Realigning corporate governance: shareholder activism by labor unions.

• Author: Schwab, Stewart J.

TABLE OF CONTENTS

1. Two Stories of Union-Shareholder Activism

   1. The UFCW Floor Fights at Albertson's

   2. Teamsters' Pension Fund Bylaw Proposals at Fleming Companies, Inc.

2. Shareholder Activism and Union Goals and Means

   1. Traditional Union Functions and Weapons

   2. The Union Corporate Campaign

   3. Union-Shareholder Activity -- New Tactics or New Role?

3. Labor's Shareholder Activism and Corporate Law

   1. Union Use of The Shareholder Proposal Rule -- Rule 14a-8

      1. Procedural Objections to Labor's

         Shareholder Proposals: Rule 14a-8(a)(4)

         and the Alter Ego Problem

      2. Substantive Objections to Labor's Shareholder Proposals

      3. Empirical Studies of Unions' and Other

         Shareholders' Corporate-Governance Proposals

   2. Mandatory Bylaw Amendment Shareholder

      Proposals Under Rule 14a-8 and the Fleming Companies Decision

   3. Shareholder Resolutions at the Annual

      Meeting and Corporate Management's Responses

      1. Floor Proposals: Issues Raised by Rule 14a-6 and Rule 14a-9

      2. Floor Proposals: Discretionary Voting and Rule 14a-4

   4. "Just Vote No" Campaigns

4. Checks on Labor-Shareholders' Conflicts of Interest

   1. Fiduciary and Other Checks on Taft-Hartley Pension Funds

   2. Labor Needs Other Shareholders' Support for

      Their Voting Initiatives to Succeed

   3. Market Discipline

5. Do These Checks Work?

   1. Current Shareholder Initiatives

      1. Traditional Corporate-Governance Proposals Under Rule 14a-8

      2. Employment-Related Voting Initiatives

      3. Executive Compensation

   2. Implications of Labor-Shareholder Activism for

      the Debate over Director Fiduciary Duties

      Conclusion

      Appendix

      Labor unions are active again -- but this time as capitalists. The potential strength of union pension funds has long been noted,(1) but until recently unions have held their stock passively or invested in union-friendly companies. In the 1990s, however, unions have become the most aggressive of all institutional shareholders.(2) In most cases, it is hard to find a socialist or proletarian plot in what unions are doing with their shares. Rather, labor activism is a model for any large institutional investor attempting to maximize return on capital. Unions, union pension funds, individual union members, and labor-oriented investment funds are using the corporate voting process to push for a wide variety of changes in corporate governance. These range from redemption of rights plans(3) to implementation of confidential shareholder voting to caps on executive pay.

      This shareholder activism by unions requires a major realignment of the traditional ideologies of shareholder, worker, and manager. Managers traditionally were thought to represent shareholders' interests and unions were thought to represent workers'. Of course, a viewpoint that equates managers' and shareholders' interests is naive.(4) Corporate scholars have long emphasized a divergence between managers and shareholders.(5) Indeed, in the 1980s workers often aligned with managers against shareholders in thwarting hostile takeovers, depriving shareholders of substantial premiums in the process.(6) Most empirical work has found that workers were not harmed by takeovers(7) and so gained little from this alignment. In the 1990s, a historic shift has begun, as worker-shareholders prod other shareholders into holding management more accountable. Important changes in corporate governance have already resulted. To maintain its momentum, this realignment will require unions to modify their self-image as well. Unions, swept along by actions of their pension funds, increasingly will focus on the long-run health of corporations. If they do not, labor-shareholder activism may be a fad of the 1990s, doomed to fizzle. But the potential exists for fundamental change in both corporations and unions.

