June 27, 2006
The Merits of Employee Buyouts
Posted by Lisa Fairfax

         The Washington Post reports that about 47,000 employees have accepted buyout packages from General Motors and its supplier Delphi Corp, which makes it the largest of such buyout in corporate history.  This kind of buyout is apparently on the rise.  Ford has instituted a buyout program in which it expects 11,000 workers to participate.  Even the federal government has gotten into the act.  The GAO reports that since 2002 when Congress authorized such buyouts, the number of federal agencies offering buyouts to their employees has nearly doubled.

           On the surface employee buyout programs seem like a win-win situation.  Employees get to control their own fate, while the corporation gets to restructure and cut costs in a manner that appears—as some have argued—“compassionate” and “humane.” 

           But then I am reminded of something Judge Easterbrook said of another GM program in McNab v. General Motors, 162 F.3d 959, 960 (7th Cir. 1998): "Like many other firms, General Motors Corporation uses early-retirement programs to reduce its workforce without resorting to involuntary separation. One problem with early-retirement systems, however, is that the best employees may leap at the opportunity, knowing that they can add income from other jobs to their retirement packages; the firm wants to keep these superior employees while shedding those who are not up to snuff, but the sub-par workers are less willing to go, because they may value sinecures and do not expect to find comparable employment elsewhere. If the firm augments the early-retirement incentive to make it attractive to employees who lack prospects of finding other jobs, then the best employees have even more reason to take the offer. To overcome this problem of adverse selection, firms may limit early-retirement programs to employees chosen by management. Managers offer the package to the weakest members of the staff, simultaneously cutting their unit's budget and improving the average quality of its workers. But good workers may take exclusion poorly; why, they may ask, should rewards vary inversely with quality? Resentment may lead to litigation."

       So the win-win idea may be taking it a bit too far.  As Easterbrook suggests, these programs appear to target older workers who lose benefits they may not be able to recover in the market.  Yet it seems like a better alternative than lay-offs.  Thus, it still feels like a net positive for both groups.

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June 06, 2006
The Corporate Social Contract
Posted by Fred Tung

As more and more old-line companies--Generous Motors, Ford, Delta--struggle to retool around their legacy costs, the Kaiser Family Foundation has recently released a survey report detailing some of the costs of this retooling.  The report describes the effect of two major steel company bankruptcies--LTV and Bethlehem Steel—on health coverage for retirees and their dependents.  The two bankruptcies left approximately 200,000 retirees and dependents without health coverage between 2002 and 2003. While most respondents (about 74%) were able to find health coverage after the loss of their retiree benefits, the loss of benefits caused significant disruption to their lives and retirement plans. For example, about one-half of pre-65 retiree respondents reported that they or a spouse returned to work or delayed retirement as a result. Twenty-five percent of pre-65 respondents reported that they cashed in “a lot” of their savings or assets to cover health care or insurance premium costs. Also 49% of pre-65 respondents reported postponing or going without needed physician care, and 29% reported postponing or going without need hospital care, because of cost concerns.

The old-line corporate social contract is probably no longer sustainable except in a handful of less-than-competitive industries, and companies seem to be transitioning to more defined-contribution type arrangements.  Some folks are getting caught in the transition.

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May 12, 2006
Sox and Offshore Whistleblowing
Posted by Fred Tung

Tn_whistle From its inception, the (non) application of SOX to foreign issuers has been controversial.  Now the whistleblower protections of SOX have come into focus as another avenue for crossborder tensions.  The ABA Journal has a nice summary of current issues.  Europe, it turns out, is much less enamored of whistleblowers than we are in the States.  While "Americans like to elevate whistle-blowers to near folk-here status, from Daniel Ellsberg . . . to Sherron Watkins," in Europe, whistleblowers are often thought of as informants, as rats.  in Germany, "the term  term most likely conjures up memories of the Gestapo . . . .  In France, the term evokes images of the Vichy regime’s collaboration with the Nazis and of neighbors ratting out one another." 

No wonder that the EU has had some trouble coming to terms with the application of the new Sox whistleblower provisions to its issuers crosslisted in the US--especially the requirement that issuers establish procedures to allow employees to file internal whistleblowing complaints anonymously.  Europeans are apparently more concerned about the privacy and reputation of the accused.  "[W]hile the Americans are most concerned with protecting whistle-blowers to ensure market integrity, Europeans place a higher premium on guarding personal reputations of targets of complaints, which sometimes arise out of spite, revenge or other suspect motives."

