In my book Corporate Governance after the Financial Crisis, I argue that proposals to empower shareholders to be more actively engaged in corporate decision making are problematic because, among other ills, the shareholders most likely to make use of such powers will use them to engage in private rent seeking.
With many categories of institutional investors thus eliminated as potential activists, we are left mainly with union and state and local pension funds, which in fact generally have been the most active institutions with respect to corporate governance issues. Unfortunately for the proponents of institutional investor activism, however, these are precisely the institutions most likely to use their position to self-deal or to otherwise reap private benefits not shared with other investors. With respect to union and public pension fund sponsorship of Rule 14a-8 proposals, for example, Roberta Romano observes that:
It is quite probable that private benefits accrue to some investors from sponsoring at least some shareholder proposals. The disparity in identity of sponsors—the predominance of public and union funds, which, in contrast to private sector funds, are not in competition for investor dollars—is strongly suggestive of their presence. Examples of potential benefits which would be disproportionately of interest to proposal sponsors are progress on labor rights desired by union fund managers and enhanced political reputations for public pension fund managers, as well as advancements in personal employment. … Because such career concerns—enhancement of political reputations or subsequent employment opportunities—do not provide a commensurate benefit to private fund managers, we do not find them engaging in investor activism.
There have been several troubling incidents of the sort to which Romano refers. In 2004, for example, CalPERS organized a proxy campaign to remove Safeway’s CEO and chairman of the Board Steven Burd. At that time, Safeway was in the middle of acrimonious collective bargaining negotiations with the United Food & Commercial Workers Union. It turned out that CalPERS had acted at the behest of Sean Harrigan, Executive Director of the United Food and Commercial Workers Union, who was then also serving as president of CalPERS board. Nor is this an isolated example. Union pension funds tried to remove directors or top managers, or otherwise affect corporate policy, at over 200 corporations in 2004 alone. Union pension funds reportedly have also tried shareholder proposals to obtain employee benefits they could not get through bargaining.
There's a new wrinkle to the problem, however, which is that union pension funds are now using the corporate governance process to effect a specific political agenda.
Unions, of course, are one of the key special interests of which the Democratic Party is comprised. The vast majority of union campaign contributions go to Democrats. The vast majority of union endorsements go to Democrats. The vast majority of union volunteer efforts go to help Democrats. Whether you think the Democrats are in the unions' pocket or vice-versa, their political alliance is undeniable.
In this highly-charged political year, union-controlled pension funds are using their corporate governance powers as shareholders to carry water for a left-liberal agenda intended to help Democrats and other liberal causes.
Consider, for example, the current campaign to get disclosures or/restrictions on corporate political contributions. If you believe Lucian Bebchuk and his law professor allies, this is just a matter of good corporate governance:
... public investors have become increasingly interested in receiving information about corporate political spending.
... disclosure of information on corporate political spending is important for the operation of corporate accountability mechanisms, including those that the Supreme Court has relied upon in its analysis of corporate political speech.
Unfortunately, of course, this is all bullshit.
If you want a close-up look at why certain shareholder activists have seized on this issue, take a look at what happened at Wellpoint's shareholder meeting:
Union representatives and other protesters repeatedly interrupted Chairwoman and CEO Angela Braly after she opened the meeting and introduced proposals for shareholder voting. ...
"Full disclosure of corporate spending on political activities is in the best interest of shareholders," audience member Dave Wallace shouted as Braly told him in a monotone he was speaking out of order, before the meeting's question-and-answer session. Wallace is the president of the American Federation of State, County and Municipal Employees, or AFSCME, Local 1117 in Torrance, Calif. ... (Source)
Union activists didn't just try to disrupt the shareholder meeting. They also presented a proposal calling on Wellpoint to provide greater disclosure of political and campaign contributions. Their fellow non-activist shareholders overwhelming rejected the proposal:
WellPoint later said a total of 83 percent of shareholders voting rejected the proposal calling for greater disclosure. Company officials also said a similar measure was rejected a couple of years ago. (Source)
The Wellpoint shareholders' rejection of the union proposal is part of a growing trend of non-activist investors wising up to the anti-corporate/anti-business agenda motivating these union-backed proposals:
Support for political proxy proposals has fallen significantly at other big companies as well. Overall, according to the Manhattan Institute's Proxy Monitor, in 2012 political spending or lobbying proposals have received an average shareholder vote of 18.3%, compared with 22.6% last year. Could shareholders be getting wise to the political charade? (Source)
In addition, the union pension fund activists "asked shareholders to vote against board members Julie Hill and Susan Bayh (wife of former Indiana Senator Evan Bayh) because of the board's refusal to disclose political spending. The result was a rout: Two non-targeted board nominees received between 93% and 94% of the votes, but Ms. Bayh and Ms. Hill got nearly as many votes with between 92% and 93%." (Source)
As they have done at many corporations recently, the union pension fund activists also tried to bully Wellpoint into "cutting ties with the American Legislative Exchange Council, or ALEC, a conservative nonprofit group that brings together lawmakers and private sector organizations to develop legislation and policy." (Source)
All in all, what we see here are massive union-controlled pension funds flexing their corporate governance muscles to advance their private political agenda of electing Democrats and promoting liberal causes by defunding conservatives.
It's easy to understand why unions support on-going efforts to empower shareholder activism. It's less clear why law professors like Bebchuk want to promote an agenda that empowers private rent seeking by politically motivated activists. But whatever their motivation may be, it's impossible to deny that they are carrying water for the unions carrying Democrats' water.
Saul Alinsky would be proud.