The Wall Street Journal-20080123-The New Labor Activism
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The New Labor Activism
As public companies sift through shareholder proposals in preparation for their annual meetings, a recent Labor Department action could indicate stepped-up scrutiny of one of the most activist investor groups -- labor-union pension funds.
By conventional measures, unions are in sharp decline: They represented 38% of the private sector workforce in 1956, but only 7.5% today. In an odd twist, though, labor unions are in a sense among our most influential business owners as a result of the billions of dollars invested in public companies by union pension funds.
In 2006, union funds accounted for more shareholder proposals than any other group of investors. Unions have been articulate voices in recent debates over executive compensation, "shareholder access" to the company proxy in director elections, and other governance issues. In the words of AFL-CIO Secretary-Treasurer Richard Trumka, unions have learned to "organize our money essentially the way we organize workers."
Critically, however, "union pension funds" do not belong to unions. The funds are managed by trustees -- half appointed by the union and half by the companies that contribute to the fund pursuant to their collective-bargaining agreements. Under the federal employee benefits law (ERISA), which is administered by the Department of Labor, these trustees are to act "solely in the interest of the plan's participants and beneficiaries, and for the exclusive purpose of paying benefits and defraying reasonable administrative expenses," as the Department reiterated in an advisory opinion last month.
The Labor Department letter addressed a reported AFL-CIO plan to promote shareholder proposals that press companies to offer more generous employee health-care benefits, and that would require companies to disclose political contributions so shareholders could see if support was being given to candidates who don't share labor's views on health care.
Before undertaking "to monitor or influence the management of corporations," the department said, fiduciaries "must first take into account the cost of such action and the role of the investment in the plan's portfolio, and cannot act unless they conclude that the action is reasonably likely to enhance the value of the plan's investments."
The Labor Department letter comes at an important time. A recent University of Chicago study showed that union-affiliated funds do indeed systematically exercise their proxies to support labor objectives rather than simply to increase shareholder value. This was already evident in unions' statements about their shareholder power, in corporate campaigns such as the attempted ouster of Safeway's leadership during its 2004 labor dispute, and the refusal of some union health and welfare plans to do business with Wal-Mart, despite its low prescription drug prices.
Currently unions are making noise about challenging the recent SEC rule confirming that companies may exclude from the proxy statement shareholder proposals that would create new procedures for electing directors. "Proxy access" would advance a cherished union goal of increased leverage over corporate directors, but it is hard to see why retirement funds should bankroll that quest.
While the Labor Department letter is a welcome reminder that "union pension funds" are not "our money," as Mr. Trumka would have it, this is an area for further scrutiny.
In the first place, the Labor Department has a statutory responsibility to conduct investigations and bring federal court actions when pension assets are misused. The department does not hesitate to bring test cases against employers to highlight neglected legal responsibilities -- the AFL-CIO often demands such litigation. Some union shareholder activism is appropriate and even salutary, but there are abuses that call for the department's scrutiny and, potentially, investigation and enforcement.
Second, participants in union plans (including company managers promoted from the rank-and-file who retain retirement accounts) can engage in some activism of their own -- they may ask fiduciaries for information on their activities, and may bring their own legal actions if they conclude that plan assets are being wasted.
Finally, corporate managers have an important oversight role. As noted, union plans must be overseen by equal numbers of trustees appointed by the union and by the companies that contribute to the plan. These management trustees have the same fiduciary duty as union trustees to assure that plan funds are used properly. And yet, to hear some union leaders' intentions for "their" benefit plans, you would think that management trustees have abandoned their oversight responsibilities. That would be improper.
In a word, unions are not entitled to use retirement funds to raise costs at the companies where the funds are invested. And unionized corporations are not required to permit this. Rather, management trustees and the Labor Department are obligated to prevent it.
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Mr. Scalia, a lawyer in Washington, D.C., formerly served as general counsel of the U.S. Department of Labor.
