For several years a concerted campaign by the Party of European Socialists
in the European Parliament and the European Trade Union Confederation (ETUC)
led to increased regulation of alternative investment funds, including private
equity. Some European politicians and labour unions argue that private equity
takes a short-term approach to corporate ownership and increased regulation is
required of an industry portrayed unfavourably as 'locusts', 'asset-strippers'
and 'parasites'. These attacks form part of a broader concern that a new era of
financial capitalism threatens employment and social protection in the European
social model in particular. As increased regulatory scrutiny and the financial
crisis in 2008 raised the stakes for both investors and critics of the private
equity industry, new legislation was introduced in Europe and the US. The
European Commission's Alternative Investment Fund Managers' Directive (AIFM)
came into force in July 2011 with transposition by member states by July 2013.
In the US, the Wall Street Reform Act & Consumer Protection Act 2010
required Securities and Exchange Commission registration for private equity
This paper explores the impact of private equity LBOs on three labour
management issues central to recent debates: employment and wages; human
resource management practices; and industrial relations. We concentrate on
these aspects because the impact of private equity LBOs on labour management
and workers' interests continues to inform debates concerning the appropriate
regulatory framework in which the private equity industry operates. Unless a
cost-benefit analysis informs this regulatory framework, poorly-designed
legislation may fail to protect workers' interests and hinder economic recovery
and growth by favoring potentially less efficient organisational forms.
Both sides of the debate have cited cases to support their arguments. As
there is no reason to suggest that examples from the private equity industry
are any more objective than those from the unions, we draw on evidence from a
wide variety of systematic prior empirical studies to assess the overall impact
of LBOs, the heterogeneity of private equity deals, and the varied effects in
different business and national contexts. In addition, we contrast labour
management in private equity LBOs with labour management under alternative
forms of ownership.
The paper makes the following contributions. We develop a framework to
analyse the labour management aspects of private equity LBOs, emphasising the
impact of long and short term ownership and whether increasing value involves
efficiencies or growth. We show that the effects may vary between buyout types
and it is inappropriate to regard most private equity LBOs as a zero-sum game
with value transferred to shareholders at workers' expense. Our conclusions are
that further regulation of private equity in favour of alternative forms of
ownership such as managerial capitalism will not necessarily advance workers'
interests. In so doing, we reflect briefly on the relationships between
financial markets, firms and workers in the 21st Century.
A version of this paper appeared in Academy of Management
Persepectives. The full article can be downloaded at the link below.
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