Agency Costs, Corporate Governance and the American Labor Union

Jonathan R. Macey is the Sam Harris Professor of Corporate Law, Corporate Finance & Securities Law at Yale Law School. This post is based on his recent paper.

Union officials, who represent workers in collective bargaining over workers’ wages, hours and working conditions, are agents of the workers whose interests they are supposed to represent. And, of course, agency costs manifest themselves in the union-worker relationship just as they do in other contexts in which principal-agent relationships exist. Such other contexts, such as the class-action plaintiff/ lawyer relationship and the corporate director/ shareholder relationship, have been the subject of focused attention by policymakers and scholars. Far less attention has been paid to addressing the agency costs in unions.

The lack of attention the agency costs inherent in the union/worker context is somewhat surprising in light of the fact that union officials (who owe fiduciary duties to the rank-and-file members whose dues and fees pay their salaries) have proven to be highly imperfect representatives of the workers. The lack of adequate focus and attention on agency costs in the union context can be attributed to three sources.

First, this paper, Agency Costs, Corporate Governance and the American Labor Union, shows that despite persistent and well-documented patterns of corruption, self-dealing, and collusion with employers, the interests of unions and workers are often conflated, and a union’s representation of workers at the bargaining table with employers often is inaccurately characterized as direct worker representation of their own interests.

The second impediment to addressing the problem of agency costs within unions is the critical importance of the concept of worker “solidarity” to achieving improved wages, working conditions, and job security for workers. Solidarity, which is defined as a community of interests, feelings, and actions, is used in this context to describe the sense of unity and shared objectives among workers that bind such workers together in such a way that they are able to make sacrifices for the general welfare of the entire group. Solidarity facilitates successful group action by reducing the incidence of defection and limiting the collective action problems such as free-riding that make it difficult for workers to negotiate effectively with employers. In the union context, solidarity is thought to be tied inextricably to workers’ loyalty and allegiance to the union. Loyalty and allegiance to a union is an expression of solidarity. Failure to manifest loyalty and allegiance to a union represents a lack of solidarity. I argue that the benefits of worker solidarity can be achieved without ignoring agency costs. This can be done by focusing not on workers’ solidarity with their labor unions or with labor union bosses, but rather on workers’ solidarity with their fellow rank-and-file workers.

Third, I argue that the agency problem in unions has not received the attention it so desperately deserves because the union officials who occupy significant positions of power within unions are considered to be workers. Thus, while there is a clear line of demarcation in the corporate context between shareholders and managers, there is no concomitantly clear line of separation in the union context between workers and union officials. Here, analytically, I point out that workers would be better served by recognizing that union officials (particularly those who work full time for the union, and cease being rank-and-file workers) have interests and preferences that diverge significantly from those laborers who actually work for a unionized employer.

Thus, ideological and political considerations that tend to conflate the interests of workers with the interests of union officials (notwithstanding the fact that these interests often diverge in significant ways with workers’ focused on job security, wages and working conditions) and union officials focused on maximizing the private benefits of office. This, I argue, has resulted in agency costs receiving far less attention in the union context than they deserve, and far less attention than agency costs receive in other contexts, particularly in the corporate context, where the divergence of interests between shareholders and managers has been the focus of significant attention for decades.

Unfortunately, recognizing the existence of the agency cost problem in unions is merely a necessary, rather than a sufficient condition for ameliorating the problem. Identifying promising solutions to the agency problem in the union context is a uniquely difficult challenge because the market mechanisms and contractual tools that are used to manage and control agency costs in other settings are not readily available or easily applicable in the union context.

This paper posits that the most promising way to deal with the agency problem in unions is to engage in simple policy arbitrage in which the devices and structures used to control agency costs in other settings, particularly the corporate setting, are introduced in the context of union governance. However, care must be taken to identify those mechanisms for reducing agency costs that can be transported successfully from the corporate context to the union context. This paper identifies several such mechanisms.

First, the use of proxy advisory firms to monitor and evaluate voting proposals appears to be a particularly attractive candidate for import into the union context. The problem with using proxy advisory firms is the lack of a source of payment for their services. Since the proxy advisory industry is highly concentrated, with two firms enjoying a dominant market share, this paper proposes a bargain, in which the existing dominant proxy advisory firms, Glass Lewis and Institutional Shareholder Services, be designated as official proxy advisory services and tasked with generating voting recommendations on union issues for the use of rank-and-file workers.

In addition to using proxy advisory firms, I endorse not only strengthening unions’ disclosure obligations in ways that already have been proposed (and fiercely challenged by unions), but also “weaponizing” these enhanced disclosure obligations by giving rank-and-file workers the right to vote up-or-down on union officials’ compensation with “say-on-pay” voting rights.

Third, following SEC Rule 14a-8, I suggest reforms in union voting procedures that would give workers the right to make shareholder proposals that are distributed, along with the union’s voting materials, at union expense, to workers. Such proposals would include not only suggestions for corporate governance reforms of unions, but also the right to nominate rival slates of union directors and officers.

Finally, following well-established norms of corporate governance, independent directors should be introduced to union boards and certain decision-making power should be removed from the board as a whole and delegated to these independent board members. In particular, the responsibility for nominating union directors, determining compensation for top union officials, setting internal governance rules, and selecting the union’s independent, outside auditors should all be allocated to independent, outside directors.

The complete paper is available here.

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