The global private equity industry has thrived in the pandemic, with trillions of dollars spent on deals, and buyouts of London-listed companies reaching their highest level in decades. Much of private equity may indeed be a force for good, as Oakley Capital’s Steven Tredget told Dave Baxter in a recent IC podcast, but the growing power of the sector is reigniting old tensions between company bosses and employees.
The TUC this week expressed dismay at the shifting ownership of UK public companies to foreign investors with “obscured identities” who now reap the rewards of workforces’ labour. It blames what it describes as the tilting of boardroom decision making away from reinvestment and towards value extraction on the prevalence of these new types of owners.
The TUC isn’t alone in pushing back on the disconnect between new owners and workforces or in arguing that employees are the key drivers of a company’s success – much more important than shareholders who bring funds for investing, research and paying off debt. A recent paper from think tank The Institute of Employment Rights (IER) by Ben Crawford argues that the sole aim of the private equity model is the extraction of maximum returns for investors. What Crawford finds most problematic is private equity’s claims on the future revenues of the companies they acquire. He points to studies showing that premiums paid in buyouts are typically recovered through job destruction and wage cuts, and that cash flow must be diverted to cover interest and debt repayments. He reminds us that when Bain Capital and KKR took over Toys ‘R’ Us in 2007 the interest payments on the new $3.5bn debt already outstripped existing profits.
Among the changes workforce campaigners want to see are workers gaining seats on boards (something already done at a handful of companies including Capita and FirstGroup), directors prevented from prioritising the interests of shareholders, and obliged to give as much weight to the workforce and the local community as they do the business’s owners.
These battles are not new but what is different is that the IER reckons that progress can be made here in the same way that listed companies and asset managers have been driven to implement climate change policies and divest “unsuitable” holdings. It might be easy to dismiss the idea that asset managers will now become an ally of workers, or that businesses will prioritise employees, customers and local communities above profits, but a confluence of forces will continue to edge all of them them in that direction.
The pandemic, for example, has shifted the balance of power away from bosses, challenged the old model of working life, and focused attention on the well-being of employees. Another factor at play that’s likely to drive real change on the social aspects of corporate ownership is the influence of the Gen Z workforce. Today’s young workers are more likely than any previous cohort to take a different view of the role of businesses and to expect their values to be respected and reflected inside the workplace.
Fair treatment of customers is another issue bubbling to the surface. Alphabet is currently under pressure from a small but vocal number of shareholders on several social issues. Regulators are also cracking the whip on putting customers not profits first: the FCA’s new rules in this regard are expected to cost financial services firms billions of pounds. Fundsmith manager Terry Smith won’t be the only person in the City to think that Unilever management has “lost the plot” and that its obsession with sustainability credentials is at the expense of running the business; but there will be just as many investors irritated by his comments.
Whatever changes emerge in the great battle for fairness, it won’t be company bosses who are jostled out of the prime positions when it comes to rewards. It will be ordinary shareholders.