This is Part I 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.
LPE: Let’s start with where we are now and how we got here. How did we get to a place where some workers get to decide how their retirement assets should be invested, while others don’t? What were the key fights between labor groups, employers, and financial industry players on this question, and what were the outcomes?
David Webber: Worker shareholder power can be found mostly in public sector pension plans, which are publicly-created retirement plans that invest the retirement savings of public-sector workers. These large state, city, and county employee retirement plans hold at least $4 trillion in assets, roughly 10% of the U.S. stock market, and at least a third of “alternative investment vehicles” like private equity. The most famous examples are the California Public Employees’ Retirement System ($350 billion in assets), the California State Teachers Retirement System ($223.8 billion), the New York City Pension Funds ($195 billion), and the New York Common Retirement Funds ($207.4. billion), among many others. Almost all public pension plans have worker representatives on the boards of trustees, the equivalent of worker representation on corporate boards. These workers are elected by other workers (or retirees) who participate in the funds. Sometimes those worker slots are controlled or heavily influenced by unions. Sometimes workers outright control the board; more often they constitute a minority of trustees.
In addition to the large public pensions, many of the key players in this space are the capital strategies departments of key unions, such as the AFL-CIO Office of Investment and the capital strategies divisions of the North America’s Building Trades Union, the American Federation of Teachers, the Service Employees’ International Union, the American Federation of State, County, and Municipal Employees, the United Food and Commercial Workers union, and others. I should add that some of these unions may straddle both public and private sector employees, and therefore wield some influence in the public pension space too.
The private sector equivalents of these funds exist in the form of labor union funds. They’re smaller ($500 billion in assets) and are governed by Taft-Hartley, which establishes boards that are 50% worker and 50% management representatives, and also governed by ERISA and the U.S. Department of Labor, which may somewhat constrain their shareholder activism, particularly depending on what party controls the White House.
One additional observation: much of this worker shareholder power can be found in blue state public pension plans. Blue states have larger public sectors and therefore larger public-sector retirement plans. They have more workers, pay those workers more, and give them more and better benefits. There is some irony here. Red states often tout their lower taxes, “right to work,” and smaller public sectors. But those factors tend to make their pension plans less important as shareholders. Texas and New York have roughly the same population, but New York’s pensions are far larger and more important precisely because of its larger public sector. Furthermore, the blue state politicians who sit on or otherwise influence public pension boards are more likely to be Democratic and therefore more likely to be sympathetic (or perhaps beholden) to workers and their organizations. I believe the combination of size, comparative political sympathy, and worker representation facilitates more worker-oriented shareholder activism in these blue state plans than elsewhere.
In my book, The Rise of the Working Class Shareholder, I aim to show how the most sophisticated and forward-thinking of these funds have begun to deploy their massive shareholder power on behalf of workers along two dimensions: protecting their retirement savings, and avoiding job losses, protecting jobs, and creating new jobs (which in turn create new contributors to these types of funds). Some of that activism has been devoted to corporate governance reform like say-on-pay votes, reining in executive pay or tying it to median worker pay, reforming shareholder voting, and leading shareholder lawsuits (roughly 40% of all securities fraud and deal class actions are led by these working-class shareholder institutions—e.g. cases like Enron, WorldCom, or the current lawsuits against Wells Fargo). Some of it has been devoted to legislative reform like requiring private fund registration or the CEO-to-worker pay ratio. And some has been devoted to workers as workers, such as New York City’s recent adoption of responsible contractor policies. I am not guaranteeing it will happen, but I think it is plausible to imagine that these pension funds can give a strong boost to labor, to their own pensions, and to workers generally by applying labor’s own capital in this way.
It is also worth noting where worker shareholder voice does not exist: in corporate pension plans and mutual funds. First, traditional defined-benefit corporate pension plans have largely disappeared, replaced by the now ubiquitous 401(k) offered by mutual funds. Mutual funds tend to lack the type of worker representation just described. Mutual funds also face built-in conflicts that constrain their ability to exercise shareholder voice in the same way the pension funds do. Criticizing the CEO’s pay or a company’s labor practices is not a good way to persuade that company to let your mutual fund manage its employees’ 401(k) investments. Public pension funds and labor funds aren’t trying to win that business, so they can act with a freer hand. And they do.
One thing that concerns me greatly is the effort to take what happened to corporate pensions in the 1980s and replicate it in the public sector, to smash and scatter these large public pension plans into millions of individually managed 401(k)s that get shipped out to the mutual funds. That debate is always framed in terms of the purported underfunding of public pension plans. Regardless of where you stand on that debate, if all these public pensions are individualized and turned over to mutual funds, much of the activism I describe, much of their capacity to act for workers, will disappear.
A traditional pension is like a union and a 401(k) is like right-to-work. The dynamic is largely the same: workers have much more voice as part of a collective, separately managed and worker-influenced or controlled pension fund than they do as atomized individuals inside 401(k)s. Workers have collective voice and significant clout in these pensions as they exist now, and much of that will be lost if these reforms proceed unchecked.
Michael McCarthy: David offers a nice snapshot of where we are now. He argues that workers have “shareholder power” in public pension funds because of three key factors: the large size of the funds, the influence of Democratic politicians on fund boards (located primarily in blue states), and worker representation on those boards. The project of democratizing funds to afford workers greater collective input over how they allocate their wealth is one potential means of reversing the neoliberal turn in labor relations—a turn somewhat ironically caused, in part, by shifts in corporate governance toward maximizing shareholder value in the 1980s. Labor funds might push firms to retain workers, spend more on wages and benefits, more fairly distribute firm profits, install better employment practices, and counter activist hedge funds on boards seeking to implement anti-worker proposals. Beyond voice, they might even be used to reallocate finance, moving investments out of bad firms and into investments that prioritize the social good over returns.
