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The Commissioner, 'Transparency', and Codes of Conduct: the Last Refuge of a Scoundrel?

9 February 2009 Editorial
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No one can accuse EU Commissioner for Internal Market and Services Charlie McCreevy of excessive subtlety, but his current escapades set new benchmarks. "Commissioner McCreevy and the European private equity funds are engaged in an orchestrated maneuver to undercut a clear call for binding regulation of the buyout industry adopted by a huge majority of the European Parliament last year", according to IUF General Secretary Ron Oswald. "McCreevy and the funds want to smuggle in toothless 'Codes of Conduct' in place of binding legislation. Left unchecked, this will provide an object lesson in undercutting democracy and pave the way for similar efforts in North America and elsewhere at a time when there are growing calls to bring private equity activity within the framework of comprehensive regulation."

In 2006,McCreevy commissioned a group of private equity funds and investment bankers to author the background "report" for a European Commission White Paper on "Developing European Private Equity" (which the funds and bankers then "welcomed").

In October 2008, the European Parliaments adopted (by a cross-party majority of 526 to 82) the report prepared by the Party of European Socialists (PES) on legislative regulation of private equity and hedge funds. The normal response would be for the Commission to develop concrete legislative proposals. McCreevy, however, is now maneuvering to subvert the Parliament's vote by promising private equity firms that they can avoid regulation by signing up to… codes of conduct. This was McCreevy's explicit message in a recent speech to the British Venture Capital Association (BVCA), and he appears to be working on it at EU-level.

"The IUF and unions globally have considerable experience with corporate codes of conduct", says Oswald. "They have always been a move to escape from binding laws and regulations, either the elaboration of new ones or the effective implementation of existing ones."

In the case of private equity, the mother of all codes is the one elaborated in the 2007 report of the UK Walker Commission, which was roundly criticized by unions at the time as an inadequate substitute for binding regulations. If McCreevy intends to again turn to the European Venture Capital Association to provide the cover for his assault on democracy, the February 1 Financial Times editorial by BVCA head Simon (not Sir David) Walker may provide more than a few clues. According to Walker, the buyout funds have to "keep marching down the path towards greater transparency" and "the regime of self-regulation" established by the 2007 report. The report, strictly speaking, establishes no regulations at all, but deals entirely with a limited number of disclosure issues in a limited number of areas for a limited number of funds - and in fact applies to a mere 56 of some 1,300 UK private equity-owned portfolio companies. Moreover, the "disclosures" are essentially useless. A quick trawl through the internet would supply more, and more relevant, information to workers and all citizens concerned with the impact of private equity on investment, employment and public finances.

Permira, Europe's largest buyout house, blazed "the path towards greater transparency" by publishing the UK's first Walker-compliant annual report. Here's what they have to say, for example, about the job they did on Danish telecommunications company TDC, which they took over as part of a private equity consortium of 5 of the biggest global buyout funds in a 2005 deal which was 80% debt-financed and took the company's debt to asset ratio up to 90%. Permira and the other funds then depleted the cash reserves, distributed the equivalent of half the company's assets to the new owners and top managers and eliminated thousands of jobs:

TDC has introduced substantial changes over the past two years including: i) significantly strengthening the management team; ii) successfully focusing the business on the core Danish operations through disposals of non synergistic assets outside the Nordics (Bite, One, Talkline); and iii) reorganising the company into a customer-centric organisation. In addition, TDC has developed a new corporate strategy and launched an extensive cost improvement and complexity reduction programme that is currently being implemented.

That's it. There's a generic picture of a mobile phone, the names of senior management, and the size of the total investment, but nothing about what really matters: the debt, how it was financed, who owns it, the evolving debt to equity ratio, how they've been taking their money out, the company's tax liabilities (or lack thereof), and so on. There is no information here of any relevance to a union involved in collective bargaining or anyone simply seeking to understand the impact of the buyout on the company, the sector or the country as a whole (unsurprisingly, TDC. is no longer a leader in wireless technology).

In 2004, Permira bought Spanish retailer DinoSol from Ahold for €895 million. To get their money out quickly, they launched a "sale and lease back" program in January 2005 which freed up cash for Permira but worsened the company's balance sheet and piled more debt on to the books, took on additional debt in November 2006, and in February 2007 took out more money through a €488m dividend recapitalization. This is what is driving developments at DinoSol. What does the report tell us?

The company is focused on defending and strengthening its competitive position in its core Canary Islands market while improving the performance of the firm’s mainland operations, aiming to increase both footfall and revenue per customer.

The "march down the path towards greater transparency" continues through the portfolio, but provides not a clue as to why many of these companies are staggering under their accumulated leverage and their debt is trading at severely "distressed" levels, a possible prelude to insolvency (of course this can and will be blamed on "unfavorable circumstances" in whose creation they had no part…). It's like reading an account of European history in the first half of the twentieth history which compresses two world wars and a devastating depression into a few lines celebrating a successful endeavor at "concentrating on core business". One eagerly awaits the next report's handling of the financial carnage at Pro-Sieben, Europe's biggest television broadcaster from which Permira and KKR sucked out a €270 million dividend last summer at a time when the company was struggling with €4 billion in debt and plunging deeper into the red.

Is this the "new tone" which McCreevy, following Simon Walker, intends to impose on private equity as "the course of action" to assure it of a "bright future"?

"It is the meltdown in financial markets, not the "self-regulation" of the ludicrous Walker "code of conduct", which has put a temporary halt to pillage through leverage", says Oswald. "What Walker and McCreevy are proposing on disclosure doesn't even come close to meeting existing requirements to which the funds should be held to account - and disclosure is only a small, if significant, part of the total regulatory program which is urgently needed."

Unions have not sufficiently emphasized the fact that strict disclosure requirements are well defined in relation to collective bargaining in existing legal instruments, including Conventions of the ILO (which have the force of international treaty law), the OECD Guidelines on Multinational Enterprises, and the ILO Tripartite Declaration on Multinational Enterprises. All of these stress the necessity of workers' access to full and complete information on the economic situation of the enterprise/company in order for "meaningful" negotiations to take place. .Since unions negotiating with a private equity portfolio company are essentially negotiating with a highly leveraged financial construction, this can only mean full disclosure of the details of the debt financing in addition to the kinds of information that unions have traditionally sought concerning revenue, investment, productivity etc. As Michael Gordon of Fidelity International wrote in a March 31, 2008 Financial Times editorial, "Private equity as we have come to know it is all about debt - lock, stock and sinking barrel."