This is Part III 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. Make sure to check out Part I and Part II.
LPE: We now have several potential obstacles on the table. Let’s take a closer look at some of them. First, the legal obstacle—what does fiduciary law really require, and is this a problem for prioritizing something other than short term financial return in fund governance? Second, politics—what will it take for labor to demand a seat at the table, or a majority of the seats?
David H. Webber: Though I do not view current fiduciary law as an insurmountable barrier to the activism I describe, it could be better. ERISA comes from trust law, though the statute explicitly states one should be cautious in using trust law to interpret it. I have argued that, in many respects, the more flexible fiduciary duties found in trust law’s cousin, corporate law, may be a better fit for pension plans as they exist today than trust law itself. Historically, because shareholders were thought to be comparatively more empowered vis-à-vis corporate boards and managers than beneficiaries were vis-à-vis trustees, more flexible fiduciary duties evolved in the corporate sector.
But I think that in the case of many pension plans, these distinctions have broken down. First, public pension plans now make regular disclosures through Certified Annual Financial Reports, the pension law equivalent of the 10-K. Second, plan participants and beneficiaries get to vote for worker and retiree representatives on boards, and in their capacity as citizens, they also get to vote for the elected officials who serve as employer representatives on those boards. So there is a measure of accountability not found in traditional trusts. Third, on the corporate side, diversified shareholders have effectively lost their capacity to exit. Divesting is expensive, can often hurt you on the way out, and may undermine diversification. Many shareholders are locked in the same way pension beneficiaries are. It may be time for greater convergence between pension law and corporate law, one that takes account of the new institutional realities.
On a separate note, I would like to see unions, pensions, and activists seek out favorable pronouncements from state attorneys general on the meaning of state pension codes, much in the way that DOL issues interpretive bulletins on ERISA. Activists might also consider reforming state pension codes to explicitly allow labor issues to be considered, as some states did to facilitate divestment from South Africa over apartheid in the 1980s and 90s. That could put some wind in the sails of reform.
Two other quick points are worth mentioning. First, in an article that is about to be published in the Boston University Law Review, I advocate for collective defined contribution funds, a kind of worker-controlled mutual fund analogous to a collective 401(k). While I believe that traditional defined benefit pension funds are worth defending, as a fallback position, there are structures that could quell the fears of pension critics while preserving workers’ collective shareholder voice, shareholder litigation and voting rights, etc. I also would like to see efforts to return voice to individual 401(k) holders via rules requiring mutual funds to vote their holders’ preferences.
Michael McCarthy: As a quick aside, I think that it is more desirable to expand the public provisioning of retirement income than to hitch more people’s retirement fate to the turbulence of global financial markets as a collective 401(k) would.
Returning to the question: in assessing the importance of fiduciary law, it is worth stressing two points. First, the development of fiduciary law is itself the result of political battles and historically has been used to clamp down on union control of pension funds. This history is most evident in multi-employer plans, where unions like the Teamsters have been subject to significant state litigation about the use of their funds. Second, the influence of fiduciary law has also led to more aggressive, speculative investing that mimics other large institutional investors and has had a chilling effect on unions interested in using their funds in activist or unconventional ways. Today, “prudence” just means following best practices of institutional investors with similar risk profiles, which subordinates workers’ capital to the investing logic of Wall Street.
In much the same way that David is doing now with his own book, Randy Barber and Jeremy Rifkin sparked a new interest in these issues in 1978 when they published The North Will Rise Again. That book argued, among other things, that by directing pension investment into areas facing deindustrialization, workers’ finance could counter job loss in America’s declining industrial cities in the North. The labor movement heard this call. In November the next year at their convention, the AFL-CIO adopted a resolution to investigate the ways unions could better influence the investment of their members’ assets. The next year, they released a report surveying labor leaders that found that, “whatever enthusiasm there was for taking on non-financial objectives—whether for employment or other social objectives—was tempered by the ‘prudent’ judgement that union trustees must first meet financial objectives.” The DOL bulletins have continued to have this chilling effect. Reflecting on two bulletins in 2015, Meg Vorhees, director of research as the Forum for Sustainable and Responsible Investment, wrote “they are discouraging to investors contemplating first commitments to responsible investment.”
This is the bottom line from my view. Companies adopt anti-union, wage-depressing policies and exact harm on the environment precisely because these choices are cost-saving, profitable, and increase stock value. They have competition with other firms to recon with if they don’t. Recall that when American Airlines made unilateral pay increases for pilots and flight attendants in 2017, their stock plummeted. To get beyond the trap that sinks workers’ capital into bad firms requires a fundamental reinterpretation of what is understood by “beneficiary interests;” that is, an interpretation that runs counter to corporate interests.
