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NEW INVESTMENT FUNDS, RESTRUCTURING,
AND LABOR OUTCOMES: A EUROPEAN
PERSPECTIVE
Howard Gospel, Andrew Pendleton, Sig Vitols, Peter Wilke
To cite this version:
Howard Gospel, Andrew Pendleton, Sig Vitols, Peter Wilke. NEW INVESTMENT FUNDS, RE-
STRUCTURING, AND LABOR OUTCOMES: A EUROPEAN PERSPECTIVE. Corporate Gover-
nance: An International Review, Wiley, 2011, 19 (3), pp.276. �10.1111/j.1467-8683.2011.00848.x�.
�hal-00622881�
Review Copy
NEW INVESTMENT FUNDS, RESTRUCTURING, AND LABOR
OUTCOMES: A EUROPEAN PERSPECTIVE
Journal:
Corporate Governance: An International Review
Manuscript ID:
CGIR-2010-0084PE.R3
Manuscript Type:
Private Equity Issue
Keywords:
Corporate Social Performance < Firm-Level Governance Outcomes,
Ownership Mechanisms, European Economy(s) < Governance
Environments
Corporate Governance: An International Review
Corporate Governance: An International Review
Review Copy
1
NEW INVESTMENT FUNDS, RESTRUCTURING, AND LABOR OUTCOMES: A
EUROPEAN PERSPECTIVE
ABSTRACT
Manuscript Type: Empirical
Research Question: This article considers the consequences for employment, work
organisation, and industrial relations where companies are acquired by private equity, hedge
funds, or sovereign wealth funds. It also assesses the role of national labour regulation in
moderating labor outcomes
Research Findings: The article draws on three case studies – a Spanish supermarket chain, a
German engineering company, and a ports and logistics group hitherto based in the UK.
Employment reductions are found in each case, though to varying extents. There are few
changes in work organization but some developments in employee voice and representation.
National systems of labour regulation do not impact substantially on employment reductions but
they do affect the extent to which worker representatives receive information after (though not
during) the acquisition.
Theoretical Implications: Contrary to extant theory, the extent of national employment
regulation does not appear to be an impediment to restructuring by investment funds. The
differential effect of the three funds suggests that the extent of ownership is not decisive in
explaining the level of activism or its impacts on labor. Instead, the objectives and time frames
of funds appear to be more important.
Policy Implications: The implication of the findings is that greater disclosure and regulation of
new investment funds is more likely to enhance employee protection than further labor
regulation. Broadly, this has been the main thrust of recent policy within European Union
institutions.
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INTRODUCTION
The activities of investment funds, such as private equity (PE), hedge funds (HF), and sovereign
wealth funds (SWF), have been controversial in Europe and beyond, especially in relation to their
effects on labor and employment. On the one hand, European trade unions and the European
Socialist Party group of parliamentarians have been major critics. In a study of PE and HFs, the
Socialist Party argued that funds threaten the viability of target companies, lead to employment
reductions and wage cuts, put pensions at risk, and ignore employee voice (European Socialist Party,
2008). On the other hand, the European Venture Capital Association, representing PE funds, argues
that PE is engaged in value creation rather than value destruction or value redistribution. PE funds
inject new investment and new management and, in the long-term, have a beneficial effect on
employment and jobs in the companies which they acquire. According to this view, the cases where
PE has had adverse effects on employees are relatively few, but have attracted a disproportionate
amount of publicity. Moreover, these instances tend to be where target firms have been weak
performers with poor prospects (European Venture Capital Association, 2008). For their part, HFs
make similar defences of their activities, arguing that activist involvement in firms is relatively rare,
HFs bring liquidity to markets, and their higher returns lead to real benefit to workers, not least for the
pension funds which invest in them (see for example the Alternative Investment Management
Association material quoted in Gospel, Haves, Pendleton, Vitols, and Wilke, 2010: 88).
This debate between protagonists has been mirrored by controversy among academics, at least
in relation to PE. Some large-scale US survey evidence has suggested that PE tends to be associated
with job growth, at least in the medium term (World Economic Forum, 2010). Similarly, surveys
have found that on the whole there have been few changes in industrial relations institutions and
procedures in PE buy-outs (Bacon et al., 2010). Against this, there is evidence from more detailed
cases of large-scale job loss, intensification of working practices, and a reduction in employee voice,
including withdrawal of union recognition (Clark, 2009b). Methodological considerations have a
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substantial bearing on findings, with the more positive accounts of PE effects vulnerable to charges of
respondent and survivor biases, whilst the more negative cases studies are questionable on grounds of
their typicality and representativeness (Lutz and Achleitner, 2010). More nuanced accounts suggest
that PE funds are neither ‘angels nor demons’ (Lutz and Achleitner, 2010) and that there are variations
in labor effects between sub-species of buy-outs (Wood and Wright, 2010). Meanwhile, to our
knowledge, there are no academic studies of the labor effects of HFs and SWFs.
This article contributes to these debates by examining the labor and employment effects in
three companies acquired or invested in by these three types of investment funds. Two main research
questions are addressed. First, to what extent, and in what ways, is labor affected by the intervention
of investment funds? Specifically, do fund interventions lead to employment change, modifications
to work organization and working practices, and reductions or enhancement of employee voice and
representation? How far does the extent of labor and employment change correspond to the extent of
ownership by these funds? Second, does national labor regulation have a significant moderating
effect on labor outcomes arising from fund interventions? There are two aspects to this: does the
extent of employment protection regulation affect the amount of employment change and how far do
national systems of employee voice enable employees and their representatives to influence
restructuring processes?
The article draws on three case studies of firms which have been the subject of interventions
by investment funds. The first is a Spanish company acquired by a British PE fund; the second
concerns a German company subject to intervention by a US HF; and the third involves a British
company acquired by a Dubai SWF. These company cases were developed from material researched
for the European Commission by the present authors and later extended by them. The cases were
selected to provide a spread of investment fund types, with varying degrees of ownership. In so far as
this is possible with a small number of cases, they were selected to be representative of typical fund
acquisitions rather than extreme or polar types. In each case the target company was a large firm
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