Union’s Call for Editorial Staff Ouster Raises Ownership Questions

by allaboutgeorge (flickr)

Last week, I posted a summary of a LERA presentation on the benefits of private equity firms using labor pension funds to invest in struggling businesses. 

One of the upshots discussed at the lunch was that the pension funds had greater control over the use of their investments. 

Instead of just being a faceless, unimportant investor, the fund’s money would be used to direct an individual business’s trajectory, making it a win-win for the union.  The pension money grows, and the investment advances the agenda of the union.

At least one union is stretching the limits of that theory. 

Earlier this month, the Beverly-Hills-based private equity group Platinum Equity bought the struggling San Diego Union-Tribune for an undisclosed amount.  Usually, what happens after that is that the private firm just reorganizes or breaks up the company, and then sells it for a profit, which satisfies its investors. 

In this case, though, the Los Angeles Police and Fire Pension System has upwards of $30 million invested in Platinum, and one of the unions contributing to that pension fund, the Los Angeles Police Protective League, wants a little more for its money than double-digit ROI .  From the San Diego News Network:

[T]he union that represents Los Angeles police officers is demanding the ouster of the newspaper’s editorial page staff….

In a letter to Platinum Equity Chief Executive Tom Gores, Los Angeles Police Protective League President Paul M. Weber said the Los Angeles Police and Fire Pension system is now a Union-Tribune part-owner because of its $30 million investment in Platinum.

The union is complaining about editorials in the Union-Tribune that have repeatedly criticized the amount of money going into San Diego’s public employee pension plans.  The union says that it’s investment makes it part owner of the paper, and therefore the editorials are out of line, and the staff should be replaced.

How exactly one contributor of one investor of the company that eventually bought the newspaper becomes part owner is sort of lost on me.  And, apparently, on Platinum:

In a recent interview with the Union-Tribune, a Platinum executive indicated that the union was wasting its time because Platinum has no editorial agenda.

But the union does make one interesting point.  This idea of “control” is a selling point for the private equity funds.  The news story has the following quote from the union’s letter to Platinum:

“When you went to pension funds seeking their investment dollars, you promised to invest that money for the benefit of those funds and their members…  One way you can fulfil that promise is to dismiss the Editorial Staff of the San Diego Union-Tribune.”

In this case, of course, the argument is meaningless because the union isn’t the investor, the pension fund is.  But if a pension fund decided to get militant, who would be the final decisionmaker?  The private equity fund, for sure.  That’s why we separate funds from their beneficiaries – so fiduciaries can focus on the greater financial good, without getting bogged down in principle and moral directives. 

But that makes the private equity funds’ “control” selling point a fallacy from the start, right?

Fashionable Unions – H&M Workers in NYC Ratify First Contract

by reiner.kraft (flickr)

A Quick test:  When you think of unions and New York City, what comes to mind?  I’m guessing it’s not slim cardigans, GQ-worthy suits and adult-sized under-oos. 

Well, shows what you know.  As the New York Times reported, over 1,000 NYC employees of the international, high-fashion-low-cost retailer H&M are going to work today under a union contract that will raise their hourly pay and place restrictions on the company’s ability to change schedules at the last minute.   

The H&M workers actually voted for representation by the Retail, Wholesale & Department Store Union back in November of 2007; their first contract was ratified on May 20th of this year.  According to the RWDSU’s press release, the new 3-year contract promises a 3% wage increase this year, with reopeners on wages for years 2 and 3, and allows for annual, merit-based increases. 

The contract also guarantees that employees will know their schedules at least a week in advance – a provision that should make anyone who’s grunted through a mall job jealous.  Frank Bail, the President of RWDSU local 1102 pointed out that over-flexibility in weekly schedules can be difficult for some employees with young children. 

It’s unlikely that the H&M contract is a sign of big changes in the labor movement.  I can’t see midwestern malls being taken over by organizing campaigns in the near future.  But in urban areas like New York, Chicago and L.A., the workers at these places are probably more insulated and the turnover rates are lower (well, maybe not in L.A.).  Plus, the close proximity of multiple storefronts could create a large enough worker base for organizing to be worthwhile.  It’s something retail employers in major metropolitan areas should at least consider.

For now, it seems like NYC union workers are going to have to think a little harder about what they wear to the hall.  Skinny up those jeans, and swap that hard hat for a trilby.  And remember, it’s summer, so no felt - straw is much more breathable for your scalp.

