Getting the Boss to Behave

Big Labor has led the charge for corporate-governance reform

Last year, before there was a whiff of accounting fraud at Enron or WorldCom, the United Association of Plumbers submitted a shareholder resolution at Walt Disney Co. (DIS ) on behalf of itself and three other unions that own about $93 million worth of stock. The proposal called for the company to stop giving consulting work to its auditor, PricewaterhouseCoopers. Disney asked the Securities & Exchange Commission if it could disallow the resolution, since it dealt with "ordinary business." The SEC, however, ruled in December that it be put to a vote at Disney's annual meeting in February. Even before the vote was held, as corporate scandals mounted, Disney vowed to stop using PwC's consulting services. Then, as the proxies rolled in, the company promised wider auditor curbs. Even so, the resolution won 44% of votes cast--a strong showing.

It was another victory for a group that may be doing more than any to push for corporate-governance reform: Big Labor. Since the early 1990s, unions have used their $3 trillion-plus in pension assets to prod business to adopt good-governance practices. Labor's goals are largely the same as those of other investors: to maximize shareholder value. Now, the current wave of scandals has put unions at the fore of an issue far removed from their usual fight for higher pay. All the malfeasance "has opened up the corporate-governance debate in a way that hasn't happened since the 1930s," says William Patterson, head of the AFL-CIO's Office of Investment.

Labor was well-positioned to take advantage of the new reform mood. Unions submitted 28% of all shareholder resolutions in the 2002 proxy season vs. 18% last year--far more than any other institutional investor, says the Investor Responsibility Research Center in Washington. Says IRRC analyst Rosanna Landis Weaver: Labor "has made superb use of the moment."

Indeed, the unions' reform initiatives are winning more majorities or strong votes than anyone expected last year (table). Unions submitted resolutions on auditor independence at 33 companies in addition to Disney. Thirteen have agreed to new limits and oversight on auditor services, while three more are discussing similar changes with labor reps. Votes have been held at the other 17, with many resolutions garnering shareholder support of 30% to 40%.

Unions have been effective in part because they target issues with broad investor appeal and mobilize quickly behind them. They were first to attack Stanley Works (SWK ) for its attempt to save taxes by moving to Bermuda. And when the auditor/consultant issue bubbled up, unions "analyzed it fast and jumped on it," says Kenneth A. Bertsch, head of corporate governance at TIAA-CREF, the teachers' retirement fund.

Labor also has put its political campaign skills to work. Unions coordinate pressure tactics with each other and build support with like-minded institutional investors. In its recent bid to knock former Enron Corp. director Frank Savage off Lockheed Martin Corp.'s (LMT ) board, the International Association of Machinists won support from the California Public Employees Retirement System (CalPERS) and the New York State pension fund, among others. Savage was reelected, but 28% of shareholders voted against him, a rare show of dissent in what is usually a perfunctory election.

As the proxy season winds down, labor is gearing up to lobby Congress for new pension and accounting laws. Patterson and others have been meeting with SEC Chairman Harvey L. Pitt, pressing for tighter curbs on stock analysts. "We're giving workers a voice in global capital markets," says AFL-CIO Secretary-Treasurer Richard L. Trumpka. It's a voice Corporate America is likely to hear with more frequency.

By Amy Borrus, with Paula Dwyer, in Washington

— With assistance by Paula Dwyer

    Before it's here, it's on the Bloomberg Terminal.