Private equity investors routinely get a bad press – but how justified are claims that the management buyouts (and buy-ins) they engineer give the green light to a series of predictable decisions that stamp out both the representation and interests of employees? For trade unions, the questions typically raised when private equity buyouts take place tend to focus on how fast, blatant or circuitous the transition, and rarely on whether damaging changes in industrial relations will actually be avoided. Against a backdrop of significant growth in the buyout market in recent years, along with high-profile investigations by international bodies, banks and regulators, the first proper pan-European survey commissioned by the European Private Equity and Venture Capital Association – conducted by researchers from the Centre for Management Buy-out Research at the UK’s Nottingham University and Miguel Meuleman from the Vlerick Leuven Gent Management School – sought to determine the extent to which private equity firms are fair game for their critics.
The theory goes that business owners backed by private equity focus relentlessly on driving down costs, labelling undesirable activities as ‘waste’ while revving up any area of the business that generates immediate revenue.
But one stakeholder’s efficiency drive may be another stakeholder’s brutal round of redundancies. Advocates of private equity deals say post-buyout fallout may appear harsh (and feeds the media’s appetite for headlines) but that in the long run, job security for those who remain is safeguarded. Unions coordinating cross-border pressure on the EU to regulate private equity firms say investors instinctively sideline collective bargaining and even harass their more vocal or better organised members. Private equity leaders counter that more red tape simply places the very people unions say they want to protect at increased risk of losing their jobs – and that unions conveniently refuse to acknowledge the long-term investment and growth strategies that are more realistic characteristics of the buyouts they finance.
While some aspects of employment legislation apply across the EU, where differences exist, more liberal countries (such as the UK or Ireland) may even on occasion experience more positive post-buyout benefits for employees than in countries like the Netherlands, where employers work within tighter regulatory frameworks. However, the Nottingham-Vlerick research shows that private equity buyouts are far from the precursor to massive change that critics portray.
The survey indicates a statistically insignificant reduction in union recognition by companies acquired by private equity investors. Indeed, northern European and Mediterranean countries saw no change at all. Across Europe, the views of individual managers changed only marginally, with those in the UK and Ireland most likely to harden their attitudes towards unions. The proportion of employees who are union members also remained unchanged after buyouts.
Meanwhile, collective consultation and negotiation – a feature of traditional industrial relations highly treasured by unions and, they say, most at risk from private equity buyouts – also changed little. The Nottingham-Vlerick team found that unions continued to be consulted on issues such as pay, working hours, holiday entitlements, grievance and disciplinary procedures, and health and safety. Any discernible differences between countries operating under different social models or regulatory frameworks tended to disappear. And far from being kept in the dark, unions remain as informed about issues such as training, staffing plans, pensions and equal opportunities, as they were prior to private equity firms appearing on the scene. A major fear for many European unions is that private equity deals will lead to a more liberal ‘Anglo-American’ employment culture – in which they wield far less power – spreading beyond its borders. But that doesn’t seem to have happened.
The proportion of firms reporting consultative committees actually increased significantly in the post-buyout period (from 51% to 63%), even in liberal Ireland and the UK. Even more pointedly, managers say consultative committees carry more influence on production, financial and employment issues, and on future plans – indicating that boardrooms backed by private equity do more than simply pay lip service to their workers’ representatives. If investors want to enjoy the rewards of boosting corporate performance, it’s perhaps not so surprising that management is keen to maintain and improve relations with unions and consultative committees.
Unions may feel they have more grounds for grievance about being elbowed out of the picture prior to buyouts deals being struck. While more than four in 10 managers say employee representatives were informed that buyout negotiations were taking place, far fewer went so far as to consult them (9%) or invite them to participate (2%), and almost half (47%) said representatives were not even informed. Representatives were more likely to be involved, or at least kept in the loop, in companies where unions already had responsibility for negotiating pay and conditions. However, in unionised companies, only 8% were opposed to buyouts, although 65% remained neutral (22% were supportive). Anecdotal evidence suggests that investors might enjoy more post-buyout trust amongst the workforce by communicating with their representatives during negotiations, even if those communications are limited to informing rather than consulting.
Tiny differences were detected between management buyouts and those driven externally: fewer insider buyouts involved unions in prior negotiations, and in only 5% of those companies did unions support the buyout. But more outsider buyouts involved the unions, and in 12% of those instances, buyouts enjoyed union support. There was even less little difference detectable when contrasting large and small organisations.
It would appear that private equity investment doesn’t tend to have the detrimental effects – on union representation, recognition and scope, as well as management attitudes towards union membership – that is often asserted by critics. Indeed, the proportion and influence of consultative committees tends to increase under private equity ownership.
High-profile individual buyouts – often involving large, household-name employers, and characterised by accusations of ruthless asset-stripping and merciless job losses – are largely unrepresentative of the norm. The majority of private equity deals take place in smaller organisations; the relative cordiality of negotiations and limited reach of their implications for employees make them less newsworthy.
HR directors interviewed by the research team typically report that, once long-term strategy is established, existing management teams are generally encouraged to run the show and invest in their workforce – reflecting the tenet of the private equity model that ultimately prioritises adding sustainable value over immediate and indiscriminate slashing of costs and jobs. In other words, it’s simply not in the interests of private equity firms to act in ways that produce outcomes unions would find disagreeable.
Of course, that doesn’t mean difficult decisions won’t need to be made in the aftermath of a private equity deal. But if the alternatives are closing the company down or selling it to a hostile party, the backing of people focused on growth (and who see job creation as a necessary precursor) is likely to be more palatable and of greater benefit to a larger proportion of the workforce. However, such is the widespread belief that private equity investors cannot conceivably have any other aim than making a fast buck – no matter the cost to employees, customers, suppliers or communities – that even clear statistical evidence such as that provided by this study might not stave off tighter regulation, by the EU or by individual nations. If a political agenda is being pursued (as is almost certainly the case), then even the most subjective or emotive arguments against private equity buyouts may trump those of rational directors, managers and workers, and the entrepreneurs who regard them as attractive investments.
Bacon M. Wright M. Scholes L. Meuleman M. 2010. Assessing the impact of private equity on industrial relations in Europe. Human Relations. 63 (9) : 1343 - 1370.
Published on 25/07/2011
