Participation, a legacy from social Gaullism

In French political tradition,social Gaullism is one of the major unfinished projects. Based on employee participation in the development of the company,it aimed to reconcile labor and capital,and although it was only ever partially applied,it has left an undeniably solid and lasting legacy.

Although nowadays its most influential heirs are to be found on the right (François Fillon,Henri Guaino,etc),historically social Gaullism was neither a left- nor right-wing notion,and without Louis Vallon,a leading figure in the International Workers movement,it may never have come into being.

Pan-capitalism and ownership for all

In 1965,the Vallon amendment prepared the legal ground for the implementation of participation – an instrument specific to French company law under which employees receive a mandatory share of profits. With the publication “Pan-capitalist Reform”,Marcel Loichot,founder of the SEMA and advisor to President de Gaulle,won many people over to his doctrine despite some serious flaws in terms of economic theory.

Pan-capitalism (or capitalism for all) sets out to be an alternative between liberal “oligo-capitalism”  and communist “a-capitalism”. It proposes sharing company profits in two stages:(1) Capital is rewarded with fixed interest of the order of 5%,just as labor receives a fixed wage;(2) Any residual profit is shared,half going to the capital,half to the labor. Payment of this part of the profit is done through attribution of shares that cannot be sold for 10 years. Marcel Loichot calculated that if employees keep their shares,after around 20 years they would end up holding a majority stake in the company capital. The assertion that shareholders would not see their investment despoiled was never fully demonstrated.

What remains of pan-capitalism?

Since 1967,the law introducing employee participation preserves this initial pan-capitalist notion;in effect,the share of the profit is calculated as equivalent to half the profit after deduction of a sum equivalent to 5% of the capital,all of which is multiplied by the ratio between the total payroll and the gross margin.

Participation = 1/2 (Profit – 5% x Capital) x (Payroll / Gross Margin)

Without the multiplication by the last ratio,we would be in a pure pan-capitalist scenario. This ratio of payroll to profit generated – a notion we probably owe to Georges Pompidou and Edouard Balladur – corrects one of pan-capitalist theory’s major flaws;its ignorance of a company’s capital intensity. We can however note that if the capital intensity is taken into account through this ratio,then the principle of sharing 50/50 no longer applies. In other words,the employees only have the right to half of what they are due.

Since the legislature has been careful to leave negotiators on participation agreements a free choice of formula for sharing,let’s concentrate on the merits of pan-capitalism. In a profit-sharing logic,ensuring minimum remuneration for capital is rational. A rate arbitrarily fixed at 5% requires justification,which the law of supply and demand could well provide. Then sharing residual profit is an innovation whose economic motivation lies in the intuitive notion that labor forms part of a sort of “social capital” for the company. However,sharing 50/50 is not justified,and should be reconsidered.

Experience has shown that even the keenest companies rarely attain a level of 15% of capital held by employees. So collective control of the company doesn’t seem to be a real threat. What’s more,the recognition by shareholders of the minority participation of employees in the capital,and their accession in due proportion to the decision-making apparatus,have proved positive for morale and motivation within the company.

Human capital and participation

Since the days of the pioneers Vallon and Loichot,economic thinking has made a great deal of progress in its approach to profit sharing.

The first question is that of the pertinence for shareholders of sharing any wealth that is created. The only reason for capital to renounce part of the profit generated is to ensure the alignment of interests of labor with those of capital providers,and it is on this condition that profit sharing is not plundering the capital. That is the objective sought,for better or worse,in the attribution of stock options,shares,and bonuses,of which employee participation is the “democratic” version.

A second point is sharing the company’s risk. The threat of unemployment in the case of collective under-performance,much like the prospect of promotion in the case of success,is one of the realities faced by employees. To this can be added dependency on a single company,because unlike financial investors,the employee cannot diversify his or her investment.

Lastly,the rewarding of human capital eligible for a share of profits and the integration into the formula of the human capital part in the “social capital” – which is nothing more than the sum of the financial capital and the human capital – ensures a genuine and lasting alignment of interests. Thus,labor and capital can effectively cooperate and follow the same strategic goals for the company. Providers of labor and providers of capital then have real reasons to form a shared enterprise and make it prosper.

We should note that social Gaullism strived to reconcile labor and capital. Revisited and amended with a view to a genuine alignment of interests,employee participation in a company’s success takes on a less dogmatic aspect,it becomes the balanced solution of an micro-economic question. In other words, it becomes mutually beneficial to all stakeholders.

What use can be made of participation?

Company directors who would like to see their employees take a share of profits have every interest in using the legal instrument of participation. We cannot recommend strongly enough revising the formula applied so that it represents the forces present in the company. Once the economic method of profit sharing has been established,the legal framework for participation is an efficient tool for fiscal optimization of low-to-middling variable remuneration. Since the fiscal advantage is capped,the overall profit-sharing system must top up the participation element through other modes of remuneration,such as bonuses,other profit sharing instruments such as “intéressement,” or even the attribution of shares.

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