January 24, 2011
1/24/2011—I’ve just returned from the annual meeting of the Labor and Employment Relations Association (LERA) in Denver, where a main topic for the Conference was “financialization” of the economy – a term that was barely discussed even a few years ago, and one neither Microsoft Word not Dictionary.com yet recognizes. The research presented focused on enhancing our understanding of the impact that the growth of the financial sector and the concentration of power among Wall St. firms is having on how US companies are run, and the implications of this for US workers.
While this power waned briefly as a result of the global financial crisis that these institutions caused through excessive risk-taking, it has come back quickly with the government bailout and subsequent economic recovery. The recovery is generating large profits and bonuses for financial institutions, but few jobs for average Americans. This exacerbates a disturbing long-term trend toward greater inequality – the latest data indicates that over the last three decades the top 1% of Americans received 58% of all of the growth in national income, garnering nearly two-thirds (65%) of the growth during George W. Bush’s presidency. And it is this group that just got the greatest benefit from the tax cut compromise that President Obama reached with the Republicans in Congress.
One key factor that has been contributing to growing inequality is the explosion in top executive pay. Prof. Bill Lazonick of U Mass, Lowell shared disturbing findings from his book, Sustainable Prosperity in the New Economy?, describing how CEOs have been maximizing the value of their stock options and insuring they meet bonus targets linked to stock price through the use of stock buybacks. He showed (see Figure 1), that many of the largest U.S. public corporations are disinvesting from the U.S. economy, moving investment offshore and spending more money buying back their stock than they are on R&D and new capital investment to fuel new innovation and job creation.
The debate on the impact of private equity on US workers was more balanced. Professors Rose Batt and Eileen Appelbaum revealed the dark side of private equity. Their preliminary analysis of department store chain buyouts in the US and Europe, found private equity firms pursued similar strategies: buying firms with large amounts of debt, selling off the real estate for quick profit and then leasing the stores back to the chains, which then led to unsustainable losses. Figure 2 shows the depressing results.
Steve Sleigh, a partner at Yucaipa, a private equity firm, and former senior leader at the machinists union, made the case that private equity is itself neutral: it can be used, as appears to have often been the case, in ways that harm workers – cutting employees, raiding pension plans, and incurring high debt levels that threaten the viability of firms during deep recessions. Yucaipa, however, adopts a very different strategy: it seeks firms that are under-valued because of bad management, removes them and then strikes a deal with the union to introduce high-performance working practices, offering in return to share a percentage of any gains that this produces with the employees. This strategy, while rare among private equity firms, has produced consistently high returns for the last several decades.
Steve made the case that the most effective way to shift more private equity companies to behave like Yucaipa would be for the fund managers who invest the more than a trillion dollars in worker pension funds to place their money only in private equity firms that commit to following such worker friendly policies. This could broaden the definition of what it means to do socially responsible investing, that has proved influential in encouraging corporations to adopt more environmentally friendly policies, to avoid child labor, to adopt more transparent corporate governance, and to divest from South Africa under Apartheid.
There was one area, however, where convincing evidence was presented of financial governance arrangements that can benefit workers: broad-based employee ownership. I pinch hit for Doug Kruse, Joseph Blasi and Richard Freeman, sharing the results of their book, Shared Capitalism at Work, which synthesizes results from more than 100 studies, along with their own original research from a nationally representative sample of workers, to show that when companies combine employee empowerment and skill development with broad-based ownership and/or profit-sharing that it produces superior long-term financial returns and substantially increases the wealth of workers. And Ed Carberry and his colleagues shared the results from the forthcoming LERA 2011 Research Volume, which features the work a number of Rutgers fellows, providing further evidence from many different disciplines of the benefits when employees retain substantial ownership of the enterprise.
A new research project by another Rutgers fellow, Erik Olsen, however, suggests that while giving workers some stake in their enterprise’s success is common, there are still relatively few majority-owned worker enterprises in the US. Worker cooperatives, like the highly successful Mondragon that is expanding globally from its Basque roots, are rare in the US, with under 250 enterprises identified accounting for only 2,380 employees in 2009. Olsen thus far has been able to identify another roughly 1250 majority employee-owned companies, through ESOPs or other means, accounting for just under a million employees.
Combining the conclusions of some of these different studies suggests a possible policy approach for going forward that might help to address the long-term growth in US income inequality: creating tax penalties on companies that do stock buy backs unless the shares that are repurchased are shared broadly with employees.