This is Part II of a conversation between David H. Webber and Michael McCarthy on the prospect of combating neoliberal corporate governance through the shareholder activities of workers’ pension funds. Workers’ retirement savings make up a substantial share of the capital invested in the public stock market and the private equity market. If shareholder primacy is the dominant paradigm of our financialized economy–usually a problematic proposition in these pages–then shouldn’t workers have a say in how these companies are run?Webber and McCarthy are both sympathetic to this idea, but disagree about how well such efforts have worked in the past and how likely they are to work in the future.
David Webber: Though I think he somewhat overstates the case, I agree with Michael’s observation that these pensions have, at times, been used against labor. And not just historically. I discuss (and decry) contemporary examples of this phenomenon in my book, such as pension fund investment in privatization. And it is also true that both private and public sector pensions have been used in favor of labor, as my book demonstrates. Before digging into those issues, I want to clarify some important distinctions between the public and private fund context, respond to some of Michael’s claims about ERISA and fiduciary duty, and point to examples of why, regardless of what has occurred historically, things are changing and have the potential to change further, if acted upon.
First, Michael shifts the focus to private union pension plans. Fair enough. I discussed them above and I’ll return to them below. But the bulk of my discussion focused on public pension plans, and with good reason. In part that’s because they are far larger. The public pension funds of California alone significantly exceed the assets of all private union pension plans combined. But there’s another reason to focus on public pension plans: they are not governed by Taft-Hartley or by ERISA. They are governed by state pension codes. That matters for two issues: board control, and fiduciary duties.
As to board control: in some jurisdictions, workers outright control a majority of the pension board seats. When I directly examined this question, I found that among the largest pension funds (those with $10 billion or more in assets at the time, n=53), all had worker representation on their boards. In fact, on average, there were more worker representatives than employer/political ones. Twelve boards were outright controlled by worker representatives, another nine had a majority of neither workers nor politicians, with the remainder under primarily political control. But even this somewhat understates the role of worker voice in these pensions. Workers are also voters, and in some jurisdictions, public sector unions remain an important political force. That means workers may have considerable control over their pensions, even if they technically constitute a board minority. (This contrasts with the private union Taft-Hartley context, where workers get half the board, and the employer gets the other half, with little or no worker say over the identity of employer representatives). One of the sharpest critiques conservatives have made against public pension funds is that public sector unions have too much influence over benefits because they have both worker representation and employer representation via their influence over the political process. I think that argument is exaggerated, but in many cases, worker control of public pensions is quite real.
As to state-level fiduciary duties, some of the codes are similar to ERISA on fiduciary duties like the duty of loyalty, but some are not. Even where state pension code language tracks ERISA, it is ultimately state law and state interpretations of the law that matter, not the U.S. Department of Labor’s interpretation of ERISA. So, some of the history Michael cites is only indirectly relevant to the public side of the spectrum. And even when Republican administrations take control in Washington and begin putting the most unfavorable interpretations on ERISA, state public pension plans are not obligated to follow them because they are creatures of state law (though there is some residual federal power over them via tax law). That’s part of why the blue state political and legal context matters, and why the public pension/private pension distinction matters too. And it also explains why these public pension funds have played an outsized role in shareholder activism generally and labor-focused activism in particular.
That said, let’s return to private union pensions and ERISA. Michael focuses his analysis on the “prudent person” rule and points to DOL interpretations that emphasize what I call the “returns only” view of fiduciary duty. But I think that there is room under ERISA, even as it exists now, for a more capacious view of fiduciary duty. The key language come from ERISA Section 404, which requires trustees to invest “solely in the interest of the participants and beneficiaries and (A) for the exclusive purpose of (i) providing benefits to participants and beneficiaries and; (ii) defraying reasonable expenses of the plan.” What that language means has been a political football in Washington for almost twenty-five years, with the Clinton DOL liberalizing it, the Bush DOL narrowing it, and the Obama DOL broadening it again. (In my view, though the Trump DOL issued a Field Assistance Bulletin on the subject, that bulletin marked more of a tonal shift than an actual departure from the Obama bulletin). We might also ask whether consideration of the jobs of workers who contribute to pensions are truly “non-financial factors.”
Regardless, consider two fiduciary duty cases I cite in my book, Brock v Walton (11th Cir) and Bandt v San Diego County (Cal. App.). In Brock, the DOL sued a pension plan for offering below-market home loans to its members, arguing that, by definition, offering a below-market rate loan breached the duty of loyalty for failing to maximize returns. In Bandt, pension trustees were sued (under California law tracking ERISA) for agreeing to allow San Diego to make a lower pension contribution to save worker jobs. In both cases, the trustees pursued some other economic benefit for workers beyond investment returns. And in both cases, the court ruled that the trustees did not violate their fiduciary duties. That suggests some tradeoffs are permissible. I am not suggesting that all cases have come out this way. But Brock and Bandt suggest that there is room for debate. For more on this subject, see my 50-state survey of state pension codes on fiduciary duties. Finally, I have been working with a Member of Congress on legislation that would reform ERISA to make it clearer that trustees can consider, for example, worker jobs when making investments, not least because pension plans are financially dependent on worker and employer contributions and not just investment returns.