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January 05, 2006
While at the AALS Conference, I Have Not Witnessed Any of This
Posted by Christine Hurt

But, I probably wouldn't have been invited.  The WSJ reports today that four Morgan Stanley has fired four employees for taking clients to an "adult entertainment" venue during a business trip.  Although in years past this may have been business as usual, after MS had to pony up big bucks in 2004 in a sex discrimination case brought by a female trader (which Scott Moss, who worked on the case, can tell you about personally at any time!), MS now has rules forbidding such exclusionary outings on business trips. 

Biltmore When I started practicing law in 1993 in the South, stories of these types of jaunts among attorneys and attorneys/clients were widespread.  (If you've ever driven on the Loop in Houston and looked at the billboards, you know how widespread this type of activity is!)  But surely we've come a long way since then.  Notably, the MS guys were at the Arizona Biltmore.  If you can't think of anything else to do at one of the most beautiful places in the world than go to a sleazy strip club, there's something wrong with you.

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December 15, 2005
GM's "Job Bank"
Posted by Gordon Smith

The W$J editorial page excoriates GM for its "job bank":

Uaw1_2[The] "jobs bank" ... is the company's euphemism for a post-employment limbo in which GM pays laid off members of the United Auto Workers not to work. If you want to know why GM's costs are too high for the number of cars it sells, here's one explanation.

GM doesn't like to talk about the "jobs bank," to the point that it won't disclose how many idled workers are in the bank or even how much it costs the company. However, the Detroit Free Press has dug around and reported that the "bank" holds some 5,000-6,000 employees, at an annual cost of as much as $800 million a year. And that's just the beginning of the damage it does.

The jobs bank was created in 1984 at a time when it became fashionable to worry that automation would cause robots to replace workers on factory floors. So in exchange for the right to introduce productivity improvements in factories, GM, Ford and Chrysler all consented to jobs banks. The idea was that in exchange for educating themselves, doing community service or in some cases just sitting around a factory, workers would continue to collect pay and benefits until the automaker could find another job for them.

This is one of those stories that I read and think, there must be more to this. Or maybe not. The W$J tells the story of a worker who is scheduled to retire in about four years, having spent 10 of his 30 years at GM "in the bank." As I have said here repeatedly, GM's CEO Rick Wagoner took over a company with some serious structural obstacles to reform, and this looks like one of those. The job bank is part of the UAW agreement, which will not expire until 2007.

And you thought academic tenure was cushy!

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November 29, 2005
New Techniques & New Results on the Labor Front
Posted by Matt Bodie

There's a very interesting article in the New York Times about a drive by the Service Employees International Union to organize janitorial employees at five big Houston companies.  The article reports that the union is claiming victory in their drive to organize over 5,000 employees.  In many ways, the union is using a familiar tactic: organizing all the employers in a particular community and/or industry, thus ensuring that cheaper competitors won't undercut the unionized firms.  SEIU has used this strategy in its "Justice for Janitors" campaign in other cities.  As a chart at this SEIU website makes clear, janitors in New York, Los Angeles, and Chicago are represented by SEIU and make considerably more than their Houston counterparts.

However, there is a lot about the Houston campaign that represents a new approach to organizing.  The union and the employers have committed to a card-check neutrality agreement.  Essentially, instead of exercising their rights to tell employees why not to join the union, the employers here have agreed to remain neutral.  And instead of insisting on a secret ballot election, the employers will accept a union victory if a majority of employees sign cards asking for union representation.

Although still uncommon, card check neutrality agreements are becoming a much more crucial tactic in union organizing campaigns.  Such agreements give unions a much better opportunity to make their case and ensure that employees are not coerced by employer threats.  The question with these agreements always is: why would employers agree to these conditions?  The details about this agreement -- or lack thereof -- present an interesting story.

We don't really know why the employers went along with the agreement.  It includes a confidentiality provision, so the parties aren't talking on the record.  According to other union leaders, the Houston employers were pressured by building owners and pension funds into signing the agreement; in addition, sympathy strikes in other cities played a role.  Government officials, such as the mayor and several congressmen, as well as members of the clergy also pressured the companies to remain neutral.  According to the NYT, the Catholic archbishop told janitors at a union rally that "God was unhappy that they earned so little and did not have health coverage."

