French capitalism is not dead!

Posted on November 25, 2012 by Doug

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!

Low-Cost Stimulus: Regulation and the US economy

Posted on November 18, 2012 by Doug

Regulation and the US economy

As the US economy slowly recovers from the Great Recession while fiscal challenges still loom, one missing element in the discussion seems to be the potential to liberate economic potential via further regulatory reform. Regulatory reform is not a silver bullet solution, but it can deliver economy-wide medium to long-term benefits via improved performance of American business and government, all at a relatively low up-front cost.

US competitiveness

While the United States remains a dynamic and powerful economy, continued regulatory shortcomings in some areas are nonetheless contributing to a slow erosion of competitiveness. This is evident in several international indicators. For example:

The Fraser Institute compiles the annual Economic Freedom of the World index for 144 countries. The EFW index “measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to compete, and security of privately owned property.” According to the Fraser Institute, the US rank has declined from 3rd place during the 1980s and 1990s to 19th in 2010.

The World Bank maintains the Ease of Doing Business index focused more specifically on regulations as they affect business. In 2013, the index employed 11 sets of objective indicators and covered 185 economies. The United States has maintained a 4th place ranking by performing fairly well in most of the indicator sets, while many other countries were inconsistent (e.g., in some cases performing highly in some categories, but poorly in others). Nonetheless, when one looks into the underlying indicators there are some areas where US performance falls well below the top 10. For example, with respect to the challenges faced by a medium-sized business located in New York City, the indicators of regulatory burdens place the US at 22nd in terms of trading across borders, 25th in terms of registering property, and 69th in terms of paying taxes. The particularly low score with respect to paying taxes is associated with both administrative burdens and financial costs. With a ranking of 69th in this category, the United States places just below Madagascar (68) and just ahead of Mongolia (70).

The World Economic Forum maintains a Global Competitiveness Index, which is a structured inquiry that takes into account executive opinion of key dimensions of economic competitiveness in 144 economies around the world. The United States has slipped from 1st place in 2006-07 to 7th place in 2012-13 (though subsequently climbing up a few places). Business executives listed inefficient government bureaucracy, tax rates and tax regulation as the top three problems in this context.

International institutions are not only monitoring progress on regulatory issues. Quite a few concrete initiatives are underway to improve regulatory frameworks around the world. For example, the OECD conducts an active program to promote regulatory reform using approaches such as country reviews and development of tools for improving regulation (e.g., a regulatory impact assessment tool). Since 1999, OECD has completed 31 country reviews — including one for the United States in 1999 — to “assess how countries manage the design, adoption and implementation of regulations.”

What to do?

Appropriate regulation is an essential part of a modern economy. The regulatory framework provides rules of the game for business, non-profits, government and other economic institutions. When the rules are properly specified, they provide clear objectives for economic actors without unduly constraining freedom. And, businesses and others should be free to innovate and find efficient ways to attain the regulatory objectives (e.g. reduction of pollution, improvement of safety, facilitation of trade, among others). In striving for these objectives, care should be taken to avoid unnecessarily burdening economic actors, as that would risk gumming up the functioning of the economy.

The United States has succeeded in previous regulatory reform initiatives. For example, one of the significant economic achievements of the Clinton-Gore administration was a streamlining of government regulation. A consensus approach was employed in identifying areas where action would be helpful. According to the Clinton Presidential Center, during the Clinton-Gore tenure some 16,000 pages of regulation were eliminated and 31,000 pages of regulation were redrafted in plain English. Some 640,000 pages of internal government agency rules were cut. In addition, government performance was reviewed and actions were taken to reduce the size of the bureaucracy while improving the operational performance of government agencies. Through such actions, the initiative known as Reinventing Government realized savings of some USD 136 billion during the years from 1993 to 2000. But the benefits extended beyond walls of government, because these actions also liberated businesses to improve their performance and the performance of the economy more broadly.

The OECD’s Review of Regulatory Reform in the United States (1999) was positive in its assessment of this period, while noting areas for improvement with respect to social issues and bureaucratic functioning. As stated in the blurb for the report:

“The United States has been a world leader in regulatory reform for a quarter century. Contrary to popular belief, the United States is not less regulated than other countries, but differently regulated due to the pro-competition policy stance of federal regulatory regimes, and the openness and contestability of regulatory processes. Far-reaching economic deregulation combined with efforts to improve the quality of social regulation have supported the construction of one of the most innovative, flexible and open economies in the OECD, while maintaining health, safety and environmental standards at relatively high levels. However, significant regulatory problems still exist. Improving the performance and cost-effectiveness of expensive social regulations and government formalities is a key challenge for regulatory quality. In a word, the challenge of regulatory reform in the United States is not how much regulation, but how good.”