      Much of what the union shareholder is doing is familiar to other institutional shareholders -- only the union sponsor is novel. For example, in 1997 unions sponsored several resolutions to redeem poison pills and to declassify corporate boards of directors -- classic issues of corporate governance -- using Rule 14a-8,(8) the traditional avenue for shareholders to place resolutions on the ballot at the annual meeting. Unions are also active in seeking changes in executive pay, an area a bit closer to labor interests and one in which institutional shareholder interest has been increasing recently. For example, a Teamsters' pension fund sponsored a shareholder resolution in General Electric's proxy statement for its 1997 annual meeting to cap executive base salaries at $1 million.(9)

      More startling are the innovative methods unions have developed to get corporations to listen to traditional shareholder complaints. Unions are at the cutting edge of corporate and securities law in getting their message out to other shareholders and corporate boards of directors. One example of such innovation is the Teamsters' widely publicized list of the "least valuable" corporate directors.(10) Press attacks on directors are an unusual shareholder method of voicing displeasure, but the Teamsters' substantive complaint with the directors was one dear to shareholders: the directors were not maximizing firm value. A more important development is the number of labor-sponsored "floor proposals" submitted for a shareholder vote at annual meetings, sometimes independently of the company's proxy statement. The innovation with the greatest long-term potential to alter the balance of power between shareholders and management is mandatory amendment of corporate bylaws by shareholders. Unions have been at the forefront in the recent movement by shareholders to amend corporate bylaws to limit the authority of boards of directors on the sensitive issue of takeover defenses.

      Not all labor-shareholder activism involves a new-age alignment of shareholder and worker interests. Sometimes unions use their shareholder power simply as a new weapon to further unions' traditional organizing and collective-bargaining goals. Some of the shareholder activism certainly occurs at companies at which unions are concurrently engaged in contract negotiations or union organizing campaigns.(11) Corporate management claims that most union shareholder activity is part of a "corporate campaign" designed to win other concessions for workers. Corporate management representatives have even asked the SEC to restrict unions' ability to submit shareholder proposals.(12) For example, the American Society of Corporate Secretaries and other management groups have urged the SEC to impose limits on unions that are using the shareholder-proxy process to increase their leverage at the collective bargaining table.(13) Management's arguments to restrict labor unions' shareholder activism rest on the premise that unions are seeking to protect jobs and further other labor interests at the expense of the corporation and other shareholders.

      We argue, however, that much of the union-shareholder activism cannot be dismissed simply as an old dog's new tricks. In many cases, unions are trying to improve the financial performance of their pension funds, just like any other institutional investor. Between these two poles, we suspect that the goal behind some of the union-shareholder activity is to become more involved in strategic corporate decisions. In recent decades, unions have become increasingly frustrated at their lack of influence over basic corporate policy. Shareholder activism is a promising way of getting the attention of top management and the board of directors.

      In this article, we investigate the consequences of the new shareholder activism of unions. We claim that much union-shareholder activity represents an alignment of shareholder and worker interests that attempts to prod management to increase the overall worth of the firm. At other times, the union shareholder seeks to benefit workers at the expense of other shareholders. But other shareholders are generally able to distinguish, on a case-by-case basis, which hat the union shareholder is wearing. Without the support of other shareholders, the union shareholder cannot change the company. These are not worker-owned firms. This check on union-shareholder power -- in addition to existing fiduciary checks on union-pension-fund activism and powerful market forces -- negate the need for any change in corporate or securities law to regulate union shareholders specifically. We therefore advocate no change in existing law. We do argue, however, that the alignment of union and other shareholders will have profound effects on both corporate governance and long-term union goals.

      We begin, in Part I, by describing two stories of union-shareholder activism that illustrate some of the issues involved. Part II then outlines our theoretical framework. Here we distinguish union-shareholder initiatives designed to further unions' traditional organizing and collective bargaining goals from those that enhance unions' role as a participant in strategic corporate decisionmaking, a newer vision of the union. We also distinguish between activities of unions and their pension funds.

      In Part III, we use this framework to describe labor unions' current voting initiatives. Our hypothesis is that it is no accident that unions are at the cutting edge of innovative corporate law. Their desire for a more visible presence in corporate boardrooms requires innovation. From the labor perspective, unions have slowly withered as they focused on collective bargaining and relied on strikes to back their demands. From the corporate perspective, unions have remained peripheral players in the boardroom, despite their vast stock holdings, because traditional shareholder voting initiatives, particularly under Rule 14a-8, are largely ineffective methods for focusing shareholders and directors on a limited number of corporate-governance issues. Further, but more tentatively, we suspect that unions are less able than other institutional shareholders to exercise influence through...