Individual shareholding: how to (re)democratize investment
Champions of savings, the French are now turning their backs on shareholding. Although the number of individual shareholders has fallen drastically over the last ten years, this has not always been the case. Until the end of the 1980s, households still directly held one-third of the French market capitalization! During the financial crisis, is it still possible to change the situation and give French savers a new taste for productive investment?
The decline of individual shareholding in France
At the end of 2018, 42% of the market capitalization of CAC 40 companies was held by foreign investors, 14.5% by family shareholders, and only 5% by individual shareholders, according to Euronext.
The weakness of France ‘s individual shareholder base stands out. The number of individual shareholders has halved since 2008, to around 3 million, a far cry from the record 7.2 million individual shareholders in 2007.
- Stock market crises and economic uncertainties
Economic uncertainty partly explains this phenomenon. Indeed, the French people’s disenchantment with the stock market has accelerated since the subprime crisis and the collapse of Lehman Brothers. The current panic on the markets, linked to the Covid-19 epidemic, is likely to have the same type of effect on investors.
As early as 1986, the various waves of company privatizations had made a major contribution to increasing the number of individual shareholders. The more the privatized companies were known and the wider the public of subscribers. Thus, in 2005, the opening of EDF’s capital convinced more than 5 million individuals. These operations, such as Société Générale, GDF, ADP, etc., helped to democratize recourse to the stock market.
However, this craze met its limits after the violent fall of the markets. Many individual investors, especially the less well-informed, felt cheated when they lost money on the stock market. While investing in the stock market is one of the most profitable investments, it is not the only one. Over the long term, it must be recognized that the timing was not very favorable for investors who would have started investing in the 2000s.
While collective investment management – whether through the purchase of collective investment schemes or unit-linked life insurance policies – has been on the rise for the past 25 years, with assets under management of nearly EUR 1,000 billion, the trend reversed in 2008. Flows became negative for both direct and indirect investment in listed equities.
- Risk aversion and lack of economic culture
The results of a 2018 Ipsos poll also show that the French are risk averse: 62% of them prefer an investment that provides a low return but with low risk. The Livret A – despite posting a negative real return when inflation is taken into account – continues to attract nearly one in four investors.
Lack of economic and financial literacy is also likely to explain this lack of interest in investing. With compulsory education of one hour and a half per week in the second year of secondary school, the French scored 8.3 out of 20 in the latest test conducted in 2010 by the Conseil pour la Diffusion de la Culture Economique (Council for the Dissemination of Economic Culture). France also ranks last in the 2017 European ranking on economic and financial culture.
The consequences of this lack of economic culture are significant, both for the real economy and for citizens. Edmund Phelps, winner of the Nobel Prize in 2006, calculated that these shortcomings caused France to lose one point of growth each year.
They make it difficult to understand business transformations and state reforms, provoking very strong – even violent – societal resistance and breaking a crucial link between citizens and businesses. « Encouraging shareholding is the best way to encourage the French to better understand the drivers of our economy, » explains Bruno Le Maire, Minister of the Economy and Finance, in his preface to the White Paper of the Individual Shareholder Observatory (only available in french).
- Household financial difficulties
A study conducted in June 2019 confirms this risk aversion, as well as the feeling that many French people do not have all the keys to managing their savings. Households’ financial difficulties and their need for liquidity also limit their choice to turn to the stock market.
While more than 1 in 2 French people say they have already made a financial investment or wish to do so (53%), those who have not yet taken this step explain it by: a lack of knowledge of available investments (35%), the perceived risks involved in this type of investment (32%), the cost that management fees represent in their eyes (22%), but above all, by a lack of money to invest (50%).
- An old stock market culture
The collapse of individual shareholding in France over the last ten years is irrefutable. Although individual shareholders now account for one-tenth of the market capitalization of listed companies, this has not always been the case. Until the end of the 1980s, households still directly held one-third of the market capitalization.
Moreover, while investment in the stock market is now marginalized, it should be remembered that France has a very strong stock market culture. The world’s first joint-stock company was founded in Toulouse, France, in 1372. Rich in its industrial history, the country’s economy benefits from the power of large groups that grew up with the stock market and are now world leaders in their sector (Saint Gobain, Air Liquide, etc.).
Should the French economy, whose history is intimately linked to that of the Stock Exchange, do without its historical financiers? How can we redevelop the shareholder base among private individuals?
Re-launching French individual shareholding
The development of individual shareholding, while obviously dependent on the commitment of the companies themselves and the associations representing them, cannot do without a favorable context for investment in shares. Associations, listed companies, market authorities, financial intermediaries and, above all, the State, must mobilize and work – together – to achieve this objective.
- The role of the State
Given the financing needs of French companies, it is crucial that the State continues to make a visible commitment to individual shareholding. The PACTE law, promulgated on May 22, 2019, is the beginning of a virtuous dynamic in this respect, notably with the simplification of the French Share Savings Plan (PEA) and the introduction of the PEA for people under 25 (PEA Jeunes). Privatizations such as those of Française des Jeux and Aéroport de Paris also reflect the Ministry of Economy’s ambition to revitalize the popular shareholding.
