Notice & Comment

Toward a “Tender Offer” Market for Labor Representation, by Aneil Kovvali and Jonathan Macey

For decades, corporate America has succeeded in delivering ever higher profits for shareholders by squeezing workers.  Whether the basic driver is labor monopsony, or a lack of worker power to capture economic profits at corporations, or increasingly ruthless business and legal practices, there appears to be a fundamental power imbalance between workers and the providers of financial capital.  The result has been rich financial returns and stratospheric stock prices for shareholders, and increased economic and personal misery for workers.

Labor unions are supposed to provide a solution to these problems.  They are designed to exercise the collective power of workers to bargain with an employer together rather than individually.  Workers can join or form a union by gathering enough signatures to petition the National Labor Relations Board to schedule an election and then winning a majority vote to certify the union as their representative.  The union can then advocate for higher wages, better working conditions, and other worker interests, and the employer must bargain with it in good faith.             

But the once-mighty American labor movement is in disarray.  Only about 6 percent of private-sector workers in the United States belong to a union.  This diminished scale is a profound impediment to unions’ ability to improve outcomes for workers.  Employers are free to replace workers who strike to obtain economic benefits, so a union that represents only a handful of workers in the relevant labor market has little leverage.  Employers are also reluctant to make concessions that would put them at a competitive disadvantage, so a union will make little headway in negotiations with an employer unless it can credibly promise to impose the same terms on the employer’s competitors.  And large-scale representation is necessary for effective advocacy in the political arena.  As a result, the diminished size and influence of unions translates directly into a diminished capacity to drive better outcomes for workers.

The power imbalance between workers and capital seems unlikely to change without significant reforms.  One major problem is that labor unions appear to lack credibility with American workers.  While there have been some small victories, recent experiences in Bessemer, Alabama and elsewhere suggest that many workers are deeply skeptical of unions’ ability to make decisions about their livelihoods.

Resources are also scarce, forcing unions to make difficult and contentious decisions about spending money.  Limited funds for organizing leave unions at a disadvantage to employers.  Given that employers already have powerful ways to frustrate organizing, including the ability to restructure their operations or to require workers to attend meetings to hear anti-union messages, the disparity in financial resources is an important constraint.

A broad range of solutions have been proposed, but they generally only address part of the problem.  For example, policymakers have suggested making it easier for unions to win certification elections, including by eliminating various advantages enjoyed by hostile employers.  But such measures would neither increase unions’ credibility with workers nor increase the resources available for organizing.  Others have suggested reforms to internal union processes or new models for competition between unions.  While these measures could increase the credibility of workers’ representatives, they would not increase available resources.  A final model of reform would empower workers directly by having government mandate terms for employment and provide more benefits.  But while this approach has promise, it would only have a limited impact on workers’ ability to bargain collectively, and terms imposed generally cannot provide all the benefits potentially available from agreements tailored to particular firms and employees.  The existing proposals thus do not solve the problem of ensuring vigorous, effective, and well-resourced collective action on behalf of workers by well-motivated representatives.

But the basic problem has already been solved, at least for shareholders and corporations.  Much like workers, shareholders have much to gain from successfully overcoming collective action problems, and much like workers, shareholders have much to lose if their representatives fail to advance their interests. 

Corporate law and the market for corporate control largely solved shareholders’ agency problem, allowing shareholders to enjoy outsized returns – and an enormous advantage in dealing with their dispersed counterparties in labor.  This suggests the potential for a “policy arbitrage,” in which mechanisms and innovations that have made corporate governance successful for shareholders are used to make labor law better serve their interests. 

It is well known that if corporate officers and directors fail to deliver adequate returns to shareholders, an outside investor can offer to buy shares directly from the shareholders.  If enough shareholders tender their shares, the outside investor will gain bargaining power over management and can wield the collective power of shareholders to manage the company better.  To prevail, the investor must offer more than the current market price of the shares because, without such a premium, shareholders would have no reason to tender.  And to earn a return on the purchase of its shares, the outside investor must be able to manage the company in a way that increases returns even above the returns associated with the tender offer premium.  While managers now have powerful tools to defeat a hostile tender offer, it remains an important disciplining force.  Even managers who are not the subject of a takeover are acutely aware that, if they fail to deliver returns to shareholders, an outside investor could emerge to wrest control away.  Managers of any public company with broadly dispersed shareholders are under constant threat of replacement.

A similar market mechanism could revitalize labor organizing.   Under our proposal, the law would allow an investor to offer workers at a workplace money in exchange for the right to represent them.  If a majority of workers accepted the offer, the investor would be certified as the exclusive bargaining representative of the workers and would bargain with the employer.  The investor would make money by receiving a percentage of any wage gain it secured in the negotiation.  To persuade the workers to accept the offer, the investor would have to make a meaningful offer, putting cash in the pockets of workers immediately.  Such a payment would send a strong signal of the wage increases it believes it can generate.  And to profit, the investor would then have to negotiate a meaningful wage increase for workers. 

The new market would bring significant resources and scale to the task of organizing workplaces.  Traditional labor unions would be armed with new tools to organize workplaces and attract investment, including the ability to make payments to workers upfront and to profit from successes.  And a broad range of new players — including private equity funds and other sophisticated investors, drawing on the skills of activist investors and litigation financiers – could invest in organizing workplaces.  Each would have a financial incentive to identify where workers are underpaid, intervene, and drive wages up.  The mechanism would also create new competition and accountability for traditional unions by giving workers in all companies a sense of how much traditional collective bargaining should be able to deliver.

Exploring the mechanism can also shed light on broader issues.  Corporate experience could be a rich source of ideas for labor law reforms.  But corporate ideas also serve as a useful provocation.  Corporate governance was successful in delivering financial returns to shareholders in part because it focused exclusively on delivering financial returns to shareholders.  We recognize that focusing labor law on the narrow goal of delivering wage increases is likely to be controversial.  But the current plight of the American worker demands a critical reevaluation and creativity in devising new approaches. 

This post comes to us from Aneil Kovvali, a Harry A. Bigelow Teaching Fellow and lecturer in law at the University of Chicago Law School, and Jonathan Macey, the Sam Harris Professor of Corporate Law, Corporate Finance, and Securities Law, at Yale Law School.  It is based on their recent article, “Toward a ‘Tender Offer’ Market for Labor Representation,” available here.

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