Conclusion: Needed Reforms to the LSF Industry
Labour-Sponsored Funds:
Examining the Evidence
Prepared by the CAW Research Department
February 1999
9. Conclusion: Needed Reforms to the LSF Industry
Support for the concept of LSFs has come from many honest trade
unionists, who sincerely believe that they are supporting a social
project that will expand "workers’ control" of the economy.
This will have been particularly true during recent years in which
debate on the subject has quieted down within the labour movement,
and hence the drawbacks of the LSF model have not been made so
apparent. This naive support for LSFs comes from a "good place:"
the desire to do something constructive about a private-sector
economy which is failing more and more Canadians.
In reality, however, the LSF industry is the wrong way for the
labour movement to become more active in the struggle for a fairer,
more productive and efficient economy. The LSF industry entails an
acceptance of the same regime of private, self-interested,
profit-seeking investment which has so failed our economy and our
workers during the 1990s. The LSF industry has created an elaborate
and expensive administrative structure, has been incredibly
inefficient at channeling taxpayers’ dollars into actual
investments, and has had far less positive impact on labour markets
than we should expect from a program this costly. In the process of
supporting this concept, labour has allowed its good name to be
attached to a private investment scheme that is dubious at best,
and downright corrupt at worst.
At this point in history, however, the debate is not over
whether these funds should exist (although the potential for a
liquidity crunch in coming years once investors qualify to withdraw
their funds penalty-free from LSFs raises genuine questions about
the prospects for survival of some LSFs). The present debate was
sparked by the 1997 decision of the federal government to expand
its already-generous subsidies for this scheme. Clearly this is the
wrong fiscal priority for a government which claims to be strapped
for cash; discretionary funds should be channeled into programs
which are of much more benefit to average Canadians. And if LSFs
are going to continue to remain a feature of Canada’s broader
financial industry, and continue to receive both generous subsidies
and the endorsement of major labour organizations, several
important reforms need to be implemented to ensure that Canadian
taxpayers receive better value for their contributions to this
program, and that the LSF industry helps workers and their unions
rather than undermining them. We propose the following five
specific changes that would affect both the legislation governing
the LSF industry, and the management practices of the industry
itself:
- Federal and provincial tax subsidies should be eliminated
from LSFs which are not sponsored and controlled by provincial
labour federations whose affiliates represent at least 10 percent
of the relevant province’s workforce. [This would disqualify
all LSFs in Ontario, where the Ontario Federation of Labour has
not supported the concept.] And the so-called "true" LSFs must
publicly call for an end to subsidies to the rent-a-union funds
in Ontario. These funds receive $7 in public subsidy for every $1
received by the "true" funds in English Canada; they are an
outrageous misuse of the labour movement’s good name. It is
not enough for the "true" funds to quietly bemoan the
embarrassment caused by rent-a-union abuses behind the closed
doors of labour movement forums, but then to forge an effectively
united front with those same funds in their parallel lobbying
initiatives for increased public subsidies.
- As a condition for receiving publicly-subsidized LSF funds,
each recipient company should be required to hold a union
certification vote within one year of receiving the LSF
investment, in the name of whatever union signs up the most
company employees in the course of that year. Workers in
LSF-supported companies cannot be forced to join unions, of
course, but they should at least have the opportunity to choose
to do so free from the usual vociferous opposition which
characterizes organizing attempts in small businesses. If the
union vote is successful, the company must voluntarily recognize
the new union and reach a first contract settlement within the
next year, or else return its LSF investment. Through a measure
such as this one, LSF investments could play some role in
improving the very weak level of unionization in small firms in
Canada. In addition, the "true" LSFs should set internal targets
to increase the proportion of funds invested in unionized
companies; they should aim to have at least one-third of their
funds invested in unionized firms within three years, and at
least one-half after five years. If they fail to use their role
as investors to promote unionization in the companies they
subsidize, then these "labour" funds are implicitly endorsing the
business argument that unions are bad for the economy.
- The federal government should disqualify LSF holdings from
the category of small business investments which can be leveraged
to allow individual investors to increase their foreign
investment of RRSP funds above the 20 percent ceiling. LSF
investors already receive very generous public subsidies for
their efforts, and do not need this additional, socially
destructive incentive–especially since the whole structure
of LSF subsidies is justified solely on grounds of investing
capital in job-creating Canadian projects. The "true" LSFs must
immediately cease promoting this loophole to the 20 percent rule,
and press the government to have all LSFs disqualified from the
provision.
- LSFs should be prohibited from investing in companies which
raise equity through stock market issues. If a previously private
company in an LSF’s venture portfolio goes public with a new
stock issue, repaying the LSF stake must be a condition of the
new issue. LSFs were not intended to be vehicles for
publicly-subsidized stock market speculation. Those "true" LSFs
which have invested in publicly-traded companies (including the
Working Opportunities Fund and the First Ontario Fund) must
immediately divest those holdings.
- LSFs must make it explicit in their advertizing and
organizational development practices that LSF holdings are not
appropriate to constitute any significant portion of the funding
for workplace pension plans. It is a top priority for all unions
to negotiate adequate workplace pension plans for their members
(preferably with a defined benefit structure), and the
substitution of subsidized LSF investment programs for genuine
pension arrangements is one of the greatest dangers that this
investment system poses to the labour movement.
In the unlikely event that both governments and the LSF industry
itself were to agree to these fundamental reforms, then the case
that subsidizing private individual investments in private
profit-seeking companies is an effective strategy for both
strengthening the labour movement and enhancing the degree of
social accountability over capital might be somewhat stronger. In
the absence of reforms such as these–to improve the
performance and accountability of the LSF industry–then the
legitimacy of its claim to both continuing taxpayer subsidy and the
political endorsement of significant sections of the labour
movement must be seriously reconsidered.
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