‘Investment funds, corporate governance, and labour outcomes: A European perspective’

1. ‘Investment funds, corporate governance, and labour outcomes: A European perspective’ Howard Gospel Geneva, June 2011

2. Work for EC and Eurofoundationin light of general concern and Directive Three types of funds – private equity (PE), hedge funds (HF), and sovereign wealth funds (SWF) Restructuring = Employment relationsWork relations / organisationIndustrial relations Personal originsCorporate governanceFinancial markets Outline GeneralThree casesGeneral conclusions Introduction

3. Finance + ownership + governance will matter These ‘extreme’ forms will matter in particular But impact on labour likely to vary between type of fund. PE most interventionist, followed by HF, then SWF Predict that impact will be moderated by strategy of fund e.g. ‘buy & flip’ v. ‘buy and build’ Predict that impact will be moderated by (a) capital regulation and (b) labour regulation Starting position

4. Hypothesised linkages Financial marketregulation context The firm Labouroutcomes Investment funds Labour marketregulation

5. Examples 1. PE KKR, Carlyle, PG, Goldman CVC, Permira, Apax 2. HF Bridgewater, JP Morgan, Paulson, Soros 3. SWF World – Saudi, Gulf States, China, Singapore, Norway, Russia

6. Investors (institutions, banks, foundations, private) subscribe to closed fund for defined period Capital pool used to acquire companies – family cash-out, divestments from large companies, public to private transactions – ‘buy-ins’ etc. Acquisition typically financed by debt, secured against assets/income stream of target company Model assisted by cheap credit General partners of PE fund charge investors a management fee + take 20 per cent of annual returns (‘carried interest’) of the fund. The PE model 1

7. Targets include under-performing firms, but with high cash flow and good growth prospects. Often firms in mature and traditional industries. Aim is to restructure / develop to generate greater returns. Debt burden imposes discipline on management of target firm. Limits ‘free cash flow’ As debt repaid, value of the firm increases. Aim is to exit within five years usually either by IPO or trade sale. The PE model 2

8. Do employees get informed and consulted at time of buy-in? Initial restructuring of target companies may involve asset sales and closures. Impact on employment? New managers installed. Breach of ‘implicit contracts’ with labour? Managers tightly controlled by new owners and incentivised by bonus / options contracts. Reduction of wages and benefits? Reduction of employee voice? The PE model 3: impact on labour?

9. The PE model

10. Like PE, privately organised investment vehicles which operate outside many national securities regulations. Limited disclosure. Variety of investment strategies, including currency and commodities. Focus here is equity. Strategies e.g. ‘directional; / ‘short selling’ ‘events’, ‘activist’. Activist HFs focus on strategic direction of target company. Pressure to increase returns to investors thro e.g. increase dividends and share buybacks; re-orientate business strategy, divest marginal or poor-performing activities; change management Usually take a minority stake, unlike PEHold for shorter time period – 5 to 10 months Hunt in ‘pack’, sometimes with an ‘alpha wolf’ The HF model 1

11. Involvement in takeover battles leads to increase price premium. May lead to strong pressures to reduce employment post-takeover. Diversion of cash-flow to investors limits resources available for employment, wages, benefits. Governance changes leads to strategy changes, potentially involving reductions in employment. But, expect that employment effects less strong than PE because interventions are not so ‘deep’ Except where bring about major change e.g. Kraft Cadbury The HF model 2: impact on labour?

12. The HF model: summary

13. Investment funds operated by governments or their agencies where ‘excess’ foreign reserves (Saudi, Gulf States, China Singapore, Russia, Norway). Take stakes, sometimes controlling, in target companies But, usually ‘softly, softly’ approach, in part because of political sensitivities Therefore traditionally tend to be passive investors, seeking few changes in target companies But, becoming increasingly involved in PE and HF, and taking larger stakes. Also, some out-right / long-term acquisitions The SWF model 1

14. Predict less impact on labour due to passive investment approach Predict that employment consequences will be less marked that PE and HF May ‘rescue’ company e.g. investment in US banks But maybe some pressure to restructure, which may have consequences for employment, voice Especially impact where out-right and long-term. The SWF model 2: impact on labour?

15. The SWF: summary

17. PE big in Spain; joint third in Europe; 0.3 million workers employed by PE-owned companies Permira – UK-based and one of largest European PE houses Acquired ailing DinoSol from troubled Ahold group in 2004. 11,000 employees Plan: to sell off stores where weak; buy stores in areas where strong; improve performance; float. DinoSol board works under Permira broad financial and strategic parameters DinoSol: the case of a UK PE fund in Spain 1

18. Sell-and-lease-back – frees up money for PermiraDividend paid to Permira‘Tight with money’ 60 stores, with 900 employees, sold to new owners.Fears of further disposals / sale of whole company But, because of new acquisitions and growth, no net fall in employment. Move from part-time to full-time. Introduced merit, performance, profit payTougher absenteeism policy DinoSol: the case of a UK PE fund in Spain 2

19. Has continued / increased investment in training ‘Employment Plan’ with two main unions fcompany-wide council relocation, transfers, redundancy monitored by joint committee peaceful industrial relations Trade union membership has grown Permira said not to be directly involved, but also has not opposed. Permira probably to stay longer than anticipated DinoSol: the case of a UK PE fund in Spain 3

