AUSWR
The Association of U S West Retirees
 

 

 

Review and Outlook:  Union Proxies
The Wall Street Journal
Friday, December 7, 2007

To hear his critics tell it, SEC Chairman Chris Cox threw American investors to the wolves last week.  His crime?  He voted to maintain a status quo that had gone unchallenged for 30 years until last year.

The issue goes by the benign-sounding name of shareholder access.  Annette Nazareth -- the one SEC commissioner who voted against last week's 3-1 rule-making and currently the lone Democrat on the commission -- calls the regulation that prevailed the "non-access" rule.  Get it?  The Republicans at the SEC oppose "access," while all right-thinking people supposedly support it.

So what is this "access," and would it be good corporate governance?  The access in question is to a company's proxy materials, sent out to all shareholders each year ahead of a public company's annual meeting.  Most of the time those proxy materials include a ballot listing the board members up for re-election, along with a recommendation to vote for them.

In practice, shareholders who vote usually have two choices.  They can vote for the board-approved nominees, or they can withhold their votes.  Access proponents would like to be able to place competing nominees on company proxy materials, at company expense.  And in 2006 the American Federation of State, County and Municipal Employees sued the insurer AIG for denying the union access to the proxy and won on appeal to the Second Circuit Court of Appeals, forcing the SEC to act to clarify its rules.  Hence last week's vote.

"Access" sounds good in theory.  But in practice, what really matters is whether such proxy slates serve the interests of all shareholders, or merely a few.  In the case of proxy challenges, the main agitators are unions and their political allies who run public pension funds.  These groups have their own political agendas that they want companies to pursue, and those agendas may or may not serve the larger interest of increasing shareholder value.  In the worst case, such agitation could empower special-interests on boards that reduce a company's value.

On that score, a recent study by Ashwini Agrawal of the University of Chicago examined the voting patterns of AFL-CIO-controlled pension funds over a four-year period.  Mr. Agrawal found that the union pension funds vote against the board's recommendations in much higher numbers when the union represents workers at a particular company.  When the union ceases to represent workers -- as happened to the AFL-CIO at a number of firms when it split in 2005 -- the union starts voting for company-nominated directors.

Shareholders are free to vote their shares in the manner they choose, but this evidence suggests that the dominant concern of such pension fund holders is union representation, not overall corporate performance.  Readers may recall what happened in 2004 when Calpers, the big California public pension fund, withheld support from the CEO of Safeway for driving a hard bargain with union workers.  The Calpers Chairman at the time was executive director of the very union Safeway was negotiating with.  For a grocery company competing against the likes of low-cost Wal-Mart, this was not in the interest of all shareholders.  Calpers happens to be a big supporter of "access."

Commissioner Nazareth noted last week that "the vast majority of the [more than 8,000] commenters on the non-access proposal opposed it."  But who were those commenters?  A great number were either union members or officials, or managers of pension funds for the benefit of union members.  Company executives and directors were uniformly opposed.  They have their own set of interests, but the ability of unions and their proxies to generate this lobbying campaign underscores the political nature of this exercise.

Keep in mind that, under current law, nothing stops a company from adopting by-laws that would provide for easier proxy access by shareholders.  If there were an advantage in doing so -- if a company received a stock-price premium -- more companies would do it because more investors would insist on it.  That no such premium exists explains why investors at large aren't clamoring for this kind of proxy "reform."

Far from abandoning shareholders, Mr. Cox is sticking up for their interests by refusing to buckle to political pressure from unions, some SEC staff, left-leaning media and barons on Capitol Hill.  Average investors should be grateful.