The Rise of the Working Class Shareholder

David Webber is Professor of Law at Boston University. This post is related to Professor Webber’s recently published book, The Rise of the Working-Class Shareholder.

In my recently published book, The Rise of the Working Class Shareholder: Labor’s Last Best Weapon (Harvard University Press 2018), I tell the story of a largely invisible group of activists who have learned to use the shareholder power of public pension funds and labor union funds to advance the interests of their worker-contributors. I demonstrate how these activists have played a critical role in transforming shareholder voting through the efforts of New York City’s pension funds, the United Brotherhood of Carpenters Fund, and Harvard’s own Shareholder Rights Project, among others. I tell the hidden story of CalPERS’s fateful divestment from hedge funds, and how the American Federation of Teachers’ pushed back against hedge funds that invest teacher pension money and then attack teacher pensions. I outline these funds’ mixed efforts to rein in CEOs through say-on-pay votes, shareholder proposals to split the roles of CEO and Chair, and the recently implemented CEO-worker pay ratio. I illuminate the important role of entities like the AFL-CIO’s Office of Investment in shaping Dodd-Frank and SEC regulation.

I examine these funds’ performance as lead plaintiffs in securities fraud and deal class actions, from Enron to WorldCom to Wells Fargo. And I show how the North America’s Building Trades Union secured a responsible contractor policy from private equity firms like Blackstone, committing them to pay fair wages and benefits for workers on infrastructure projects. Beginning with a controversial shareholder campaign following a five-month strike at Safeway supermarkets in 2004, the book touches on many key moments in the rise of these working class shareholders over the past fifteen years, including the ultimately successful fight for proxy access, the struggle to split the role of CEO and Chair at JPMorgan, the pension-led UnitedHealth stock options backdating case, and the use of labor’s capital to create jobs. Three-quarters narrative, the book demonstrates the potential—only occasionally realized—for public pension funds and labor funds to advance the interests of those who entrust them with their retirement savings, and by extension, the interests of other long-term, diversified investors. It also illustrates how these funds have occasionally been used against their own workers, and how to deal with that problem.

This account of working class shareholder activism leads to two main legal and policy takeaways. The first is the question of the scope of fiduciary duties for pension trustees. The meaning of the duty of loyalty embedded in ERISA and state pension codes’ “exclusive purpose rule”—that trustees should invest “solely in the interests of participants and beneficiaries and for the exclusive purpose of providing benefits”—has been a political football for decades, with the Clinton, Bush, Obama, and Trump administrations each placing their own interpretive gloss on this language. I argue that trustees should be allowed to consider the jobs of their contributors in making investment decisions, particularly as those jobs affect worker and employer contributions to the funds. In so doing, I build upon and advance arguments I made previously on this blog in The Use and Abuse of Labor’s Capital.

Second, I argue that the current nationwide wave of pension reform efforts, if left unchecked, would pose an existential threat to the activism just described. The necessary precondition for this activism is to have collective, centrally-managed pools of capital. The current pension reform campaign aims to smash and scatter large, collective, defined-benefit pension funds into millions of individually-managed 401(k)s outsourced to existing mutual funds. If that happens, much of the activism described above would disappear. I analogize a pension to a union, and 401(k) to “right to work”, with the latter leaving investors atomized and powerless. Wherever one stands on the question animating pension reform—the controversy over pension funding—there are cures for it that may be worse than the disease, and that would silence the voice of these investors. I believe that these asset-side considerations, about how pensions wield their investment power, should play as much a role in pension reform debates as the liability question of how to pay workers the benefits they have been promised.

The book is available at Harvard University Press, Amazon, Powells, Indiebound, and elsewhere.

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