Transparência e Governança

The Economist

Business in France

Double trouble

May 2nd 2015 | From the print edition

FRANCE has always been proud of its corporate champions. But these are worrying times. Only one French firm is in the global top 50 by market value. The country’s stockmarket is just 3% of the world’s total, down from 5% a decade ago.

An American activist fund, PSAM, has just mauled Vivendi, a media firm. Flagging Gallic contenders, among them Alstom (engineering), Alcatel (telecoms) and Lafarge (cement), are being bought by foreigners. The Chinese are coming. Peugeot has sold a stake to Dongfeng, a carmaker from Wuhan that doubtless hopes to take control eventually. Club Med, a holiday firm managed by the son of a French president, is now in the hands of a billionaire who began by selling bread in Shanghai.

Enter, stage left, the French government, which has legislated to strong-arm firms to give souped-up voting rights to loyal shareholders. It reckons this will protect firms from speculators and raiders, and allow them to punch above their weight. The idea has plenty of support across Europe. In reality, it will do more harm than good.

A revolutionary idea

The “Florange law” was passed in 2014 and will come fully into force in March 2016. Shareholders who have owned stock in a listed French company for more than two years will then see their voting rights double. The change is automatic unless two-thirds of shareholders vote to amend their firms’ constitutions, as some are now scrambling to do (see article).

The rule is bad for two reasons. First, it will add clout to an elite of insiders whose record is mediocre. Two-thirds of firms in the CAC-40 index have a long-standing anchor investor—usually the state, a family or a mogul. They will become more powerful. Vincent Bolloré, a tycoon, will take creeping control of Vivendi. The government will probably get more sway over Renault, to the irritation of its boss, Carlos Ghosn.

Supporters say that such anchor investors allow firms to plan for the long run. Google, for example, is controlled by its founders and can ignore Wall Street’s whims. But mature firms often stagnate if insulated from outside threats. Orange (formerly France Télécom) and Bouygues, a conglomerate, are protected by the state and a family respectively and have drifted since the 1990s. Bosses in Italy are adept at creating fiddly capital structures that fortify their control and feeble at building competitive multinationals.

Second, France is attempting to impose double voting rights as a default option. One-share-one-vote is not a divine right; nor is a wholly free market for takeovers. Firms should be allowed to issue whatever securities they want—though, if they protect themselves, they will pay a higher cost of capital and may perform worse. Even countries that think an open approach to ownership breeds more ruthless and valuable firms will block deals that genuinely threaten the public interest.

But when a country systematically tries to enforce unequal shareholder rights (and even worse, does so on already-listed firms) there are high costs. The voting power that France is taking from newer investors has a value: shares without votes typically trade at a discount of 5-10% to those that do, and as much as 40% when managers are mistrusted. The higher cost of capital will apply to all French firms; their valuations will be lower than their peers’ in investor-friendly places; and they will find it harder to issue shares to pay for expansion or takeovers. That will hardly help them command the global stage.

From the print edition: Leaders