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The chief executive of Washington State Investment Board (WSIB), one of the nation’s largest pension funds, has become a major-league booster for private equity firm Kohlberg Kravis Roberts’s Ownership Works, a nonprofit that proposes to help companies distribute equity shares to employees.
CEO Allyson Tucker promoted the program at an investor conference last month in California, and sits on a leadership council for the organization with directors from other pensions, including California’s CalPERS, the State of Michigan Retirement System, and the New York State Common Retirement Fund.
But the support from top pensions for KKR’s new public relations gambit has run into resistance from organized labor.
Along with insurers and sovereign wealth funds, pensions have dramatically grown their allocations to private equity in recent years, forking over high fees in the hope that more exclusive markets deliver higher profits and withstand downturns. That gives retirement funds like Washington State, which has entrusted some $12 billion to KKR since the 1980s, enormous sway over buyout funds’ strategy.
At a WSIB board meeting on Thursday, the labor union United Food and Commercial Workers (UFCW) submitted a public comment arguing that there is an apparent conflict of interest in Tucker’s public promotion of Ownership Works.
UFCW, which has long-standing grievances with KKR over its consolidation of the grocery industry, pointed to negative social impacts of the fund’s past investments. It drew attention to WSIB’s investment through KKR Asian Fund III in Cue Group, a firm that allegedly collaborated with a branch of the Chinese surveillance state.
“KKR is a government contractor for Washington State Investment Board. Washington’s CEO is in a position to hold KKR accountable for investments like Cue, or not. In our opinion, there is an appearance of a conflict of interest in advising a non-profit founded and funded by a KKR executive,” UFCW wrote in public comment. “Does your CEO’s role with Ownership Works help burnish KKR’s image? Should the Washington State Investment Board do that for a large contractor?”
Tucker acknowledged the public comment at the meeting, but did not address its criticism of her involvement with the nonprofit.
“It’s an initiative we’re hoping becomes a movement, in at least the private equity industry,” she told board members, describing the push for employee ownership.
In its comment, UFCW urged the pension fund to reject future investments in KKR because “we don’t believe a fund manager can invest in a company that collaborated with an arm of the Chinese surveillance state in one fund, and at the same time promise to invest in companies that won’t have negative social impact.”
Stephen Diamond, a professor of business law and corporate governance at Santa Clara University, told the Prospect that based on the limited information available about Ownership Works, he doubted there was a technical conflict of interest. However, he said, for pension fund executives, “a broader question of appearances comes into play.”
“It’s a bit aggressive, but one could claim that they are on both sides of the table. How can they be part of a board that has a fiduciary obligation to its beneficiaries to evaluate, objectively and at arm’s length, whether investment in KKR makes sense?” Diamond said.
The Washington pension fund’s reputational assist raises a dilemma, as private equity firms look to improve their public image. KKR is raising money for a new social impact fund, working on building its image as a successful ESG (environmental, social, and governance) manager, and deepening its investments in China during a period fraught with political risk. Can institutional investors critically evaluate the holdings of a private equity group on behalf of their shareholders, while at the same time promoting its publicity initiative?
KKR HAS EXPERIMENTED with employee ownership at portfolio companies for years. The company says 45,000 employees at 25 of its portfolio companies have benefited in some way from its programs. This has occasionally led to windfalls for workers: Last month, more than 600 hourly employees at a garage-door maker in Illinois, including assembly line workers and truck drivers, saw a massive payout from KKR’s $3 billion sale of the firm, with the average payout of $175,000. The deal generated rave media coverage about KKR’s social impact.
Earlier this year, Pete Stavros, KKR’s co-head of private equity, launched Ownership Works, which says it will help companies implement similar programs. Nineteen private equity funds, including Silver Lake, Apollo Global Management, and Leonard Green, have pledged to administer employee ownership programs in at least three of the companies they control by the end of next year.
Proponents of employee governance like Ian MacFarlane, the president of a worker-owned environmental consulting firm, have argued that the Ownership Works initiative misuses the term “employee ownership,” since the model grants workers restricted stock or other forms of equity before selling the company, meaning there is no long-term plan for employee control.
