May 15, 2007
The House Financial Services Committee is holding a hearing tomorrow morning (10 am Eastern) on "Private Equity's Effects on Workers and Firms." You can view the live webcast here. Speakers include:
- Andy Stern, President, Service Employees International Union
- Douglas Lowenstein, President, Private Equity Council
- Robert H. Frank, Professor, Johnson Graduate School of Management, Cornell University
- Jon L. Luther, Chairman and CEO, Dunkin’ Brands Inc.
On the agenda:
1. Given the typically high degrees of leverage in many of these transactions are the restructured firms able to make the investments in technology, capital equipment, and research essential to long run productivity growth?
2. Do workers – either through layoffs and/or pay and benefit cuts – find themselves disadvantaged through financial – or other – restructuring?
3. What are the implications of the very high degrees of profitability in many of these transactions on the growth of income inequality?
I'm not sure about question 1 (long term R&D); my best guess is that managerial slack in public companies is a bigger problem for the economy than inadequate R&D funding.
As for Question 2 - many workers are worse off, especially in the short run. I suspect the way to handle this is some sort of private or public wage insurance rather than discouraging buyouts.
As for Question 3 - I don't think income inequality is necessarily bad in and of itself. But if there are distributional concerns, I'd rather see them dealt with through the tax system than through corporate or banking law. Corporate law has never struck me as a good method of redistributing income.
Should be an interesting hearing.
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1. Posted by Matt Bodie on May 16, 2007 @ 9:08 | Permalink
I have to pipe up whenever anyone says: "Corporate law has never struck me as a good method of redistributing income." It's not a method of redistributing income -- it's a method of distributing income. You may think that the current system of stock ownership is the best available alternative, but don't treat that system as a given and then treat any change to the system as a "regulation" layered on top of everything else.
Having private equity provide market competition to management makes a lot of sense. The problem is that the current shareholders get the payoff when the company changes hands. Management can also get paid off by threatening defensive board action -- that's why golden parachutes have to be negotiated. If there's a union and it has some leverage, as discussed in the WSJ steelworker article earlier this week, employees can also negotiate for some share of the pie and/or control over the direction of the company. Without a union or board representation, however, employees have no way of getting a share of the surplus and have no say in what happens next.
Employee ownership will not be the answer for most companies. But we need to find ways for employees to have more participation in control and more of an opportunity to get some of the surplus. I don't think those three questions for the hearing really get to the heart of the issue. Houw about: "(4) What are ways for employees to have more of a voice and more of a share in the surplus for these transactions?"
