Concerns about French disclosure levels
The French equity market is in upbeat mood. In the first half of this year there were 71 IPOs on the Paris Bourse. That's more than the whole of last year when 68 companies came to the market – in itself a record. Trawl further back and you get a better idea of how things have changed: in 1995 only 26 companies listed.
Those in the know in Paris are confidently predicting upwards of 120 companies being listed this year – provided, of course, there are no massive market blips. Companies are even going ahead with IPOs in the July and August vacation season, which is virtually unheard of in the French market, such is the desire to gain a listing. Advisors are having a field day and few will complain that their vacation plans have been knocked awry.
Backlash waiting
However, despite the optimism pervading the French market, there is real concern in some quarters that a backlash could be waiting to happen. Over the past few years foreign institutions have poured money into Paris-listed stocks to the point that they now own almost 40 percent of total market capitalization.
During those good times relatively little pressure has been directly exerted on French companies to improve their disclosure levels, which in a good number of companies badly lag behind international standards. Of greater concern, though, is the charge that the French regulatory authorities – headed by the Commissions des Operations de Bourse (Cob) – are failing to protect investors, failing to really push for greater disclosure.
Guy Wyser-Pratte, director of Wyser-Pratte on Wall Street, is one of the greatest and most outspoken critics of the French regulatory system. He's currently pushing the authorities toward revealing the names of French banks which, he says, allowed their clients to withdraw from the recent Allianz tender offer for AGF because the stock price rose above the set value at the last minute.
Wyser-Pratte is livid – along with other international investors – and has demanded that the French authorities release the names of the 'guilty' parties. So far the only reaction he has obtained is that the matter is being looked into. 'I'll follow these perpetrators to Hades if necessary,' says Wyser-Pratte.
He's been in a similar situation before and hasn't been shy of criticizing the French authorities. But Wyser-Pratte does not expect miracles from his actions. His charge is that the French regulatory bodies are so wrapped up in protecting the French establishment, including the underwriting banks, that they wouldn't dare stand up for investors in such a fight. 'The establishment closes ranks,' he says, adding that the usual regulatory reaction is to change the rules after the dust has settled. Or, as he puts it, 'once the horse is out of the barn. It's the good old boy network,' he continues. 'They think like bureaucrats. The French authorities do nothing to help investors and they don't represent the common man. They are the agent of companies.' He suggests that one way to actually push the French regulators toward better investor protection may be to lever off the US SEC's international collaboration agreement by pointing out that French ADRs are being bought by US investors.
Keeping quiet
Strong stuff, indeed. Of course, one might go so far as to suggest that Wyser-Pratte has his own agenda to push which could color the objectivity of his arguments. Yet trying to get those in the know to give an objective assessment of the regulators is notoriously difficult.
Colette Neuville, president of the Association pour la Defense des Actionnaires Minoritaires, hasn't been shy about making her views known. She remains openly critical of the failure of French companies to improve their disclosure and corporate governance practices (although she welcomes the recent AFG-ASFFI corporate governance principles as 'a move in the right direction'). But having been involved in direct confrontation with the regulators some may also view Neuville as less than objective.
Unfortunately, those not involved in direct confrontation seem unwilling to say anything – positive or negative – regarding the role of the regulatory authorities. Too many people see their own interests at risk – from lawyers to investors, companies and agencies. Two days traipsing around interviews in Paris was enough to confirm that view. Those that are willing to talk about the situation prefer to remain anonymous. Some raise questions over the ability of Cob personnel, but provide no answers. Others suggest that when there is a difficult subject to tackle, the regulatory bodies 'play tennis' to determine who gets their fingers dirty.
On the record
Still, there are one or two prepared to go on the record. Pierre-Henri Leroy, director of corporate governance research agency Proxinvest, points to several areas where listed companies are not being pushed forward by the authorities. He notes the continued failure of French firms to divulge details of executive pay. To be fair, this issue is so sensitive in France that the regulators only require companies to disclose the total remuneration of all directors. Yet some companies still consider revealing a total remuneration figure to be too risky (largely, it seems, due to fears of union action). For example, upmarket retailer Hermes International details in its annual report: Cette information n'est pas communique en raison de son caracture confidentiel. (This information is not provided because of its confidential nature.)
Leroy also argues that you would have to scour countless annual reports to work out some of the related party interests and cross-shareholdings that continue to exist between listed companies in France. And still you wouldn't be able to track them all down. Again, he maintains that the Cob is notoriously reluctant to push companies forward on such disclosure issues. 'Many companies still believe that the less you give out the better,' says Leroy. 'Unfortunately, the Cob doesn't understand the issues. They believe all issuers are great people. The trouble is these guys have never had shares.'
Melanie Tran, the French market analyst at Institutional Shareholder Services (ISS) in Bethesda, Maryland, backs up some of Leroy's criticisms. To start with she calls for the French regulators to force companies to release their annual reports at an earlier date – rather than just prior to the annual meeting – in order to allow international investors time to analyze the resolutions. 'And I'd certainly like more information on directors' ownership of stock and compensation plans,' says Tran. However, she does add that she believes the regulators are moving in the right direction – upholding the regulations as they currently stand and with plans to release their own corporate governance paper later in the year.
So what does the Cob make of all this criticism of the regulatory authorities? It took some time to pin anyone down to an interview but they finally came up trumps. Herve Philippe, head of corporate finance and in charge of corporate disclosure, is more than willing to answer questions openly. He begins by pointing out that the Cob holds more power than many securities regulators in other major markets but dismisses any suggestion that its mission is heavily tied in with the interests of the French state or those of corporate issuers. 'The Cob is an independent body created by law. We have no link with the State or with the companies that it runs. We have independent finance.'
Powerful force
Nor will Philippe stand for the accusation that the Cob has failed to push French companies toward improving their disclosure. 'We certainly don't think it's a good thing to change the rules each year; they've been largely permanent since the early 1990s,' he says. However, he adds that at the start of this year the Cob requested companies to disclose the likely impact of the Asian crisis on their businesses and to explain how they were dealing with the Year 2000 problem. It is also looking at introducing detailed regulations on share buy-backs following recent legislation allowing companies to ask their shareholders to authorize buy-back programs.
But how effective is the Cob's supervision of companies at ensuring they abide by the rules? Philippe points to the ability to force companies in to disclosing information: its last resort is to ask the bourse for a suspension of their shares or to take the offenders to court. However, in most cases the Cob will contact companies directly and discuss the situation behind closed doors.
Difficult balance
Does that leave them open to the investors' charge of siding with issuers? 'The companies say that we work too much in the interests of investors and work against their interests,' he retorts. 'It's a difficult balance. Our first goal is to protect investors but there are certain limits to that goal. [Our mission] is to protect investors and make the Paris marketplace a safe one, a good one. We have to balance the demands of investors and the interests of companies.'
Philippe adds that there is usually not a disclosure problem with the bigger companies on the market, implying that disclosure problems are more likely to occur in those companies that are still learning the ropes.
Philippe also acknowledges that some Cob personnel may themselves still be learning the ropes, but he denies that this implies the regulator cannot live up to its task. 'People here are generally quite young and very few have investor experience, that's true.' He explains that the Cob endeavors to mix the experiences of the professions – lawyers, bankers, accountants, etc – but says that it is difficult to obtain the services of professional investors since they are generally too expensive. 'So we have to spend a lot of time in discussions with outside groups and will always accept to go to a meeting to discuss an issue.'