An examination by The Wall Street Journal (subscription required) finds that a range of companies have been quietly converting their pension plans into resources to finance their executives’ retirement benefits and pay. By moving some of the obligations for supplemental pensions into rank-and-file pension plans, companies capture tax breaks intended for pensions of regular workers and use them to pay for executives’ supplemental benefits and compensation. Companies using this tactic have included Intel Corp. and CenturyTel Inc. In addition to being a dubious use of tax law, the practice risks harming regular workers: It can drain assets from pension plans and make them more likely to fail. Ultimately, taxpayers are helping finance executive compensations while companies grow richer. With the current bear market in stocks weakening many pension plans, the maneuver could put more plans in jeopardy.
The impact of private equity on employment arouses considerable controversy. Labor groups concerned about the fortunes of workers employed at buyout firms contend private equity firms destroy jobs. By contrast private equity associations and other groups have released a number of recent studies that claim positive effects of private equity on employment following the takeover. In this paper we conduct a comprehensive examination of the impact of private equity buyouts on the employment outcomes of firms that are taken over by these investment firms. We focus the analysis on two different dimensions. First, what are the employment outcomes of workers employed at establishments existing at the time of the buyout? Second, what is growth performance of the firm following the buyout? We conduct the analysis using a unique linked dataset covering the universe of US firms and information regarding US buyout operations between 1980 and 2005. We find targeted establishments exhibit net employment contraction, higher job destruction and establishment exit relative to controls. However, targeted firms exhibit higher greenfield entry and more acquisition and divestiture.
From the abstract:
The World Bank’s Doing Business report has become one of the most influential, yet the most controversial instruments which affect labour law reforms around the world. This study discusses the controversy between the World Bank’s and the International Labour Organization’s approaches towards flexibility of employment regulation with special emphasis on fixed-term contracts.
The ILO employment regulation targets are balanced to harmonize the interests of all three stakeholders – employers, employees and governments, while the Doing Business targets clearly favour the interests of employers. What is more important, the Doing Business targets on fixed-term contracts and dismissals seem to contradict the international labour standards as reflected in the ILO conventions and recommendations.
Although both organizations ultimately have the same goal – to help economies and people prosper, their visions of the proper mixture of flexibility and security are clearly different. It is hardly possible to expect that Doing Business reports would lobby for the interests of employees because this will not necessarily stimulate more favourable businesses environments. However, as this study suggests, there are ways to reduce tensions between these two visions.
From the abstract:
Business leaders, government officials, and academics are focusing considerable attention on the concept of “corporate social responsibility” (CSR), particularly in the realm of environmental protection. Beyond complete compliance with environmental regulations, do firms have additional moral or social responsibilities to commit resources to environmental protection? How should we think about the notion of firms sacrificing profits in the social interest? May they do so within the scope of their fiduciary responsibilities to their shareholders? Can they do so on a sustainable basis, or will the forces of a competitive marketplace render such efforts and their impacts transient at best? Do firms, in fact, frequently or at least sometimes behave this way, reducing their earnings by voluntarily engaging in environmental stewardship? And finally, should firms carry out such profit-sacrificing activities (i.e., is this an efficient use of social resources)? We address these questions through the lens of economics, including insights from legal analysis and business scholarship.
Former U.S. Attorney General Richard Thornburgh examines today’s corporate culture and finds that, while it is replete with good corporate citizens, we’ve seen a culture of greed and failure to observe basic fiduciary duties in the first part of this decade. Thornburgh argues that the Sarbanes-Oxley regulations do not go far enough in addressing wrongdoing because the problem exceeds our legislative grasp. “What we’re really left with,” he says, “is a failure of corporate management.” Thornburgh says it is time for a system of corporate best practices for good governance.
The business of resolving credit-card disputes is booming. But critics say the dominant firm favors creditors that are trying to collect from unsophisticated debtors.
What if a judge solicited cases from big corporations by offering them a business-friendly venue in which to pursue consumers who are behind on their bills? What if the judge tried to make this pitch more appealing by teaming up with the corporations’ outside lawyers? And what if the same corporations helped pay the judge’s salary?
It would, of course, amount to a conflict of interest and cast doubt on the fairness of proceedings before the judge.
Yet that’s essentially how one of the country’s largest private arbitration firms operates. The National Arbitration Forum (NAF), a for-profit company based in Minneapolis, specializes in resolving claims by banks, credit-card companies, and major retailers that contend consumers owe them money. Often without knowing it, individuals agree in the fine print of their credit-card applications to arbitrate any disputes over bills rather than have the cases go to court. What consumers also don’t know is that NAF, which dominates credit-card arbitration, operates a system in which it is exceedingly difficult for individuals to prevail.
