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Revising Gordon Gekko – "Wealth, not Greed, is Good": French Finance Minister Speaks at HBS

On February 5th, Francis Mer, the French Minister of Economy, Finance and Industry, spoke at HBS on the topic of “Reflections on Corporate Ethics in our Global Economies and the Attractiveness of the French Economy”

Mr. Mer, who was appointed Minister in May 2002, is the first business executive to take up that post. He is credited by many as the savior of the French steel industry, having overseen the privatization of Usinor, a state-owned unprofitable firm, and later molding it into Arcelor, now the world’s largest steel enterprise.

The Minister’s speech focused first on the importance of good corporate governance in the age of globalization. He appealed to the students in the audience, whom he called the “future elite of corporate America”, to recognize the “high standards of governance we have established and continued to improve in corporate France.”

Mr. Mer began by stating that France’s “reputation for regulation is highly exaggerated.” According to him, France does have strict regulations but they are not a problem for the corporate sector. He then went on to applaud the United States for closing the regulatory gap with Europe. He referenced the Sarbanes-Oxley Act (a recent US legislation that specifies stricter standards for corporate governance, financial disclosure and the practice of public accounting in the US) as a step in the right direction, representing a higher, more appropriate level of regulation in the United States.

Mr. Mer had sponsored similar reforms, in the form of the Financial Security Act (FSA), in France, last spring. The Act created the Financial Market Authority, known as the AMF. The AMF is charged with supervising securities issuance and public takeover bids, and ensuring compliance with professional ethics and rules. The Act also created an audit oversight committee consisting of representatives from both the public and private sector.

Mr. Mer pointed out two important differences between the Financial Security Act and Sarbanes-Oxley Act. First, the FSA does not define independent administrators, and does not specify their percentage composition among administrators. Second, the FSA also does not mandate the existence of audit committees.

Mr. Mer acknowledged the limitations of public sector regulation, and lauded the French private sector’s efforts towards self-governance. He cited the example of the chairmen of Societe Generale, France’s third largest and the Euro Zone’s sixth largest bank, for creating a “code of good conduct.” The code specifies that the basic responsibilities of the board of directors is to determine management compensation.

Shareholder meetings are tasked with the approval of stock-option plans.

The new code of conduct also recommends that the board of directors set up a remuneration committee or ensure reasonable proportions between variable compensation and fixed compensation.

Mr. Mer took the opportunity to air his personal views on executive compensation. He supports high levels of executive compensation when they reward “the genuine and lasting creation of value for a company, its shareholders and employees.” Modifying a line made famous by Michael Douglas, as the investment guru “Gordon Gekko” in the movie “Wall Street”, the Minister said he “would not say… that ‘greed is good’ but rather that ‘wealth is good.'”

Mr. Mer pledged support for the International Financial Reporting Standards prepared by the International Accounting Standards Board, a private group based in London. However, he stressed the need for practicality in application.

He promoted the establishment of a genuine dialogue between the SEC and the European Commission. The various topics he proposed for discussion included the “convergence of the European and US models; the conflicts in law that may arise, such as the question of the extraterritoriality of the Sarbanes-Oxley Act; and the regulation of various providers of investment services, such as credit rating agencies and hedge funds.”

Pointing to the recent scandals as a failure of rules-based regulations, he once again stressed the need for practicality in application. He proposed the establishment of a principles-based approach. He hoped that a “body of principles adapted to account for each nation’s specific culture could pave the way for the mutual recognition of the regulatory and governance systems developed on both sides of the Atlantic.”

Mr. Mer has been a spokesperson for flexibility in other instances of enforcement of transnational protocol. Along with Germany’s Finance minister, he has refused to make cuts recommended by the European Commission in order to bring budget deficits in line with 3% of GDP specified by the “stability and growth pact.”

Switching to his second topic of making the French economy more competitive, Mr. Mer described “three major shocks” which France must respond to: an aging population at home; the population boom in China, India, and other areas including North Africa; and the “transformation of the world by scientific progress.”

He identified several reforms designed to address such shocks: adaptation of the 35-hour working week and the reform of the retirement system among them. He mentioned that efforts are underway to reform the health insurance system and government bureaucracies.

Other measures were more novel: recruitment of international students and tax incentives to attract expatriates. As an example, he stated that the government is planning to abolish the tax on the resettlement bonuses paid to expatriates settling in France.

He also cited plans to cut social security charges by about 7 billion euros in 3 years, and to gradually lower the business tax. Taking a page from Japan’s Research Tax Credit, the government is also planning to reduce social security charges and taxes for innovative businesses and R&D investments.

Reforms aimed at the financial institutions sector include a three-year plan to eliminate the financial contribution imposed upon credit institutions and insurance companies. The government aims to continue to reduce this special tax “during its entire legislature.”

Mr. Mer announced the establishment of what he called a “Strategic Council to Make France More Attractive,” consisting of business leaders and particularly of foreign executives. He ended his talk with an invitation for HBS students to come to France, welcoming “more American post-graduates, investors, entrepreneurs and researchers!”

February 17, 2004
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