Parachute blogging happens when you read one post (out of 5701 in my case) and decide that post represents the totality of the blogger's thinking on the subject. Been there. Done that. Mea cupla.
Eduardo Penalver parachuted into the debate over Mitt Romney and private equity, opining that:
I saw that last week Steve Bainbridge posted a lengthy defense of Romney’s work at Bain, and of corporate takeovers more generally. His defense largely matches Douthat’s: a few eggs must be broken in order for capitalism’s creative destruction to work its magic. Bainbridge very reasonably observes that: “[T]he creative destruction worked by takeovers makes the economy more efficient and frees up new social wealth. . . . Private equity firms played a huge role in busting up the conglomerate dinosaurs. Without a working corporate takeover model, however, the dinosaurs would still be clogging up our economy with their inefficient and outdated model.”
This is all fair enough, as far as it goes. I’m willing to admit for the sake of argument that the ability of firms to shut down factories and lay off workers fosters aggregate social wealth. From the perspective of Catholic social theory, what is problematic for me about Bainbridge’s defense of Bain is the way it never leaves the world of aggregate welfare. Under Bain’s watch, thousands of workers lost their jobs in order to free up capital to create new jobs elsewhere. How Bain’s impact on employment nets out is in some sense irrelevant. We are supposed to understand that the local harms caused by creative destruction is all for the greater good, but what happens to the individuals left behind by this process? It is no doubt true, as Bainbridge would likely argue, that some of them will find new jobs and benefit from the greater dynamism of the broader economy. But what steps does Bainbridge (or, more importantly, Romney) favor for those who cannot start over — those close to retirement or those whose skill set is poorly matched to the new economic realities. These individuals constitute the collateral damage of creative destruction. Even if they are outnumbered by those who benefit from greater economic efficiency, we cannot simply disregard them.
The trouble with parachute blogging is that you may well have missed prior posts by the author you're now criticizing in which s/he addressed the point in question.
In a recent post on Kodak's bankruptcy, for example, I wrote:
I feel badly for the people who work at Kodak. Ideally, public policy would provide mechanisms for retraining and transitioning of employees adversely affected by corporate takeovers. After all, if corporate takeovers really are Kaldor-Hicks efficient, there should be some money available for the state to redistribute to those who suffer from the externalities of that market. But Kodak still should die.
Are those not steps? Do I really need to include such a disclaimer every time I write about job losses and takeovers?
Having said that, I should also point out that I am somewhat dubious of legislative responses specifically directed at employees and other nonshareholder constituencies of corporate takeover targets, as compared to general welfare laws that benefit all persons suffering financial distress of some sort.
A number of commentators have advanced theoretical bases for the claim that takeovers are detrimental to nonshareholder corporate constituents. As the basic argument goes, many of the contracts making up the corporation are implicit and therefore judicially unenforceable. Some of these implicit contracts are intended to encourage stakeholders to make firm specific investments. Consider an employee who invests considerable time and effort in learning how to do his job more effectively. Much of this knowledge will be specific to the firm for which he works. In some cases, this will be because other firms do not do comparable work. In others, it will be because the firm has a unique corporate culture. In either case, the longer he works for the firm, the more difficult it becomes for him to obtain a comparable position with some other firm. An employee will invest in such firm specific human capital only if rewarded for doing so. An implicit contract thus comes into existence between employees and shareholders. On the one hand, employees promise to become more productive by investing in firm specific human capital. They bond the performance of that promise by accepting long promotion ladders and compensation schemes that defer much of the return on their investment until the final years of their career. In return, shareholders promise job security. The implicit nature of these contracts, however, leaves stakeholders vulnerable to opportunistic corporate actions.
As the theory goes, this vulnerability comes home to roost in hostile takeovers. In all hostile acquisitions, the shareholders receive a premium for their shares. Where does that premium come from? Recall that the employees' implicit contract involved delaying part of their compensation until the end of their careers. If the bidder fires those workers before the natural end of their careers, replacing them with younger and cheaper workers, or if the bidder obtains wage or other concessions from the existing workers by threatening to displace them or to close the plant, the employees will not receive the full value of the services they provided to the corporation. Accordingly, a substantial part of the takeover premium consists of a wealth transfer from stakeholders to shareholders. Or so the story goes.
There are any number of problems with this thesis, however. For one thing, there is no credible evidence that takeovers transfer wealth from nonshareholder constituencies to shareholders. The theoretical justification for protecting nonshareholders is equally unpersuasive. Many corporate constituencies do not make firm specific investments in human capital (or otherwise). In contrast, the shareholders' investment in the firm always is a transaction specific asset, because the whole of the investment is both at risk and turned over to someone else's control. Consequently, shareholders are more vulnerable to director misconduct than are most nonshareholder constituencies. Relative to many nonshareholder constituencies, moreover, shareholders are poorly positioned to extract contractual protections. Unlike bondholders or unionized employees, for example, whose term limited relationship to the firm is subject to extensive negotiations and detailed contracts, shareholders have an indefinite relationship that is rarely the product of detailed negotiations. In general, nonshareholder constituencies that enter voluntary relationships with the corporation thus can protect themselves by adjusting the contract price to account for negative externalities imposed upon them by the firm. Many nonshareholder constituencies have substantial power to protect themselves through the political process. Public choice theory teaches that well defined interest groups are able to benefit themselves at the expense of larger, loosely defined groups by extracting legal rules from lawmakers that appear to be general welfare laws but in fact redound mainly to the interest group's advantage. Absent a few self appointed spokesmen, most of whom are either gadflies or promoting some service they sell, shareholders--especially individuals--have no meaningful political voice. In contrast, many nonshareholder constituencies are represented by cohesive, politically powerful interest groups. As a result, the interests of nonshareholder constituencies increasingly are protected by general welfare legislation. Additional legislation targeted at employees of corporate takeover targets thus may well represent duplicative effort and/or a second bite at the apple.
