What would be the worst-case outcome of the ongoing United Auto Workers (UAW) and looming Kaiser Permanente strikes?
What would be the ideal outcome?
To conceptualize the labor dispute situation, we must first identify the stakeholders. When we understand the stakeholders and their motivations, we can think about ways ahead.
The first stakeholders are…
The workers
They want more pay and better benefits. They put in arduous labor for their product and deserve to be respected and well compensated.
Workers need job security in the long term to keep providing for themselves and their families. In the context of the labor dispute, job security means the workers need to be able to keep their jobs. The corporations must be successful to stay viable long-term and continue to need workers.
The unions
We need to separate the unions from the workers. Though the unions represent the workers in negotiations, they are not themselves the workers. The unions are separate companies that earn their living from union dues paid by the workers. The union representatives partner with the workers but don’t work for the corporations.
This unique arrangement is notable because the unions may achieve significant raises for the workers, and the raises aren’t sustainable in the long term for the corporations in the event of a downturn. The workers could be laid off, but the union representatives still have jobs. The unions don’t intend to break the corporations, but their task is first to achieve raises for workers. If they consider the corporations at all, it’s a secondary concern.
In the case of the UAW strike, the UAW union now seeks a minimum 30% raise for the auto workers, as well as a 32-hour work week with 40-hour work week pay. UAW represents 46,000 employees at General Motors, 57,000 at Ford, and 43,000 at Stellantis.
The Kaiser strike could be the “largest ever health care worker strike in the United States.” The union representing the Kaiser employees seeks better pay and benefits, as well as increases in staffing. Kaiser employees say the COVID pandemic highlighted the lack of staffing across the healthcare industry, and they need more support.
The workers and the unions represent one side of the negotiating table. The other side starts with…
The corporations
The automakers are public corporations. Kaiser is a privately held medical nonprofit institution. This distinction is interesting because the automakers have a fiduciary responsibility to act in the best interest of their shareholders, while Kaiser does not.
The automakers have a fiduciary responsibility to their shareholders. The Securities Exchange Act of 1934 required directors and officers of publicly traded corporations to act in the corporation’s and its shareholders’ best interests. However, corporations have no requirement to act in the best interest of the workers.
In contrast, Kaiser is a nonprofit institution. The Kaiser Foundation Health Plan CEO in 1997 said, “Unlike a for-profit, the nonprofit is not obligated to balance fiduciary responsibility to shareholders with responsibility to patients.”
The contrast between the two types of institutions, highlighted by the difference in fiduciary responsibility, is fascinating. What’s the impact on the shareholder if the corporations give too much in negotiations and the labor agreement isn’t sustainable in the long term? If profits stagnate due to the labor agreement, does that mean the corporation failed to honor its obligation to the shareholder? Or would higher worker pay incentivize workers to be more efficient and result in higher profits?
The fiduciary responsibility is a definite wrinkle in the situation. Corporations are legally obligated to act in the shareholder’s best interest, not the worker’s.
In the Journal of Law and Social Change, Volume 10, Haig Panossian advocates for fiduciary consideration of workers. He wrote:
However, just as a common goal of profit maximization has led to different classes of stock being successfully protected by the same fiduciary duties, it is likely that workers' shared interests in job security, safe working conditions, and fair wages will also allow them to feasibly be protected by fiduciary duties extended to them as a group.
Another consideration for the corporation is modernization. The automakers need to invest in infrastructure and modernize equipment while remaining profitable to move to changing production lines. Automakers need the capability to transition to increasing production of electric vehicles, depending on the market's future potential (EV sales have lagged expectations). A labor agreement needs to enable the automakers the capability to invest in this changing market.
Just as the unions represent the workers, another stakeholder represents the corporations. They are…
The executives
The executives guide the corporation to profitability and long-term success. One of the principles executives consider is payroll-to-revenue ratio. A good guideline for many businesses is a 15-30% payroll-to-revenue ratio.
Let’s look at General Motors (GM).
*Note* Below are hypothetical calculations based on some assumptions! The analyses include the available published data and assumptions when data was not available.
GM’s lowest recent annual revenue was $105,000,000,000 (Billion) in 2009. GM’s highest recent annual revenue was $156B in 2022. Since 2009, GM’s annual revenue has exceeded $150B in five years.
GM employs 155,000 workers, 92,000 of whom are in the United States.
If GM had a payroll-to-revenue ratio of 15% (and assuming annual revenue of $150B), payroll would be $22.5B. Divided by 155,000 workers, GM would pay an average of $145,000 per employee in salary, health care, pension or 401K contributions, and other benefits. At a payroll-to-revenue ratio of 16%, GM would pay $154,000 per employee, at 17%, $164,000. At 20%, GM would pay an average of $193,000 per employee.
Comparably.com says GM’s median salary is $135,000. Adding an assumed $25,000 for healthcare and other benefits results in a median salary package of $160,000 annually. One could reasonably guess GM’s payroll-to-revenue ratio is 15-20%. A pay increase at the UAW desired 30% level would mean a median salary package of $208,000 annually.
