This intervention is part of the NextGen summit on business transformation. I will have the pleasure of participating on November 26-27, moderating two roundtable discussions with decision-makers from the economic, political, and social spheres.
Why talk about profit distribution today?
In a recent article, I discussed value distribution and explained how new technologies can help us distribute the wealth generated by value chains more fairly. Today, I would like to talk to you about profit distribution.
I am convinced that now is the right time to discuss this topic. Firstly, because due to the negative effects of Covid-19 on the economy, inequalities within our society are at risk of deepening even further.
Even supporters of liberal capitalism - such as Kristalina Georgieva, Managing Director of the International Monetary Fund, or Jamie Dimon, CEO of investment bank JP Morgan - have recently sounded the alarm, urging decision-makers worldwide to combat the rise in inequalities.
Secondly, because the rise in inequalities risks fueling the rise of populist movements. These movements thrive on the opposition between the "elites" and the "people". An excessively unequal world is a world where the democratic institutions we cherish are weakened.
Finally, because I firmly believe that it is better to support the incomes of employees by involving them more in the profits of their companies rather than through social assistance disconnected from the effort provided, which risks fostering situations of dependency.
What share of profits do employees receive today?
It is obvious that the value generated by the company irrigates its entire ecosystem. Not only shareholders, but also employees, suppliers, banks...
According to the database of BASIC (Bureau d'Analyse Sociétale pour une Information Citoyenne), in 2018, the turnover of CAC40 companies (excluding the financial sector) was distributed as follows:
But let's take a closer look at how companies share profits with employees. There are three mechanisms for sharing profits with employees - profit-sharing, profit-sharing, and contributions:
- Profit-sharing is the only mandatory mechanism (for companies with 50 or more employees). It is a mechanism introduced for the first time in 1959, then made mandatory in 1967. Its amount is determined according to the legal calculation formula or by another formula. This latter is defined by agreement between the employer and employee representatives. It must be at least as favorable to employees as the legal formula.
- In addition to profit-sharing, companies that wish to do so can pay employees a profit-sharing bonus. It is defined based on the achievement of objectives.
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In addition, there are contributions. That is, additional payments that a company can grant to an employee when they invest money in a savings plan (Company Savings Plan - PEE - or Collective Retirement Savings Plan - PERCO).
In 2017, overall, French companies paid their employees a total of 18.4 billion euros under these mechanisms. This equates to 2512 euros per employee. It is interesting to note that mandatory profit-sharing represents only 38% of the amount paid. Indeed, the preferred mechanism for employers is profit-sharing. It is a real management tool that allows employees to be involved through the definition of objectives.
In addition to these mechanisms, there are also dividends received by employee shareholders. According to the ERES profit-sharing barometer, in 2018, dividends paid to employees by companies in the SBF120 (index including CAC40 companies) reached 680 million euros.
The total amount received by employees for profit-sharing is therefore in the order of 20 billion euros. (obviously, it varies greatly from one year to another depending on the economic cycle).
And the shareholders?
In 2017, only CAC40 companies distributed 47 billion euros in dividends to their shareholders. So it's an amount that is about 2.5 times higher than the share received by employees. And we are only talking about CAC40 companies. Zooming in on these shareholders, we also see that the capital is very heavily concentrated. According to a report from France Stratégie, in 2018, 0.1% of households accounted for two-thirds of dividends!
Let's be clear: it is entirely legitimate for shareholders to be remunerated handsomely. First, because they invest their capital and risk losing it. Then, because often shareholders, especially in SMEs and midcaps, are also the founders of the company. Those who had the idea, who started, who created value and jobs.
But allowing shareholders too much freedom in the way they dispose of profits has a major drawback: some shareholders may be tempted to prioritize short-term dividend maximization over a long-term vision, to the detriment of stakeholders, including the company itself. This is what I call the pursuit of excess profit.
A new formula for profit distribution
We could then imagine imposing on companies a new formula for profit distribution. A formula that guarantees shareholders adequate and attractive remuneration. But also, which obliges them at the same time to share more of the profits with other stakeholders: the company itself, employees, the planet.
We could imagine the following distribution formula:
- 30% of profits would be paid to shareholders. This would be their fair remuneration for capital investment and risk-taking.
- 30% would be paid to the company itself, which would be obliged to use them to strengthen its assets (cash, equity, patents...): this would be a sort of insurance premium that the company pays to itself to strengthen its assets and give itself more chances to overcome the hardships that will inevitably come its way.v
- 30% would be paid to employees. This would be the fair reward for all those who make the company live on a daily basis. For example, those who take care of customers, who innovate, who work overtime... This 30% could be calculated by integrating existing mechanisms (profit-sharing, profit-sharing, contributions).
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Finally, 10% would be invested in projects with high social and environmental impact - chosen by all employees of the company.
Notice that this system intervenes on profit distribution without diluting the company's capital. In the event of a company sale, the founders remain the big winners. Indeed, they are the ones who receive the fruits of the value created.
Investing in projects with a positive impact
I would like to develop further the point regarding the 10% earmarked for CSR projects, which represents the main novelty of this new approach.
Imagine that within each company, 10% of profits are invested in projects with a high social and/or environmental impact, to be chosen with employees, through debate and voting. These should be open obligatorily to employees and, optionally, to other stakeholders (customers, suppliers).
These consultations, a sort of corporate version of participatory budgets implemented by many municipalities, would be an opportunity for companies to have a great debate with their employees - concluded by a vote - on how to maximize their positive impact.
They would also be a means to ensure that the purpose introduced by the PACTE law, and more generally the CSR strategies of companies, do not remain dead letter, or then marginal initiatives disconnected from the company's economic model.
Imagine the wealth of ideas and proposals that these consultations could generate! They would generate plenty of ideas on the CSR front. Moreover, the debates could even bring out disruptive ideas, new business models inspired by a circular and inclusive economy!
On a societal level, such a measure would redirect a portion of companies' investments towards activities with a high social and environmental impact, counterbalancing the tendency of capitalism to direct investments towards those with "market potential".
So considering the benefits it brings, this 10% share earmarked for financing CSR projects, could even be increased, don't you think?
Sources
(1) BASIC, Bureau d'Analyse Sociétale pour une Information Citoyenne, La répartition de la valeur au sein du CAC40
(2) DARES, Enquêtes ACEMO – PIPA
(3) ERES, Baromètre du partage des profits, 7ème édition (2018)
(4) France Stratégie, Comité d’évaluation des réformes de la fiscalité du capital, Deuxième rapport, octobre 2020
