FRENCH CORPORATE GOVERNANCE REFORMS COMING

PARIS - Alcatel-Alsthom S.A.'s decision to replace Pierre Suard, its long-time chairman and chief executive officer, reveals French companies may be heading down the road to a U.S.-style system of corporate governance.

Mr. Suard's dismissal demonstrates shareholders now are prepared to hold managers accountable for their actions.

In the wake of sharply declining profits and personal and corporate scandals involving Mr. Suard and other Alcatel executives, the board of directors decided April 18 to dismiss Mr. Suard.

In his place, the board of Alcatel, the world's largest maker of telecommunications equipment, temporarily installed Marc Vienot, chairman of Societe Generale, a major French bank and Alcatel's largest shareholder with a 9.1% stake.

Mr. Vienot has agreed to serve as Alcatel's interim chairman and chief executive until July 31, although Mr. Suard has not yet resigned, creating a confusing situation in which there technically are two heads of the company. Mr. Suard, however, has been banned by a French court from acting as Alcatel's chairman since March 10.

"The Alcatel board has opted for a buying time strategy," said Sophie l'Helias, president of Franklin Global Investor Services, Paris, a corporate-governance consultant. "At the same time, Pierre Suard has not yet tendered his resignation and will only be asked to resign when the permanent president-directeur general is appointed.

"This shows that the board is also sending a message to the judges, the company's employees and shareholders and the market as a whole," Ms. l'Helias explained. "It is trying to signal the judges that they will not bend to all of their wishes. They are also trying to reassure Alcatel employees and shareholders with an indication that they are going to (emerge from the crisis) gradually, and that they will clarify the situation by no later than July 31."

Mr. Vienot's main task will be to find his own successor. That could prove difficult, given Alcatel's need to find a new direction and clean up its tarnished image.

Mr. Suard's dismissal follows two years of legal skirmishes involving alleged personal misuse of corporate funds and other alleged corporate misbilling of French telephone and utility companies.

Meanwhile, corporate profits nearly have halved, plunging to 3.6 billion French francs in 1994 from 7.1 billion francs in 1993. Competitors have been making inroads into Alcatel's markets.

Mr. Vienot will be backed by a "permanent committee," including current Alcatel board members Jean Peyrelevade, chairman of Credit Lyonnais, and Guy Dejouanny, chairman of Compagnie Generale des Eaux, a leading French water supply company.

One issue the committee may address is whether to separate the jobs of chairman and chief executive, following recent trends in the United States and the United Kingdom.

Mr. Peyrelevade has likened the role of the French corporate chairman to that of a monarch, in whom all power is concentrated.

Mr. Peyrelevade has said France needs something like the U.K.'s Cadbury Code, which urges splitting the roles of chairman and chief executive, appointing "truly independent" directors to the board, and creating independent audit committees. But France requires a change in the law, not a code of good practice, he said.

All of France's current corporate governance practices may be facing an overhaul. But shaking up France's cozy networkers and powerful bosses will not be easy.

French companies are bound to each other through cross-holdings in each other's stock, and shared directors. Intercompany links are made almost unbreakable by an elitist schooling of French chairmen, the backbone of France's "old-boy" network.

Many executives meet and become friends while attending Ecole Polytechnique, the top engineering school, or l'Ecole Nationale d'Administration, the top school for civil servants. Often, French executives put in several years of civil service before moving to industry.

These networks are coming under pressure. French prosecutors have targeted corruption among French businesses and government. The French press has supported this new judiciary policy and has advocated the development of corporate accountability in France.

Foreign institutional investors, who own more than one-third of France's listed shares, could place additional pressures on French boards.

Andrew Clearfield, a European equities manager with the College Retirement Equities Fund, New York, said French companies must adopt more responsive practices or risk losing U.S. pension fund investors. Corporate governance "shows up in (stock) prices and influences our decision to invest more or less money abroad."

France needs to update its governance practices, Mr. Clearfield said. "If Frances does not adjust, it will become a backwater within Europe."

Not everyone has welcomed change. The Conseil National du Patronat Francais, France's powerful employers' association, said in a report: "Shareholders can freely select the members of the board."

Concerns that cross-holdings and cross-directorships might weaken shareholders' rights are "more theoretical than real," the report said.

Still, there are signs of a shift taking place. Loss-plagued Credit Lyonnais has set up an independent audit committee and created an executive committee. At Banque Paribas, Paris, the board has created an audit committee and will disclose pay of board directors in its next annual report. Pinault-Printemps-La Redoute, Paris, will disclose stocks options given to members of the board.

Last month, La Lyonnaise des Eaux, a Nanterres-based utilities and communications company, revealed two senior directors will replaced by individuals not linked to the "old boys" network. Also, the board will set up committees to deal with auditing, executive pay and ethical issues.