Based on UAW representing 46,000 GM workers and UAW’s desire to achieve a minimum 30% raise, the payroll-to-revenue ratio of UAW-represented employees would be slightly above 20%.
In a “down” year where GM earns an annual revenue of $120B, assuming all 155,000 workers averaged $208,000 yearly, the payroll-to-revenue ratio would be 27%.
Executives need to consider other factors in addition to payroll and revenue. Another principle executives have to consider is profitability. GM made just under $10B in profit in 2022. In the same year, GM paid profit-sharing bonuses of just over $500 million to workers at $12,750 per worker.
Assuming all 46,000 UAW workers made the new median income of $208,000 per year, the new proposed salary level would represent an additional $2B annual cost to GM. In a down year, this could significantly cut into corporate profits.
*Note* Above are hypothetical calculations based partly on assumptions!
Some might say the workers should get the majority of the profits. They are a big part of the team and deserve to be paid. In theory, this is a noble statement. In practice, the corporation has a fiduciary responsibility to return these profits to the stockholder. Corporations exist to deliver profitability to shareholders. Nobel Prize-winning economist Milton Friedman wrote in 1970:
There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits.
Executives must ensure long-term viability and profitability for stockholders, taking into account payroll and revenue.
The workers, unions, corporations, and executives are not the only stakeholders. There are two more. First is…
The corporate stockholders
Stockholders have no role in the corporation’s performance, but if corporate profitability falls, the stock price falls. As stockholder confidence wanes, the long-term viability of a corporation comes into question.
The Impact of Strikes on Shareholder Equity, a study published in the Industrial and Labor Relations Review, 1986, by Cornell University, found strikes reduce the stock value of a corporation by roughly 4%. At a value of $45B, a 4% loss in the value of GM represents a loss of $1.8B.
Another component of stockholder equity is that shareholders currently support worker rights. In an extreme example, Starbucks’ shareholders recently sued the corporation, claiming labor concerns violated the corporation’s fiduciary responsibility to shareholders by threatening operations and reputation.
This support for worker rights affects shareholders and reverberates throughout the nation.
And the final stakeholder…
The American people
The final piece of this muddy picture is the American people. We depend on the goods and services the automakers and healthcare companies provide. A prolonged strike could significantly impact the economy and the lives of millions of Americans.
The American people support unions and labor activities. We depend on the goods and services the automakers and healthcare companies provide.
In sum:
Workers want more pay and better benefits.
Union representatives represent the workers in their negotiations for more pay and benefits but have little regard for the corporation.
The corporation has a fiduciary responsibility to its shareholders but no obligation to its workers. Corporations need resources to invest in infrastructure and modernization.
Executives need to maintain the long-term viability of the corporation and deliver profitability for stockholders.
As stockholder confidence wanes, the long-term viability of a corporation comes into question. Shareholders currently support worker rights.
The American people support unions and labor activities. We depend on the goods and services the automakers and healthcare companies provide.
What would be the worst-case outcome of the ongoing United Auto Workers (UAW) and looming Kaiser Permanente strikes?
There are two terrible outcomes of the labor disputes.
The first would be an agreement between the corporations and workers that isn’t sustainable in the long term. Everyone loses in that case. The corporation loses because it fails to exist. The executives lose. The shareholders lose as the stock value plummets. The workers lose their jobs. The American people lose.
A second would be a prolonged labor dispute. The automakers have already started laying off workers at supply plants. The American people support laid-off workers with taxpayer dollars funding unemployment benefits. A prolonged labor dispute results in significant economic damage to the corporations and the country. This scenario could lead to job losses, higher prices for goods and services, and a decline in the quality of life for millions of Americans.
What would be the ideal outcome of the ongoing United Auto Workers (UAW) and looming Kaiser Permanente strikes?
The ideal outcome would be a fair negotiated agreement for workers and the corporations. This outcome would mean that workers receive a fair wage and benefits package while the corporations can remain profitable and continue to invest in their businesses.
Workers, and the unions on their behalf, should negotiate for wages to be 25% of annual revenue. The agreement should also include provisions to address workers' concerns, such as staffing levels, working conditions, and job security. The contract should also include provisions to protect the long-term viability of the corporations, such as investment in infrastructure and modernization.
In short, the agreement should be fair to all stakeholders, including workers, the corporation, shareholders, and the American people.
This proposal supports innovation and competition as executives and workers share a goal to increase revenue. It aligns the interests of workers and shareholders, as both groups benefit from increased revenue. As the businesses succeed, workers make more money. As businesses have lean years, workers keep their jobs.
Workers should negotiate for recurring pay slightly below the 25% revenue mark, with quarterly bonuses paid to meet the 25% revenue mark. Though the concept is similar to profit sharing, salaries would be revenue-based, not profit-based.
Thanks for considering my perspective.
May God bless the United States of America.
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