REVIEW & OUTLOOK
Pension Fund Blackmail
Unions play politics with their members' pensions.
WSJ.com
Saturday, April 2, 2005 12:01 a.m.
A notable sidelight to the Social Security debate has been Big Labor's battle to keep business from supporting reform. The specifics of that attack are worth examining in their own right (see below), but the bigger story here is the way the AFL-CIO and its friends are now using pension funds to advance their political agenda.
With their membership falling, union leaders are finding it harder to influence companies or politics from the factory floor. Their new approach is to use their control over large employee pension plans to insert themselves directly into the boardroom. The result is what one observer has termed "the new politics of capital," in which liberal activists attempt to turn entire corporations into lobbyists for their social and political goals, their campaigns all neatly disguised as "shareholder activism."
Last year Calpers, the pension fund managing some $180 billion in assets for California workers, used its investment in Safeway to advance a labor agenda. When the grocer took a tough stance against its union during a strike, several Calpers board members demanded that it capitulate. Yet even as then-Calpers Chairman Sean Harrigan put the screws to Safeway, he was serving as the executive director of the very food workers' union striking against the grocer. Eleven of the 13 Calpers board members had union ties, including Democratic State Treasurer Phil Angelides, who will undoubtedly point to his anti-Safeway bona fides while hustling labor endorsements for his 2006 gubernatorial run.
Meanwhile on the East Coast, New York State's Democratic Comptroller Alan Hevesi was using his clout to aid John Kerry. When Sinclair Broadcast Group decided to air "Stolen Honor," a documentary on Mr. Kerry's post-Vietnam antiwar activities, Mr. Hevesi fired off a letter to the company in his capacity as trustee of the state pension fund (which owned shares of Sinclair) suggesting the broadcast could hurt "shareholder value." Recognizing a not-so-subtle-threat when it saw one, Sinclair pulled the show.
Now comes the AFL-CIO's campaign against private Social Security accounts. In addition to its usual grassroots and Congressional lobbying, it is threatening to pull its $400 billion pension fund business from any financial services firms backing personal accounts. "We have no intention of letting any of these companies get away with this while they manage our workers' funds," stated Gerald Shea, a top AFL-CIO lobbyist.
That threat sent two Wall Street players, Edward Jones and Waddell Reed, scurrying out of a coalition supporting reform, as did the Financial Services Forum, a group of 21 chairmen of large financial concerns. Next on labor's hit list are heavyweights ranging from Morgan Stanley to Charles Schwab. Three trustees representing the New York City Employees' Retirement System recently sent a letter to a half-dozen investment banking companies demanding a review of their Social Security stance.
The problems with all this are many, starting with a rich irony: Unions are using the clout they've acquired from investing in the stock market to oppose a plan to let individuals invest their own tax money in the same market. According to a Tax Foundation paper, of nearly $2 trillion in public employee pension plan assets, 55% are invested in corporate equities. Labor leaders don't mind stock-market investing when it enhances their own political leverage, but for individual workers to build their own wealth is too "risky."
Then there's the use of the "shareholder rights" slogan to muzzle the free-speech of corporations. If any CEO who speaks up on a hot-button issue is suddenly risking "shareholder value," we are in a brave new political world. The next step will be to stop corporate execs from making political donations, or contributing to the Chamber of Commerce.
Most troubling of all is the confusion of fiduciary responsibility with partisan politics. As a matter of law, pension-fund trustees have a fiduciary duty to maximize investment returns for their beneficiaries. That certainly includes the right as shareholders to lobby for better "corporate governance," to the extent that that improves company performance or prevents fraud.
But Big Labor's new political campaigns have nothing at all to do with return on shareholder equity. They may even end up lowering returns to the extent that they prohibit certain good investments or obstruct useful government reforms. A successful union strike would have made Safeway less competitive against Wal-Mart and other companies. And Schwab and other investment companies could only benefit from the spread of an "ownership society" more knowledgeable about stock-market investing (even if companies' direct fees from managing Social Security accounts were negligible).
This fiduciary question is something that both the Labor Department and SEC ought to be looking into. The obligations of pension-fund trustees are fairly well defined, but the fiduciary duties of union leaders need to be examined now that those leaders are determining where pension money can be invested. State lawmakers will also need to put limits on the political activism of state officials who manage public assets but have their own partisan ambitions.
Meantime, the pension juggernaut is growing. Terence O'Sullivan, president of the Laborers Union, has argued that unions should consolidate their assets under one umbrella, in a kind of giant financial AFL-CIO. The idea would be to produce new profit centers for unions from credit card, mortgage and pension fund management, but more important to create an investment body large enough to dictate political terms to any company in America.
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