Private Equity's Bottom Line for Workers

Sam Zell and Andy Stern each have an idea for making sure that when companies are taken private, employees get some of the benefits if things go well.

Zell's idea is to use about $8 billion of borrowed money to buy Tribune Co., a badly run media company in a declining industry, which he would then recapitalize and restructure into an employee stock-ownership plan. When his financial alchemy is completed, employees will control 60 percent of the stock in the new, privately held Tribune, while Zell will control 40 percent.

Now it may strike you, as it did me, as a little strange that somebody could propose one of the largest-ever employee ownership schemes without talking to a single employee. The financing plan would require that the contributions Tribune makes to its employee pensions in the future be used, in effect, to buy Tribune stock, which isn't exactly the kind of portfolio diversification that pension advisers recommend. Moreover, it turns out that while employees, through their trust, would "control" a majority of the stock, they wouldn't control the board or decide how the place is run. Those powers would remain with the minority shareholder, Zell.

In truth, this is a deal that only a real estate mogul like Zell could love. Zell has no real commitment to employee ownership or empowerment. His only interest is using the employee stock plan to avoid millions of dollars in taxes and finance a $13.2 billion deal with only $315 million of his money. Yes, it's possible that employees will come out big winners if Zell can turn Tribune around. But, given that he's now about to load the company with debt equal to 10 times cash flow -- a big risk for a company whose revenue base is shrinking 5 percent a year -- it's just as likely that the new employee-owners will take it on the chin.

That said, Zell has raised awareness of an issue that ought to be front and center: the relationships between private-equity funds and the employees of the companies they buy and sell.

In case you haven't noticed, these funds have recently been buying up corporate America at a furious pace. Standard & Poor's has estimated that they control companies employing 7 percent of American workers. Moreover, their success has put pressure on many public companies to adopt their strategies and tactics -- whether it's being ruthless in reducing costs or taking on more leverage or giving big pay packages to top managers.

Indeed, it is a measure of private equity's growing importance that key members of Congress, desperate to find new sources of revenue, are looking at closing one of private equity's cherished tax loopholes. Europeans are so worried about the threat posed by private-equity firms to their way of life that they demanded the subject be put on the agenda of the most recent meeting of Group of Seven finance ministers. And after years of keeping a low profile, the industry has decided to organize a group, the Private Equity Council, to polish its image.

Against that backdrop, Andy Stern, president of the Service Employees International Union, has opened another front in his campaign to get American business to share more of its newly created wealth with American workers. Stern has begun to approach leading private-equity firms with an intriguing proposal: If you agree to a set of principles on how workers should be treated at the companies you buy, we'll give you a measure of political cover against your critics at home and abroad.

Such a deal might include a promise, for example, that all employees will be offered health insurance, or a portable pension benefit, along with a generous severance package if they are laid off. It might also include a share of the profits if and when the company is sold -- an incentive that private-equity firms have used extensively, and successfully, with the managers of the companies they acquire.

This top-down method of promoting the interest of workers is a trademark of Stern's SEIU. For example, rather than get tangled up in the almost hopeless effort of winning recognition elections for the union with each individual building owner, the SEIU's Justice for Janitors campaign has been remarkably successful in using public opinion to pressure all the building owners in a city to "voluntarily" recognize janitors unions and negotiate a first contract. And the union has taken a lead role in a remarkably successful lobbying and public-relations campaign to discredit and demonize Wal-Mart, the world's largest retailer, in an effort to pressure it to improve its pay, benefits and working conditions.

Now Stern has set his sights on private equity. Last week, the SEIU launched a critical Web log focused on the leading private-equity firm, Blackstone Group, after the firm announced its intention to go public. At the same time, Stern has begun meeting privately with big private-equity firms about some sort of master deal.

Such arrangements are not without precedent. In negotiating the purchase of TXU, the giant Texas utility, in February, Texas Pacific Group negotiated a landmark side deal with an environmental group that had been blocking the company from proceeding on construction of new coal-fired power plants. And when Onex, a Canadian private-equity firm, took public its airplane parts unit in Wichita late last year, each employee received more than $60,000 in cash and stock under an arrangement struck with the machinists union. Recently, the United Auto Workers declared they will do whatever they can to block the sale of Chrysler to one of the several private-equity groups now kicking the tires -- a signal that any such deal will require extensive negotiations with workers.

Now that "going private" seems to be all the rage in corporate America, private-equity fund managers probably can't avoid taking a leading role in restoring the frayed social contract between companies and their workers. I doubt Sam Zell has hit upon the solution with his involuntary and highly leveraged employee stock plan at Tribune. But Andy Stern may well be onto something more important and worthwhile.

Steven Pearlstein can be reached atpearlsteins@washpost.com.