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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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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