Organised labour’s most underrated weapon may be its capital.
Hedge funds such as Elliott Management and index investing groups like BlackRock have been most vocal about putting shareholder pressure on corporate boards. But pension money invested by labour unions and US states and municipalities, which together totals in the trillions, is increasingly asserting itself, not just with the traditional “maximise shareholder value” message but to push for social goals like higher wages and worker protection.
In an era where there are growing calls to reconsider the purpose of the corporation, social priorities are finding a hearing in a place hitherto viewed as hostile territory: the boardroom. And the views of pension money, once thought of as a source of rogue proposals at AGMs and investor lawsuits, has started to sound much more like the mainstream.
Perhaps the most shocking victory for unorthodox shareholder activism occurred in late November when two blue-chip private equity firms, Bain Capital and KKR, agreed to fund $20m in severance payments for workers of Toys R Us, the bankrupt retailer that liquidated earlier this year.
Private equity-owned businesses fail regularly leaving nothing for their employees. However, well-organised protests by advocacy groups such as Rise Up Retail created a storm that several state pension funds simply could not ignore. The Minnesota state pension, for example, has $650m committed to four KKR funds (including the one used to purchase Toys). At a public meeting of the Minnesota State Board of Investment in June attended by governor Mark Dayton, the state suspended new commitments to KKR until the plight of Toys R Us workers was examined.
In the statement announcing the employee fund, Bain and KKR did not directly identify what prompted their action. However, the intense broad-based pressure, including direct threats to investment (state pension money is estimated to provide around a third to a half of private equity assets under management), undoubtedly attracted their attention. Toys R Us workers have even thanked Minnesota for its scrutiny.
In a less publicised but equally interesting example, Blackstone in 2017 agreed to a formal “Responsible Contractor Policy” that sets higher standards for the labour and construction contractors it employs on projects in its new, multibillion-dollar infrastructure fund. The RCP was championed by the New York City Employees’ Retirement System and North America’s Building Trade Union, whose members have hundreds of billions of pension assets.
In his recent book, “Rise of the Working Class Shareholder”, Boston University law professor David Webber recounts the history of labour’s investor activism, predicting that, “there is no going back to a world in which labour and capital are mutually exclusive, lined up across a barren cavern of confrontation”.
Reconciling the interests of pension money is a clear point of confrontation, however. Retirement funds have a mandate to meet the retirement needs of beneficiaries and fiduciary duties to maximise investment returns. Pressing public companies or private equity firms to raise wages, for example, could depress these returns.
Yet there are counter-arguments in this conundrum. First, higher wages can make employees more productive — Wal-Mart’s recent wage raises were justified on these grounds. Pensions also argue that by promoting better terms for workers, a more resilient, stable base of jobs is created and sustained which, in turn, funds more pension contributions. Mr Webber writes that pensions could choose a less profitable investment “as long as trustees believe that the avoidance of job losses and therefore maintenance of worker contributions can outweigh the profit reduction”.
The increasing power of labour investor activism comes at an otherwise difficult moment. The unionisation rate in the US, hovering at around 10 per cent, is at an all-time low. Political and judicial hostility towards organised labour and defined benefit pensions has increased.
“The attack on public pension plans is motivated by an effort to silence the activism of outspoken public funds who are at the forefront of moving an impactful governance agenda,” Scott Stinger, the New York City Comptroller, told the FT.
That KKR fund, which had invested in Toys R Us, had achieved an annualised return of more than 16 per cent according to the state of Minnesota. And in September, the Minnesota State Board of Investment unanimously rescinded its resolution to suspend future commitments to KKR.
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