Unions Flexing Their Corporate-Governance Muscle
As the bitter dispute in Wisconsin between Governor Scott Walker and Democratic legislators illustrates, state budget constraints have put public-sector unions on the defensive over collective-bargaining rules.
Still, public-sector unions are in a better position than their allies in the private sector, where unionization rates have been plummeting for decades. Both public and private unions, however, have lately been flexing their muscles in a common area: by submitting shareholder proposals through publicly traded corporations' annual proxy process.
As a part of the financial disclosures required by the federal Securities and Exchange Commission (SEC), publicly listed companies file annual proxy statements for each year's required annual meetings, which can include proposals submitted for a shareholder vote by any stockholder.
Such shareholder resolutions typically address classic questions of corporate governance—such as director-election rules—as well as, more recently, executive compensation and various issues related to the "social responsibility" of corporations.
To examine proxy-process trends, the Manhattan Institute this January launched a publicly available database, ProxyMonitor.org, which contains information related to all shareholder proposals submitted to Fortune 100 companies since 2008.
The Proxy Monitor data reveal that labor unions play a major role in modern corporate governance through the stock-market holdings of their retiree pension funds. Two of the five most frequent proponents of shareholder resolutions are the AFL-CIO and American Federation of State, County and Municipal Employees (AFSCME); the Teamsters, Service Employees International Union (SEIU), and various state and municipal employee funds are among other major union sponsors of such proposals.
Although pension-fund managers have the right to play a role in shareholder voting—and indeed, they have a fiduciary duty to do so to the extent the exercise of equity voting rights affects share value—the prominent role played by union funds in the shareholder-proposal process raises concerns.
Unlike most other equity shareholders, whose interests are aligned around the principle of maximizing share value, union funds at least potentially have an interest in sponsoring proposals that would increase their negotiating leverage over corporate management for unrelated labor demands.
A deeper analysis of unions' shareholder-proposal submissions heightens these concerns. Union funds' shareholder proposals have been heavily concentrated on issues particularly sensitive for management.
Over the last three years, union funds sponsored 38 percent of all shareholder proposals related to executive compensation submitted to Fortune 100 companies, as well as 58 percent of all proposals calling on the companies to separate their board chairman and chief executive officer roles.
Executives are obviously sensitive to their own pay, and for companies with a joint chairman and CEO, proposals to separate the positions effectively entail asking the corporate boss to report to a superior or give up active management of the company.
Moreover, union funds have concentrated their shareholder proposals in industry sectors that unions have targeted for organizing activities—that is, sectors where union representation is low.
Unions have backed only 16 and 18 percent of the proposals, respectively, submitted to heavily unionized energy and manufacturing companies, as compared to 43 percent of retail-industry proposals and 32 percent of financial-industry proposals. The retail and financial sectors are not only lightly unionized but also the publicly announced targets of organizing campaigns by the United Food and Commercial Workers International Union and the SEIU.
Recent regulatory changes, most notably those initiated through the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, work to reinforce labor�s recent shareholder-activism efforts.
Dodd Frank's Section 951 requires that shareholders regularly vote on executive compensation packages (thus mandating a key union shareholder-proposal objective); and Section 971, as implemented, threatens to enable union funds to sponsor alternative slates of directors on corporate proxy statements (subject to a pending legal challenge.)
Voting rights are a key mechanism for protecting equity interests, but unions' active sponsorship of shareholder proposals may indicate that labor is manipulating the corporate-governance process to further objectives adverse to other shareholders. As they work to refine our securities regulations, Congress and the SEC should take a close look at labor's shareholder activities.
This piece originally appeared in Washington Examiner
This piece originally appeared in Washington Examiner