Examination of Witnesses (Questions 200-219)|
20 JUNE 2007
Q200 Mr Newmark: I do not think this
does you credit either. I move on quickly to the workforce issue.
Do you say that relations with workers are bad in all 1,500 private
equity deals done per year, or is it more unusual? You give the
examples of the AA and the Birdseye deal that was taken out. Are
these exceptions to the rule, or do you say that pretty much all
1,500 deals done a year have examples of poor relations with the
Mr Dromey: We are not saying that,
but there are too many bad examples. For example, when Texas Pacific
took over Gate Gourmet it treated the workers shamefully and sacked
600 women in a canteen and that led to a crippling dispute. There
are too many examples of that, and time and again it comes back
to private equity and leveraged buyouts. We have been very specific
in our criticism. It is not a question of whether one is for or
against private equity. We work with reputable players in the
finance sector time and again to invest in and help rescue companies
that employ our members. Mr Kenny has been very specific about
the nature of the criticism: it is the rapid growth of leveraged
buyouts and the price that workers pay which time and again is
bad news. Workers are the only stakeholders who do not get a look
in; the pension trustees and banks do so. There are premium rates
of interest and covenants are sought. The only people whose voice
is not heard are the workers in those circumstances, and that
Q201 Mr Mudie: I think the group
makes the point it is ironic that the very same trustees who may
be fighting to save the pensions when a private equity firm comes
in are the people who may well be putting the investment into
the private equity fund. I thought it was very humble of Mr Kenny
to say that his organisation would not have very much influence.
Mr Newmark said that he did not agree about the danger. I do not
think there is anybody in the industry who does not think that
benign economic circumstances will change and there will be casualties.
Whether or not it is systemic, there will be casualties and if
private pension funds are in there, as they are, and a big firm
that has invested money gets into trouble there are catastrophic
consequences for a lot of ordinary working people. Do you limit
yourself to the time that the firm is taken over and you are defensively
talking to trustees at that time, or do you have a co-ordinated
policy at a political as well as a trade union level to try to
influence trustees about the wisdom of their investment policies?
Mr Talbot: I think that is a very
fair point and it is something that we will have to pay more attention
to in future than perhaps we have done in the past. There is a
lot of concern about it. There could well be some sort of trouble.
All sorts of economic factors could change. It is a bit like an
earthquake: you do not know that it will definitely happen but
it could and you do not know what the final consequences will
be. I entirely take your point. Obviously, we do not have day-to-day
control over the trustees. Nevertheless, in terms of advice, guidance
and so on I for one shall certainly be looking at this in the
Mr Kenny: We have had discussions
with the TUC about creating a framework so we can get information
out to people and understand not just the potential benefit but
the potential risk. That has been missing in this debate. There
has not been a debate like this. Maybe it took the union to raise
the issue for the whole debate to take place.
Q202 Mr Breed: Dr Dromey, in your
submission you suggest that the general public has an interest
in the private equity-owned company plans and activities. What
do you think the public should be told, and why do you think it
has a right to be told that information?
Mr Dromey: The strength of public
companies is that they are accountable. Obligations fall on them
in terms of disclosure to their employees but also their shareholders.
Q203 Mr Breed: That is because they
are a public company.
Mr Dromey: Yes.
Q204 Mr Breed: But we are talking
about a private equity-owned company. Why does the general public
have an interest in a private equity-owned company?
Mr Dromey: Because if one has
very powerful companies operating in secret and they are totally
unaccountable for the consequences of their actions for workers
and the public that is wrong; it offends against what has been
a generation of progress on openness and transparency of public
companies. The model of public company operations is one that
we should preserve, but private equity is escaping public scrutiny,
which cannot be right.
Q205 Mr Breed: Basically, you want
the general public to have exactly the same information on a private
equity-owned company as a public company?
Mr Dromey: There can be no reason
whatsoever why public companies and private equity should have
different rules applied to them. The same rules, standards and
law should apply to both.
Q206 Mr Breed: Mr Kenny, in your
submission you state that private equity companies have no duty
of public accountability. Why should private equity firms have
a higher disclosure than, say, very large family-owned companies,
some of which are based in my constituency? Surely, it is wrong
to discriminate against one particular form of ownership. Why
should private equity firms have any higher disclosure than, say,
some large family-owned businesses that have been going for a
long period of time?