Strange Bedfellows: Labor & Capital

Cat dog bed by Jon Åslund (Flickr)

Some unions in troubled companies are finding an unlikely source of salvation and partnership: private equity. 

Yesterday, the Chicago Chapter of LERA invited Steve Sleigh, a member of the private equity group Yucaipa Companies, to discuss the current state of labor and capital.  Sleigh admitted that private equity is most often associated with greedy takeovers,  where the investor comes in to sell off profitable pieces of a foundering company, instituting layoffs and forcing concessions from unions.  Increasingly, private equity is the third seat at the table of industrial relations, and disliking its interference is sometimes the only thing unions and management can agree on. 

But it doesn’t have to be that way, according to Sleigh.  Yucaipa occupies a unique position in the private equity arena: their partners come from backgrounds in all three camps – labor, management and finance, and their focus is on companies with unionized workforces and a solid product.  The investments come in large part from multi-employer pension funds, which means the private equity group essentially becomes a conduit for unions to reinvest in the labor movement.

Like most private equity investors, Yucaipa buys companies in hopes of retooling them and selling them.  But Sleigh thinks that the prevailing model of reducing payroll and benefits in order to accomplish the quick turnaround is short-sighted.  Instead, Yucaipa starts its analysis by assuming that the labor costs are fixed, and then asks what else at the company can be adjusted. 

In one example, a large, Midwestern cold storage company had each of its locations making individual contracts and operating decisions.  Every facility had its own IT contracts, its own practices and guidelines.  “They had 120 fiefdoms,” Sleigh said.  By consolidating operating decisions, the company was made profitable with no loss of employment or benefits.

The secret, according to Sleigh, is in getting labor and management to focus on the good of the company together.  “We often say that we’re mediators with money,” he said.  By the time a company is failing, though, the two sides are often either giving up or at each other’s throats.  ”My number one question is always: Who cares about the firm?”  The number one answer, Sleigh said, is usually the workers – not just because they want to keep their jobs, but because longstanding workforces develop senses of community that will be lost if a company is grossly restructured or closed.  By working with the unions – and having partners with history in labor organizations – Yucaipa can get early information on issues like cash flow and productivity that guide its investment decisions. 

Sleigh also pointed out one of the key areas where companies get into trouble with their unionized workforces: lack of transparency.  Sleigh said that, during a restructuring, they require annual presentations to both management and union representatives on the health of the company.  That way, no matter what changes are needed during the turnaround, they’re not a shock to anyone.  Putting unions and management on the same informational page also fosters cooperation between the parties, according to Sleigh. 

Here, though, Sleigh said unions presented the biggest obstacle.   Often, the union doesn’t have anyone to represent them who truly understands the financials.  He said unions needed to start thinking of themselves as partners in the process.

It seems there would be some inherent conflicts in using private equity – with union pension fund backing – to restructure unionized workforces.  First, what happens when a company won’t survive unless pension benefits are cut, or a defined benefit plan has to be changed to a contribution-based plan like a 401(k)?  It seems like robbing Peter to pay Paul.  Sleigh said that Yucaipa actively avoids those investments, and that they would ask for concessions where necessary.  But drastic measures like replacing plans are much less necessary than people think. 

“In 20 years of doing this,” Sleigh said, “I don’t think we’ve ever replaced a DB plan.”

Sleigh was also quick to dispel the notion that his work was less investment and more labor activism.  “It’s not our business model to just be nice to unions,” he said.  “It’s that being nice to unions is good for our business.” 

How good?  In the twenty or so years that Yucaipa has been doing this type of private investing, their average annual ROI sits above 40%.  In the past few years, when overall investing has seen losses of about 35%, private equity (including Yucaipa) has lost more like 5%.  That makes pension plan fiduciaries happy to invest, Sleigh said.  The benefit to unionized workforces is a happy side-effect.

So what’s the next step for this blended investment model?  Employee ownership.  Sleigh said that he’s working on a business model that would use ESOPs as an exit strategy.  So, once a company was healthy, instead of putting it up for sale on the open market, an ESOP would be put in place to turn ownership over to the employees without requiring the massive debt that’s made recent ESOP use such a disaster (think: Sam Zell’s Tribune takeover).