DW: I disagree with Vorhees’s assessment of the bulletins and I also disagree with the assumption that anti-union, wage-depressing policies are necessarily more profitable. There are academics and investors who have argued that paying higher wages to more skilled workers can be more profitable, that some cuts may be driven by ideology and short-termism. Of course, cutting wages can be profitable, and that’s why I also argue for funds taking their workers’ jobs into account. But ESG investing can pick the low-hanging fruit, where available.
To see why I believe Michael’s read of the history is too fatalistic, let me return to where I began and reframe this by asking the following questions. If labor’s capital is really just capital’s capital, if it is as captured and co-opted by Wall Street and the corporate sector as Michael insists it is, then why are we witnessing such a comprehensive effort by Wall Street and its allies to dismantle it? In my book, I describe the campaign funded by the Koch brothers and others that is targeting public pension funds. That campaign includes state and city ballot initiatives, model legislation, litigation, and even academic conferences, all dedicated to smashing and scattering these state- and city-run, defined benefit pension plans into millions of individually managed 401(k)s, outsourced to mutual funds. What would be the point of that campaign if the corporate sector and Wall Street already controlled those funds?
We now have substantial evidence that 401(k)s are profoundly inadequate retirement vehicles, so much so that the founders of the 401(k) have now renounced it. In my view, the effort to convert traditional pensions into 401(k)s is about silencing the shareholder voice of the workers who invest in those pensions. If you think it’s hard for workers to organize their voice inside public pensions and private union pensions, just try to organize them when they’re in individually managed 401(k)s. In my view, that’s not a bug but a feature of pension reform. It is the right-to-work equivalent in the investment space. But if your view is that there is no worker voice to begin with, then it would follow that little would be lost. Failing to fight this development would be a huge mistake for labor.
As to today’s political context, I think support for instituting more labor-friendly investment policies by pensions and others has a better chance of being realized than in prior decades for a variety of reasons. Concern about economic inequality has moved to the center of public debate. There is increasing recognition that issues once thought of as political are now playing out in capital markets and corporate boardrooms. If there is one contemporary episode that captures this development, it is democratic socialist Bernie Sanders speaking at Wal-Mart’s shareholder meeting on behalf of workers seeking board representation and a $15 minimum wage.
I think this episode represents a changing environment. That environment includes the rise of ESG–driven investing. It includes divestment campaigns on college campuses, investor activism in the fight over guns and funding for the NRA, and in Larry Fink, the head of Blackrock, suddenly starting to talk about companies acting for the social good. Of course, some of this is rhetoric and marketing. But the underlying shift in attitudes has real consequences. The Labour Party in the UK has made creation of a worker investment fund part of its party platform. Senator Sanders will introduce a similar idea here, the specific contours of which are still being worked out. Senators Elizabeth Warren and Tammy Baldwin have introduced legislation about putting workers on corporate boards.
Increasingly, because of a combination of the decline of unions, a legal environment that favors shareholders, and the rise of companies and markets that operate globally while being regulated locally, workers are turning to shareholder power both out of necessity and because they actually have shareholder power. They should have more of it. But they’re only now beginning to use what they already have. I think my book provides evidence of how that can be done.
MM: First, I think David overstates the empirical support for the idea that ESG governance is profitable, especially when ESG proposals are pro-labor proposals. Most studies focus on governance—i.e. shareholder voice, which can equally be used to anti-worker ends—and the environment. Transformations in corporate governance driven by the principle of maximizing shareholder value have led to downsizing labor forces and cutting wages, not pro-worker reforms. Second, the example of the Koch interests seeking to dismantle public pension funds in favor of individual accounts does raise an interesting question. My own sense of the answer is that it is less about wresting investment control from labor and more about realizing a hyper-individualistic vision of how to provide for social needs. As the Chamber of Commerce argued in 1947, “the primary responsibility for providing against the hazards of old age must rest with the individual.” My guess is that that is the spirit in which libertarians like the Kochs attack labor’s pooled funds organized through the government. It is more an anti-state strategy than an anti-shareholder power one.
Democratizing finance is one of our great historical challenges, and there are a wide range of ideas being circulated about how to do it. These include the inclusive ownership funds originally proposed by Corbyn’s Labour Party and now Bernie’s campaign, sovereign wealth funds proposed by the People’s Policy Project, the public investment banks supported by Labour, municipal public banking gaining steam in many U.S. cities, and even the prospect of nationalizing the major banks and democratizing the Federal Reserve. Whichever mechanism we pursue, subjecting the allocation of finance to democratic oversight can counter the current mode of investment allocation that has led to growing inequality, increasing precarity, and macroeconomic instability. But we shouldn’t mistake the institutions we already have—like pension funds—for the institutions we need to build.