Mr Kenny: You have just described
why there is a difference. If you have a family-owned business,
or one that has been running over a long period, it is clear that
people are in it for the long haul. Someone described the period
as three to seven years; most of the stuff I have seen is based
on three to five years and people will get out quicker if they
can. I think there is a very different approach both to how the
business is managed and the employees are treated and the long-term
investment issues related to that business. They are very different.
Why should the public have an interest? If you take a company
like Boots which is paying £150 million corporation tax and
private equity takes it over and suddenly that £150 million
no longer goes to the Exchequer, that has to be found somewhere
else because they are paying out on the leverage. There is a liability
on the taxpayer if the pension scheme goes; the taxpayer picks
up the responsibility under the FAS. Finally, the taxpayer and
public have the right to know that people are paying a fair share
of tax, whether they are domiciled here or are offshore. There
is an issue here about public disclosure so that people can see
it is fair.
Q207 Mr Breed: Your criterion for
discrimination in terms of accountability, disclosure and everything
else is to do with how long the company has been going?
Mr Kenny: I am not an expert and
I hope that you and the Treasury are. Ultimately, it seems that
the rules were changed to encourage investment, which we wantwe
want growth and the creation of valuebut in the end value
is extracted. I am saying that the time one is involved before
one can benefit must be important.
Q208 Mr Breed: If one takes the example
of Boots, that company continues. Boots has been going for over
100 years and it will carry on, we hope, for another 100-odd years.
How do you discriminate in the case of that particular company
which has been going for years, just like some big family-owned
businesses? Why should there be any differential in disclosure
Mr Kenny: I do not think that
Boots should ever have to carry the level of debt that it is currently
Q209 Mr Breed: But that is up to
Mr Kenny: If, god forbid, the
company got into difficulty the potential impact on the taxpayer
to prop up the pension scheme is huge. I think that is a matter
of public interest. The manner in which those people are treated
is of interest to our union. We have members in Boots.
Mr Dromey: What does private equity
have to fear from having to be open?
Q210 Mr Breed: We will ask them that
in a moment.
Mr Dromey: To be frank, from the
point of view of the public until the GMB's campaign more was
known about the Cosa Nostra than private equity.
Q211 Mr Love: Mr Dromey, earlier
you called for an independent analysis of the economic impact
of private equity, presumably looking at productivity, although
as a trade union representative your interest would be in job
gains or job losses. Would that answer all of the concerns of
the trade union about private equity?
Mr Dromey: No; no study in itself
is not enough. The time has come for action. We strongly believe
that there is sufficient evidence to justify the taking of action
now on tax transparency and the protection of workers. It would,
however, be valuable for this debate to be properly informed,
but what we do not want is a public policy response that is simply
to conduct an investigation. What the workers we represent need
is for government to be on their side and to act in the public
interest to change the laws and rules as they apply to private
Q212 Mr Love: Ms Ludkin, earlier
you said that when you tried to carry out a study you could not
find any relevant information of help to you. Why do you think
Ms Ludkin: I think that private
equity likes to operate under a veil of secrecy. I do not think
that their results would stand up to independent scrutiny.
Q213 Mr Love: The veil of secrecy
has allowed all sorts of talk about asset-stripping, casino capitalism
and all the words that have been bandied about in the debate over
the past few weeks. All the public comment suggests that that
is not in the interests of private equity, so why does it not
Ms Ludkin: I do not think they
anticipated this level of scrutiny. We are not responsible for
all the dialogue and press accounts about them. I think it has
taken them by surprise. There is a certain level of arrogance
in the industry; it has fallen in love with ideas about itself
and all of this is a shock to it. It is time for the industry
to stand up. I am sure it is looking forward to speaking to you
today, and I am certainly looking forward to hearing it.
Q214 Mr Love: Mr Kenny, Sir David
Walker is currently looking at a number of issueswe hope
to pass our report to himrelating to transparency and disclosure.
He is looking specifically at a code. What do you hope to get
out of that? Would that begin to answer the concerns of the workforce?
Mr Kenny: I like to give something
more than two minutes before I make a judgment on it, but in truth
not only has the horse bolted and the stable door has been shut;
I think the whole stable block has been burnt to the ground. That
initial report into some form of self-regulation as disclosure
was a reaction to the situation at that time. The debate has moved
on so far. There are issues about tax, which will not be covered
by that, jobs and BVCA statistics. I think we copied one of the
statistics that they gave us only to discover that it was not
true. That statistic related to the number of jobs currently in
that particular sector of the economy under their control. You
have to believe some things they tell you, but the one thing they
did tell us was not true.
