Alain Charles Martinet*
Ausar Energy, Lyon University
*Business Science Institute faculty members
The list of future "scandals" to be debated in corporate governance classes is growing with a new case, CASINO. Before perhaps becoming, with its CEO Jean-Charles Naouri and the Rallye holding company, the protagonist of a gripping thriller that could well find its way onto streaming platforms.
Let's briefly recall the plot. On December 17, 2015, Muddy Waters Research, headed by Carson Block, launched an attack on Casino and its holding companies by publishing a vitriolic warning report. The report highlights the over-indebtedness of the holding companies that own the group's companies, as well as an unfavorable strategic trajectory that would not generate enough cash to repay long-term debts. The opaqueness of the corporate governance structure is criticized, and could facilitate all kinds of abuses. The conclusion was clear: it was urgent to sell the shares, preferably "short". Muddy Waters rushed to put this recommendation into practice.
Since then, the Casino case has become the scene of financial confrontations and legal battles. There have been rating downgrades by the agencies, complaints filed, investigations by the Autorité des Marchés Financiers (AMF) and the Parquet National Financier. The political world has also got involved: François Hollande's "mon ennemi, c'est la finance" (my enemy is finance) in 2012 has given way in 2019 to "l'ennemi de nos entreprises françaises, ce sont les fonds activistes de vente à découvert" (the enemy of our French companies is activist short-selling funds), according to Bruno Le Maire, Minister of the Economy and Finance.
Since the triggering of a safeguard procedure in 2019, everyone has been waiting for the fall. Barring a spectacular turn of events, it is imminent with the appointment of a buyer. In other words, Casino's strategic and financial situation has long been a cause for concern, and is steadily deteriorating, justifying the intervention of the Comité interministériel de restructuration industrielle.
This is the highlight of the show. The jungle of capitalism is becoming ever more dangerous, violent and ruthless. Yesterday's predators are now prey. As in the bush or savannah, the young and wounded are attacked first. The lionesses take it in turns for several hours to kill the buffalo. The cries of the hyenas, eager to gnaw the bones, amplify the movement.
Logically, the first scientific lessons are introduced into the debate, notably in The Conversation France. The consensus is developing in terms that largely vindicate the report made public back in 2015 by Muddy Waters.
In terms of financing, the "holding company holding company holding company" arrangement known as "Breton pulleys", where holding companies carry debts which they repay with dividends from the companies they control, raises questions about its viability. Deemed morally questionable even if perfectly legal, it is sometimes described as "rogue pulleys", requiring a headlong rush to generate a growing cash flow. In any case, it always arouses the suspicion of unfair treatment of minority shareholders and potentially authorizes all manner of accounting abuses. Critics therefore seize every opportunity to denounce its logic. For them, the Casino case is already a textbook example.
From an industrial standpoint, Casino's positioning as a relatively high-priced, quality retailer in a sector undergoing profound upheaval has clearly proved incompatible with a debt-financed development logic, guaranteed by share values.
At institutional level, in the press, in more scientific articles and even in interviews with Carson Block, the Casino case would already have the value of an example. It would be yet another demonstration of the collusion of interests in "French-style" capitalism. This would explain the slowness of reaction, the general blindness and the unreasonable support given to the company and its manager right up to the point of catastrophe (in the sense of the theory of the same name). In this sense, the Casino case is symptomatic of the inability of the "French-style" governance system to rise to the level of professionalism expected of it.
The backbone of this analysis is convincing, which explains why it is so widely accepted, in both the specialized and general press, and even on scientific websites. It is even more convincing if we consider Casino's mobilization of another lever in addition to its holding companies/Brittany pulleys: recourse to the financial markets.
However, from the point of view of management science and management research, the Casino case is exemplary, and in itself serves as a warning for three other reasons, which are less frequently emphasized or even totally absent from the debate.
Firstly, such a practical financing scheme appears compatible with an industrial and commercial base with high margins and market growth. It is thus clearly "tenable" for a group like LVMH operating under Bernard Arnault's leadership in a luxury goods industry where margins are exceptional; or, as Vincent Bolloré demonstrates via Financière de l'Odet, when activities are carried out in largely politicized industries where rents are secured while being combined with dynamic asset portfolio management. The reasons for the non-viability of the "Breton pulley" system here, rather than the financing architecture itself, are to be found more in Casino's retail business, which is akin to that of a low-margin grocer requiring constant, highly detailed fine-tuning.
