Shareholder activism by public pension funds and the rights of dissenting employees under the First Amendment.

• Author: Finseth, Eric John
• Position: Twenty-Ninth Annual Federalist Society National Student Symposium: Originalism

INTRODUCTION I. THE BACKDROP: A BRIEF HISTORY OF THE RECENT AND ONGOING REVOLUTION IN CORPORATE GOVERNANCE A. The Shift in Control to Independent Directors B. Shareholder Influence over Board Composition and Conduct 1. Shareholder Control Rights Within the Corporation 2. The Initial Push for Shareholder Proxy Access 3. "Just-Vote-No" Campaigns 4. The Rise of the Majority Voting Standard 5. The Elimination of Broker Discretionary Voting in Director Elections 6. The Dodd-Frank Act and Further Anticipated Changes to the Governance Landscape i 7. Adoption of Shareholder Proxy Access II. THE PHILOSOPHICAL FOUNDATION OF THE GOVERNANCE REFORM MOVEMENT A. The Philosophy Behind the Assertion of Shareholder Power B. Application of that Philosophy to the Context of Public Pension Funds 1. The Trust Fund Objection 2. The Collective Efficiency Objection III. DOES THE FIRST AMENDMENT REQUIRE OPT-OUT RIGHTS? A. Opting Out of Agency Shop Service Fees B. Does the Use of Property by the State for Ideological Purposes Constitute a Form of Tax Immune to First Amendment Challenge? 1. United States v. Lee 2. Keller v. State Bar of California 3. Application in the Context of Public Pension Funds C. Does the Government Speech Doctrine Foreclose First Amendment Challenges to the Political and Ideological Activities of Public Pension Funds? 1. Johanns v. Livestock Marketing Association 2. Do the Political and Ideological Activities of a Public Pension Fund Constitute Speech by the Government? a. The California State Bar is a Private Rather Than Governmental Body b. The Court's Basis for Concluding that Speech by the Beef Board is Governmental c. The Degree of Government Control Over Speech by CalPERS More Closely Resembles the Case of the California State Bar 3. Using an Independent Instrumentality Test Helps to Delineate the Border Line Between Government and Non-Government Speech D. The Requirement of State Action 1. In the Context of Public Pension Funds 2. In the Context of Union Pension Funds in the Private Sector a. The RLA, NLRA Distinction b. Split Among the Circuits E. Are the Corporate Governance Activities of Public Pension Funds Commercial, Are They Political or Ideological, or Are They Both? 1. The Treatment of Solely Commercial Speech 2. Speech Can Easily Be Political or Ideological in Addition to Being Commercial in Nature 3. As Applied to Public Pension Fund Activities a. The Broad Social Movement b. Environmental Matters c. Diversity d. Animal Welfare e. Fund Objectives in Action F. The Reaction to Citizens United and the Link Between Corporate Governance and Other Policy Objectives CONCLUSION INTRODUCTION

We are in the midst of a sea change in the corporate governance landscape. Over the past decade, activist shareholders, public pension funds prominent among them, have effected a tangible shift in the balance of power between institutional shareholders and incumbent boards of directors of U.S. public companies. This drive toward greater shareholder influence will have consequences throughout American commercial and political life.

The drive for greater shareholder power has been fueled by the rise of mutual funds and pension funds as major holders of U.S. equity securities. But not all institutional holders share the same policy priorities. Mutual funds tend not to rock the corporate boat steered by incumbent boards, but labor union and public-sector pension funds often do. In recent years a panoply of activist shareholders has emerged, including not only pension funds but also religious organizations, socially oriented investment funds, and individuals. These investors have advocated and achieved numerous corporate governance reforms. These activists, however, have not restricted their policy objectives to matters of corporate governance. Many are pursuing a broad array of environmental, social, and political goals. The advocated corporate governance reforms are not seen as separate and distinct from their other objectives; instead, they see them as the necessary prerequisite to effecting broader changes in the conduct of corporate affairs. Both the broader social and policy goals and the changes to the corporate governance regime have engendered ideological disagreement.