The collapse of the credit markets over the last year has hit more than just the homebuilding and mortgage sectors of the economy. As interest rates increased, private equity, or “PE,” an important new form of financial capital, was also rocked on its heels. … Trade unions have an ambivalent attitude toward the rise of private equity. On the one hand, many American labor unions have representatives on the boards of the same pension funds that are largely responsible for the steady flow of capital into PE funds, and, of course, that means some union members have benefited handsomely from the funds’ above-average returns. On the other hand, over the last decade, organized labor has developed a relatively sophisticated program of investor activism through the Office of Investment at the AFL-CIO, the Capital Strategies Group of Change to Win, and similar groups at key affiliates. This effort relies on labor’s pension-fund investments in public companies to raise concerns about corporate social responsibility, excessive CEO pay, workers’ rights, and internal corporate governance. But labor does not seem to have made up its mind whether or not PE funds raise or lower corporate standards of behavior.
The Modern Corporation and Private Property
Adolph Berle and Gardiner Means
Private Equity’s Broken Pension Promises: Private Equity Companies’ Links
To Insolvent Pension Funds
GMB, a Central Executive Council Special Report, 2007
A Workers’ Guide to Private Equity
International Union of Food, Agricultural, Hotel, Restaurant, Catering, Tobacco and Allied Workers Associations
A recent report by the AFL-CIO Office of Investment reveals directors at major corporations often have serious conflicts of interest, influencing the cost of health care. While companies would be expected to cut benefit costs through policies such as including generic drugs as part of prescription coverage, executives at big health insurance and pharmaceutical companies who are also board members at some of the country’s largest non-health care related companies may affect plans. Many have much greater financial stakes in the health firms, suggesting outside motives that may influence benefits policies of these other businesses. The report shows that 21 Fortune 500 companies with substantial health costs for retirees, employees and dependents have significant conflicts of interest, with leaders also executives or directors at a major health or pharmaceutical company. In one case, the prescription drug Nexium was actively protected and maintained as part of a health plan by General Motors, while other corporations substituted less expensive generics. Percy Barnevik, retired CEO of AstraZeneca, was a board member and chair of GM’s Policy Committee at the time.
Source: The International Union of Food, Agricultural, Hotel, Restaurant, Catering, Tobacco and Allied Workers’ Associations (IUF), May 2007
The IUF first drew the attention of the international trade union movement to the growing scale of private equity buyouts in the context of the “financialization” of corporate investment to deliver maximum short term financial returns to shareowners. The secretariat has briefed UK and European parliamentarians on the threat of private equity, established a unique website on private equity in the IUF and other sectors and assisted affiliates in responding to private equity buyouts.
The IUF secretariat has now published a A Workers’ Guide to Private Equity, a 36 page A5 brochure, aimed at IUF affiliates and trade unions and their members around the world.
Available in English, and shortly in French, German, Spanish and Swedish, the publication sets out in accessible language what private equity is, how it operates and the dangers it represents to workers and unions. It points to possible strategies in bargaining with the private equity funds who are becoming increasingly significant players as owners and employers in many IUF sectors. It explains how a specific political environment (deregulation) has made it possible for the funds to expand globally, and how political action can contain the funds.
Source: Stephen R. Sleigh, Perspectives on Work, Summer 2006, Volume 10, no. 1
The theme of LERA’s Annual Meeting in 2006 was “Labor and Capital in the Twenty-First Century: Human, Social, and Financial Contributions to Creating Wealth.” In a wide variety of settings— including formal sessions and informal discussions in the hallways—lively debate was the order of the day….
… Despite the positive role large unionized companies play in American society, a fundamental conflict exists between the short-term financial focus of many in the investment and management communities and the longer-term focus of others, including employees who value job security and long-term investors who seek consistent growth. Conflicts over corporate control revolve around this tension. From a strategic union perspective, developing an action plan around making large companies more accountable to employees and other stakeholders, including long-term shareholders, must involve a number of new approaches.
Given the track record of labor’s success in trying new approaches, we have our work cut out for us. Still, unions represent employees in nearly 80 percent of the largest publicly traded companies in the United States. Perhaps more significant is the fact that nearly half the assets in American equity markets are held by the pension funds and savings plans of organized workers and union-represented employers. Taken together, unions have the potential to exert considerable leverage on capital markets.