I’d also like to say a word about the historical context. I don’t take issue with Michael’s characterization of the history around Taft-Hartley and ERISA. His book does a wonderful job of sketching that out. Perhaps the following is heretical, coming from the law professor and not the sociologist, but I would be cautious about centering the text and legislative history of legal statutes in understanding either the legal environment or the broader political and cultural one in which this activism takes place. In fact, there is very little litigation over the fiduciary duties of defined benefit public pension trustees, at least over these investment portfolio issues, and certainly in comparison to my other field (securities and corporate law), where litigation is rampant, and where there are tomes of caselaw to consult. A year ago, I spoke with the head of one of the largest providers of fiduciary liability insurance for pension trustees, both public and private. His firm has been selling that insurance for decades. It has never had a claim. Not one single trustee that he has insured has ever needed that insurance. This strongly suggests that, to get a sense of what’s really going on today with labor’s pensions, we have to look closely at the facts on the ground.
That is the primary purpose of my book: to demonstrate, using recent case studies, how certain savvy labor-side shareholder activists have been able to use the power vested in worker pensions to protect and advance the interests of the workers who contribute to them. I show the American Federation of Teachers’ counterattack on hedge funds that attacked teacher pensions, and the SEIU’s involvement in CalPERS’s decision to divest from hedge funds. I show how the AFL-CIO Office of Investment pushed for private fund registration, forcing private equity to make many disclosures for the first time and revealing widespread malfeasance. I show how the North America’s Building Trades Union obtained responsible contractor policies, how AFSCME pushed for say on pay votes, how pensions have led the charge in shareholder lawsuits, how New York City successfully pushed back against managerial entrenchment.
Yes, public pensions participated in KKR’s dismantling of Nabisco leading to large job losses, as Michael pointed out. But today, Washington and Minnesota’s pensions threatened to cut off KKR and Bain if they did not pay severance to fired Toys R Us workers—which they ultimately did—and KKR competitor Carlyle is now funding the construction of Terminal One at JFK Airport alongside the Union Labor Life Insurance Company, creating 4,000 union jobs using labor’s own capital. And for decades, the AFL-CIO Housing Investment Trust and the AFL-CIO Building Investment Trust have made investments that require the hiring of union labor. That doesn’t happen by accident. It happens because of the conscientious wielding of labor’s capital for the benefit of workers who fund it and depend upon it for retirement. That is the type of action that should be replicated today. These are episodes that have occurred in this current political and legal environment, with all of its constraints. Not all of these efforts have been successful, but even the failures are illustrative. I view this space as an organizing opportunity. But I do ultimately agree that even greater political organization can help the cause.
Michael McCarthy: I think it is worth clarifying why I think that the history of private union funds is not simply a matter for historians, but is deeply relevant to the issue of worker control of finance, even in public funds. I bring it up, along with Taft-Hartley and ERISA, not simply to say that unions that seek to mobilize their retirement assets for public purposes are constrained by law. I think it is fair to say, as David argues, that there is more legal and political room for workers’ control of public funds than private ones for just the reasons he lays out. More fundamentally, though, the history of the key fights between unions, employers and politicians over workers’ finance shows that the corporate control of these funds is not an accidental historical outcome that happened behind everyone’s back. Instead, it is the result of overt pushback from employers and policymakers from both parties. That workers don’t collectively control their own pools of finance is a matter of their failure to win it when they tried, not their failure to consider it. That defeat needs to be grappled with to say something meaningful about the prospects for how to win next time.
In my view, that history is illustrative of why business and finance might push back again as well as reasons why they will likely win in political battles over the issue if it is simply left to the legislative process. I am far less hopeful than David about the political affiliation of the state government as indicating that state legislation will be pro-labor on this issue. And while there is some variation, in most cases attorney general opinions are advisory. So while I think we should be writing legislation on this and taking the fight to the courts where we can, to achieve a deeper democratization of workers’ finance will almost certainly require mobilizing the disruptive power of unions and citizens outside of this formal process.