Regulation remains on the political agenda in the US. Some action is underway, led by the Executive Branch. In May of 2012, the White House announced a series of measures intended to “save nearly $6 billion in the next five years by eliminating outdated requirements and unjustified costs. To ensure that the federal government continues this important work, the President also signed a new Executive Order today, making it a continuing obligation of our government to scrutinize rules on the books to see if they really make sense.”

But, as the international indicators demonstrate, more needs to be done. Some aspects, such as reform of tax regulation, will require co-operation of the Legislative Branch, including a degree of bipartisanship and frank consultation with a broad range of stakeholders. And, this is not to say that regulatory reform is a silver bullet solution. Many aspects of competitiveness are beyond easy reach of regulation or deregulation (e.g., quality of education). In addition, mistakes can be made in deregulation (e.g., some of the blame for the US financial crisis in 2008 may be due to failures of deregulation or failures to properly implement regulations that were on the books). Nonetheless, regulatory reform remains an underexploited policy lever, one that should be pursued because it is clearly in the national interest.

Patti Smith, Mikhail Bulgakov & Emperor Constantine’s Mom

Posted on November 11, 2012 by Doug

“…and I trust my guitar…”
Patti Smith

Patti Smith and Me

Patti Smith burst into my world in 1978 via her album Easter. The driving energy and the lyrics fit well with my personal reflections, philosophy readings and humor. It was poetry. It challenged my beliefs. It was wild. I soon explored her music catalog backwards and then forwards. I soaked it in.

Horses, Radio Ethiopia, Easter. This was music that made statements; it delivered existential moments; it energized. Her voice was alternately strident or low and heavy. Much of it moved me. Some of it did not agree with me; some of it did not speak to me. But, even those bits, I respected. Since that time, Patti Smith has drifted in and out of my play lists. Some of her albums seemed more relevant to me than others. I built a digital collection, so that I could focus on what worked for me.

Patti Smith's Exposition at the Fondation Cartier in Paris

Guide to the exposition, presenting her Polaroid Land Camera photos

And out there in the real world she would periodically become manifest in my life in various ways. A few years ago, Patti Smith launched a revival tour with a show in Switzerland and there was a glowing review in the Swiss paper, Neue Zuericher Zeitung, that caught my eye and prompted a revival in my listening. In 2007, she recorded an iTunes Originals album with interviews and new editions of old songs that provided insights into her perspectives on life. In 2008, I visited an exposition of her art at the Fondation Cartier in Paris, a show that was anchored by a long series of photos that she had taken with a Polaroid Land camera. Again, there were parts of the show that really spoke to me (e.g., a lone horse in a barren field) and other bits that I did not “get”. Then, there were a few concerts in Paris that stirred up discussion with some of my friends, but I never managed to get tickets to these sold out shows.

And now, Patti is back with a recently released album entitled Banga (June 2012). The deluxe edition includes a hard cover book of photos, text and lyrics. The book tells the story of the development of the album and its intellectual underpinnings. The project draws on her recent travels and the art and writings that she encountered. The music and poetry of the album provide a fresh sound, at times mellow, but often with a certain energy and strength. It is a wonderful, mature artistic expression.

In accomplishing this project, she pursued some lines of exploration where I lack first-hand experience. For example, she visited sites in Italy associated with St Francis of Assis and she sailed on the Costa Concordia (the same ship that later ran aground and partially sank off of the coast of Italy early in 2012). Nonetheless, reading through the short book gave me goosebumps. Unbeknownst to me, she was also out exploring paths that I’d been down in the last few years in search of Mikhail Bulgakov and Constantine the Great.

Bulgakov Lives!

In Banga, Patti Smith tells of discovering Mikhail Bulgakov’s writings. Bulgakov was a great Russian writer of fiction that spoke to reality during the first half of the 20th century. His classic book The Master and Margarita is a tale of oppression under Stalin, but also Christ’s crucifixion, Satan’s return to the Earth, and a large black cat. At about the same time that Patti Smith was discovering Bulgakov, my dear friend Volodya G was pointing me to Bulgakov as well. The Master and Margarita instantly became one of my favorite books: it made me laugh and challenged me to reflect on history and religion. There were layers of meaning. It was splendid.

Patti Smith’s album title is a reference to Banga, Pontius Pilate’s dog in Bulgakov’s tale of The Master and Margarita. The dog is the one creature to whom Pilate could tell his woes about his blinding headaches and torment.