Q215 Mr Love: I do not want to leave
the impression that maybe you are being too negative in relation
to private equity. We understand that the primary concern of all
the witnesses is their members. You have already said that not
all private equity takeovers have been bad for trade union relations;
and you have said that in some cases it leads to higher rather
than lower levels of employment, although overall you believe
that the balance is very negative. What changes in terms of disclosure
and the way that private equity operates will allow you to believe
that you are therefore able better to protect your members?
Mr Talbot: One of the things we
have said would be a welcome step is the introduction of a code
of conduct agreed with the appropriate regulatory authorities
and the trade union bodies and which can therefore set a standard
right across the industry. If you asked me specifically what we
are saying in relation to that it is that, first, there should
be a commitment to corporate social responsibility, disclosure
of information and consultation with the employees of the organisations
concerned. There should be respect for terms and conditions and
information and consultation arrangements, and so on. We think
that that would be a welcome step. We accept that a code of conduct
does not have legislative background. Nevertheless, if it was
agreed in the way suggested it might go some way to resolve some
of the present difficulties.
Mr Dromey: A code of conduct would
be welcome, but self-regulation by private equity would be worse
than useless. There are now some voices heard in private equity
about their concerns as to what is happening, and we welcome that.
It is inconceivable that self-regulation will work, not least
because unless there is an enforceable code of conduct for a new
regulatory framework the rogues will undercut the reputable.
Q216 Mr Love: When they come before
us we will ask questions about some of the issues you raise, but
there are many in private equity who say that you will kill the
goose that lays the golden egg, as they put it. How do you respond
Mr Kenny: I do not believe that
is true. The European Venture Capital Association has just said
that the amount of new money that is available is not going to
the traditional venture capital set-ups and management buyouts.
Huge amounts of it is going into management buyins, so the very
thing for which we are trying to create a tax regime to encourage
value creation is now being starved of available money in the
market and it is going into management buyins. That is a different
agenda. I know that it is a bit like the emperor's new clothes
and sometimes it is not a pretty sight, but in this case they
are dealing with the business differently and they are not in
for the long haul but to make money quickly, and they do not care
who is hurt in the process.
Q217 Jim Cousins: First, I am grateful
to Mr Kenny and the GMB for bringing to the attention of the Committee
the memorandum of understanding of 2003 between the Inland Revenue
and the British Venture Capital Association which substantially
modified the impact on private equity of the changes in the Finance
Act 2003. As we can now see, not only did it do that but in two
significant respects it varied long-standing guidelines about
the way that interest should be treated. Did you make some further
inquiries after you discovered this, because the memorandum of
understanding can be set aside where the Inland Revenue judges
that the purpose of the arrangements is tax avoidance? Do you
have evidence that any such inquiries were made and any override
of the memorandum of understanding ever took place?
Ms Ludkin: Subsequent to discovering
thatthe memorandum was hidden in plain view on the HMRC
site, having been directed to it by some accountantswe
have written to the Revenue to make further inquiries about it
but have not so far received a response. We would be happy to
supply that to you once we have had the opportunity to look at
Q218 Jim Cousins: A further point emerges
from the memorandum of understanding which you have brought to
the attention of the Committee. I think most people visualised
that the people who benefited from capital gains tax taper relief
were individuals, but what this memorandum of understanding reveals,
as is quite obvious once it is pointed out, is that the relief
can be extended to companies and special purpose vehicles that
can be created for the specific purpose of having carried interest.
These companies are not necessarily domiciled in the UK for tax
Ms Ludkin: Absolutely not.
Q219 Jim Cousins: Do you have any evidence
of the extent of the use of companies employing individuals for
the benefit of carried interest, or special purpose vehicles being
formed for the purpose of holding carried interest, that are not
domiciled in the UK for tax purposes?
Mr Kenny: We do not because we
discovered that only recently and sent it to you. We are still
working on it but we do not have any evidence to present to the
Committee at this stage. But if the inquiry is still going we
will provide whatever we can come up with.
Chairman: Thank you for your appearance.
The memorandum of understanding is something that we shall look