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Hrab Op-ed in The American Enterprise Online
July 22, 2004
The Unions' Resurgence <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
After several decades of losing members, American labor unions today wield a fraction of the membership, influence, and power that they once enjoyed. But the recent string of corporate scandals gives unions new cause for hope. Corporate <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />America's reputation has sustained multiple body blows, thanks to the actions of individuals at Enron, WorldCom, and other firms. As a result of these scandals, pension funds, private individuals, and others who hold shares in publicly traded corporations now feel emboldened to ask tough questions of corporate managers, giving rise to increasing shareholder activism. For example, the June 28, 2004 edition of The Christian Science Monitor reported that, in 2002, "shareholders brought 802 proposals to a vote at company annual meetings.... So far [in 2004], a record 1,147 proposals have been made."
For unions, the question is: How can we harness this greater scope for shareholder activism to our advantage?
In a new book, Jarol Manheim, professor of media and public affairs and political science at George Washington University, provides one answer to this question. In Biz War and the Out-of-Power Elite: The Progressive-Left Attack on the Corporation, Manheim (who is hardly a conservative ideologue) argues that unions may be able to harness the wave of outrage over corporate excess and turn it to their own benefit, using a little-known tool, a "small, obscure, but strategically positioned company known as Institutional Shareholder Services [or ISS]."
ISS describes itself as "the world's leading provider of proxy voting and corporate governance services.” It serves nearly 1,000 "institutional and corporate clients," providing them with "informed research and objective vote recommendations for more than 10,000 U.S. and 12,000 non-U.S. shareholder meetings each year.” ISS assists pension funds and other entities that often hold shares in many different companies evaluate shareholder resolutions brought at annual meetings.
Interestingly, ISS is partly owned by a British firm called Hermes Pensions Management, which, Manheim notes, "is owned by, and serves as investment manager for, the pension funds of British Telecom and the British Post Office," and has earned a reputation for social activism. In 1998, for example, Hermes linked arms across the Atlantic with the California Public Employees' Retirement System (CalPERS), another union pension fund, and pledged to work together "to push for policy changes at companies in which both hold stock," Manheim says. As a Hermes spokesman put it at the time: "Hermes and CalPERS both believe that active and constructive exercising of shareowner rights is an important element in enhancing shareowner value.... We are therefore natural partners."
ISS denies it is anything other than a provider of careful, objective research to its clients.
In early June, ISS vice chairman Jamie Heard used a chat with a Financial Times reporter to, in his view, set the record straight: "We only have influence to the extent that clients agree with our recommendations. Our clients make the final decision. They can go against our recommendations.” Heard also asserted that ISS is "not an advocacy organization" and complained that some of ISS' critics, such as the Business Roundtable, "have deliberately misrepresented our role" and "have never once come out to see us, asked to see how we work, to find out about our processes."
Actually, ISS has more influence than Heard rather modestly lets on. It is, as Prof. Manheim points out, the sole independent operation that gives advice on proxy voting to institutional shareholders in the U.S.—a rather important and powerful niche. Its reports therefore have considerable heft, and an ISS endorsement of a resolution is considered a coup.
For example, as Prof. Manheim notes, in 2002, Unocal, the oil company, faced pressure from the AFL-CIO and Britain's Trades Union Congress to adopt certain labor standards for all its employees around the world, such as the right to belong to a union. The Longview Collective Investment Fund of the Amalgamated Bank—which is union-controlled—and the Paper, Allied-Industrial, Chemical, and Energy Workers International Union sponsored a shareholder resolution along these lines and submitted it to Unocal's annual meeting. When ISS endorsed the resolution, AFL-CIO Secretary-Treasurer Richard Trumka beamed with delight: "We are pleased that ISS—a truly independent expert—recognizes that Unocal's endorsement of global labor standards would benefit the company and its shareholders.” The resolution failed in the end, after receiving 31 percent of the vote. Its backers considered the result a moral victory, however, and a good basis from which to continue pressuring the company to change its practices.
One long-standing goal of unions and other activists has been to restructure "corporate objectives to weigh the social good more heavily than the private good," notes Manheim. Shareholder resolutions offer unions one such way to nudge corporations closer to this orientation. While ISS does not advocate specifically on behalf of any cause, it is in a powerful position to legitimize resolutions intended to advocate on behalf of a particular point of view. Prediction: As the trend towards greater shareholder activism gains momentum, the linkages profiled in Biz-War will become more influential—and controversial.