Monday, May 5, 2014

A template for jobs growth in France

A new corporate entity type to empower French college graduates

Unemployment in Europe remains stubbornly high. In France, the unemployment rate is 10,4%. The only answer that European central bankers seem to be considering at the moment is rolling-out an American style bond buying-back program known as quantitative easing. Critics of this approach see it as nothing more than a backdoor bailout to large banks by artificially keeping interest rates low, allowing banks to arbitrage their lending as a way to recapitalize their tattered balance sheets. Mario Draghi, the European Central Bank president, is considering whether the ECB should adopt quantitative easing to stimulate banking profits, which he hopes will trickle down into new jobs. What delusion ! The only program that will create jobs is a “jobs creation” program. As it stands, the unemployment picture is only going to get worse. Amongst French youths, aged 15-24, the unemployment rate is 25%, slightly above the European average of 23,5% for that demographic, according to recent statistics. In Greece and Spain, unemployment of youths exceeds 50% ! How can a nation like France attract new investment while at the same time spur employment that is targeted at, let’s say, college-educated youths ?

France college students jobs program photo france-amphitheatre-universite_scalewidth_630_zps5f6bb7e2.jpg

In France, corporations generally face a high regulatory environment at a very basic level. Small things are over-regulated, like the width of the exterior sidewalks around office buildings, in a culture that resembles to impose a crude version of “broken windows” theory of business regulation that focuses on minutia, but does not focus enough attention at bigger issues, like the systematic way that corporations can exploit workers, for example, like what happened at the Goodyear plant in Amiens-Nord. It’s no wonder that, in this environment, France is losing a gifted young generation of entrepreneurs to other nations. Is there a way, for a period of, say, five to ten years, to incubate new businesses free from some of the most tedious of regulations -- just enough to liberate a creative class of young French citizens -- under a new form of organization to target jobs growth in several cities to jump start a new generation of prosperity ?

Traditional attempts to facilitate foreign investment in France -- the creation of a relatively new type of corporate entity in France, the société par actions simplifiée -- is a vehicle designed to essentially create subsidiaries in France, and this is a recipie for more disasters, where French workers will not achieve autonomy or freedom to create their own successes and instead unfortunately engender hostility. There is room, though, to create a new corporate structure to facilitate responsible investment to create a stronger France. This new structure, which would need to be created by a new law, would work in a new, enthusiastic partnership with the state as a jobs program. The state has a vested interest in seeing to the success of this corporate entity, and as a condition of simplifying some business regulation for a period of duration under this new corporate entity, the state would receive an equity investment in the new structure. Let me explain how this would work.

The state should enact a new law that creates one and only one specialized investment fund similar to a SIF structure with multiple compartments under Luxembourg law. The overall compliance management of the SIF at the umbrella level shall be overseen by a SIF governance committee comprised of, say, government economists and government lawyers, but the French can decide who would be best trusted with this role. Management of each compartment shall be determined by the constitution of each compartment, in accordance with the autonomous arrangement between the collective French workers and the venture capital investor. Each compartment created under the umbrella shall be 20% owned by the state. Forty-percent shall be owned by a venture capitalist, who seeds funding for a respective compartment. The remaining 40% shall be owned by the French workers, who, further organized as a collective for their part, propose a compartment to the SIF governance committee. So long as the workers are organized as a collective, present a business plan, pay a nominal incorporation duty, file a constitution for the compartment, and are sponsored by a venture capitalist willing to invest a minimum of €1 million, the SIF governance committee shall approve the creation of the compartment.

The French workers and the venture capitalist shall have wide latitude to create compartments, but since the social issue that this SIF structure is intended to address is the high unemployment rate of young French adults, the compartments should be geared to the long-term success of business ideas. The constitution of the SIF structure at the umbrella level must commence from its primary purpose : to be an incubation for new businesses. The constitution must also incorporate “public service” as a primary purpose, noting that each compartment formed thereunder shall carry out “socially-responsible business activities.” Since the state is waving some of its regulations to incubate the compartments, each compartment must file yearly financial and governance statements that attest the compliance of business activities to the compartment’s public service purpose. A feature of the SIF constitution must allow for a mechanism for the French public to enforce the “public service” and “socially-responsible business activities” purposes upon each compartment.

