Big Labor's Governance Lesson
By Aaron Bernstein
When it comes to good governance, Corporate America can learn a useful lesson from, of all places, the labor movement. For more than a year, the AFL-CIO has been plagued by a stock scandal at Ullico, a labor-owned insurer. The company's former chief executive and more than a dozen of its 28 directors, mostly union leaders, pocketed millions of dollars by selling Ullico stock at the expense of the union pension funds that own most of the company.
What's notable, is that after months of internecine battles, AFL-CIO President John Sweeney and other labor leaders who sat on Ullico's board moved decisively to clean up the mess. They ousted CEO Robert Georgine and put directors on notice that they'll have to pay back the profits they made. That could amount to at least $6 million.
These actions stand as a model for other large companies. It's painfully clear today that corporate boards rarely fulfill their designated role as watchdogs over the CEO. Complacent directors allowed apparently illegal abuses to occur at a string of companies, from Enron to Tyco International. Many other directors do little to rein in executive excesses: Consider former General Electric (GE ) CEO Jack Welch's outsize retirement package, or the tens of millions raked in this year by the CEOs of American Airlines (AMR ) and Delta Air Lines (DAL ), despite huge losses.
The problem, of course, is that many boards remain clubby conclaves with little desire to check egregious CEO behavior. Ullico's board was perhaps even more inbred than most, since many of the directors Sweeney confronted are leaders of unions that elected him and pay dues to the AFL-CIO.
Yet Sweeney and a few others, such as Laborers' Union President Terence O'Sullivan, who has since been named Ullico's new CEO, defied the institutional taboos and took on their chums. "We still have boards that are handpicked by the CEO, for the most part, and those directors don't usually stand up to the CEO," says University of Delaware management professor Charles Elson. "Directors need to have the guts to make change. That's the lesson from Ullico."
No question, it wasn't easy for labor leaders to oppose Georgine. He was was the head of the AFL-CIO's building-trades department for 26 years -- 10 of them after he took over at Ullico in 1990. Georgine packed the insurer's board with building-trades pals, who remained loyal even as the scandal triggered investigations by a grand jury, the Labor Dept., and other agencies.
Sweeney, O'Sullivan, and other labor leaders had to mount an all-out battle. When the scandal broke last year, Sweeney, then a Ullico director, prodded fellow board members to mount an investigation.
Sweeney didn't make any money from selling stock himself and quit the board in December after Ullico refused to release the resulting report. After failing this year to win over a majority of directors, Sweeney and O'Sullivan lined up the union pension funds to vote their shares against Georgine at Ullico's annual meeting on May 8.
Even so, the battle went down to the wire: Georgine handed O'Sullivan his resignation at 2 p.m., just as the meeting began. AFL-CIO and Laborers' officials had arrived armed with proxy resolutions that would have forced emergency changes to Ullico's bylaws if Georgine hadn't offered his resignation. Those would have allowed shareholders to override directors (see BW Online, 5/9/03, "Tense Moments in a Labor Power Struggle").
In the end, Georgine backed down, and on May 13, a new board with a dozen union leaders untouched by the scandal voted to require directors to return their stock profits. Georgine's lawyer didn't return calls for comment.
The outfit still faces plenty of trouble. Congressional hearings are due in June, and the criminal investigation remains unresolved. But the AFL-CIO now can cite Ullico -- not just as a case of executive greed but as an example of how to deal with it. Good thing, too, since the AFL-CIO is spearheading dozens of shareholder resolutions on CEO pay this year. Having fixed its own greed problem, labor can claim some credibility in that campaign.
Bernstein follows labor unions from Washington