Secondly, at a more theoretical level, work on group strategies has, for over thirty years, highlighted various management styles and now even a limited number of corporate control configurations ("centralized operator", "controller", "developer", "investor", "financier"). Such configurations have been formulated through methodological attention to the intimacy of group operations, to the context in which activities are carried out, to the singularity of histories, and to the ways in which management processes and procedures are used. In other words, there is no such thing as good or bad management, but rather forms that are more or less adapted to different contexts. From this point of view, analyses of the Casino case remain weak or non-existent, as they were in the 2015 Muddy Waters report that set the world on fire.
Finally, at a more political level, the scientific debate on governance pits, on the one hand, the advocates of legal-financial shareholder governance and the practices it legitimizes, against, on the other hand, work that postulates the need to understand governance as partnership-based, or even cognitive. This debate has made a spectacular appearance in the media arena with the PACTE law and mission-driven companies. The underlying idea is that a different kind of governance - European, strategic and organizational - can and must be opposed to the sole logic of maximizing shareholder interests. A shareholder who, moreover, is a convenient figure behind which investors hide, even though they are not necessarily the owners of the shares they manage.
The Anglo-Saxon legal-financial logic of corporate governance was masterfully portrayed by Oliver Stone in the film Wall Street. The main character, Gordon Gekko (played by Michael Gouglas), is a ruthless matador who spots his prey and only bets when he's sure. He assumes it: we live in a Darwinian world; managers are always suspected of abusing their positions of authority to entrench themselves and enrich themselves unduly on the backs of the company, and therefore the shareholders; under these conditions, he replies to his detractors that he "doesn't destroy companies" but, on the contrary, "liberates them".
Of course, in public, he fails to repeat what he tells young apprentice Bud Fox in private: that a sheep's destiny is to be sheared.
Adapted to the Casino case and the figure of Muddy Waters Research and its director Carson Block, the analogy is striking. The same postulates of a form of economic and financial Darwinism, based on the long-term efficiency of markets, can be found in both discourses. In this conception, bankruptcies and disappearances are considered necessary and give the system its dynamic. The job of the vigilante is therefore to identify the targets to be killed, and then to hasten the process of killing them by selling them short. This is exactly what happened back in 2015 with the Muddy Waters report on Casino, or very recently with Gotham City Research's attack on French nugget SES-imagotag. It's an appealing thesis, and some would argue that the way in which Zatarra Research and its director Mattew Earl brought down Wirecard using the same process demonstrates both its rigor and its relevance.
However, except in the case of billion-dollar frauds on an exceptional scale, research in management science shows that this Darwinian conception can (and should?) be countered by a longitudinal, process-based vision, in which the dimensions of the triptych "financial set-up - choice of strategic/industrial bases - operation of financial and regulatory institutions" do not appear independent and decoupled, but rather intertwined and in complex interaction. A very different reading of a case like Muddy Waters' attack on Casino over the period 2015-2023 then appears, and could potentially reveal a very different reality.
Firstly, in terms of financing, the deterioration in Casino's situation is clearly linked to massive short-selling of securities, which asphyxiated financing whenever the company called on the financial markets. The descent into hell has thus become inescapable. While Carson Block's victory has been unanimously celebrated, it seems essential to consider a more complex reality and assess the self-fulfilling impact of Muddy Waters Research's prophecies on the Group's situation. In other words, we need to re-examine the "Coase theorem", according to which the nature of financing has no impact on the nature of resource allocation, property rights or investment decisions. By definition, in this case, the choice of recourse to financing by the financial markets mechanically exposed the company to attacks by activist funds, as Bruno Le Maire deplored, and modified the group's strategic dependence. The 2015 report therefore loses its status as a warning report and becomes more like a pyromaniac fireman's match, with the - admittedly - objective of breaking the trust between the company and its investors.