However, a very brief survey of the history of private union pension plans, which were installed and came to dominate the institutional investment scene much earlier than public plans, suggests that the factors that David points to have not historically translated to a progressive use of retirement fund capital. And there is little evidence that they are today. Though defined benefit plans went into significant decline in the 1980s, they remain a significant portion of labor’s finance—nearly 68 percent of union workers in the private sector have one. This history suggests that there is more to the problem of working-class shareholder power than labor’s choice to utilize it.
Though the major unions have installed capital strategy departments in the past 25 years, many have been concerned with worker finance since at least the early 1920s when the first labor bank was established by the Amalgamated Clothing Workers of America. Labor-oriented shareholder activism made headlines when the Amalgamated Clothing and Textile Workers Union made a public spectacle of the anti-labor practices of Southern textile firm, J. P. Stevens in the 1970s. But capital strategy tactics were on the table from the moment pension funds were collectively bargained over on a widespread basis in the postwar period. Though their efforts have been uneven, since that time unions have tried to control them. Yet instead of being sources of worker power, they have been subjected to corporate control and allocated in ways favorable to firms and capitalist growth. I explore the causes and consequences of this in my book, Dismantling Solidarity: Capitalist Politics and American Pensions since the New Deal.
Despite their massive growth—union pension funds controlled nearly 25 percent of all U.S. corporate equity by the mid-1970s—the result has been a terrible misuse of workers’ finance by corporate-dominated boards. Union funds have been and still are invested in anti-union companies, contributing to the race to the bottom in labor standards by bolstering the credit ratings of firms with highly exploitative labor practices in non-union areas of the U.S. and the world. And these funds—even public funds—have helped to finance leveraged buyouts. In 1988, the private equity firm KKR overloaded Nabisco with debt, stripped its assets, fired its workers, and sold off its pieces with funding in part from AFSCME’s Oregon State Public Employees Retirement System Fund. This is to say nothing of their inconsistent financial performance (sometimes significantly underperforming the S&P 500), how they have contributed to stock market volatility, or their impact on climate change.
That workers have not been able to collectively control their pensions is largely a political story, the result of which is a stifling legal framework that now hems unions into quite weak forms of financial activism, like proxy voting and shareholder proposals, the bulk of which fail. To understand the corporate misuse of labor’s capital, two policy changes are most important. The first was the passage of the Taft-Hartley Act in 1947. In one of its main provisions, policymakers and employers intervened to prevent unions like the United Mine Workers, the United Steel Workers, and the United Auto Workers from controlling their pension funds. In debate over the precursor to Taft-Hartley, the Case Bill, Senator Harry F. Byrd (D-Virginia) argued, “if such a condition were allowed to take place, labor unions would become so powerful that no organized government would be able to deal with them.”
After World War II, major industrial sector unions led the largest strike wave in US history to win higher wages and fringe benefits. With collectively bargained pensions a new fixture of contracts, politicians, businesses and their associations understood well that they could be used by unions to strengthen the power of workers. For this reason, Section 302 of Taft-Hartley kept unions from controlling the funds by requiring that management representatives make up at least 50 percent of the board. Senator Robert Taft (R-Ohio) argued that, “unless we impose some restrictions we shall find that the welfare fund will become merely a war chest for the particular union.” Though multi-employer plans tended to permit more union control than single-employer plans, the Taft-Hartley Act effectively turned labor’s capital over to employers to manage. Unions fought to control their funds entirely, but now they merely had a junior seat at the table.
The second key change was the passage of the Employee Retirement Income and Security Act (ERISA) in 1974. This added yet another layer of constraints on unions, though it did include some beneficial provisions as well. Most important were the rules concerning fiduciary standards in Section 404. These rules require that those who manage funds do so “with the care, skill, prudence and diligence” that a “prudent man” would use in such circumstances. When put to the test, it was determined that to act prudently in the beneficiary’s best interest meant to invest primarily with an eye to financial returns.
This rule largely remains in effect today. According to a bulletin from the Department of Labor in 2015, non-financial factors (such as environmental, social, or governance ones, or “ESG”) can be taken into account only “as tie breakers when choosing between investments that are otherwise equal with respect to return and rise over the appropriate time horizon.” And as the Department of Labor noted in April 2018, “A fiduciary’s evaluation of the economics of an investment should be focused on financial factors that have a material effect on the return and risk of an investment based on appropriate investment horizons consistent with the plan’s articulated funding and investment objectives.”
From my reading of this history as a political sociologist, controlling labor’s capital has always been a matter of power. There is a large literature on the potential power of these funds ranging from Teresa Ghilarducci’s Labor’s Capital to Archon Fung et al.’s Working Capital to Robin Blackburn’s Banking on Death, Or Investing in Life. David is going a step further to argue that these funds are already a source of labor’s power. That these funds ought to be used in ways that serve the long terms interests of working people and the environmental sustainability of the planet is without question. Yet I am less optimistic about how labor might do so. It won’t simply require more resources put into capital stewardship programs and trustee educational initiatives, though both of those would be essential. It will also require a political movement powerful enough to unlock these funds from corporate control—and this is where the real heavy lifting comes in.
David H. Webber is a Professor of Law at Boston University School of Law and author of The Rise of the Working-Class Shareholder, published by Harvard University Press in 2018.
Michael A. McCarthy is an Assistant Professor of Sociology at Marquette University. His research interests are in political sociology, political economy, labor, and finance. He is the author of Dismantling Solidarity: Capitalist Politics and American Pensions since the New Deal (Cornell University Press, 2017) and is currently working on a second book on the politics of democratizing finance.