The entrance to Bulgakov’s Apartment House, now a museum and a place of pilgrimage for fans (© Doug, 2009)

On one visit to Moscow, I made time for a pilgrimage to Bulgakov’s apartment, which is now a museum. The walls of the stairwell are covered with graffiti from devoted fans. The museum presents artifacts from his life. A docent patiently explained a few things to me about the collection despite my broken Russian language skills. I felt right at home. There was camaraderie between the visitors. I would not have been surprised to find a few Patti Smith fans among them.

Constantine and His Mom

Constantine’s Throne Hall in Trier, Germany (© Doug, 2006)

Constantine the Great was the first Roman Emperor to convert to Christianity. In Banga, Patti Smith tells the story of a painting she saw in Italy that presents a view of Constantine’s dream, a story that is recounted in various ancient sources. It appears that Constantine had a dream or vision of the Christian cross, which encouraged him to emblazon this and symbols for Christ’s name on his army’s standards and shields at a decisive battle for control of Rome. The battle was won and Constantine initiated reforms that greatly improved the situation of Christians. Constantine’s reach was impressive, with military campaigns and periods of residence stretching from Britain to Italy to Anatolia. Thus, his religious reforms helped align the Christian Church with the State and promoted a far-reaching diffusion of its teachings and influence.

Haggia Sophia was the main cathedral in Constantinople (though it was built after Constantine’s time and was converted into a mosque after the Turkish conquest). Image is of a ticket to the museum from a visit in 1996.

Helen, the mother of Roman Emperor Constantine, accompanied him during his rise. In Trier, Germany, where he was resident for a time, there are still structures such as the emperor’s throne hall, where Helen may have walked. Sometime during 327-28 AD Helen visited Jerusalem. Legend has it that she supposedly found the true cross from Christ’s crucifixion under the Church of the Holy Sepulcher. She is also said to have found Christ’s seamless robe, a relic that was given to the church in Trier. Having visited Trier many times, the connection to Jerusalem really hit me when I later stood in the basement of the Church of the Holy Sepulcher. So many have transited the ancient halls and chapels, in effect making the connection between Constantine, his mom, the spread of Christianity, and now perhaps Patti Smith!

A passage under the Church of the Holy Sepulcher (© Doug L., 2009)

A chapel in the Church of the Holy Sepulchre

Fellow travelers

As I look back across several decades of life, it is surprising to me to see how often Patti Smith has cropped up. I have never met her, but I feel that she is a fellow traveler. She is 12 years ahead of me and has in some ways led the way, though at times our paths have also diverged. Still, her music, art and poetry have influenced me and over the years have become something familiar to which I periodically return. Life has taken many turns and, for me, the journey has conflated music, religion, art, poetry, history, and people like Constantine, his mom, Bulgakov and others, in a changing mix. While it can seem dark out there on the trail sometimes, I take comfort in knowing that there are fellow travelers exploring these places and that some of these folks are probably not too distant.

No Escaping Geneva

Posted on November 4, 2012 by Doug

No escaping Geneva

Geneva was meant to be a part of my life, apparently. It keeps inserting itself into my agenda. I find myself often pondering what I need to say or do there, when I can go next, how to fund the trip. It is not an unpleasant thing to contemplate. But when I am there, I know it will be intense. And, it happens a few times each year. There is no escaping Geneva.

A bit of history and geography

The geography of Geneva is wonderful, with the Alps to the South and the Jura Mountains to the North West, and Lake Léman (aka, Lake Geneva) to the East. The city is bisected by the Rhone River, which flows westward from the lake. Coming from Paris the high-speed train (TGV) runs up the winding Rhone Valley, revealing remote and wonderful mountain vistas. Lake Léman is one of the largest lakes in western Europe and accommodates a fleet of large steamships that transit the lake in the milder seasons.

Geneva is a fascinating place: a Protestant, French-speaking city that broke with the Roman Catholic church in 1536, a city that invited John Calvin (1509-64) to come and serve in leadership and that hosted other famous protestants including John Knox (1513-72), Théodore de Bèze (1513-1605) and Guillaume Farel (1489-1565). The city itself struggled for its autonomy from time to time, suffering an attack from Savoy (1603) and invasion by France (1798), for example. Finally, in 1815, Charles Pictet-de-Rochemont and colleagues succeeded in having the city definitively attached to Switzerland and the country’s neutrality established.

