French capitalism

Despite the kerfuffle over the new French government’s proposal to increase the top personal income tax rate to 75% and to nearly double the tax on dividends and other “unearned” income to 60%, France’s hard pressed capitalists persist. French capitalism is not dead!

France is home to many global brands from Michelin to Moet et Chandon, from L’Oreal to Total, among others. France’s multinational firms contribute substantially to the French economy, while operating in a tough regulatory and social environment. They succeed where many other firms in France fail. For example, unlike some neighboring countries like Germany, France has relatively few medium-sized firms.

Small investors in France

Palais de Brongniart – French Stock Exchange, Paris
(Photo credit: ©ErickN, Shutterstock)

Similarly, France is home to a sizable number of individual investors. Something like 15% of the French population owns stock (compared to about 21% in the US). During the 1990s, there was an uptick in individual ownership of stocks associated with a series of privatizations of state holdings of firms like EADS (parent of Airbus) and Gas de France. Some shares were offered to residents of France at advantageous prices and some shares were reserved for employees of the enterprises. But, many other folks acquire shares via their employers, directly on the markets, or via investment clubs.

Actionaria

The large number of individuals holding stock was evident last weekend at the annual stock exchange exposition for small investors (Actionaria). This is a kind of trade show for companies listed on the French stock exchange to meet with shareholders, potential shareholders, journalists, job seekers and others. All sorts of people are there, from young job candidates, to seniors with retirement accounts, executives, small-investor club members and alternative lifestyle folks. But, the average age tends toward those with some grey hair. I guess I’m one of them. Most folks (including me) have just a modest amount of stock.

It is a festive atmosphere as folks wander about from booth to booth, talking with representatives from the various firms, gathering information, watching various demonstrations and video clips, collecting swag, and looking at sample products.This year, in view of the proposed tax reforms in France, there was also an atmosphere of solidarity.

I had an invitation from Michelin (as a shareholder) and a check list of other CAC 40 firms (French stock market index of the largest firms) that I wanted to contact: Vinci about construction markets, L’ Oreal about cosmetics, Societe Generale about banking, Air LIquide about industrial gases, GDF Suez about natural gas and Total about oil exploration. In speaking with various company representatives, one interesting common denominator was their enthusiasm about growth prospects elsewhere (not so much in France). Several enthused about the potential of emerging markets in Brazil, China, India, and South Africa, among other places. Some emphasized exciting technologies such as hydrogen powered cars, enhanced solar energy, on-line financial services or electric bicycles.

An interesting contrast with the US comes in the reporting requirements under the French regulatory regime. Shareholders generally have less say in the businesses and receive less detailed information than their US counterparts. They get the headline figures, but far less in terms of specifics. In some way this frees management to focus on long-term results (as evidenced by the evolution of the share price), but there are tradeoffs in terms of accountability and responsiveness to owners. Another contrast is in the social dimension of the enterprises. In France, there is much more discussion of the charitable and social works undertaken by the firms. And, there is much more personal outreach to shareholders via events, including out in the various regions of France.

Michelin shareholder meeting

My initial motivation in going was to attend a Michelin shareholder meeting. I’ve never been to such a meeting and was curious. Perhaps 500 investors turned up. The chief financial officer gave a rundown of the latest performance data and a senior executive handling innovation spoke about product development, but the star of the session was Jean-Dominique Senard, the president. He came across at first as a bit unassuming and affable, responding to wide-ranging questions and comments, which were non-technical and generally positive. But, he is clearly a master of his business and relations with the outside world. The President is clearly focused on the longer term and the positioning of the firm some 5 years out, rather than on quarter to quarter results. These are good things for long-term investors to see and hear.

The mood of the Michelin session was helped by the fact that the stock has beat the market average during the period since the global financial crisis. Michelin has also worked to improve its generally weak margins through innovation in tire structure (optimizing various parameters such as noise, energy efficiency, wet traction and dry traction among many others), increased focus on high-margin specialty products (like giant tires for mining vehicles), and investing in a big way in dynamic markets such as Brazil, China, India and the US.

There are also some interesting side projects such as a collapsible electric bike.  A few decades ago, much of Michelin’s rubber production was nationalized during the revolutions in South East Asia, so the company buys most of its rubber on international markets (it still produces some natural rubber on plantations in Brazil). In light of this, there is emphasis on development of synthetic rubber as an alternative (already something like a quarter of a tire’s composition is synthetic rubber, while old-fashioned rubber accounts for some 40%). One very cool innovation is the development of a wheel with all of the suspension, gearing and steering integrated inside. This saves on space in the car’s frame and can improve the overall efficiency.

The biggest reaction of shareholders at the Michelin meeting came when some in the audience asked what could be done about tax policies in France. The announced policies are perceived as penalizing investors and enterprises, despite some announced initiatives to improve competitiveness. The company officials sought to be somewhat diplomatic, but did note that the business environment had become more challenging. They noted that the government had indicated that it was concerned about competitiveness and sought to reduce labor and other costs, but this was far from yielding concrete results so far. There was a big round of applause to the expressions of concern.

Here’s to excellence!

I was grateful for the invitation to participate in the Actionaria exposition. It offered a unique window into an aspect of French life that one does not encounter in day-to-day life. I felt very welcome. It is great to see world-class businesses, to learn of innovation, and to hear of strategic orientations for French business. France is capable of business excellence and it is the interest of consumers and investors world-wide for this to continue!