Harvard Law School Forum on Corporate Governance: “Labor in the Age of Finance”

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Sanford M. Jacoby is Distinguished Research Professor of Management, History, and Public Affairs at UCLA Anderson School of Management. This post is based on his recently published book.

For the original Harvard Law School Forum link to this article click here

My new book, Labor in the Age of Finance: Pensions, Politics, and Corporations from Deindustrialization to Dodd-Frank (Princeton University Press, 2021), is an economic history of organized labor’s engagement with shareholder activism, corporate governance, and financial regulation in the 1990s and 2000s. An epilogue carries the narrative to the present.

The proximate cause of labor’s financial turn in the U.S. was the waning of its numbers and clout in the private sector. Traditional methods for adding new members were failing in the face of a more aggressive anti-union stance by employers. Seeking countervailing power, unions developed new organizing approaches, a part of which included shareholder activism and other finance-based tactics. With the assets in their reserve funds and multiemployer pension plans, and with support from other institutional investors, labor harnessed capital to restore its strength. Outside the shareholder realm, unions added financial regulation to their political agenda. Not since the early 1900s, the previous era of financialization, had labor given so much attention to finance writ large.

Labor’s pursuit of active ownership peaked during the first decade of the new century. Three waves of business scandals had made it a propitious moment to challenge management. Whereas CalPERS and other public funds were at the forefront of the shareholder movement in the late 1980s and 1990s, come the 2000s it was union investors who submitted the largest number of proposals and initiated many vote no campaigns. State and local pension plans were labor’s primary allies but so were other owners.

Union investors had diverse motives for active ownership at targeted companies. The largest group was made up of underperforming firms where labor had no collateral interests but sought to install the governance reforms it favored and to highlight related issues such as corporate political spending and proxy voting by mutual funds. Another group were companies where it had collateral interests. Of these, there were three types: companies with ongoing membership campaigns, those that were potential future organizing sites, and entities–such as contractors and creditors–with ties to a target firm.

During organizing campaigns, the goal was to secure neutrality agreements under which an employer would promise to provide organizers with access to the worksite, eschew retaliatory dismissals, and foreswear anti-union communications. (There were none of these restraints during the recent organizing campaign at Amazon’s Alabama warehouse). Unions also sought neutrality agreements from firms owned by private equity.

Back in the day, labor leaders like Walter Reuther had access to the senior executives of major corporations, a channel that disappeared as unions faded from the private sector. Active ownership, which included meetings with directors and executives, reopened the door for dialogue with management. There also was a genuine concern with preserving and improving returns on defined-benefit pension plans, which led to confrontations with financial services companies seeking to replace the plans with individual accounts. Defined-benefit pensions are a selling-point of union membership. Private-sector union workers are seven times more likely than nonunion workers to have one. Lastly, the financial turn had pro-social objectives: to make corporations and banks more accountable, transparent, and public-minded. The attempt resonated with a century of liberal thought stretching from Louis D. Brandeis to Adolf A. Berle and E. Merrick Dodd Jr., on down to John Kenneth Galbraith, Ralph Nader, and others more recently.

Union investors shaped the governance of the nation’s public corporations, this despite charges that labor had become a dying dinosaur. Consider that during the 2000s, the bulk of proposals for majority voting came from pension plans co-administered by the conservative construction unions. Today majority voting is the norm, as is proxy access, another reform championed by union investors. Soaring CEO pay was far and away labor’s signature issue: in public pronouncements, the shareholder forum, at the SEC, and in Congress. The issue drove a wedge separating management from investors and workers, and resonated with public apprehension over rising inequality. It led to say on pay, changes in the process of determining executive compensation, and other pay reforms.

Historically organized labor favored private orderings over government intervention, as with the collective bargaining agreement, a type of governance. But during the Great Depression, unions came to favor regulation as a complement (and sometimes an alternative) to decentralized voluntarism. Labor regularly switched venues for its governance-related activities–from private ordering to the SEC and Congress and sometimes in the opposite direction. The most notable example were the provisions embedded in the Dodd-Frank Act, including say on pay and proxy access. With its new-found expertise, organized labor participated in TARP’s regulatory system and the crafting of Dodd-Frank. But its efforts never received the attention give to Occupy Wall Street.

Labor’s governance reforms drew from the “good governance” codes that elevated shareholder influence within corporations. Endorsing pro-shareholder governance was necessary to obtain backing from other investors, who voted for union proposals even if collateral interests were in play. Nevertheless, it was odd behavior for unions to indirectly endorse shareholder primacy, which went hand in hand with larger payouts to investors. A new study finds that from 1989 through 2017, corporations created $34 trillion of real equity wealth. Forty-four percent of it was a reallocation from labor compensation to shareholders. The amounts dwarfed aggregate CEO pay. Until very recently, however, labor has not reckoned with the issue of payout levels.

Organized labor scored some successes with its new organizing methods, the paradigmatic example being the twenty-plus year “Justice for Janitors” campaign. Union membership would be lower today absent the financial turn. But it was not enough to stem labor’s loss of over three million members in the corporate sector between 1990 and 2020. After Dodd-Frank, unions cut back on active ownership, although financial tactics continued below the radar. MBAs, corporate law specialists, and even former bankers now can be found on the staff of unions and their federations.

The strength of institutional investors rests not only on their assets but also on amalgamation and coordination, not unlike labor unions. As during the era of constituency statutes, executives today are pushing back against pushy investors while elevating the concerns of other stakeholders. It’s reflected in the Business Roundtable’s “Statement on the Purpose of a Corporation, whose issuance comes at a time when millennials are rejecting the credo that big business improves social welfare.

Now as in the past, executives, owners, and workers jockey for corporate power and wealth. The winners have been executives and owners, sometimes both, sometimes one more than the other. Usually workers have been the losers, an outcome that likely will persist barring the advent of a different type of governance that includes employee representation, social responsibility, and curbs on shareholders, not only executives.

The book is available for purchase here.