Sunday, April 29, 2007

Are LBO firm's immoral?

I'm not sure myself but the Service Employees International Union (SEIU) believes that the mega-buyout firms like KKR and Carlyle are harming American workers and have gone public with a proposal intended to pressure the big funds to change their behavior. You can download a copy of the report here.

Their report - somewhat to my surprise - is actually a pretty good, fair, summary of the industry, the players, some big deals, and is well worth a skim for casual observers. And it raises some very important and difficult issues. Are LBO practices "unfair" to workers and communities? Is fairness a relevant concept in a free market? Is this all just a left-wing whinge against tough love capitalism? My answers are (tentatively): yes, yes, and no. I regard myself as a pretty hard-core classic liberal regarding economic issues. The owner is the owner and the government (or anyone else) should stay the heck out of the way, except in rare cases where the public good is clear and compelling, and allow economic actors to negotiate with 'gloves off" as it were. Sometimes labor wins, much of the time capital/management does. But when it comes to 21st century LBOs, I am not so sure anymore. The new tactics of TPG, Bain, give me pause. Maybe there are issues of basic human fairness which are being violated. I cannot yet elucidate my view in a conceptually coherent framework - but I believe there is something here which just isn't right. Maybe, at the end of the day, these guys are just making such vast unprecedented amounts of money - even I can't defend it anymore.

I do however reject much of the SEUI proscriptions as being unworkable or simply wrong. But might there be another way? Might not this issue be addressable via an approach akin to that of the Sullivan Principles? I.e., a voluntary code of conduct which institutions would request LBO firms to submit to - or not give them money to manage. US institutions - public pension funds, endowments, and foundations are sympathetic I believe to these issues. A surprising number of institutions are already pushing other initiatives which are, in my mind, more radical (i.e., less free market friendly). E.g., 'socially responsible investing', 'universal ownership/stakeholder capitalism' and the like. A voluntary code of conduct, enforced by market pressure ("abide by this or we won't invest with you") seems eminently workable to me. The tough part, the really really tough part - is what should the code of conduct contain? I have some ideas but need to give this more thought. Something along the lines of prohibiting a certain amount of leverage (perhaps as defined by a certain credit rating); abiding by prior management's commitments to worker benefits and protecting pensions; no debt-funded dividend payments within the first two years; some check on charging hefty fees to the company ostensibly to compensate the LBO fund-owner for assisting with M&A deals.

More on this in future.

No comments: