Date: 3rd May 2019
Author: Guillaume Prache, Managing Director of BETTER FINANCE

The EU CMU project aims to rebalance the funding for the EU economy from banks to capital markets. The key requisite for this to happen is to foster retail investments into capital markets.

Following a proposal from BETTER FINANCE, the EC added a new CMU action in 2017 to “develop best practices in employee share ownership schemes” to develop the equity culture in Europe.

Even if it would just reach the level it enjoys in the US, employee share ownership (ESO) would be multiplied by 6 in the EU – adding two trillion € in equity market capitalization - and even by much more as far as SMEs (the main job creators) are concerned. This alone would boost the EU 28 market capitalization by about 20%, and thus get the CMU significantly closer to its goal.

But there is much more: studies show that people who have been exposed to employee share ownership plans often become shareholders of other listed companies.

Retail financial intermediaries have stopped promoting direct investments into listed shares and bonds for decades, in favor of more complex and fee-laden “packaged” products such as funds, life insurance and pension products, increasingly estranging EU citizens from the real economy assets their savings are supposed to fund. ESO is the only – but powerful - way left to enable EU citizens as employees to learn about shares, equity ownership and capital markets.

This is why the EC links this “CMU” action to the promotion of an equity culture.

The promotion of ESO is the single most powerful means to achieve the CMU’s priority goals, ... and more:

Sustainable finance

Over the last five decades the European economy has progressively gone from a people capitalism to a financial capitalism: in 1969 EU citizens directly owned 40 % of the EU economy (the shares of EU listed companies); today only about 10%. Financial intermediaries, on the other hand, have now seized a major share of our economy’s capital and voting rights: what one of the founders of the US SEC, Louis Brandies, and present-day Professor John Kay of the UK both call “other people’s money”.

Looking only at the time horizon, active asset managers (“other people’s money”), on average, hold their equity assets for less than a year; versus thirteen years for employee shareholders in France, for example. Other studies show that ESO also improves social responsibility and governance.

Not only are the interests and time horizon of agency owners too often poorly aligned with those of the end-investor and of the real economy in the long-term, but in terms of governance and democracy it means the EU economy is increasingly de facto controlled by financial intermediaries and not by citizens as long-term savers. It is a very serious - although underestimated - threat to democracy.

For all these reasons, it is all the more a pity that the EC has been dragging its feet for so long on ESO: Already in 2002, it announced the need for a European Action Plan on ESO, and concluded again from a “Pilot Project for the promotion of ESO and Participation” in 2014 that an Action Plan focused on an awareness-raising campaign should be launched.

EU Authorities have now a unique opportunity to make it right: The 2017 CMU Action on ESO (due to be completed this year) must follow-up on this 2014 “Pilot Project” at last.