Furthermore, restrictions should be put into place in the constitution at the SIF umbrella level governing each underlying compartment : no borrowing of money or assumption of debts will be allowed, neither will be the making of loans. A cap on salaries on the employees set at a prevailing, living wage will be in effect to prevent any high earners to garner more compensation than other workers in the collective. No venture capitalist may be employed as part of the French workers’ collective. The maximum duration that a compartment may exist under this SIF structure shall be, say, five years, after which successful compartments shall exit the SIF structure as a new entity reincorporated as one of the many options then available under French law. No compartment may engage in businesses that may cause direct environmental harm, like industrial manufacturing, oil and gas exploration or production, or other chemical or industrial activities. No compartment may employ lobbyists, nor may any compartment make any politically-related contributions or expenditures. Compartments will be prohibited from influencing government law or policy. Finally, banking, investing, selling or issuing insurance, and development real estate shall be prohibited business activities.

Some will reasonably wonder whether a new corporate structure could facilitate jobs creation with so many restrictions. The immediate answer is that a structure like this could create jobs, because the state is trading less of the over-bearing corporate regulation in exchange for what basically amounts to a silent role as a passive equity investor. The anecdote of Guillaume Santacruz proves that this will be enough. The state gets a financial benefit once a compartment graduates out of the SIF structure. That the state will willingly grant some regulatory waivers to the compartments shows that the state is willing to support the success of the compartments. Others may wonder whether it is wise to give the state a 20% ownership stake in start-up businesses. Can the state be trusted to support start-ups from the inside ? Capped at 20%, the state’s role will solely be passive. The state’s ownership stake will allow the state to recoup any losses that may be incurred by the waiver of regulations. Any gains from successful compartments shall serve to balance any foregone gains from compartments, which do not succeed.

To target job creation, compartments should be formed in urban centers across France, coordinating if possible in priority development zones where there are high concentrations of educated young adults, such as Marseille, Montpellier, Dijon, Lyon, Limoge, Grenoble, Lille, Nantes, Strasbourg, Toulouse, and Paris. Corporate income tax rates would be assessed on each compartment no different than as on a small and medium-sized sociétés anonymes (SME's) under French law. Upon exit from the SIF structure, the state would be paid 20% of the fair market valuation of the compartment. A fair market valuation of the compartment will yield a higher return for the state, especially for Web-based business ventures, given that valuations of such businesses are pegged at their future potential, not on their current profitability. Under normal corporate structures, the public, including the state, miss out on "wealth creation." Under the proposed SIF structure, the state will earn a piece of this wealth, which it can, in turn, use to fund still yet other jobs creation programs or for other public purposes. After exit, the cooperative French workers should own no less than 50% of the surviving entity for a period of five further years. This will prevent the SIF structure from being used as a subsidiary tool by global multi-national corporations and will serve to respect the “cultural exception” of the business activities of the cooperative French workers. After that term, the French collective workers can autonomously decide what to do with their own creation.

Educated young adults, who would naturally find this proposed SIF structure attractive, would be creative types seeking to perhaps start Web-based businesses. These kinds of businesses, which are hot at the moment, tend to attract other young Internet-savvy employees. Who better to spearhead jobs creation for other young adults than creative and ambitious college-educated young adults ? Partnering a new generation of French workers with the state, as this proposed SIF structure contemplates, would reinforce the idea of the state as a valuable partner in the future of the French economy to its next generation of leaders, and it would serve to introduce venture capitalists to the idea that investors can work in collaboration with the French state. Indeed, France has been a magnet for recent foreign investment, making France an ideal candidate to roll-out a program like this.

During the term of the compartments’ existence under the SIF, the role of the state as a 20% owner in each compartment is to monitor the business activities of each compartment solely in respect of major realms of business regulation to prevent fraud, corruption, and other violations of law. The state will have voting rights as an owner of the compartment, but it will not hold a day-to-day management role. It is envisioned that under this proposed SIF structure the state will not interfere with the business activities of the compartments, but the state will, as the SIF’s ultimate regulatory authority, ensure that the compartments are accorded an environment with which to thrive, creating jobs in the process, ultimately serving the wider public service of improving employment and economic conditions in France. Success of this proposed SIF structure and its compartments will contribute to the success of France. By design, if the state can foster an attractive situation to satisfy entrepreneurial French workers to create their own businesses sponsored by venture capitalists, the nation will create a new source of employment for a critical segment of the nation’s population -- it’s next generation of leaders, who will help shape the future of France. The success of this proposed SIF structure will lower unemployment and change corporate culture by focusing investors on their critical role of public service, significant wins for French workers stung by recent corporate culture disasters at Goodyear and elsewhere.

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