December 01, 2015
The Bogeyman of Union Shareholders
Posted by Matt Bodie

Workers have become so divorced from the "corporation," in the eyes of many corporate law and finance scholars, that efforts to advocate on their behalf are signs of bad corporate governance.  At least, that seems to be the message of "Opportunistic Proposals by Union Shareholders," a new paper by Matsusaka, Ozbas & Yi (USC Marshall School of Business).  The titular "opportunism" refers to union efforts to use shareholder proposals to get a better deal for their represented workers.  The narrative is this: almost half of union shareholder proposals concern executive compensation (46%, versus 28% of nonunion proposals). Unions are 4.7% more likely to bring shareholder proposals during a year when they are negotiating a new collective bargaining agreement with the company.  Unions then use these proposals as bargaining chips with management during negotiations.  The study found that wage increases are 0.22 percent higher following negotiations with a withdrawn union proposal than they are when the proposal goes to a vote.

I want to put aside, for this post, any concerns about the strength of the study's results to ask a simple question: assuming the narrative is correct, what's wrong with that?  When unions are negotiating wages and benefits for their own members, as part of their strategy they call attention to the wages and benefits that executives are making.  Is that bad?  That seems to me to be exactly what unions should do.  I suppose it's bad for shareholders if the union negotiates a better deal, but let's pause on that for a second.  First, if a wage increase leads to less turnover and more productive workers, wouldn't that be better for shareholders?  Second, if you think a wage increase would generally just be a waste of shareholder profits, then why doesn't this logic also apply to executive compensation?  If you are the representative for some of the employees, wouldn't it make sense to point out to shareholders that another group of employees is making a lot of money -- much more, in most cases, than the employees that you represent?  And so how are shareholders harmed when unions introduce (hortatory) proposals to limit executive compensation?  If anything, management should be blamed for buying off the union in order to avoid scrutiny for their own sweet deals.  But that's an argument for more frequent and routine scrutiny for executive compensation.  If other shareholders don't care about executive compensation, then the union's proposal is powerless.

The good Professor Bainbridge links to this study, and the related CLS Blue Sky Blog post, as further proof that unions nefariously manipulate their shareholder rights to get "private" benefits.  Only in modern day corporate law scholarship could there be anything nefarious about employee efforts to get better wages by publicizing how much management rakes in.  But his post also mentions, yet again, the 2004 CalPERS-Safeway imbroglio as an example of the horrifying things that unions unchained will unleash upon the citizenry.  I would love to drive a stake through the heart of this Safeway example, at least when it comes to the awesomeness of union shareholder power.  As Grant Hayden and I  discuss in The Bizarre Law and Economics of Business Roundtable v. SEC, 38 J. Corp. L. 101, 130-31 (2012):

The bogeyman of unions and pension funds running amok is popular in a certain segment of corporate law literature.224 However, it is similarly unsubstantiated there. The most common example of “special” shareholders using their power to affect firm governance--in a way that harms other shareholders--is the campaign by CalPERS and the United Food and Commercial Workers (UFCW) to withhold shareholder support for certain Safeway directors.225 The campaign allegedly targeted these directors because of Safeway's hard-line negotiations with the UFCW. In the end, however, only 17% of the shares voted against the targeted directors.226
The CalPERS/Safeway example has been used over and over to demonstrate the potential for unions and pension funds to pressure boards into caving to labor demands.227 But the example itself demonstrates the lack of such potential. CalPERS and the other pension funds involved had legitimate corporate governance concerns to raise along with their union-oriented concerns; they did not nakedly assert nonshareholder interests.228 Indeed, why would they?--they were also shareholders. Their exercise of power netted only 17% of the total shareholder vote, and also led to the ouster of the CalPERS chair who had orchestrated the campaign.229 The situation was, in fact, a total catastrophe for CalPERS. It is hardly evidence that unions and pension funds will exercise their ballot box power to crush their fellow shareholders. Moreover, beyond this anecdote, the evidence is that union and pension fund shareholders have been aligned with their fellow shareholders in seeking corporate governance reforms.230

Please, no more Safeway!


