Putting Pension Power to Work

When Sam Heayman, chairman of GAF Corporation, began making moves to take over Union Carbide in 1985, the company seized $500 million from its workers' pension plan to fight back. Terminating the pension plan gave Union Carbide the cash it needed to stave off Hayman's attack. When oil prices dropped in 1986, Exxon Corp. turned to its workers' pension assets as well, draining $1.6 billion of the $5.6 billion fund in order to boost its capital. Union Carbide and Exxon were part of a late 1980s corporate fad: plundering the wealth of workers in order to further management's aims.

As the 1990s begin, however, moves in Congress and by the AFL-CIO and its local unions have sought to challenge corporate abuse of pension assets. Unions want to assert more control over what are really workers' deferred wages. The battle will not be easy: in addition to all the obstacles that management throws its way, labor will have to overcome its own ambivalence about being both an owner and an adversary of corporate America. Success, however, could provide workers with badly needed new strength.

Labor has realized that the nation's $2.3 trillion in pension funds represent clout. Pension fund assets hold about one-third of all publicly traded stock in the United States. They are, as Business Week recently observed, "permanent owners" of many top U.S. companies, such as USX (46 percent pension-owned) and Sears, Roebuck (50 percent).

Labor's interest in pension power is not sudden. A decade ago, many progressive leaders predicted, as authors Jeremy Rifkin and Randy Barber wrote, that "one of the central economic battles of the next decade" will stem from "the likelihood of organized labor using pension funds as a capital tool to assert its ownership rights in the American economy." The idea was that workers could use their retirement savings to invest locally, and in socially productive ways. By screening out companies with anti-labor or runaway plant policies, union and public sector funds could coordinate massive stock and bond purchases and proxy voting, and influence corporate behavior. Some even dreamed of the day when workers would create an alternative economic base, independent of the private capital markets. By financing state development banks and other publicly-owned enter-prises, workers could recycle scarce capital within their region, stimulating employment and investment.

Business leaders, however, were not overly alarmed. They took a different view of workers' pension assets, based on the fact that corporations can maintain control even when their shares are owned by workers. Business banked on pension funds being the rare case where in a capitalist society where those who own the gold do not rule.

As business guru Peter Drucker observed in 1976, worker ownership of corporate America through pension funds could even help undermine labor unions. With their social security tied up in the stock market, workers could be convinced that their interests lay with the captains of capital rather than with union bosses.

More say over fund management

There are three main kinds of pension funds. The biggest are the $12 trillion in funds to which management alone contributes. Federal law presumes that these corporate-sponsored plans should be exclusively controlled by management unless unionized workers are prepared to bargain away other demands for a seat on the board.

The $400 billion industry-wide plans, sponsored by unions, are a smaller category of pension plans. These were originally set up and controlled entirely by unions, which negotiated an hourly contribution rate from companies, mostly in mining, trucking and construction. This was changed in 1947 by the anti-labor Taft-Hartley bill. It required that half the trustees of these pension plans be appointed by management.

Public employee pension plans, the third category, hold $700 billion in assets. These usually have some employee representatives as trustees, but provide that the majority be appointed by elected officials. As a result, these funds tend to be managed in order to produce the highest short-term financial return, rather than to serve the multiple interests of workers and their communities.

In the past eighteen months, prompted perhaps by the excesses of pension fund abuse in the 1980s, labor has begun to re-examine pension fund control. Several initiatives aim to increase workers' control of pension assets. These efforts center around pension fund boards, whose members make the decisions over how pension assets will be invested and used. Labor wants equal voting rights with management on the boards of private pension funds. This would give labor an equal voice in pension decisions and could give labor effective control over some decisions, since management representatives do not always vote as a bloc. Second, labor wants to make better use of its representatives on pension fund boards, whether or not they enjoy equal voting rights.

A labor-backed bill introduced by Rep. Peter Visclosky, D-Ind, would require companies to give workers equal representation with management on all private pension fund boards. The measure cleared the House Education & Labor Committee last year and will be voted on later this year. Under the bill's provisions, if no union is present to appoint half the pension trustees, the company will have to hold an election among its employees.

The business community is up in arms and not only because companies would lose exclusive say over the investment of $1.2 trillion. Business also fears that the law would encourage workplace democracy; by allowing non-union workers to elect pension fund representatives, workers might develop interest in electing a collective bar-gaining agent as well. Lisa Sprague, a policy analyst at the U.S. Chamber of Commerce, says, "We think it [the bill] is a bad thing," and worries that it "is sort of an 'in' for a labor union" at companies where none now exist.