Capital markets largely depend on workers’ capital, with trillions of dollars of retirement assets in circulation. The allocation of workers’ finance typically follows Wall Street investment trends, generating market volatility through investment churning and rewarding anti-labor and anti-environment firms after profitable quarterly earnings are released. This is the norm, despite some exceptional cases. And things have gotten worse in recent years. In the public sphere, funding shortfalls have driven public union fund investment more into hedge funds and private equity since the financial downturn. In 2017, the Pew Charitable Trust found that of the more than $3.6 trillion in public pension assets managed by state and local governments, half is invested in equities, a quarter in bonds and cash, and another quarter in high-fee alternative investments like private equity and hedge funds. In the 1980s and 1990s, public funds began to turn away from low-risk investments into more high-risk equity markets (in private funds this shift happened in the 1950s), and since the crisis they have taken an even more anti-labor turn. For example, public plans fund 37 percent of the multinational private equity giant Blackstone. In Indiana, 37 percent of the public retirement system is invested in hedge funds and private equity.
I think David overstates the extent of worker control of these funds, at least in a meaningful, operational sense. As he points out, there is variation in the proportion of labor trustees on these boards. New York City’s Employees’ Retirement System consists of 11 politicians and just 3 labor representatives. Other state and local pension systems are run entirely by the comptroller. But even for funds that have majority labor representation, though in principle the trustees have control over their fund’s staff, it is rarely this way. The staff tasked with managing these funds have quite different financial profiles than the union members whose money they manage – last year the CalPERS CEO made over 400k and the CIO made nearly 900k. And they also come with educational credentials and investment expertise that can stifle the labor trustee interested in social investing. With more public plans moving away from base salaries for their staff to incentive-based ones tied to returns, we should reasonably expect greater pushback from staff when trustees advocate for approaches that might sacrifice returns for other social goods, like jobs.
If a robust plan for real worker control of this investment was advanced, not only would there be fights on the boards but we should also expect Wall Street and the City of London to use their political resources to undermine it as best they could. This is why I am not sure that David is taking the broader context seriously enough in his account of the situation. The isolated examples that David points to don’t represent a fundamental threat to how the assets of these funds are allocated, but what if unions actually followed his advice? What kind of political response from the financial sector, conventional policymakers, and business more broadly might we expect?
Finance has a tremendous amount of power in American politics. First, Wall Street has well-funded lobbying groups coordinated through interlocking directorates that are most active in some of the bluest states like New York and California. The Bank Policy Institute, the American Bankers Association, and the National Association of Insurance & Financial Advisors pour millions of dollars into political action. It’s hard to imagine them not using this power. Second, even the bluest policymakers might balk. U.S. pension and retirement assets now control an astounding $22.5 trillion in assets, making up 135 percent of US GDP. Our economy depends on them, and a radical transformation of how they are allocated could destabilize financial markets. Finally, other sectors of business are likely to resist as well. Finance has far more output linkages than other sectors. Real estate, banks, and private equity are all vital in managing the credit flows for non-financial firms. Since the crisis, weaker firms lacking access to good bank loans have become dependent on public pension funds, which indirectly finance their operations through intermediaries like hedge funds, mutual funds, ETFs, and collateral loan obligations. Finance’s entanglements with the non-financial sector is why no other sector enjoys the same degree of business unity. When finance gets threatened, other sectors come to its defense. This is what the history I lay out in my own book demonstrates, and today finance is far more powerful than it was in 1945.
DW: I’ll register a few quick objections to the above. First, as stated, I disagree with the proposition that workers have no say or control over these funds. Second, I disagree with Michael’s dismissal of labor’s shareholder proposals, which have been consequential and successful in the governance space in particular. Third, it is no secret that Wall Street is powerful, though this is also too defeatist. An example from my book: the AFL-CIO Office of Investment successfully defeated private equity lobbyists in forcing private equity funds to register for the first time, resulting in the SEC finding pervasive abuses in that space, and enabling us to learn much more about the industry than we knew before. Similar arguments can be made for the labor-influenced Council of Institutional Investors. Wall Street has big guns, but labor is not completely out of ammunition yet. Fourth, I think the Wall Street and corporate backlash that Michael fears is already very much here. The drive to replace traditional pensions with 401(k)s is that backlash. As to investments in hedge funds and private equity, I’ll limit my comments to pointing out that CalPERS’s investment in hedge funds is zero because it divested from the asset class entirely, and the fund is taking steps to create its own private equity fund rather than outsourcing all that power and control and the fees that go with it. Here, CalPERS serves as a nice counterpoint to Indiana. And I think New York City’s 2017 adoption of a responsible contractor policy also demonstrates that worker pensions can invest to advance worker interests, as some European pensions have done for decades.
MM: It is important to note that I never said workers had no control of their funds. There has long been meaningful variation on this front, which I explore in my book. My point is that when that control threatens entrenched practices and financial interest groups we should expect a reaction. The Wall Street backlash against labor’s capital long predates the emergence and spread of 401(k)s. From the moment workers first challenged the corporate allocation of finance and the legitimacy of market rates of return, there have been political efforts to stop them. Democratized finance would be a deep challenge to the fundamentals of a market system.
The conversation will continue tomorrow.