What's the real story behind the sad disappearance of legacy retailers like Sears and Toys "R" Us, the closing of hundreds of stores and the tragic loss of hundreds of thousands of jobs? Obviously, the retail markets are changing rapidly, with corporate conquistadors like Amazon invading the landscape (though Bill Moyers points out that retailers like Home Depot are still robust). And we don't think a changing landscape is the whole story.
The Steelworkers ran an article in July about the workers who lost their jobs at Toys "R" Us, noting that the two private equity companies and a real estate firm were able "to eke $470 million in fees out of the debt-ridden toy store after acquiring it in 2005 (Owliaei)."
And as Bob Kuttner reported in the Huffington Post on a piece about hedge-fund operator Edward Lampert: "In 2005, Lampert merged Sears with Kmart, loaded both up with debt, and used some of the debt on stock buybacks to pump up the share price and enrich shareholders, notably himself and his hedge fund. In a decade, 175,000 people at Sears/Kmart lost their jobs and revenue was cut in half. Various pieces of Sears were sold off. Lampert did just fine."
We are featuring, in this edition of the Expresso, two stories about Sears and Toys "R" Us, the struggles of some of the workers who are fighting for severance pay and respect and the collateral damages left behind by investors.
It's fashionable these days for large financial institutions to establish "impact investment funds," that claim to save the world. Bain Capital's multi-hundred million dollar Double Impact Fund claims, on it's website, that, "Impact investing has the power to build great companies that deliver both competitive financial returns and meaningful, measurable social and environmental good."
According to ImpactAlpha, one new $1 billion Global Impact Fund will seek to invest in businesses that deliver "commercial solutions that solve global challenges in credible and measurable ways," With such a "commercial" focus, the firm says, "we believe that we can generate private equity returns, while driving positive impact to global challenges."
Some of these bankers may actually care about workers, the environment and society-at-large. And they may do some good. But too often these funds are "impact washing," a form of green-washing. And Bain, one of the three largest investors in Toys "R" Us, had a bad history of "stripping and flipping" - including the iconic Simmons Mattress Company a few years ago - leaving in their wake lost union jobs, closed factories, and abandoned communities. Worse, they are too often using workers' capital to do so. Today, about 35 percent of private equity's money comes from public pensions, according to Preqin, a data firm.
In Heartland's Working Capital: The Power of Labor's Capital (2001: Cornell University Press), Dr. Tessa Hebb eloquently stated our case: "The earnings that workers defer for a secure retirement inform financial decisions that, in turn, determine the quality of employment and the character of goods and services they enjoy. Yet the institutions and individuals that manage pension funds often pursue narrow goals whose consequences undermine workers who provide the savings they tend." We called those investments "collateral damage investments," and Tessa asked, "Isn't it perverse then that workers' assets are so often deployed in ways that work against their long-term well-being?"
As we pointed out in The Responsible Investor Handbook (2016: Routledge/Greenleaf Publishing), the increasing misalignment of incentives between the owners and managers of corporate wealth, coupled with the decline of unions, has resulted in greater separation between the long-term interests of the beneficiaries of retirement funds and those that oversee and manage those assets.
In the coming months, we will be starting a broader conversation about how we create a "stakeholder governance" platform in the U.S., emulating the productive, competitive business models of Germany and the EU, where workers often have right to sit on corporate boards. Annie Malhotra and I wrote about this idea presented a paper on "Commonwealth Companies" at the Chicago Future of Work Conference back in the Spring. We were pleasantly shocked to recently learn that Senators Elizabeth Warren and Tami Baldwin have both introduced policy proposals to elevate Euro co-determination models in the U.S. There are many more paths to get there today, including building off of the direct experiences of the Steelworkers with board governance, the "social audits" long used by the Solidarity Fund in Quebec, and the growing human capital and workforce disclosure initiatives.
The disturbing stories below are proxies for the systemic short-termism plaguing America's capital markets and its productive economy. Or "commercial sabotage" as Thorstein Veblen, a progressive economist from the 1920s put it. There are plenty of responsible investment managers who know how to successfully turn around companies, work with unions and the workforce, and re-grow under-performing firms; some have long been Heartland Network members.
It's high time we reclaim our assets and organize our politics and make them work for America's working families.