Do union political connections affect firm value?

Business likes political influence, but not when unions have it

In February 2012, the NSW government passed a law that curtailed the political power of trade unions, corporations, and peak bodies in that state.

The legislation banned these groups from making significant donations to political parties and, in effect, prevented union members from serving on political parties' governing bodies.

But the new law enabled UNSW researchers Jared Stanfield and Robert Tumarkin to examine which benefits, if any, unions derive for their members from being politically active.

"[It] was a perfect opportunity to do research that couldn't be done anywhere else," says Tumarkin, a senior lecturer in the school of banking and finance at UNSW Business School.

"Unions could still collectively bargain on behalf of their members. So, our study [could] isolate the effects of union political influence on wages and firms. And, we [could] look at what happened to firms and unions both inside and outside of NSW, which helps ensure we are not incorrectly attributing our results to macro-economic factors," Tumarkin says.

The law change meant a confluence of factors came together to allow the researchers to test their hypothesis that laws and legal decisions that decrease the ability of labour unions to exert political influence can weaken the bargaining position of unions relative to firms.

The researchers were able to measure and compare the values of firms before and after the law came into effect and also to compare the results with states other than NSW where such laws had not been introduced.

'If a union threatens that it will use political power against the firm, the firm will have an incentive to appease the union during labour negotiations'

ROBERT TUMARKIN

Credible threats

In their paper, The Effect of the Political Power of Unions on Firm Value, Stanfield and Tumarkin found that firm values went up after the law came into effect.

"While the political connections of a firm can enhance firm value, we demonstrate that union political connections can have the opposite effect," they write.

"In the wake of this legislation, the value of affected unionised firms significantly increased and these firms were able to negotiate more favourable labour contracts relative to their unionised peers in other states. We propose that unions use political connections to increase their ability to extract rents from shareholders."

There are several reasons why this could have happened. One is that because firms were also banned from making political donations their value might have risen because they were saving money they would previously have donated.

However, firm values went up far more than that, says Tumarkin.

Another possibility is that after the law was passed, investors believed that companies would be able to negotiate more favourable wage outcomes with the unions.

Tumarkin says this is more likely and in fact those firms whose values rose the most did indeed ultimately negotiate better contracts with the unions.

The results suggest that union political power does indeed translate into bargaining power.

Tumarkin says the paper doesn't provide any direct evidence as to why – so much of the bargaining happens behind closed doors after all – however, he has some ideas.

"There's always the ability to go on strike, appeal to an industrial relations body or the Fair Work Commission about unfair practices, and rally public support," says Tumarkin.

"If a union threatens that it will use political power against the firm, the firm will have an incentive to appease the union during labour negotiations. And so, when a union's political power goes away, its ability to make those threats seem credible also disappears."

Bargaining power

Actions such as going on strike or taking legal action against an employer are related to the ability of unions to rally the public and garner support from them and this derives, in part, from their political power.

Firms may have been emboldened to bargain harder after the unions' political power had been curtailed when negotiating union wages outcomes.

"It makes the firms more aggressive and the unions less aggressive because they have fewer avenues to fight the firm. Unions might not be able to strike. They might not be able to threaten that they're going to influence parliament," says Tumarkin.

Stanfield and Tumarkin's research presents a broader view of union power than is traditionally recognised by academics. They don't just derive their power from pooling their labour and threatening to withdraw or actually withdrawing it. There is also a political element that helps their negotiations.

It also provides new insights on the importance of political connections and power in corporate finance in general.

While it has long been accepted that a firm's political connections and power can lead to a higher firm valuation, there has been little academic research examining how other stakeholders might affect firm values.

"Our evidence suggests that comprehensive research into the political connections and activities of all of a firm's stakeholders is needed," the researchers write.

"For instance, it is unclear whether the political actions of secondary stakeholders, such as community and activist groups, affect firm value. Yet, these groups have recently increased their political prominence, using technological developments to quickly and dynamically organise political action in response to firm activities."

'This work demonstrates the importance of a comprehensive perspective on unions'

JARED STANFIELD & ROBERT TUMARKIN

Court challenges

This issue has come to the fore in recent weeks after environmental groups had the Federal Court overturn approval of the Adani Carmichael coal mine in central Queensland.

The approval was set aside after the court found federal Environment Minister Greg Hunt had not properly considered advice about two threatened species – the yakka skink and the ornamental snake – when he granted approval to what would have been Australia's largest coal mine.

The federal government is now considering whether to curtail environmental groups' ability to mount court challenges.

The NSW electoral law was in place for less than two years before it was struck out by the High Court.When the electoral funding law was introduced by then NSW premier Barry O'Farrell, he said it was to limit opportunities for corruption that could arise out of the paying of political donations.

However, unions saw it as a direct and deliberate attack on their power base. Unions NSW launched a challenge to the laws, arguing that donations are a form of political freedom and that a ban was unconstitutional. To the surprise of many observers, the union body won the case.

In December 2013, the High Court ruled that the changes to the electoral funding laws were invalid, finding that the provision which prohibited any association or corporation from making a political donation to a state or local election in NSW was invalid because it breached the implied freedom of political communication contained in the Australian Constitution.

The High Court also overturned the section of the laws that placed a cap on the total amount a political party and any affiliated organisation of that party could spend on political advertising and electioneering.

The effect of this law would have been to count any advertisements that unions funded during an election campaign in the Labor Party's total.

The researchers conclude: "This work demonstrates the importance of a comprehensive perspective on unions. It suggests that unions do not simply serve their members through pooled representation with firms, but also use political activities to aid their members financially."