Organized labor will be on the cutting edge of shareholder activism during the 1998 proxy season.
With nearly $300 billion, multiemployer plans and staff retirement funds are joining in a big way public funds and other institutional investors as the leaders of the corporate governance movement.
Labor activism, limited a few years ago to a few international unions, is now a prime arena for action. The stage is set for new challenges to management and boards.
New AFL-CIO proxy voting guidelines emphasizing director independence, accountability to shareholders and limits on escalating executive compensation programs were put in place last fall.
The AFL-CIO launched its Capital Stewardship Program, which established performance standards to evaluate Taft-Hartley investment professionals. These performance criteria include: support for proxy votes that promote long-term shareholder value; public policy advocacy before institutions such as the Securities and Exchange Commission, the Department of Labor and the Federal Reserve; and consistency with workers' long-term economic interests through support for "high-road" competitiveness strategies.
AFL-CIO Secretary-Treasurer Richard Trumka established four advisory panels of investment professionals and the nonprofit Center for Working Capital to promote this Capital Stewardship Program. Delegates to the 1997 AFL-CIO convention adopted a resolution putting the full force of the federation behind shareholder activism. Prior to the convention, more than 200 labor pension plan trustees had gathered to listen to seven union presidents back the program, as well as explanations of how to use and implement the new AFL-CIO proxy voting guidelines.
To ensure plan assets are voted according to the AFL-CIO proxy voting guidelines, many multiemployer plans have been soliciting their investment managers to report on their voting record on 10 key corporate governance votes of the 1997 proxy season. Nearly all of the top 100 Taft-Hartley investment managers, which represent about two-thirds of labor fund assets, have been asked to respond.
The 1998 proxy season will be the most active ever for multiemployer trusts and labor retirement plans, with between 70 and 100 resolutions either submitted, under negotiations with the SEC or management, or in the drafting process.
With the AFL-CIO voting guidelines in place, more innovation in corporate governance proposals, higher vote totals and new standards for board performance will become more common.
The traditional labor activists, including the Teamsters, Service Employees International Union and Carpenters, have increased the number of resolutions they are proposing, while new funds like the AFL-CIO Retirement System have joined them. The real laggards in corporate governance, including AT&T Corp., Dillard Department Stores Inc., Columbia/HCA Healthcare Corp., Fleming Companies Inc. and Kmart Corp., are among their prime targets.
Executive compensation, director independence and conflicts, binding bylaw resolutions and political soft-money reporting are being emphasized this year, along with more standard corporate governance issues such as staggered boards and votes on poison pills.
Multiemployer plans are pushing director independence by offering a new set of corporate governance rules such as splitting the positions of chair and chief executive, creating independent compensation and nominating committees, denying pensions to non-employee directors, and setting up strict new rules for board of director conflicts of interests.
Executive compensation is again raising labor shareholder ire. The AFL-CIO's executive compensation Web site launched last spring to expose "out-of-control" executive pay has recorded nearly 4 million hits and is still going strong (www.paywatch.org).
Increasingly, companies with large institutional ownership bases are finding it more difficult to secure approval of their compensation plans. According to the 1996 Corporate Governance Review, votes cast against stock plans have climbed 42% during the past five years, reaching an average of 20% of shares voted in 1996. New labor proposals seek to close loopholes on deferred compensation to avoid the $1 million tax deduction limit under Section 162(m) of the tax code, and to forbid the underwater repricing of options, which are designed to protect top managers' pay from poor stock performance.
So far this year, at least 12 resolutions have been filed by labor funds to declassify corporate boards. Many boards see the handwriting on the wall. The Communications Workers of America claimed victory in February when shareholders approved a staggered board proposal at Walt Disney Co. with more than 60% of the vote.
Labor funds are tackling unresponsive boards head-on by offering and winning binding resolutions, rather than simple advisory votes. The ultimate test will be binding resolutions in the Delaware courts, where the vast majority of U.S. firms are incorporated.
Labor shareholders are keeping a keen eye out for opportunities as they arise.
Following the unveiling of worker abuse at contractors supplying Kathy Lee Gifford's line of clothing, public concern about use of "sweatshops" has put renewed emphasis on establishing labor standards for sourcing work. The focus is on prison labor in China, the use of illegal child labor and unsafe or unhealthy working conditions at home and abroad. Similarly, continued revelations about abuse of the Medicare system have led to anti-fraud compliance resolutions at Columbia/HCA, Humana Inc. and United Healthcare Corp.
And with public concern rising about the influence of big money in politics, shareholder resolutions requiring reports on the soft-money contributions of corporations are gaining ground.
In this proxy season, long-term shareholder value will be front and center of an expanding corporate governance agenda.
As multiemployer plans commit significantly greater resources to shareholder initiatives, the impact of corporate governance on corporate returns will continue to be tested, and shareholder activism will have an opportunity to prove its case. One thing is certain, labor funds have jumped into the corporate governance mix in a big way, and they are not turning back.
