Union Shareholder Activism: No Benefit to Shareholders

May 2, 2013

Harvey L. Pitt, CEO of Kalorama Partners, LLC, and former chairman of the Securities and Exchange Commission, speaks during a U.S. Chamber event where a study demonstrating the failure of union-backed shareholder activism to increase shareholder value was unveiled.

For many years, labor unions, through their pension funds, have pursued their policy and political agendas through shareholder activism. Just as unions lobby lawmakers for pro-union policies, they frequently propose shareholder resolutions in an attempt to influence corporate behavior for their own benefit.

In 1996, a senior union official said there was “no more important strategy” for the labor movement than “harnessing the power of our pension funds and developing capital strategies.” Since that time, unions have become active participants in the proxy process and have sponsored, supported, and gathered votes for hundreds of shareholder resolutions. Last year, 36 percent of shareholder resolutions at the 200 largest publicly traded businesses were sponsored by union pension funds. 

The results of a new U.S. Chamber of Commerce study demonstrate that union-backed shareholder activism has failed to increase shareholder value. The report, titled “Analysis of the Wealth Effects of Shareholder Proposals” and produced by Navigant Consulting, examined all proxy proposals “key-voted” by the AFL-CIO from 2009 to 2012, which included proposals introduced by Taft-Hartley pension plans, public sector pension plans, and individual investors.

The report analyzed a broad range of proxy proposals covering governance issues such as proxy contest reimbursements, as well as non-governance issues such as disclosure of political contributions. It found no statistically significant improvements in shareholder value in the short or long run, calling into question whether fund managers, who must be able to substantively demonstrate how their decisions benefit plan participants, are meeting their fiduciary obligations under federal law.

The analysis of non-governance issues in particular actually found some negative results. This suggests that union activists may be using shareholder activism to play politics with their members’ retirement savings, which could raise concerns about compliance with the Employee Retirement Income Security Act (ERISA). 

In 2007, the Department of Labor’s Employee Benefits Security Administration (EBSA) weighed in on this topic in an advisory opinion addressed to the U.S. Chamber of Commerce. The EBSA opined that “the use of pension plan assets by plan fiduciaries to further policy or political issues through proxy resolutions that have no connection to enhancing the value of the plan’s investment in a corporation would, in the view of the Department, violate the prudence and exclusive purpose requirements” of ERISA.

EBSA has done little work in this area over the past several years, and in 2011 declined to implement suggestions by DOL’s Inspector General that it more closely investigate shareholder activism.  The study released today should prompt a rethinking of that decision.

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