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
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.