Distracted Attention And Weakened Credibility


Labour-Sponsored Funds:
Examining the Evidence

Prepared by the CAW Research Department
February 1999

7. Distracted Attention and Weakened Credibility

The preceding sections of this report have painted a damning portrait of the fundamental economics of the LSF industry: its large overhead costs, its poor record of venture investing, the negative return on those venture assets, the massive drain of public subsidies from a number of sources, the lack of consistent social or labour screening of supported companies, and their negligible overall economic and employment impact. But perhaps the biggest difficulty with the LSF industry is one that cannot be described with economic statistics. By positioning themselves as investors in small businesses (most of which are not unionized), participating unions dangerously undermine their activity and credibility as unions in a number of worrisome ways. Here, in brief, are some of these deeper philosophical and political difficulties with the fundamental concept of LSFs:

Unjustified and Compromising Faith in Small Business

The LSF industry explicitly accepts the claim that small business is the main engine of growth and job-creation in Canada’s economy. This claim is both inaccurate and politically reactionary. The net job creation of Canada’s small business sector is vastly overstated in common statistics which ignore the rapid rate of job destruction and turnover in this same sector. The real driving force behind economic expansion, for the most part, are larger companies (which account for the bulk of investment and export demand) and government. For the most part, the small business sector is dependent on the investing decisions of these more dominant economic players. The fact that large companies and governments have not created enough jobs in recent years is the result of right-wing economic policies (like high interest rates and government cutbacks), and does not reflect the emergence of some "post-industrial" small-business paradigm. To fundamentally improve Canada’s economic performance we need to address those fundamental difficulties, rather than pretending that we can help small business to lead us to a brighter future.

Moreover, small business is perhaps the most reactionary political sector in Canadian society today. Small business lobbyists regularly call for smaller government, lower taxes, further cutbacks in UI, and weaker health and labour laws. Small businesses, on average, pay lower wages, offer far fewer employment benefits, are far more resistant to unionization, are much less productive, and invest far less in real capital than larger businesses. Not all small businesses share these views and reflect these bad practices, of course, but most do—driven to desperation by their efforts to stay afloat in their fiercely competitive, marginally viable industries. How do we oppose these reactionary views and practices of the small business sector, while at the same time holding up small business as not only the engine of economic growth, but as a worthy recipient of so-called "workers’ investments"?

Recent debates within the federal NDP provide an interesting example of the political compromises that are attached to labour’s role as sponsor of subsidies to small business. The party’s efforts to move to the centre of the political spectrum as a more "business-friendly" constituency have sparked widespread debate and general opposition from the labour movement. In this context, Pat Martin, the federal NDP labour critic, rushed to endorsed the Liberal government’s recent expansion of the LSF credits (perhaps the only time the NDP has endorsed a fiscal initiative of Paul Martin’s, and even though the federal NDP has no official policy on the matter). How can unions credibly criticize the view that the party should ally itself with small business, while at the same time advancing itself as a major "investor" in that same small business sector?

Workers and Investors

By pretending that LSFs are an important vehicle in economic development, the LSF industry accepts the notion of "workers’ capitalism" that has been so effectively propogated by the financial industry. In reality, financial wealth in Canada is incredibly concentrated in the hands of a tiny elite. But the financial industry has always tried to position itself as somehow representative of society as a whole. Bank CEOs claim that most Canadians own bank shares in some form (directly, through a mutual fund, or through a pension fund), and hence we all benefit from their super-profits. Mutual fund lobbyists claim that we all own big RRSP accounts, and hence we would all benefit from the elimination of rules forcing investors to keep a share of that money in Canada. The Reform Party claims that we will all benefit from private pension accounts invested in the stock market. The labour movement quite rightly debunks these claims as mythical; most workers have no financial wealth outside of their equity in their homes, and the private financial power of workers’ investments is in fact shrinking as a share of the overall financial world. But the advertizing and lobbying claims of the LSF industry reinforce the notion that workers are important investors, too—despite the general insignificance of LSFs, not to mention the fact that most of their funds didn’t come from workers anyway. In this, the creation and activity of the LSFs undermines the struggle by labour for a more democratic and economically efficient financial system.

Virtually any union initiative that involves the solicitation and management of private investment contributions from union members creates a huge potential internal conflict on any issue for which the interests of workers and the interests of investors diverge. Glib claims about "people’s capitalism" to the contrary, the economic interests of the vast majority of working people depend far more importantly on the state of labour markets (job-creation, wage increases, labour laws) than on the profits of financial investments or real businesses. But when unions position themselves as both representatives of workers in the labour market, and their "agents" with respect to personal investments, their position is fundamentally compromised.

