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The European Way of Changing the Capitalist Model

ARTICLES - 21 October 2021

As Europe struggles to promote the values it upholds, the model for capitalism that it has developed over the past decades may be particularly well positioned to respond to main challenges that our societies currently face. To seize this opportunity, Europe must make sure its model is truly competitive, benefiting all stakeholders and attracting domestic and foreing investment, and it must act fast. 

To discuss these issues, Institut Montaigne and Sciences Po's School of Management and Innovation are holding a series of events on the future of investment in Europe. This article follows the second event on the European model of capitalism, with Jean-Pierre Mustier, former Chairman and CEO of Unicredit, Yves Perrier, Chairman of the Board of Amundi, and Natacha Valla, economist and Dean of the School of Management and Innovation at Sciences Po.

New challenges, new tools

The main challenges that our societies face today require a new model of capitalism, distinct from the Anglo-Saxon model theorized by Milton Friedman. Friedman asserted that the sole purpose of companies is to maximize shareholder value.

The environmental crisis requires closer consideration of negative externalities, just as eroded social cohesion calls for a new approach to sharing value. The Yellow Vests in France, the election of Donald Trump in the United States, the Brexit vote in the United Kingdom, and the rise of populist parties across Europe all point to the Western middle classes' rejection of the current capitalist model. 

The main challenges that our societies face today require a new model of capitalism.

Europe is well-positioned to offer a more balanced and sustainable approach, with stronger convergence of stakeholder interests and a social market economy capable of providing everyone with acceptable living standards. In his book Capitalism versus Capitalism, Michel Albert contrasts Anglo-Saxon financial capitalism with Rhine or Alpine capitalism, which can be found in Germany, Austria, and Switzerland.

The latter form of capitalism promotes a more even balance between stakeholders - employees represent up to 50% of German boards of directors, for instance - and is less constrained by concerns over short term financial gains. This Rhineland model of capitalism has already proven its efficacy, both from an economic perspective, as seen with Germany's economic growth over the last few decades, and from a social one, as shown by the increase in workers’ purchasing power.

A real advantage that European companies have developed over their American counterparts over the past decades is their awareness of and attention to multiple stakeholders. In 2019, the American-led Business Roundtable also offered to redefine companies’ missions to include other stakeholders alongside shareholders. However, let’s not forget that the same was done in 1980, with no tangible follow-up.

Bringing stakeholders on board for the long term

The emergence of a European model of capitalism allowing companies to go beyond the short-term financial incentives promoted by the Anglo-Saxon model requires aligning the interest of the company's various stakeholders - shareholders, management, employees and customers. This should be coupled with long-term value creation strategies.

Within the companies, shareholders are ultimately in control. A long-term vision thus requires long-term shareholders, which Europe is sorely lacking. It is struggling to direct its savings towards its companies: only about 6% of European savings are invested in shares, compared to nearly 30% in the United States.

To then align management with this long-term vision, we need to encourage the implementation of appropriate remuneration structures, with long-term objectives that are not only financial but also social and environmental. Finally, a company's vision and values need to be shared by its employees and customers.

A long-term vision thus requires long-term shareholders, which Europe is sorely lacking. 

The notion of companies having a raison d'être, an explicit mission statement, serves this purpose. Without this, a company will find it hard to justify decisions that, while being harmful in the short-term, will be met by higher multiples and stronger degrees of customer and employee loyalty in the long term.

Establishing the European model as a global example

Promoting the emergence of a European model within companies is not enough. Further measures must also be taken to allow its development in a context of both limited resources and major geopolitical struggles. 

To develop its own model, Europe must be able to attract capital. Today, Europe is not yet perceived as a single market by foreign investors, and each national market still requires dedicated expertise. To make the European market more accessible, and thus develop its ability to attract capital, Europe must work towards greater standardization across its member states, whether in banking regulation, green taxonomy, or other sectors.

Europe must also lead the way with its own accounting standards. IFRS standards and fair value measurement, according to which a company only has value as a transferable security, have done a great disservice to the European model. To avoid repeating the mistakes made in the early 2000s, it is crucial that Europe develops standards capable of accounting for - companies’ externalities, particularly environmental ones.

Finally, for Europe to successfully promote its model globally, it must develop an ambitious industrial policy and a strong political vision capable of clearly defining the new roles of the State, the regulatory authorities, and the companies.

 

Co-authored with Elise Lannaud, Assistant Policy Officer.

 

Copyright: ARMANDO BABANI / AFP

 

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