In my book The New Corporate Governance in Theory and Practice, I argued that:
The interests of large and small investors often differ. For example, large holders with substantial decision-making influence will be tempted to use their position to self-deal; i.e., to take a non-pro rata share of the firms assets and earnings. As management becomes more beholden to the interests of such large shareholders, moreover, management may become less concerned with the welfare of smaller investors.
With respect to union and public pension fund sponsorship of shareholder proposals under existing law, 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.[1]
This is not just academic speculation. The pension fund of the union representing Safeway workers, for example, used its position as a Safeway shareholder in an attempt to oust directors who had stood up to the union in collective bargaining negotiations.[2] 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.[3] Union pension funds reportedly have also tried using shareholder proposals to obtain employee benefits they couldn’t get through bargaining.[4]
There is now new evidence that I was correct, summarized in a post by John G. Matsusaka, Oguzhan Ozbas and Irene Yi:
Union shareholders attract more critical comments than any other group: as pension fund managers they have an incentive to press for higher investment returns, but as worker representatives they also want wage and compensation policies that benefit current members. While some observers have argued that – for statutory and strategic reasons – unions will not use the proposal process for private purposes, there is a lack of empirical evidence on whether and how often unions make proposals for private purposes.
In a new study, “Opportunistic Proposals by Union Shareholders,” now in working paper form, we provide what we believe is the first systematic evidence that unions do in fact use the proposal process for private purposes, and such use is not a rare occurrence. Identifying opportunistic proposals is difficult because sponsors are not going to admit that their proposals have an ulterior motive. Our strategy is to look for heightened proposal activity during times when a proposal is particularly likely to provide an ulterior benefit for unions. Specifically, we examine whether unions make more proposals in years when the company is negotiating a collective bargaining agreement. We conjecture that unions might make proposals to create bargaining chips; they can withdraw their proposal before it comes to a vote if management offers a suitable contract. Since there is no obvious reason for proposals to jump during negotiation years other than private benefits for the union, there is a good circumstantial case for believing that extra proposals in negotiation years are intended to influence contract negotiations.
They conclude:
... our study suggests that the possibility of there being downsides to enhanced shareholder rights should be taken seriously. Much of the argumentation, particularly in the academic sphere where we reside, has focused on agency problems in the CEO’s office, and the power of shareholder rights to curtail managerial misbehavior. We are convinced by the large body of evidence that agency problems are real, and believe that controlling agency problems is a good justification for enhancing shareholder rights and giving shareholders more power to intervene in corporate affairs. However, it is also important to recognize that shareholder rights can be abused, and to design smart regulations that mitigate the risk of abuse.
This is, of course, much the same policy prescription advanced in my essay Preserving Director Primacy by Managing Shareholder Interventions, available at SSRN: http://ssrn.com/abstract=2298415.
[1] Roberta Romano, Less Is More: Making Shareholder Activism A Valued Mechanism Of Corporate Governance, 18 Yale J. Reg. 174, 231–32 (2001). None of this is to deny, of course, that union and state and local pension funds also often have interests that converge with those of investors generally. See Stewart J. Schwab & Randall S. Thomas, Realigning Corporate Governance: Shareholder Activism By Labor Unions, 96 Mich. L. Rev. 1020, 1079–80 (1998).
[2] Iman Anabtawi, Some Skepticism About Increasing Shareholder Power, UCLA L. Rev. 561 (2006).
[3] Stephen M. Bainbridge, Flanigan on Union Pension Fund Activism, available at http:// www.professorbainbridge.com/2004/04/flanigan_on_uni.html.
[4] Id.
