The SEIU and private equity

I’ve previously written about the problems unions have with private equity, coming to a head with the aggressive publicity/organizing campaign of one particular union, the SEIU.

One problem is that private equity doesn’t offer unions and other social activists the usual corporate levers of publicity and power, particularly including public shareholder meetings and the proxy process. So the union has to find other modes of entrée. Indeed, as I’ve written in Uncorporating the Large Firm, foregoing costly corporate-style monitoring is part of the essence of private equity and other “uncorporate” approaches to governance.

Another problem the unions face in confronting its new enemy is that the enemy is them.  Some of the biggest investors in the funds are, guess who: labor pension funds, such as Calpers. As I discussed in my last post, that was a particular sticking point when the SEIU supported a bill in California that would have restricted state pension fund allocations to private equity firms receiving investments from sovereign wealth funds in countries with bad human rights records.

Of course the pension funds' private equity investments aren't surprising, since that's where the money is. In effect, the union battle against private equity pits union leadership and current workers against retirees, which of course all of the workers will be one day. I pointed out that “in coming years labor may increasingly have to decide whether to “overcome” the capitalists or join them.”

The SEIU lost the California fight, but as the NYT’s Dealbook reports today, it isn’t giving up. Now it

will call upon people to attend protests on July 17 in 100 cities in 25 countries. The rallying cry will be: Take back the economy from buyout firms that the union says have exploited tax loopholes to amass great wealth at others’ expense. “It’s important to unite our strength globally and make sure these companies live up to social responsibility,” Andrew L. Stern, the president of the S.E.I.U., told DealBook.

The union notes the power of private equity: “Companies owned at least in part by Kohlberg Kravis employ more than 816,000 people, according to the firm’s Web site more than the population of San Francisco.”

The union is noisily claiming the tax code should change, but they haven’t said exactly how. Eliminate the tax deductibility of debt? That’s a non-starter, unless as a precursor to the elimination of the corporate tax, which would only hasten the changes the unions are fighting. Or focusing on private equity debt? That’s harder than you think, because as my article shows, “private equity” is only a part of the much larger uncorporate story. Try to focus on private equity and you’ll find other functionally similar finance mechanisms taking over.

The union thinks “it is possible to amend current law to specifically target private equity’s use of tax deductibility without wrecking havoc with modern finance.” But it’s not clear how. The union is using comic Lewis Black to in “a video professing bewilderment at how buyout executives make their living via financial engineering.” But they’re going to have to go beyond bewilderment and actually understand what’s happening. Maybe they should read my article.

And of course we come back to the problem I highlighted above: the SEIU’s three largest pension funds are invested in private equity.

So, it turns out, the SEIU is actually talking rationally to private equity executives. The SEIU’s Adler notes at the end the difference between what it’s actually doing and it’s headline-grabbing activities.

My article predicts this political confrontation between the forces of corporate social responsibility and the uncorporation, which is a powerful mechanism of managerial accountability to owners' interests.  The story is just beginning, and has a long way to play out.

Comments

[Matt Bodie]

The NYT article doesn't mention this, but in its literature SEIU has discussed reforms regarding the taxation of carried interest. It's interesting that the article focuses on the taxation of debt, which is obviously a much broader issue.

[save_the_rustbelt]

One of the most interesting battles (somewhat lost in the subprime mess) is the purchase of HCR/Manor Care by Carlyle.

DHHS-CMS has data implying that previous PE purchases in long-term care resulted in lower quality of care. I'm not surprised.

Carlyle/HCR will have to file a lot of public reports, but it will be difficult to stitch all of the reports together to make sense of the financial results.

Previous PE purchasers have also been very clever (or the lawyers have been clever) about building barriers to regulation and malpractice liability. Grandma can be neglected to death without consequences, inviting a regulatory and consumer backlash.

No corporation has managed to (legally) produce high returns from long-term. Carlyle says there will be no strip-and-flip. Stay tuned.

On the labor front, SEIU is currently in a national brawl with the California Nurses Association, the origins of which seem very strange.