The Times report may be premature; this Houston Chronicle article reports that there has been no determination that the union has gotten the necessary majority.  But a union victory wouldn't be a surprise.  The Chronicle quotes Bill Bux, head of the labor and employment law section for Locke Liddell & Sapp in Houston, who represents several building owners that hire cleaning companies.  "I thought they'd have the cards signed within 30 to 60 days.  How hard can it be to get people to sign a card with all the cooperation they're getting?"

Is this organizing drive an isolated story?  We don't know exactly how the union persuaded these employers to sign up.  But two factors likely predominated.  First, the agreement encompassed the five big players in the market, thus removing labor costs from competition.  While unions can no longer do this at domestic manufacturing firms, there may be some services that cannot be farmed out to foreign workers.  Janitorial work is one example.  Second, community pressure seems to have played a significant role here.  Unions are likely to get more community support when they represent poorer workers, such as janitors or migrant laborers.  That may mean these tactics are not available for unions looking to represent middle-class employees.

In this article Jim Brudney persuasively argues why card-check neutrality agreements should be the wave of the future.  But I've always wondered why employers would ever agree to them.  Although the parties aren't talking, I hope further details emerge so we can understand exactly what is happening in Houston.

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September 22, 2005
Corporate Incongruity
Posted by Gordon Smith

This was one of the squibs that greeted me on today's W$J:

Sony will cut 10,000 jobs, or more than 6% of its global work force, and reduce costs by $1.8 billion by early 2008, in an effort to bolster its ailing electronics operations.

I get the concept, but does it strike anyone else as incongruous? Cut = Bolster?

In other unemployment news ...

  • "Delta plans to slash up to 9,000 jobs and cut employee pay as the airline tries to achieve an additional $3 billion in annual savings under bankruptcy protection."
  • "Initial jobless claims rose to the highest level in two years last week, as workers continued to file for unemployment compensation in the wake of Hurricane Katrina."

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October 06, 2004
Steve Barley on Gurus, Hired Guns, and Warm Bodies
Posted by Gordon Smith

Yesterday Steve Barley of Stanford spoke to our group at the Initiative for Studies in Technology Entrepreneurship (INSITE). Steve has just published a book (with Gideon Kunda) entitled Gurus, Hired Guns, and Warm Bodies: Itinerant Experts in a Knowledge Economy. This is an ethnography of highly skilled contract workers in Silicon Valley. The purpose of the book is to provide a rich description of these contingent workers, examining their motivations for leaving the world of permanent employment (they are, after all, almost all contract workers by choice) and the motivations of employers for hiring them (as you might expect, the bottom line is the bottom line: it's all about saving money). The talk offered an enticing glimpse at employment practices in modern corporations, but I was struck by the superficial acknowledgement of law in this account. Of course, many of the employment practices that Steve described are driven at least partly by law -- or perceptions about law on the part of human resource managers. My comments are not intended as criticisms of the work -- the authors are talented and respected in their field -- but rather as observations about the value of interdisciplinary work. Indeed, Steve expressed (without prompting from me) an interest in learning more law, which he said was "underappreciated" in his field. So, if you are a management scholar, take a lesson: find a law professor who seems open to interdisciplinary work and make friends.

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March 29, 2004
Minimum Wage
Posted by Gordon Smith

Madison is in the middle of an active debate about the minimum wage. The city council has been debating a proposal to increase the minimum wage in Madison from $5.15 per hour to $7.75 per hour. The local newspapers are involved. See here and here. This Saturday, the Law School leaps into the fray with a program entitled "DO HIGHER WAGES EQUAL UMEMPLOYMENT? The Living Wage Debate: Just a Theory or a Growing Reality."

The positions are familiar: proponents argue that minimum wage employees need to earn a living wage, while opponents contend that employers will reduce hours or fire employees to shave excess labor costs. An additional wrinkle here is that Wisconsin Governor Jim Doyle is advocating a statewide minimum wage (though he has rebuffed the legislature's attempt to constrain municipalities).

As you might expect, the facts about the effects of a minimum wage hike are less clear than all of the participants in this debate would have us believe. This is not a particular area of expertise for me, so I will tread gently. A recent study of data from Brazil observes wage compression in the wake of a national minimum wage. In addition, the study finds that a minimum wage increase "does not always have a significant effect on employment and it is not always negative." Both the compression effect and the employment effect seem generalizable beyond Brazil. But do they translate to localized minimum wages?