Secondly, on a strategic and industrial level, the proponents of Anglo-Saxon capitalism usually argue that stock market attacks and short sales have no effect on the strategic problems encountered by a company, which they merely reveal. However, one of the major lessons of strategy, control and governance research over the last thirty years is that the capacity for vigilance and managerial attention to seize new development opportunities is the rarest and most precious asset of managers and their management teams. This is what led Harvard Professor Robert Simons to formulate the concept of Return-on-management (ROM), which he contrasts with traditional ROI and ROE. In the pages of the prestigious Strategic Management Journal, this is what led William Ocasio to propose an attention-based-view of the firm, far more complex than the simple knot of legal contracts that orthodox literature on corporate governance retains. In other words, in the light of such theoretical shifts/reframings, it is possible to consider that, by forcing group managers to focus solely on short-term results and the value of the shares that guarantee debts, the attacks lock management teams in a kind of "attention tunnel". The management team thus has no choice but to focus all its energy on defending itself against attacks, thereby limiting the time and attention available for strategic development opportunities. This is a key point when it comes to apportioning blame for the losses suffered by shareholders today. Indeed, the prophecy of a disruption of food distribution by Amazon envisaged by Muddy Waters in its 2015 report has by no means come true. On the other hand, the attacks have certainly deprived Casino of a strategic capacity for attention and vigilance to manage the succession of COVID, Ukraine, commodity price inflation and rising interest rates crises. These are all considerable challenges and "strategic issues" that the 2015 Muddy Waters report naturally could not have envisaged.
Finally, on an institutional level, unless we accept the idea that herds should be progressively decimated in an almost "natural" way by the self-appointed vigilantes that are activist funds operating short (in every sense of the word), the Casino case should create the opportunity for a different viewpoint than the one that consists of watching buyers fight around a corpse whose managers are now caught in the pincers between their country's judicial and administrative orders. In fact, the Casino case already seems to be a warning of the transformation of capitalism itself. In other words, a European-style system of governance that is truly capable of standing up to the attacks will not be able to stop at the mere question of principles, such as those formulated in the PACTE law. Research in the spirit of Gendron, Paugam & Stolowy (2020), which shows how activist funds use staging and rhetoric to ensure the performativity of their predictions, is proving to be of major use here.
In conclusion, contrary to the media consensus, there is a scientific urgency to help French and European companies arm themselves to better understand the motivations behind the attacks of the modern-day Gordon Gekko, an issue that was widely studied before the primacy of shareholder governance disqualified it from the research agenda. This requires corporate governance that is also conceived as the art of self-defence.
In this new context, since capitalism is increasingly taking on the airs of the Corrida, then what we need to meditate on is no longer just the Wall Street soundtrack ("Fly me to the moon" by Frank Sinatra) but also this excellent song by Francis Cabrel: "La Corrida". Now that all it takes is a report published on the Internet by an overdrawn activist fund to turn a company into a bull in a Corrida show.
(By Francis Cabrel)
Since the time i'm awaiting in that dark room
I hear cheers and songs At the end of that corridor;
Someone touched the lock
And I dived into the light of day
I saw the brass bands, the fences And the people
Around In the first moments I believed I only had to defend myself
But this place is a dead-end I start to understand
They locked it behind me
They were afraid I would step back
I will end up getting it This ridiculous ballerina ...
Is that world serious?
Andalusia I remember The pastures borded of cactuses
I'm not going to shake in front of That puppet, that lightweight!
I'm going to catch him, he and his hat
Make him spin like a sun
Tonight the wife of the torero Will sleep on both ears1
Is that world serious?
I pursued all those ghosts
Almost touched their ballet slippers
They'd hit hard in my neck For me to give in
Where are they coming from those acrobats
With their costumes made of paper?
I never learned to fight Against dolls
To feel the sand under my head It's crazy how good it feels
I prayed for all this to stop Andalusia I remember
I hear them laugh like I gasp I see them dance like I succumb
I did not know one could have so much Fun around a tomb
Is that world serious?
Is that world serious?
Yes, yes man, man
We have to dance once again
And we'll kill others Other lives,
And kill others
Come on, come on Come on, come to dance
(Translation : www.deepl.com)