In 1992, the launch of the PEA was a strong signal of the authorities’ desire to democratize investment in companies and made the stock market very popular with savers. The PEA Jeunes scheme is aimed at young adults aged 18 to 25 who are part of their parents’ tax household. It is a very good economic and financial education tool that, if sufficiently exploited, could help to rejuvenate the French individual shareholder base.
There are also many schemes to encourage employee shareholding: elimination of the social tax on profit-sharing paid in companies with fewer than 50 employees and on profit-sharing in companies with fewer than 250 employees, reduction of the social tax to 10% on the employer’s contribution for purchases of company shares in company savings plans (PEE), and raising the ceiling on the discount on the price of shares subscribed by employees from 20% to 30%, possibility for the employer to make a unilateral contribution to the shareholding funds on the PEE, simplification of employee shareholding in simplified joint stock companies… The list is long, and that’s good, because employee shareholding can itself be a first step towards individual shareholding.
- The role of banks and the financial market authority
To date, savers – especially younger savers – feel that their bank advisors provide little information about investing. The latter would prefer Livret A, home savings and life insurance. As a result, there are still many preconceived notions about the feasibility and dangerousness of investing on the stock market.
The banks, represented by the Fédération Bancaire Française (French Banking Federation), could thus set up more systematic and comprehensive communication with their customers, especially young adults, on the terms and conditions of investing in shareholding (PEAs, risks and benefits, portfolio diversification, holding period, etc.) or, at the very least, not make it more complex for savers to access this type of investment. In this respect, it is worth highlighting recent developments, allowed by online banks, to simplify the experience for their customers wishing to invest in equities.
The Autorité des marchés financiers (AMF – Authorities on Financial Markets) also has an essential role to play in enabling savers to invest safely and under the best conditions and in helping to educate households about investing in the stock market. It is currently planning digital tools, events and webinars dedicated to individual shareholders on the prevention of scams, long-term investment, etc. The visibility of these measures and training is all the more important as the French have a particularly high aversion to risk.
- The role of economic and financial education
The National Education system can also contribute to improving the knowledge of economics and finance of young French people through teaching economic and social sciences.
The national financial education strategy – launched in 2016 and operated by the Banque de France (French National Bank) – must also continue its efforts to enable everyone to become more at ease with financial matters and reduce inequalities in this area.
Built around five pillars, including « financial and budgetary education for young people » and « lifelong learning of financial skills », it enables, for example, the experimentation of training courses giving access to qualifications, such as the « Financial Education Passport », which is currently being tested in several schools.
- The role of enterprises and the associations that represent them
For Guillaume Robin, Chairman and CEO of Thermador Group and member of the Individual Shareholders Observatory, supported by the Institut du Capitalisme Responsable, a significant proportion of individual shareholders in the capital offers advantages that deserve the efforts linked to this type of investor. It bears witness to this:
« Naturally, these individuals develop an affectio societatis by adhering to the business model and management style. Very frequently, they share with us their satisfactions, disappointments or questions, thus showing their attachment to the company and draining a multitude of good ideas towards us. Another consequence of this strong bond is that they often show their confidence by giving their power to the Chairman when voting on resolutions proposed in the General Meeting. In this way, the management of a diluted capital company can enjoy a good level of independence, set very distant objectives and calmly implement the strategies to achieve them.
Secondly, we note that these people have a very long-term vision of their investments, well beyond most institutional investors, who are accountable to their own clients within shorter timeframes. So, we meet very frequently with individual shareholders who thank us for our communication and say that they have held our shares for 10, 20 or 30 years, which means that they have gone through several stock market crashes with us and without panic. Among them, we also have more active investors who, day after day, ensure a minimum volume of transactions and a more fluid listing of our shares. They often keep our « line » but act on small volumes when buying or selling to try to improve their overall return by arbitraging a portion of their investment.
Finally, our individual shareholders sometimes have concerns that are different and complementary to those of the funds or managers. Behind an apparent naivety, fundamental issues that are in line with corporate social responsibility are very often hidden. Having only limited time to study annual reports, they go to the essentials with real common sense. For example, they do not hesitate to make a clear-cut judgment on the total compensation of executives, without going into the smallest details of the variable component. In the social area, they show empathy for employees and are very favorable to all initiatives that enable them to increase their equity, even if this slightly penalizes the short-term performance of the share. To sum up, they are above all looking for simplicity, consistency, fairness and transparency, which leads us to improve our financial communication by avoiding financial or extra-financial jargon.
On this subject and regarding the means to be implemented for listed companies, we recommend that the reader download free of charge our White Paper « Let’s develop shareholding for all! ». In this document, the members of the Observatory have gathered their best practices so that other companies can embark on the virtuous conquest of this type of loyal and demanding investors. »
by The Individual Shareholders Observatory members