The care home crisis is a labour rights issue

Who would you trust to make decisions around an elderly relative’s care: care home workers or hedge fund managers?

Based on the balance of rights in contemporary corporate governance, the prevailing wisdom appears to be the latter. Yet confronted with the harm inflicted upon care home residents and workers by twenty years of mismanagement and asset stripping, even the most zealous exponent of the efficiency of capital markets would blanch.

In May of this year, the futures of the homes of some 17,000 elderly and disabled people were put at risk when Four Seasons Care Ltd collapsed into administration, having struggled for years under a debt burden accumulated through repeated private equity buy-outs. The futures of 22,000 employees were also put at risk.

The care sector is notorious for poor employment practices. Poor working conditions feed into poor experiences for residents and, in extreme cases, abuse scandals. Yet most commentary fails to draw the link between these factors. Concern for the rights of care workers is framed in terms of accessing basic statutory minimum rights. Meanwhile, residents are seen as victims of excessive profiteering.

What is needed is a radical reconfiguration of labour rights to empower workers to create positive care and work environments and resist exploitation by financial interests.

The City and the care home sector

The City has been targeting the care home sector since the early 2000s, with investors chasing returns on the underlying property assets of homes and speculating on rising profitability due to an aging population and financial pressures on the NHS.

Four Seasons’ problems began following its 2006 leveraged buyout by Three Delta LLP, a Qatari state-backed investment fund, which ran quickly into trouble as the effect of the financial crisis hit the company’s property portfolio. Following financial restructuring in 2009 the company returned to profitability, encouraging the 2012 purchase by Terra Firma Capital Partners which saddled the company with a new £565m tranche of debt. Servicing this debt cost Four Seasons £50m per year. Yet when reported profits fell by 39% in 2016, the company blamed funding cuts and the introduction of the National Living Wage.

The collapse of Four Seasons follows the fate of Southern Cross, formerly the largest care home provider in the UK, which went to the wall as a result of financial engineering deployed by former owner Blackstone, a US-based private equity firm. Blackstone had grown its chain through buying up homes, selling off the properties and then leasing them back, using the revenues generated to continue expansion. The company folded in 2011 under the weight of the resulting rent bill. Blackstone had exited 4 years earlier with a tidy £1.1bn profit.

In both cases the finger of blame was pointed at the level of funding available from local authorities, and the rise in the minimum wage. These arguments have been widely repeated across news outlets. This reflects the trade narrative put out by the major care home providers, whose extraction of money from the sector drives a constant crisis of frequent sell-offs and debt-financed takeovers. The Competition and Markets Authority found that of the funds granted the largest 26 providers, 5% leaves the sector in management fees to financial organisations, amounting to some £200m a year. On top of this providers take a profit of £60-80m, with another £177m servicing debt to banks and bondholders. This is not to mention the £390m a year passed to landlords as a result of the sale of property assets under private equity owners. Yet the CMA uncritically accept the loss of over £760m a year as the cost of doing business, calling for an additional £1bn in funding. 

The cost to labour

Given the low operating margins of care homes, meeting private equity investor demands for a 12-14% return inevitably entails squeezing labour costs. Private equity takeovers are strongly associated with repressed wage growth, anti-union practices and – where management is appointed by private equity groups – job losses.

There is a strong relationship between financial cutbacks, declining job quality and quality of care. This puts quality of jobs front and centre in any strategy to improve care. The trade union Unison has demonstrated how staffing shortages are linked to serious care failings, with overstretched staff too rushed to provide adequate care – even when working through breaks. The union has been pushing councils to recognise the relationship between workers’ rights and residents’ interests through the Residential Care Charter.

Meanwhile, Unison has fought a rear-guard action to prevent closures of financially stricken homes around the country. Following the sale and closure of a number of Four Seasons homes in Northern Ireland, they emphasised the need for stakeholder rights to constrain market influence given that the majority of the sector “is now in the hands of the market, and in many cases subject to decisions beyond our shores which have little or nothing to do with the cost of care”.

But any such efforts are ultimately after the fact. Unions and workers have zero rights to influence corporate decision-making to protect homes, jobs and residents from financial takeovers. They are hamstrung under a legal ownership structure that places ultimate power in the hands of share capital owners, to whom a home is just another bundle of underperforming assets in need of shareholder value maximisation.

Existing worker rights to information and consultation are weak and ineffective. Workers need real bargaining rights before the consummation of private equity deals and during restructuring. This should include rights to veto value extraction through dividends, recapitalizations and fees. Workers must be given ‘owners’ rights to balance the power of finance and protect the integrity of social institutions such as care homes upon which we all rely.

Ben Crawford works at the Institute of Employment Rights.

Image Credit: truthseeker08 via Pixabay