`Working Capital': Labor's New Weapon?

It wants to use pension funds to reshape corporate policies

When 4,200 members of the United Steelworkers went on strike at Wheeling-Pittsburgh Steel Co. last year, they didn't just walk a picket line. Aided by a new AFL-CIO Office of Investment, the union also went after major stockholders of Wheeling-Pitt's parent, New York-based WHX Corp. In angry letters last summer to WHX's largest shareholder, Dewey Square Investors Corp., AFL-CIO Secretary-Treasurer Richard L. Trumka pointed out that the strike had cut WHX's stock price in half. By backing WHX, he argued, Dewey Square had hurt its 10% stake. Trumka also noted that Dewey Square's parent, Boston-based United Asset Management Corp. (UAM), manages $10 billion in union pension money. "We said: `If this is your philosophy, you shouldn't be managing worker money,"' says Trumka.

Caught in the middle, Dewey Square backed off from its prior public support of WHX Chairman Ronald LaBow. In mid-July, after the Teamsters and other unions with large pension funds complained, too, Dewey Square President Peter M. Whitman Jr. wrote LaBow to urge him to solve the dispute, which ended in early August. On Sept. 2, Whitman took some credit in a letter to union leaders, writing that "we are pleased to have played a small and constructive role in the process."

BLACKMAIL? Corporate America and Wall Street can expect more such confrontations. A few unions already have been using their pension funds' large stock holdings to hammer corporations, usually about governance issues such as poison pills. Now AFL-CIO President John J. Sweeney wants all unions to join in. On Sept. 19, Trumka, who heads the effort, will announce a new Center for Working Capital at a meeting of union pension trustees prior to the AFL-CIO's biennial convention in Pittsburgh.

The ambitious goal: to coordinate the holdings of all unions and union members and turn billions of pension assets into a new weapon for labor. Union officials envision a wide range of actions, from intervening in bargaining disputes, such as at Wheeling-Pitt, to demanding that fund managers invest for long-term growth--not short-term stock gains that stem from job or wage cuts. "Our goal is to make worker capital serve workers, not just when they retire, but on a day-to-day basis," says Trumka.

These grand plans face many obstacles. By law, unions share control over members' retirement assets with management-appointed trustees. And all trustees are required by law to be fiduciaries for retirees, which limits their ability to pursue a labor agenda that might yield lower returns.

Still, unions clearly have a great deal of weight to throw around. Taken together, union retirement funds across the board hold $1.4 trillion in corporate stock, about 14% of all outstanding shares in the country (table). Of course, unions don't control all this stock, but if their trustees begin to act in concert, unions would become the largest bloc of organized shareholders in the country. And many of labor's goals, such as good corporate governance practices, are shared by other activist stockholders.

Already, pension managers are worried about being caught between business and labor. And business is bracing for a fight. Labor stockholder actions "are a new form of union blackmail against companies," charges Laurie T. Baulig, who has fought Teamsters shareholder resolutions as the head of labor policy at the American Trucking Assns.

The AFL-CIO started down this road last fall, when it hired William Patterson to create an Office of Investment. Patterson was an early pension fund activist, at the clothing workers' union and then at the Teamsters. In recent years, he and other union officials have sponsored dozens of proxy resolutions, winning a growing number by forming alliances with other shareholders. In May, for example, a fund owned by the Union of Needletrades, Industrial & Textile Employees persuaded 62% of Columbia/HCA Healthcare Corp. shareholders to kill the company's poison pill. Patterson also has played a key role at Washington's Council of Institutional Investors (CII), a group of large pension funds that promotes corporate governance standards.

"PARTY'S OVER." One of Patterson's first jobs has been to find out just how much stock labor can possibly influence. The biggest chunk is in public-employee retirement plans. Union trustees don't run these funds, but they have a lot of input because public workers are about 40% organized. For example, unions appoint half the trustees of New York City's $75 billion in retirement funds. Labor also can bargain over the governance of single-employer plans and even demand the appointment of union trustees, though most unions haven't done so. Labor has the most control over multi-employer plans. Trustees of these funds must by law be half-management and half-union, but unions tend to be the most active since they initiate the plans.

The Center for Working Capital will focus on getting the country's 6,000-odd union trustees to be activist investors, says Patterson. The center also will issue guidelines for trustees voting on shareholder resolutions. A draft cites relatively noncontroversial positions, such as demanding that a majority of company directors be independent from management. But some are certain to raise hackles in corporate boardrooms. One proposal, for example, says that CEO pay should be linked to "compliance with environmental laws, workplace health and safety, or labor supplier standards."

These ideas won't surprise pension fund managers. In early August, Patterson and Trumka met in Chicago with 125 managers who specialize in union pensions. They laid out plans to develop standards for judging the performance of companies that handle union pensions. The final version will be drawn up with the help of panels of fund managers and pension lawyers that Patterson is forming to advise the new center. Among the new standards: that managers invest in companies that adopt high-wage, high-skills competitive strategies. The center also will draw up litmus tests of shareholder resolutions that labor supports. "We want to provide some standards and accountability for union investments," Patterson says.

Even such mild talk scares many fund managers. Some fear they'll be dragged into labor disputes. Others worry that investment returns could suffer if they're asked to pursue objectives other than simply maximizing shareholder value. Mostly, however, fund managers resent the extra hassle that labor performance standards will bring, says CII Deputy Director Anne Hansen. Right now, most union trustees leave investment decisions to the managers. "Trumka told fund managers in Chicago that the party's over," says Tom Mackell, executive vice-president of Simms Capital Management Inc., a Greenwich (Conn.) asset management firm that handles $600 million, including $100 million in union pensions. At the meeting, which Mackell attended, "a load of folks expressed trepidation about what the AFL-CIO is trying to do."

Because unions rarely control a majority of a company, labor's financial clout is inherently limited. But if the AFL-CIO's new effort succeeds, Corporate America could be facing a newly energized labor movement in the boardroom as well as in the streets.

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