialized Committees ensure the preparation of Board meetings, but they do not replace them. They make recommendations. The responsibility for decisions remains the collective prerogative of all Directors.

At this stage, we only mention the names of these different Committees. We will go into detail on some of these committees in future papers. The most frequently encountered Committees are:

• Audit Committee or Accounts Committee
• Risk Committee
• Nominations Committee
• Remuneration Committee
• Strategic or Executive Committee
• Quality and Sustainable Development Committee
• Technology Committee (depending on the company's specificities)
• Corporate Social Responsibility, Ethics, and Governance Committee

A special mention should be made for the Audit Committee because it has been mandatory for listed companies since 2008, as well as for financial institutions and insurance companies. Its main missions include ensuring the follow-up of the financial information elaboration process, the effectiveness of internal control systems and risk management, the legal control of annual accounts, and consolidated accounts by statutory auditors and their independence. The composition of this Committee is free, but its members must all come from the Board of Directors. One of them must be independent and have financial or accounting skills.

Governance codes recommend, in addition to an Audit Committee, the creation of a Remuneration Committee and a Nominations or Selection Committee. Any establishment with a total balance sheet exceeding five billion euros must establish a Nominations Committee and a Remuneration Committee.

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In light of the profound transformations in its role, the Board of Directors seems poorly named, for each of its two constituent words. Its role is not limited to a simple advisory mission. It is a fundamental management body, guaranteeing good practices and strategy. It represents an essential line of defense for all investors in controlling the operational management of the company. In no case is its role limited to the notion of administration, which gives a somewhat outdated view of the company. The administrative aspect too much refers to mere control, whereas the Board must be focused on strategy, anticipation, ensuring that the execution of plans is in line with the rules of sound management, and that the company is able to meet all its regulatory and governance obligations.

Marc SEVESTRE