Corporate campaigning on workers’ pensions

In today’s Wall Street Journal, former Department of Labor general counsel Eugene Scalia highlights a recent DOL effort to ensure that pension funds are not being diverted to uses which may not provide the best returns. Union pension funds, as he notes, have become a favorite weapon of unions seeking to influence companies.

In 2006, union funds accounted for more shareholder proposals than any other group of investors. Unions have been articulate voices in recent debates over executive compensation, “shareholder access” to the company proxy in director elections, and other governance issues. In the words of AFL-CIO Secretary-Treasurer Richard Trumka, unions have learned to “organize our money essentially the way we organize workers.”

Critically, however, “union pension funds” do not belong to unions. The funds are managed by trustees — half appointed by the union and half by the companies that contribute to the fund pursuant to their collective-bargaining agreements. Under the federal employee benefits law (ERISA), which is administered by the Department of Labor, these trustees are to act “solely in the interest of the plan’s participants and beneficiaries, and for the exclusive purpose of paying benefits and defraying reasonable administrative expenses,” as the Department reiterated in an advisory opinion last month.

The Labor Department letter addressed a reported AFL-CIO plan to promote shareholder proposals that press companies to offer more generous employee health-care benefits, and that would require companies to disclose political contributions so shareholders could see if support was being given to candidates who don’t share labor’s views on health care.

Yet this instance of pension fund advocacy by organized labor is hardly new.

The Labor Department letter comes at an important time. A recent University of Chicago study showed that union-affiliated funds do indeed systematically exercise their proxies to support labor objectives rather than simply to increase shareholder value. This was already evident in unions’ statements about their shareholder power, in corporate campaigns such as the attempted ouster of Safeway’s leadership during its 2004 labor dispute, and the refusal of some union health and welfare plans to do business with Wal-Mart, despite its low prescription drug prices.

The use of shareholder resolutions in corporate campaigns should be especially suspect, because it subordinates pension investment returns to other goals, that is, the goals of the corporate campaign, which is usually to unionize a company. (A corporate campaign is an aggressive, multi-faceted reputational attack on a company which a union seeks to unionize.)

Finally, as I noted some time ago (reflecting on a forum moderated by Scalia), justifying such use of pension funds would require an excessively broad interpretation of fiduciary duty on the part of the unions.

For more on corporate campaigns, see my interview with George Washington University professor Jarol Manheim, who literally wrote the book on corporate campaigns.