Geneva grew into a major center of diplomacy. In 1863, Henry Dunant and Gustave Moynier, founded the International Committee of the Red Cross (a private institution) in Geneva. In the first half of the 1900s, the city was designated to host the League of Nations and the International Labor Organisation (ILO), international organizations founded at government initiative in the wake of WWI in the hope of promoting peaceful means to resolve conflicts and advance the cause of social justice. Unfortunately, the US failed to join the League of Nations.

In the aftermath of WWII, world leaders made a new attempt at development of an international framework for peace, this time with full US engagement and eventual membership. The result was the establishment of the United Nations and the UN family of international organizations (including the ILO). Later, other international organizations established headquarters or branch offices in Geneva. A recent notable example is the World Trade Organization (WTO), which began operations in 1995.

Making the world a better place

The big multilateral organizations are far from perfect. As institutions intended to be global, many compromises were necessary to get buy-in from around the world. The global scale of their operations entails complexity and makes it difficult to operate efficiently and effectively. But, constitutions underpinning these institutions and the international agreements they have subsequently achieved, form a body of rules for the conduct of international affairs ranging from economics, to technical standards, to war, among other policy areas. Though there have been some tragic failures (e.g., in Bosnia), the multilateral system has delivered many successes big and small, ranging from trade liberalization to progress in satisfaction of development objectives (Millennium Development Goals), peace truces and humanitarian relief.

Mutual respect for the rules is important for the system to function. Member nations expend time and resources to meet their obligations and commitments; to justify these actions, they expect that other members will generally play by the rules or that there will be consequences for those Member nations that do not. Thus, for example, the Geneva Conventions of 1949 and subsequent amendments establish rights and protections for prisoners of war and non-combatants. There is to be reciprocity. This is why it was so dangerous, when in 2001-2002 the US administration decided to suspend the application of the Geneva Conventions in cases involving “enemy combatants“; this established a precedent that some individuals or governments might have interpreted as leaving some US citizens without reciprocal rights and protections. While the Geneva Conventions have not always functioned well (some nations, big and small, have violated these accords), they have helped to mitigate some of the misery of war for many.

In some areas of the multilateral system, there have been improvements in efficiency and effectiveness over the years. For example, the establishment of the WTO introduced a dispute settlement mechanism that has improved the possibility to enforce binding trade commitments. Further reforms are underway in other international organizations and there is continued pressure for progress in the functioning of the multilateral system.

Old Town and Tourism

Geneva is about more than a beautiful location and international organizations, of course. One highlight for tourists is the somewhat sleepy old town. The medieval part of the city is built on a hill that at one time afforded some defensive advantage. Now, it is a place of cafes and restaurants, historic sites and leafy parks. Many of the historical sites relate to the Protestant Reformation and the earlier Roman Catholic foundations. St. Pierre’s Cathedral offers splendid vistas from its two towers, a plain interior and a restored and ornate Chapel of the Maccabees. Inside the main cathedral one can see John Calvin’s fairly plain and minimalist chair, as well as wonderful, ornate carved choir stalls. Underneath the cathedral is an archeological site with layers going back 1600 years.

Along the base of the hill (facing the Rhone River) is a nice park with the Reformation Wall, with sculptures commemorating the Protestant reformation, including Geneva’s shift to Protestantism in 1536 and statues of key founding theologians of this movement. (A small monument to Ulrich Zwingli, a Swiss theologian and an intellectual father of the Anabaptist reform movement sits vandalised in the park across from the Reformation Wall, as if he were outcast.) Along the base of the hill facing the lake, there is a fancy shopping district. After a few hours of hiking around the old town, there are wonderful cafes and pubs where a traveler can relax. Fortunately, some of the austerity of the puritan forefathers has worn off and comfortable establishments abound.

Time for a visit to Geneva?

Certainly, there is luxury and even a measure of grandeur to be found in the international hotels and institutions of Geneva. The many watch shops and the Patek Phillippe museum are certainly upscale. But, on balance, the urbanism is somewhat understated, in contrast to what one finds in Paris with its grand spaces. For me, “comfortable” is indeed a good word for Geneva. The natural setting, the neighborhood cafes and bistros, the streetcars, the fairly compact city center, the fact that most things work most of the time, the calm on Sundays, all work together to create a comfortable environment. If this is your cup of tea, then it may be time for a visit to Geneva. You, too, may find it difficult to escape the charms of this city.

Photos from a recent visit to Geneva (October 2012)

(Use the arrows to scroll down to see additional photos)

Visit to the UN and surrounding area

[flagallery gid=16 name=Gallery]

Visit to Geneva Old Town

[flagallery gid=17 name=Gallery]

Q4TK

A quest for truth and knowledge

Monthly Archives: November 2012

French capitalism is not dead!