Although many public-sector employees will agree with these broad goals for reform, many others will disagree. This Article addresses a point of intersection between the reform agenda of activist shareholders and First Amendment law: Do dissenting public sector employees have a right to opt out of having their pro rata portion of shares of publicly traded corporations held by public pension funds voted with respect to political or ideological matters in a manner with which the dissenting employees disagree? This Article argues on normative and doctrinal grounds that they do. This subject has not yet been addressed by either courts or the academic literature, and this Article's proposed solution would extend well-established First Amendment caselaw to a novel area of application.

Specifically, in several cases over the past few decades the Supreme Court has held that the First Amendment restricts the ability of the government to compel citizens to subsidize the political or ideological activities of private parties. To date, this caselaw has focused primarily, although not exclusively, on agency fees paid to labor unions. An employee who does not wish to join a union may nevertheless be compelled to pay to the union an amount equal to the dues otherwise required of union members. The union may not, however, use those compelled payments to fund political or ideological activities to which the employee objects and which are not germane to the collective bargaining arrangement supervised by the union. The seminal case in this area is Abood v. Detroit Board of Education, which addresses the issue in the context of public-sector unions. (1)

In Keller v. State Bar of California, (2) the Court extended the principles of Abood to state bar associations. The Court held that the bar may only compel subsidization of activities germane to the regulatory interests that compelled membership in the bar, and not the subsidization of political and ideological activities outside that scope. (3) There is good reason to conclude that the principles articulated in these cases would likewise apply to public-sector employees who are compelled by law to contribute to a statutorily mandated pension fund. Further, there is good reason to conclude that these principles would apply not only to the expenditure of contributed funds, but also and particularly to the exercise by public pension fund administrators of the voting rights (namely, a portion of the bundle of property rights) appurtenant to shares of publicly traded companies held by the funds. This Article argues that if, and to the extent that, a public pension fund engages in political or ideological activities not "germane" to the fund's core mission of providing retirement benefits to participants, through the exercise of voting rights appurtenant to shares of publicly traded corporations held by the fund, that employee should--by application of existing First Amendment principles--have a right to opt out of having his pro rata portion of such stock holdings voted in a manner with which he disagrees.

A counterargument to this conclusion might be based on the Supreme Court's 2005 decision in Johanns v. Livestock Marketing Association, (4) which rejected a First Amendment challenge to compelled subsidization of speech by the government: "Citizens may challenge compelled support of private speech, but have no First Amendment right not to fund government speech." (5) This "government speech" doctrine would pose a hurdle to the argument advanced in this Article if it applied to the political and ideological activities of a public pension fund.

Yet there are good grounds to conclude that the government speech doctrine does not apply in this context. The Court in Johanns indicated clearly that the State Bar of California, the association at issue in Keller, is a private, and not a governmental, entity for purposes of the government speech doctrine. (6) This is so despite the bar's character as a public corporation and the fact that its structure, purpose, operations, authority, and administration are all dictated in detail by statute, including the designation of a number of political appointees to the bar's board of governors. To take the specific example of the nation's leading public pension fund, the California Public Employees' Retirement System (CalPERS), there are good arguments that CalPERS should be viewed in the same manner. The government speech doctrine, therefore, would not preclude a First Amendment challenge.

In addressing this point, this Article suggests a new test that courts might employ as they develop government speech doctrine: an "independent instrumentality" test. If, and to the extent that, the government has established a body or organization that is not subject to effective control by the executive branch of government, and neither the legislature nor a democratically accountable arm of the executive branch has prescribed the specific content of its speech, that body or organization should be viewed as an independent instrumentality with sufficient autonomy that its political and ideological activities, if any, should be viewed as its own, and not the government's, for purposes of the government speech doctrine.

Because this Article addresses a novel legal issue at the intersection of recent corporate governance developments and the First Amendment, Part I reviews the efforts and successes of institutional shareholders in altering the corporate governance landscape over the past decade and the implications thereof for public pension fund activities in the future. Part I is descriptive rather than argumentative, and readers already familiar with these governance developments may...