Implications of Financial Capitalism for Employment Relations Research: Evidence from Breach of Trust and Implicit Contracts in Private Equity Buyouts

Date01 September 2013
Published date01 September 2013
Implications of Financial Capitalism for
Employment Relations Research:
Evidence from Breach of Trust
and Implicit Contracts in Private
Equity Buyouts1
Eileen Appelbaum, Rose Batt and Ian Clark
An increasing share of the economy is organized around financial capitalism,
where capital market actors actively manage their claims on wealth creation
and distribution to maximize shareholder value. Drawing on four case studies of
private equity buyouts, we challenge agency theory interpretations that they are
‘welfare neutral’ and show that an alternative source of shareholder value is
breach of trust and implicit contracts. We show why management and employ-
ment relations scholars need to investigate the mechanisms of financial capital-
ism to provide a more accurate analysis of the emergence of new forms of class
relations and to help us move beyond the limits of the varieties of capitalism
approach to comparative institutional analysis.
1. Introduction
New financial intermediaries pose a challenge to researchers concerned with
understanding the changing nature of work and employment relations in
modern capitalist economies. Private equity (PE) firms exemplify these new
capital market actors, which act as intermediaries by raising private pools of
capital from investors and allocating these funds to the acquisition of oper-
ating companies. PE firms actively assert and manage shareholder claims on
wealth creation and distribution in these companies. Whereas shareholders
under managerial capitalism made money through investments in productive
enterprises and the creation and extraction of value through the management
Eileen Appelbaum is at the CEPR. Rose Batt is at Cornell University. Ian Clark is at the
University of Birmingham.
British Journal of Industrial Relations doi: 10.1111/bjir.12009
51:3 September 2013 0007–1080 pp. 498–518
© John Wiley & Sons Ltd/London School of Economics 2013. Published by John Wiley & Sons Ltd,
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
of the labour process, financial capitalism utilizes a wide range of avenues for
extracting wealth — including financial restructuring, the selling of assets and
tax arbitrage (Kaplan and Strömberg 2009: 123–5,134–5).
The field of management and employment relations needs to conceptualize
how new regimes of accumulation and value extraction operate under finan-
cial capitalism. Prior studies in comparative political economy and industrial
relations have shown how globalization has altered labour and product
market institutions, and in turn, the character of management and employ-
ment relations (Hancke et al. 2007; Katz and Darbishire 2000; Streeck and
Thelen 2005). However, most draw on a concept of the corporation as it
operated under managerial capitalism. New research needs to focus more
attention on how the activities of financial actors influence management
strategies and processes and the outcomes for a range of stakeholders. In
particular, research should examine how and why organizations depend on
implicit contracts and norms of reciprocity and trust to be productive and
how this approach challenges the conventional agency theory view that
intermediaries such as PE create positive ‘welfare-neutral’ gains for all stake-
holders. Agency theory argues that PE reduces managerial opportunism and
improves operational efficiency (Jensen 1993) by using high levels of leverage
(debt and securitization of assets), share ownership by managers, and moni-
toring by investors to subject managers to the discipline of the market. While
these efficiencies may provide one source of shareholder value, in this article,
we draw on institutional theories of implicit contracts to show how investors
may also increase their returns by breaching trust and reneging on implicit
contracts with other stakeholders. The logic of our argument is that stable
enterprises depend on employment and other contracts that cannot be com-
pletely specified because all contingencies cannot be covered. Hence, they
rely on implicit contracts; and to deter opportunistic behaviour, they build
institutional norms of reciprocity and trust between shareholders and
stakeholders (Schleifer and Summers 1988: 34). PE owners eager to realize
quick returns, however, may knowingly repudiate these implicit contracts
and achieve personal gain from the default on stakeholder claims (Thompson
2003: 366–8). From their perspective, the firm represents a disposable bundle
of assets that should be rearranged to improve shareholder value irrespective
of the outcomes for individual plants, firms, suppliers, workers or local
economies (Blackburn 2006: 42). If this opportunistic behaviour undermines
the implicit, trust-based relations on which the enterprise depends for its
long-term survival — and stakeholders, their livelihoods — it is not value
creating but value redistributing, and hence, not ‘welfare neutral’ (Schleifer
and Summers 1988: 42–44).
This institutional approach to analysing PE outcomes is one contribution
of this article. In addition, this approach suggests a way forward for employ-
ment relations scholars to expand their analysis of capital–labour relations
to include financial capitalist relations as well. The four cases we present
provide examples of how institutional labour research can contribute to a
more fine-grained theory of value extraction by moving beyond the labour
Implications of Financial Capitalism 499
© John Wiley & Sons Ltd/London School of Economics 2013.

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