Even though Labor Day is over, it’s still worth thinking about the role of unions in our economy. In some respects, private sector unions are almost powerless. The percentage of private sector workers who are unionized has been declining steadily since the mid-1950s.
Even though our population and the number of private sector jobs both continue to grow, the number of union members in absolute terms peaked in 1970 and today is less than half of its maximum figure. If it weren’t for public sector unions, organized labor would be a spent force.
On the other hand, what they lack in raw numbers, the unions increasingly make up in economic clout via their pension funds. The Teamsters pension fund, to cite but a single example, has more than $100 billion invested.
The National Center for Policy Analysis estimates that union pension holdings now exceed $1.4 trillion, representing almost 15 percent of all outstanding shares of stock. All told, union pension funds represent one of the largest blocks of investors in the U.S. stock market, which gives them enormous potential clout.
Union leaders recognize that their pension funds represent an important source of power.They have become activist investors, using Securities and Exchange Commission rules to put proposals up for a shareholder vote, bargaining with management, influencing the outcome of proxy contests and takeover bids, and even seeking representation on boards of directors.
Defenders of union pension fund activism argue that the unions are simply making use of rights shared by all investors. In fact, however, there’s good reason to think that union pension funds are one of the classes of institutional investors most likely to use their position to self-deal — i.e., to take a non-pro rata share of the firm’s assets and earnings — or to otherwise reap private benefits not shared with other investors.
With respect to union pension fund sponsorship of shareholder proposals under existing law, for example, Yale law professor and corporate governance expert Roberta Romano observes that "examples of potential benefits which would be disproportionately of interest to proposal sponsors are progress on labor rights desired by union fund managers. ..." In contrast, she points out, private sector fund managers are far less likely to get private benefits from activism and, accordingly, "we do not find them engaging in investor activism."
In addition to tangible private benefits, activist union investment managers also get psychic and political benefits. In a blog post at Conglomerate.org, law professor Brett McDonnell opined that when union pension funds "go after powerful, overpaid CEOs, part of their explicit point is a populist attack on privilege. That’s cool with me, and I suspect it’s cool with a lot of their constituents as well."
As a 2005 Wall Street Journal editorial explained, however, this sort of activism is distinctly uncool. It represents what the left calls "the new politics of capital," in which liberal activists attempt to turn entire corporations into lobbyists for their social and political goals, their campaigns all neatly disguised as "shareholder activism."
Not surprisingly, this sort of union activism routinely puts organized labor at odds with the interests of other investors. The pension fund of the union representing Safeway workers used its position as a Safeway shareholder in an attempt to oust directors who had stood up to the union in collective bargaining negotiations.
Indeed, union pension funds tried to remove directors or top managers, or otherwise affect corporate policy, at more than 200 corporations in 2004 alone. Brokerage houses that openly supported privatization of Social Security assets were put on notice that unions would pull their money if such support continued. Union pension funds reportedly have also tried shareholder proposals to obtain employee benefits they couldn’t get through bargaining.
Equally unsurprisingly, however, because most of the private benefits from pension fund activism redounds to the benefit of the fund managers or union leadership, union activism also routinely puts their interests at odds with those of the union members whose pensions they manage. Many union members would have gotten better returns from a low-fee indexed fund in a 401(k) than they get from their union pension fund.
The SEC is considering proposals to further empower shareholder activists. As the commission does so, it would be well advised to consider carefully just which investors would be empowered and toward what ends.