Employee ownership models can, but don’t always, build worker power. For instance, Sweden’s never-quite-implemented Meidner Plan would have gradually granted shares to employees, eventually turning over full ownership. But flexible and voluntary plans for granting individual shares to employees, as Ownership Works proposes, won’t necessarily increase the percentage of worker-owned stock or boost worker voice and influence.
WHAT EMPLOYEE OWNERSHIP schemes could do, however, is revamp the private equity industry’s dismal reputation.
KKR once reveled in its villainous public image, promoting a view of private equity as canny, nimble, and unapologetically capitalist. But as the buyout sector has swelled in size and cemented its place on Wall Street, executives have come to resent their unpopularity.
“Business isn’t trusted, and the alternatives business in many cases, particularly in Washington, is hated,” Jonathan Sokoloff, the executive of participating private equity firm Leonard Green, said at a conference last month, referring to alternative assets like private equity.
Straining credibility, Sokoloff went on to say that Ownership Works is a natural fit for private equity, a sector that has always cared about shared ownership.
“We partnered with management, we shared equity ownership, 40 years ago, to make sure that a broader group shared in success, people had skin in the game,” he said. “We’ve been kind of doing this for 40 years, but haven’t really trumpeted, or calculated, or focused on it.”
As a 501(c)(3) nonprofit, Ownership Works is technically separate from KKR and other founding private equity funds. But it has become a major marketing opportunity for its parent companies, with executives proposing it as a stylish twist on démodé ESG investing. A press release on a recent sale reads: “KKR and C.H.I. Employees Prove ‘Ownership Works.’”
For its part, Washington State Investment Board says the collaboration is a win-win. “Advocating for strong investee companies with healthy inclusion for workers fits with our fiduciary duty and serves the interests of our beneficiaries,” Chris Phillips, public affairs director, said in a statement to the Prospect. “The fact that other asset owners, investment partners, and other service providers are part of such a broad-based industry organization creates greater potential for inclusion of workers and, in our view, does not represent a conflict of interest.”
KKR IS ESPECIALLY ANXIOUS to improve its image following negative reporting on its business in East Asia. The firm is determined to show that China, where it has invested in everything from chicken production to Himalayan dams, can still be a winning market for American investors.
Reporting by The Wire found that Cue, a China-based portfolio company held by KKR, helped develop facial recognition technology to identify individuals, take their temperature, and even “recognize specific blacklisted people.” The report finds that it may have developed the device in collaboration with a government laboratory under the Ministry of Public Security (MPS), a key node in China’s domestic surveillance apparatus.
Although the lab confirmed to The Wire that it had previously collaborated with Cue, and Cue promoted its ties to MPS online, KKR maintained in a statement that the machine at issue was developed “in-house,” and not in collaboration with the Chinese government. Cue remains listed on “KKRESG.com” as a portfolio company that has won an ESG-related award.
The bigger picture is that private equity titans like KKR are still looking to boost their exposure to China, where they see opportunities in infrastructure and a growing middle-class consumer base—and they would prefer that rising anti-China sentiment in the West not get in the way.
In a conversation with the Prospect at the Milken investor conference last month, KKR’s co-CEO Joe Bae argued that political decoupling need not undermine opportunities for American capital to flow into Chinese domestic markets.
“The geopolitical stuff is not going to get fixed overnight. There’s going to be sectors that there’s going to be more sensitivity to, whether that’s 5G or certain tech sectors,” Bae said. “For us in China, it’s more a question of what sectors do we think domestically are really interesting growth businesses, versus export-driven businesses.”
KKR declined to comment for this story. Even as it peddles its more interpretive approach to social impact through employee ownership, the firm is launching a new ESG fund, which includes cybersecurity firm KnowBe4 and Viridor Waste Management, a U.K.-based incinerator operator, according to a trade news site.
Originally, ESG was not conceived as choose-your-own-adventure altruism but as the idea that recklessness on matters of social good, from burning fossil fuels to harassing employees, was a form of business risk. By extension, the thinking went, neutralizing those risks would be good for the bottom line, and attractive to investors. Now, with ESG facing a reckoning, the label has become a catchall for investments that are vaguely decent.