This would not be the first time that labor’s power has been erroneously pegged to the size of labor’s funds. Peter Drucker agued in his famous book, The Unseen Revolution: How Pension Fund Socialism Came to America (1976), that through their funds, workers had come to own American capital. He made the bold and somewhat provocative claim that in fact, the United States was a socialist economy. But as the literature on principal-agent problems shows so well, ownership does not guarantee control. There are many sources of labor’s collective power, but until labor wins actual control over its pools of capital, its key weapons will remain the strike and mobilizing support for bold political candidates.
Beyond anecdotes, there is no systematic empirical evidence, as far as I can tell, that unions’ capital strategies have had a net positive effect. According to ProxyMonitor, in 2016 (admittedly only one year), just 7 percent of all the shareholder proposals submitted to the Fortune 250 passed. Just 21 percent of the total number of proposals were submitted by labor-affiliated investors. Most of the proposals to receive support concerned proxy access and were proposed by corporate shareholders. None of labor’s proposals were among those that received majority shareholder support. We have to come to terms with a stark reality. These funds have grown alongside a concurrent turn toward anti-labor practices such as outsourcing, layoffs, reductions in benefits, and other cost-cutting schemes.
So, what should be done? As David suggests, legal change is a must. We are in agreement there. But the only way I see that legal change overcoming the power of finance in American politics is if it is supported by a popular social movement. And here, again, I think labor’s power lies in both supporting democratic socialist candidates that are coming at these issues with bold new vigor as well as in its power to strike. Sparks of hope along these lines can be found in the recent strikes by education workers, many of whom are beneficiaries in large public funds, and the elections of new leaders committed to shifting power to working people. Connecting this effort to those is how we might come close to or surpass the South African BDS movement. We need the support of both lawmakers and people in the streets.
DW: A couple final points. First, size alone does not matter, but size plus activism does, particularly when other large investors are silenced by conflicts (see Part I), and even activism without relative size can be useful, as in the example of the Carpenters (below).
Second, there have been over 2000 studies on ESG, with “the large majority of studies report[ing] positive findings” between ESG and performance. I certainly agree that more needs to be done on just the labor component, but there absolutely is evidence supporting the view that paying workers more can be a profitable strategy (I’m not suggesting that’s the only reason to do it), and the ESG studies include “sustainability” measures which can include similar short-term/long-term considerations like labor costs.
Third, pointing to one year’s worth of data on labor’s shareholder proposals paints a distorted picture of those proposals. The United Brotherhood of Carpenters has filed over 700 proposals on majority voting alone, New York City filed well over 100 such proxy access proposals, and the pension funds similarly filed dozens of proposals on board voting. Moreover, it is widely understood among corporate law scholars and practitioners that proposals can be effective without attaining majority support, and even when withdrawn. Many proposals are withdrawn because they are settled when the company capitulates to the demand, as happened when New York City filed its proxy access proposal with 3M. If they wield so little influence, why did the House Republicans in the Financial Choice Act try to change shareholder proposal rules to largely eliminate these proposals, an effort that was initiated by the Business Roundtable?
In general, I think it is too reductive to argue that pensions fund investments in companies that do the wrong thing demonstrate that the funds are totally compromised by those investments. The same critique could be applied to worker investment funds, and to sovereign wealth funds, and even to unions themselves, which often work with and may have to compromise with management.
These worker pension funds are under attack and, in my view, they are worth saving and improving. By all means, I am pleased to debate their flaws. It is easy to imagine better alternatives. But I’ll reiterate that letting them fall in the face of a theoretically better, currently nonexistent alternative would be a critical mistake for labor and workers. If nothing else, they could serve as the kernel of some future better system. From my perspective, the question is how to use existing worker shareholder power to build more of it, and to think through how that power can be used to advance the interests of those who depend on these funds.
Michael, I learned a lot from this exchange. I hope it was helpful to readers. Thank you!
MM: If you look to the meta-analyses available, there does seem to be a net positive relationship between ESG and firm financial performance. My point was that, at least to my knowledge, there is still no large-scale comparison of the sub-components of ESG. And in the studies that support ESG, not all these sub-factors are given equal weight. Most of the research has concerned environmental and governance issues, not labor. And when “social” factors are considered, they tend to be reduced to questions of internal training and human capital development. Even so, the meta-analysis still shows the weakest relationship between the “S” factors and profitability. It would be misleading to suggest that questions of economic inequality and labor power have received nearly as much attention in the empirical work as the other factors have.
I learned a lot as well, David. I appreciate the exchange, even if we come down on slightly different sides here. Just to summarize, in my view, the political power of finance imposes major limitations on the extent to which workers’ funds could be controlled by workers themselves. And to the extent that they could, I am wary of the idea that labor’s capital might be used in pro-labor ways and still be as profitable as investments aimed solely at returns. Part of what is potentially transformative about labor’s capital is the possibility of subordinating the profit motive to social and environmental concerns. Yet this, in my view, runs totally counter to how capitalist markets work, and is therefore highly threatening to the people and organizations with an interest in maintaining the status quo in those markets.
Thanks again, David.