How to Destroy Shareholder Value in One Easy Lesson

Last month, a group of lawmakers introduced the “Employee Free Choice Act,” a bill which would make it considerably easier for employees to unionize. Under current law, employees are required to hold a secret-ballot vote on unionization, supervised by the National Labor Relations Board. If passed, the bill in question would force businesses to recognize a union if and when a majority of workers sign up for one — for example, via petition. In short, this is clearly intended to significantly increase the degree of unionization in American businesses.

This is bad news for shareholders, as unionization is almost always accompanied by lagging profits. Take the highly unionized Telcom sector, for example, which is dominated by traditional telephone services. As the chart on the left shows, the NASDAQ Telcom Index has significantly underperformed the S&P throughout is existence.

Conversely, the largely un-unionized financial industry has consistently outperformed the S&P throughout its history, as shown on the chart on the right.

I made note of this correlation on Fox News’s “Cashin’ In” two weeks ago. Host Terry Keenan asked a great question in response: Could this disparity be explained by the age of the sectors? In other words, shouldn’t we expect that more mature areas of the economy will lag behind less mature ones?

But when we look closer, we see that the correlation holds, regardless of how mature the sector in question is. The financial sector is, after all, older than the S&P itself — by definition. And other mature (and non-unionized) sectors such as retail have also fared well.

Put another way: The Employee Free Choice Act is a great idea, if you want the entire stock market to perform like General Motors.