One thing that seems obvious to me -- and is part of the motivation for Governor Doyle's proposal for a statewide minimum wage -- is that Madison will place itself at a competitive disadvantage vis-à-vis surrounding communities if it raises the minimum wage. Several communities, including my home town of Middleton, are well situated to attract businesses that are not captive to Madison, including restaurants. We will welcome them with open arms.

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November 23, 2003
The Truth About Profits
Posted by Gordon Smith

Rob the BusinessPundit has discovered an eternal truth: "the profits belong to those who take the risk, not those who do the work." He is starting a new company, and he argues that his employees aren't taking a risk: "If we can't make it, they will simply move on to another job. They won't owe a bank huge sums of money, they won't have lost tens of thousands of dollars of their own hard-earned cash. So from this perspective, who should the profits go to if there are any?" Of course, this is overly simplistic in that employees are taking a risk, too, when they join a startup firm. Moreover, what is stopping Rob from simply moving to another firm if this one fails? Nothing, really, but that isn't what concerns him. What concerns him is the burden of ownership. In examining this burden a little closer, we gain more insights about how profits are allocated.

Taking a cue from "Why Not?", let's try flipping this. Instead of asking who is entitled to the profits, let's ask who is most likely to maximize profits? (After all, from a societal standpoint, maximizing the residual claim maximizes value creation, and we generally like value creation.) On the one hand, anyone who has a claim to the profits will want to maximize them. On the other hand, the only person who has a chance of success is the person who controls the firm. Here is a kernel of insight: profits attach to residual control.

So, sign me up for some residual control!

Well, maybe I failed to mention that people can exercise residual control only by "purchasing" the right (not necessarily from another person, but by exposing oneself to substantial personal loss). This is where the notion of risk comes into the picture. If control were cheap, everyone would want it (which, of course, would cause the price rise ... so that was a silly game, wasn't it?). Residual control is expensive relative to other forms of participation in the firm.

Requiring entrepreneurs to take this step of puchasing residual control acts as a defense against adverse selection: people who know that they have limited competence would not be willing to purchase residual control because the costs of failure are too high.

Viewed this way, risk is a natural consequence of the need to link profits to control. It becomes effect rather than cause.

UPDATE: I wrote this last night (early this morning?) and failed to mention that I am not attempting to tell the story from the entrepreneur's point of view. That story would go something like this:

Entrepreneur discovers an opportunity that she wants to exploit and forms a firm to do just that. The firm needs employees, suppliers, investors, etc. As they divvy up the claims against the firm, the entrepreneur sells the fixed claims first. This is partly because the entrepreneur wants to retain the residual claim (because it has the most upside) and partly because the other participants generally do not want the residual claim (can you imagine an employee agreeing to pay the owner first, then taking whatever is left over?). This leaves the entrepreneur in control and holding the residual claim, which is the riskiest claim. Make sense?

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October 16, 2003
The Paranoid Among Us
Posted by Gordon Smith

Earlier today I had a long conversation with one of my students, a scientist who had participated in the founding of Madison's most prominent biotechnology company. After working as a bench scientist for many years, she became an entrepreneur in the early 1990s, and now she is studying to become a lawyer. She had some interesting thoughts about employees in a technology startup.

In a word: paranoia. She now works as a consultant for startup companies and claims to see the symptoms in (almost) every firm. When the firm is formed, the founder(s) and the early venture investors claim the largest stakes. They reserve smaller pieces of the pie for future employees. Those employees -- often extremely talented scientists -- are introduced to a world that is foreign to them. Their subsequent interactions with business people, particularly venture capitalists, are confusing and alienating. Despite their efforts, their share of the company recedes with each round of financing. Even he language of their claim against the company -- "common" stock, as contrasted with the "preferred" stock held by venture capitalists -- reinforces their sense of vulnerability.

The most interesting part of the story is that the employees' sense of paranoia manifests itself in myriad ways, sowing contention throughout the firm. While law and finance professors stand aloof, assuming that equity compensation will work its magic, the firm rots from within. (OK, I took a bit of dramatic license on that last part, but you get the idea.)

According to my student, the solution here is honest communication. The problem resides in the distrust that grows from lack of understanding. The scientist-employee needs some training in the ways of finance, law, and business. Interesting thoughts.

A question for my readers: does this resonate?

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