Notes (taken from Westlaw):

See, e.g., Stephen Bainbridge, The New Corporate Governance in Theory and Practice 229 (2008) (“Public employee pension funds are vulnerable to being used as a vehicle for advancing political/social goals of the fund trustees that are unrelated to shareholder interests generally.”); Joseph A. Grundfest, The SEC's Proposed Proxy Access Rules: Politics, Economics, and the Law, 65 Bus. Law. 361, 378-83 (2010) (singling out labor unions and public pension funds as special-interest shareholders); Romano, supra note 183, at 231-32 (arguing that union and public pension fund managers use shareholder proposals to accrue “private benefits”); Larry Ribstein, The “Shareholder Democracy” Scam, Ideoblog (Oct. 27, 2006), http:// (“It should be obvious to anybody who cares to look past the rhetoric that the unions are seeking bargaining leverage on behalf of their members, and to ensure their own survival. They are not seeking to represent the interests of investors generally.”); Mark J. Roe, The Corporate Shareholder's Vote and Its Political Economy, in Delaware and Washington 30 (Harvard Law Sch., Eur. Corp. Governance Inst., Paolo Baffi Centre Research Paper No. 2011-94, 2011), available at (referring to “agenda-driven activists, such as CalPERS and other state pension funds, as having pernicious and costly side-agendas” apart from those of “financial” shareholders).
See Grundfest, supra note 224, at 382-83.
Id. at 383. Moreover, the directors would have still been reelected, even if a majority had voted to withhold their votes.
Bainbridge, supra note 224; Anabtawi, supra note 141, at 589-90; Iman Anabtawi & Lynn Stout, Fiduciary Duties for Activist Shareholders, 60 Stan. L. Rev. 1255, 1285-86 (2008); Jill E. Fisch, Securities Intermediaries and the Separation of Ownership from Control, 33 Seattle U. L. Rev. 877, 883 (2010); Grundfest, supra note 224, at 382-83; John F. Olson, Reflections on a Visit to Leo Strine's Peaceable Kingdom, 33 J. Corp. L. 73, 76-77 (2007); Mark J. Roe, Delaware's Politics, 118 Harv. L. Rev. 2493, 2524-25 (2005); J.W. Verret, Defending Against Shareholder Proxy Access: Delaware's Future Reviewing Company Defenses in the Era of Dodd-Frank, 36 J. Corp. L. 391, 397 (2011); David H. Webber, Is “Pay-to-Play” Driving Public Pension Fund Activism in Securities Class Actions? An Empirical Study, 90 B.U. L. Rev. 2031, 2071 (2010).
Marc Lifsher, CalPERS to Withhold Votes on Safeway CEO, L.A. Times, Apr. 8, 2004, (“CalPERS said it would withhold its votes for SafewayChairman and Chief Executive Steven Burd because of a 60% drop in Safeway's stock since early 2001 that the pension fund said wiped out $20 billion in market value. CalPERS officials also cited what they described as conflicts of interest and a lack of responsiveness to shareholder concerns.”).
Tom Petruno, Business Applauds Shake-up at CalPERS, L.A. Times, Dec. 2, 2004,
Stewart J. Schwab & Randall S. Thomas, Realigning Corporate Governance: Shareholder Activism by Labor Unions, 96 Mich. L. Rev. 1018, 1019-20 (1998) (“In most cases, it is hard to find a socialist or proletarian plot in what unions are doing with their shares. Rather, labor activism is a model for any large institutional investor attempting to maximize return on capital.”). However, an empirical study did find that AFL-CIO affiliated shareholders are more likely to support director nominees by the incumbent board once the AFL-CIO no longer represents workers at a given firm. See Ashwini K. Agrawal, Corporate Governance Objectives of Labor Union Shareholders: Evidence from Proxy Voting, 25 Rev. Fin. Stud. 187 (2012). Agrawal argues that this divergence represents governance objectives that are “motivated by union labor interests rather than equity value maximization alone.” Id. at 188. The study focused on the time at which the Change to Win coalition of unions split off from the AFL-CIO, and examined the behavior of AFL-CIO funds with respect to directors at Change to Win companies. Id. Overall, Agrawal found that the AFL-CIO funds voted for director nominees 65% of the time and a Change to Win union (the United Brotherhood of Carpenters and Joiners of America (UBCJA)) voted for director nominees 55% of the time, while three different index funds supported the director nominees between 89% to 98% of the time. Id. at 195 tbl.1. Agrawal assumes, however, that the index funds' votes reflect a policy of shareholder wealth maximization. He does not demonstrate why a vote for incumbent directors equals a vote for shareholder wealth maximization beyond their support from index funds.

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