21. HFs have been active in Germany and attracted considerable attention – ‘locusts’ Wyser-Pratte, NY-based, invests in under-valued companies, with high free float, good potential; Pursues ‘activist’ strategy viz. increase dividends, buy back shares, change top management, change strategy, sell-off parts e.g. Vodaphone, Rheinmettal ‘wake up and smell the napalm’ / ‘put fire under their butts’ KUKA, old-established, mechanical / electrical engineering company. 13,000 employees. KUKA: the case of a US HF in Germany 1

22. WP built up 9% stake 2003 onwardsActed as ‘alpha wolf’ Pushed company to sell parts employing 7,000 employees But, KUKA subject to board representation, works council, and high TU membership.Impacted on decision-making.But note also: TU largely accepted Few job losses. Transfers to other companies, mainly PE houses.Net loss? Net deterioration in pay / conditions? WP still invested? KUKA: the case of a US HF in Germany 2

24. UK has been a major centre of both PE and HF activity – as HQ and investment localeAlso major locale of SWF activity. DPW operates under DW holding company, under control of Dubai ruling family In 2005 acquired P&O, UK largest ports operator / logistics company. 22,000 employees worldwide. Paid 70% premium in a contested bidding battle, financed with existing funds + large new borrowings De-listed and HQ moved to Dubai(Subsequently 20% floated to Gulf state nationals) P&O: the case of a Dubai SWF in the UK 1

25. Labour left to local managers -- ‘You don’t see them or hear them; it’s almost as though they are not there’ Employees and their reps informed, but not consulted, over acquisitionTrade unions remain recognised; but not extended to any new areas.Some fear may favour works council in Europe. Small reduction in employment – but world crisis?UK-Spanish ferries closed – but might have anywayBigger disposal of ferries?Some fears about pensions – but P&O restructured earlier. Said to continue to invest in skills. Dubai debt crisis P&O: the case of a Dubai SWF in the UK 2

26. Representativeness? Broader project for Eurofoundation: 7 countries – UK, D, I, NL, SW, P, H24 case studies. Considerable heterogeneity in types PE: ‘buy and flip’ v. ‘buy and build’ HFs: short selling, events, activism (‘balance sheet’ v. ‘operational’) SWFs: ‘generalist’ v. ‘specialist’; ‘quiescent’ v. ‘activist’ Effect of PE > HF > SWF more PE and longer-term fewer HFs, minority; but can have major effect SWF minority / passive ownership; but can have major effect Conclusions 1

27. PE leads to initial job loss, some redundancy, some transferDifficult to conclude that longer term net negative.But note counterfactual.HFs and SWFs difficult to draw firm conclusions. I and H largest job losses. Does pay rise slower or faster in PE firms? Contradictory evidence, but faster in P and H. Move towards performance-based pay, especially for managers Conclusions 2: employment and wages

28. Some evidence for greater use of ‘high commitment’ work practices. Also for increased training. But in 4 countries (D, NL, P, H) evidence of greater use of part-time and temporary working. Also some evidence of higher work intensity (NL, P, H, and to less extent D and UK) Conclusions 3: work organisation

29. Acquisition stage: information and consultation only in NL and SW; mixed in D; absent in other countries Under fund ownership, no evidence that reduction in trade union voice or joint consultation. Evidence of conflict in Italy, and to lesser extent in UK, P, NL, and D. SWFs seem to have kept out of industrial relations Conclusions 4: industrial relations and employee voice

30. Financial market regulation - significant e.g. UK and later liberalisation in D, SW, H, I. Labour market regulation: no negative effect on growth weak regulation, strong funds UK, P strong regulation, strongish funds D, SW, NL weakish regulation, weak funds I But labour market regulation mediates outcomes SW, NL, D more information and consultation UK, H, P, I less information In recent crisis, PE and HF interventions down but now back e.g. defaults, pensions Do regulatory, institutional, and temporal factors matter?

31. Peak organisations argue that they improve liquidity and capital allocation, help restructuring, impose better management. This benefits employees. Employers’ organisations are positive towards PE and SWF, but less enthusiastic about HFs. Trade unions generally more critical of PE and HFs, but in SW and NL pretty neutral and in P and H favourable To date, social dialogue at national and EU level is lacking. Peak organisations and the social partners

32. Significant differences between and within funds in terms of strategies In terms of employment and restructuring, some turbulence in jobs, uncertain effect on pay levels, effect on pay systems. In terms of work organisation, little change. Working practices mainly remained unchanged, tho’ an emphasis on securing improvements in efficiency, in all cases. In terms of industrial relations, main picture = little change. But questions re information and consultation. General conclusions

33. Role of national regulation is mixed. Variations in labour regulation does not inhibit funds and fund-acquired companies from undertaking large-scale restructuring. However, national regulations affecting employee voice and worker representation affects the extent of information / consultation. Overall, evidence is supportive of the ‘nuanced’ view of funds: they are neither ‘angels nor demons’ in terms of the impacts on labour in their investee firms? General conclusions

34. ‘Investment funds, corporate governance, and labour outcomes: A European perspective’ Howard Gospel Geneva, June 2011