There are many real-world issues on which this potential conflict of interest could become politically debilitating. As described above, many LSFs (including some "true" funds) aggressively promote their investments as a convenient means of avoiding the federal government’s 20 percent ceiling on foreign investment of tax-subsidized pension funds. This positions "labour’s capital" on exactly the opposite side of the fence from the labour movement itself, which has called energetically for the maintenance and even the tightening of the 20 percent rule. Similarly, the LSF industry is clearly dependent on the maintenance of the current RRSP system, which delivers lucrative tax subsidies to generally high-income personal investors. How credibly can the labour movement maintain its long-standing critique of that system (including the demand that RRSP deductions be converted into a fairer system of tax credits) when those demands would significantly reduce the appeal of the LSFs?

Similarly, the labour movement and other progressives have often criticized the exorbitant compensation paid to CEOs in the 1990s–compensation usually dependent on stock options and other bonuses tied to the performance of company shares. Investors in those companies, however, normally approve of these compensation schemes, because they give corporate executives a powerful incentive to take whatever actions are necessary, no matter how painful they may be to workers or affected communities, in order to maximize shareholder values. Now it seems that many LSFs–including some "true" LSFs–have agreed that this is an appropriate and effective way to structure executive compensation. If LSF managers can be paid compensation measured in the hundreds of thousands of dollars, tied in part to share prices, then how can unions argue that it is unfair for corporate executives to be paid the same way?

More generally, the growth of labour’s investments in financial vehicles and companies which clearly profit from the generally conservative, pro-finance direction of Canada’s economic policies plants the seeds for a conflict of interest that will only grow as labour’s perceived "importance" as a private investor expands. This is not to suggest that the labour movement should not be concerned with investment—quite the contrary, unions need to understand and challenge the power of private finance and wealth if we are to effectively redirect economic policy. But this challenge will definitely not occur through trying to position unions and owrkers as important private investors in their own right.

Distracted Attention

At a very basic level, the LSFs have diverted the energies and creativity of the sponsoring labour organizations from what should be the more important tasks of organizing, bargaining, and mobilizing workers in workplace and broader struggles. The "true" LSFs are staffed with some of the brightest and most creative labour officials, who now are devoting their talents to finding better ways to advertize tax breaks rather than organize new union members. A share of the First Ontario Fund’s hefty administration bill is devoted to paying lost-time for shop-floor workers to attend a training course in selling LSF investments, and then putting them back into the workplace to sell shares to their colleagues. No doubt this program recruits some of the most articulate and intelligent workers to act as financial salespersons; wouldn’t the labour movement be stronger in the long-term if these members spent their energies talking to their colleagues about bargaining or social issues, rather than explaining how to maximize their tax deductions?

Why Labour?

A related and fundamental point can be asked of the LSF industry. LSF advocates try to make a case for the broader social good that is served by the channeling of subsidized capital from private investors into small businesses. As seen above, this case is weak: the overhead expenses are too high, and the concrete outcomes too uncertain. But even if we agreed that the process undertaken by the LSFs is a socially and economically useful one, we are still left with a fundamental question: why are unions the organizations that have been chosen to manage these subsidized institutions?

Most of the funds raised by LSFs do not come from union members. Even those that are raised from union members do not represent any actual new addition to the aggregate savings of society; they represent, rather, the redirection of worker savings from conventional instruments (savings accounts, GICs, or mutual funds) into the new LSFs. Virtually none of the funds are invested in unionized companies. Why is there a central role for unions in these government-subsidized private investment vehicles in the first place? There are many other private financial industries which benefit from public subsidies (such as the entire RRSP-fueled mutual fund industry), yet unions were not granted some special power to establish or control these funds. What is the connection between "venture capital" and "unions" that explains their marriage in the LSF industry?

There is no inherent economic reason why it makes sense for unions to be running these funds. The governments which established the subsidies (and hence established the foundation for the industry) clearly carved out a key role for unions for symbolic and political reasons. The term "labour" gives some kind of social stamp of approval to a program which delivers public money to private investors to finance private companies. The LSFs are probably also politically useful to foster the attitude among unionists that their interests and the interests of business (particularly small business) are somehow coincident. The indirect link between the creation of the LSFs in Quebec and Ontario, and the imposition of contract concessions on public sector workers by social-democratic governments in those provinces, constitutes another piece of this political puzzle. Union participation is obviously assisted by the notion among some union leaders that they are doing something "important" with these funds—whether in a positive sense (creating jobs) or a negative sense (look, we can play at high-finance with the "big boys"!).

In short, by participating in these funds, even genuine trade unionists are allowing the name of "labour" to be used to justify a program which has no obvious connection to workers or the labour movement at all. In this fundamental sense, all the LSFs are "rent-a-union" funds: labour’s legislated role was designed and created from the outside as a means of giving a private investment subsidy a broader social acceptability. The long-run political implications of this compromise on the part of certain segments of the labour movement are worrisome.

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