Sprague argues that since employers bear the cost � and investment risk � of corporate-sponsored pension plans, they should also have exclusive say over how the money is managed. This view ignores the fact that corporations contribute to pension plans as part of their total compensation to workers; and they do so with earnings that workers played a large part in producing.

The Visclosky bill will have a hard time getting through Congress; it is perceived as "radical" by many lawmakers. But it is a first attack on the anti-labor bias of Taft-Hartley laws governing pension plans.

In the public sector, the American Federation of State, County and Municipal Workers and other unions are likewise demanding an equal voice with management in controlling the $700 billion in public pension assets. Many public employee plans now include some worker representation, but the majority of trustees must be appointed by one or more elected officials. Equal representation has become a hot issue in New York, where the state comptroller, the sole trustee of some $42 billion in employee retirement funds, has been investing heavily in hostile takeovers.

Put pension power to work

Despite their tremendous wealth, pension funds are not used as a collective tool to influence corporate policy or to challenge incompetent or self-serving management. Several initiatives are underway to put workers' potential power to work within the existing rules of the corporate game.

In February, the AFL-CIO's Industrial Union Department announced it will try to raise $200 million to create a buyout fund to help bring private companies under worker ownership and control. Pension fund assets would be pooled to provide the cash downpayment, although the workers would eventually purchase a majority interest by making wage concessions. Union-sponsored, the fund would be run independently by two investment bankers who structured similar deals at the investment banking firm of Lazard-Freres.

Short of buying out a company, unions can use the equity stake bought by their pensions to influence corporate decisions. Instead of relying on professional money managers, who usually vote with management, some unions are starting to vote for themselves. Increasingly, labor has been sponsoring shareholder proposals and even challenging entrenched management through proxy solicitations for new managers. For example, the United Brotherhood of Carpenters and the Amalgamated Clothing and Textile Workers Union are coordinating an effort to use labor's votes at fund boards to challenge the safety and health policies at a series of companies.

Unions are also starting to target their pension investments in ways that serve the multiple interests of plan participants. For example, the national Sheet Metal Workers' fund has invested in two companies that plan to expand, and employ more sheet metal union members. Investments like these not only yield a traditional financial return and boost the union's industry, but also in-crease the numbers of active workers contributing to plan assets.

Make services serve labor

Pension funds are major consumers of financial services. Union-sponsored plans alone generate billions of dollars each year in custodial, money management, brokerage, consulting and legal fees. Yet the same unions that insist on paying extra for a union built Zenith or AT&T computer often are not aware that they are handing anti-union firms like Bank of America or Shearson Lehman Hutton millions of dollars in fees. However, a union-led financial services boycott has at least twice proved a powerful weapon. Last year, Bank of America and, in 1986, Shearson, capitulated rapidly on long-standing labor disputes � after the mere announcement of a boycott by labor. More unions now are considering using their clout as consumers to challenge lending and other practices by financial service providers.

All these initiatives offer hope that workers will put their pension power to better use. But labor also needs to address internal problems which are holding it back. One very real obstacle is the diversity and decentralization of the workers whose retirement savings are at stake. From the 85-year-old retiree interested in his cost of living adjustments, to the 25-year-old worker eager to boost take-home pay and hold onto her job, the broad range of workers' interests make it very difficult to forge a collective mandate for pension plan power.

Another problem, easier to overcome, is labor's reluctance to implement investment strategies that would maximize the total return for pension beneficiaries: as workers, consumers and community members. Too of-ten, union trustees are intimidated by money managers and self-interested "experts" into turning pension management over to "professionals." But these money managers, such as Merrill Lynch or Goldman Sachs, invest for short-term, financial gains. They do not necessarily have workers' long-term interests in mind.

Labor must demand and win greater control over pension funds, so that its collective ownership can serve workers' multiple long-term interests. More than just a secure retirement income, these interests include continuous employment, community economic development and fair corporate policies. ^

Whose Money Is It Anyway? Pension funds, if well-managed, produce at least three kinds of gains. The defined benefits to which plan participants are contractually entitled. The excess assets which accrue above the amount of money needed to finance those contractual benefits. Ownership of these assets is now hotly debated by labor and management. The secondary social benefits which could be derived from creative and socially-conscious investing. This is rarely attempted, even though it is permissible. - M.C.

Michael Calabrese is an attorney and graduate of Stanford Business School. He runs the AFL-CIO Investment Tracking Service and represents the Federation on the Council of Institutional Investors.