08 November 2008
Maybe unions should concern themselves with the size of the bond issues by which their employer corporations are financed. The thought comes to mind while reading about the link between capital structure and corporate strategy. Before I delve further into it, let me do my bibliographic duty.
Elsevier, the Amsterdam-based academic publishing company, has come out with a new anthology on corporate finance, repetitively and undramatically titled, Handbook of Corporate Finance: Empirical Corporate Finance, Vol. 2.
Volume 1 of the set, out last year, covered banks, public offerings, and private sources of capital.
This second volume focuses on bankruptcies, margers, dividend policy and capital structure. [For those who don't know the lingo, the "capital structure" of a corporation is its mix of debt and equity financing, taking into account also the different varieties of equity -- preferred versus common -- and the different levels of seniority of debt.]
So this brings us back to "Capital Structure and Corporate Strategy," by Chris Parsons of McGill University and Sheridan Titman of the University of Texas, chapter 13 of this volume.
One question Parsons & Titman consider is the relationship between the indebtedness of a firm and its relationship with its employees. The empirical research -- most of it with a U.S. focus - suggests that firms with high leverage "pay lower wages, fund pensions less aggressively, and provide less job security to their workers during downturns," in their summary.
This makes intuitive sense. A company that has issued a lot of bonds relative to its equity may struggle to make the interest payments and thus be more quck to lay off employees in a downturn. Looking at it the other way, in industries where a good deal of the relevant labor requires a lot of training, or where sheer experience counts most, a company might want to "hoard" its laborers through a downturn. it might want to keep them on payroll so that it can take better advantage of the eventual recovery of demand for its products. If the company is going to hoard talented labor, it will want to limit its interest obligations. Industries where labor is talented (i.e. not fungible) are, interestingly, the industries most susceptible to unionization.
So I wondered as I was reading: why don't unions know about this research? And if they do know, are they pressing their employers to use more equity issuance, less debt issuance, in their capital structure? Dividend policy, after all, is discretionary. A company funded mostly by the sale of stock can withhold dividends during a downturn to hoard its labor. There's no discretion in interest payments.
Parsons & Titman address this issue only in a brief footnote, in which they say: "Labor laws specifically prohibit unions from negotiating over issues that do not directly influence workers."
That statement sent my head spinning. I do have memories of taking a course in labor law way back in my law school days -- more than twenty years ago -- and I must have passed it. I'd remember a fail. So I learned something, but nothing that stuck.
So I asked a lawyer friend, Henry. This isn't his field of expertise (he's a first amendment maven), but I was confident he'd know someone whose expertise it is. I was right. Thanks then, to Henry and thanks to the recipient of the passed buck, Vince, for enlightenment on this point.
That brief footnote was, it seems, excessively simple. Labor laws in the U.S. prohibit employers from REFUSING to negotiate with unions over certain subjects. These mandatory subjects of negotiation are the matters that "directly influence workers" as the above footnote phrases it -- wages, hours, conditions of employment. Some subjects are prohibited: the two sides aren't supposed to discuss requiring union membership as a condition of employment. But in between there is a region of "permissible" subjects.
It seems to me, if I understand Vince right, that capital structure would fall into the permissible range. If a union had enough "juice," or if it were willing to make concessions elsewhere, it might well persuade an employer to talk about the matter and to limit its equity-debt structure.
Ah, concessions elsewhere. That's the rub. There's always a trade-off.
I'm reminded of an episode of The Sopranoes. Tony is talking to Dr. Melfi, after watching some educational/historical television show. He says, "Do you know that the United States is the only country that mentions happiness in its founding document? Well, where's my fuckin' happiness, eh?"
Melfi: "It says 'pursuit'."
Tony: "There's always a loophole."
Knowledge is warranted belief -- it is the body of belief that we build up because, while living in this world, we've developed good reasons for believing it. What we know, then, is what works -- and it is, necessarily, what has worked for us, each of us individually, as a first approximation. For my other blog, on the struggles for control in the corporate suites, see www.proxypartisans.blogspot.com.