Downsizing the CEO

The omnipotent corporate chief executive emerged in the ​’90s as a popular economic superhero, rivaling the high-tech nerd as creator of the economic boom. But that came to a crashing finale with misdeeds at Enron and dozens of other high-profile businesses — when a mix of executive greed, lawbreaking and deregulation built up then burst the stock market bubble.

In the angry aftermath, the labor movement worked closely with public employee pension funds to create a new model of accountability for corporate executives, and this spring the Securities and Exchange Commission (SEC) is expected to issue new rules that will make it easier for shareholders to nominate directors.

“This is the most important corporate governance reform to correct past abuses that we’ve seen in recent years,” says Brandon Rees, a researcher at the AFL-CIO’s Center for Working Capital. It reflects a tentative alliance between organized labor and shareholders against arrogant executives and their destructive corporate decision-making.

Shareholders own corporations, but in the first decades of the 20^th Century control shifted to professional managers. Although technically accountable to boards of directors representing shareholders, CEOs and corporate insiders now effectively name the directors, who set executive pay, oversee audits and approve broad strategies. With CEOs in near-total control, executive pay skyrocketed regardless of how well corporations performed or planned for the long term.

During the ​’90s, unions increasingly used the power of their members’ pension funds — valued at $6 trillion — to combat the mismanagement that threatened the retirement wealth of their membership.

Last year unions introduced half of the record number of shareholder resolutions on corporate governance — finding support from many institutional investors that own most stock, such as public pension funds. In 2002 the nation’s public employee funds, which hold about 13 percent of all stock, lost $300 billion. New York figured its state fund lost $9 billion from 2001 to 2003 as a result of corporate corruption. The crash — and the need to increase contributions to the funds — squeezed state governments, which then laid off workers.

“It was a direct financial attack because of corporate malfeasance,” says Richard Ferlauto, director of pension investment policy for AFSCME, which represents public workers. ​“It caused our members to be fired and to have lower retirement benefits.”

These public pension funds, as AFL-CIO associate general counsel Damon Silvers notes, often own shares across the stock market, making it hard to walk away from badly managed big companies. Although some pension funds supported corporate raiders to dislodge ineffective managers, broad-based long-term investors lose more than they gain from takeovers. Even though activist labor and public pension investors increasingly won majority votes on their resolutions in recent years, managers refused to implement the proposals. For shareholders not trying to take control of a company, it is prohibitively expensive to nominate directors to challenge the slate proposed by managers, who use corporate funds to distribute proxy statements.

President Gerald McEntee increased AFSCME’s efforts to get more worker representation on public pension boards and to persuade boards to be active shareholders to prevent future abuses. The labor movement attacked exorbitant corporate pay schemes and won an SEC rule forcing mutual funds, historically rubber stamps for executives who were customers for their financial products, to disclose how they voted. Unions also supported legislative reforms but none, including The Sarbanes-Oxley Act that tightened regulation of financial reporting, increased shareholder power.

“We had to design a strategy that would give shareholders real power in the boardroom,” Ferlauto says. AFSCME’s internal pension plan filed proposals at six corporations in 2003 to permit shareholders to nominate directors and have those names included with proxy materials distributed by corporations. The SEC ruled that companies could ignore the proposals but ordered an internal study of the issue of easier shareholder nomination of directors that cropped up four times over the past 62 years. Last fall the SEC proposed a new rule: If 35 percent of shareholders withheld votes for a director or if 1 percent of long-term shareholders won majority support for direct shareholder nomination, in the next year 5 percent of long-term shareholders could nominate a limited number of directors.

Labor unions and public pension funds want a quicker process and lower thresholds for action, but corporate executives and groups like the Business Roundtable, a lobbying organization of the largest corporations, oppose it as disruptive, premature and, most of all, a tool for organized labor. 

But unions can win against executives only if they gain support from major institutional investors. At this point, the two have common interests. ​“Vast amounts of wealth have been transferred out of shareholders and workers into the corporate elite, and they both lost,” Ferlauto says. ​“There’s a real coming together of the interests of employees — who have been laid off by tens of thousands or lost benefits — and shareholders, who have lost dividends, while CEOs have concentrated wealth among themselves.”

While the rule was under discussion this year, AFSCME (along with three other groups) proposed nominating a director at Marsh & McLennan, parent to the scandal-ridden Putnam Investments. Marsh & McLennan ultimately agreed to nominate a former federal prosecutor recommended by shareholders. 

Indeed, Ann Yerger, deputy director of the Council of Institutional Investors that represents 140 public and private pension funds, argues that the new SEC rule will be a ​“tool that will be used rarely, a tool of last resort.” That is because simply the prospect of shareholders nominating a director may be powerful enough to influence many boards. With a record number of resolutions, more corporations this year are reaching agreements to avoid appearing against reform, having large votes against them or facing a future fight over shareholder-nominated director, says Melissa Moye, vice president at the union-owned Amalgamated Bank.

Yet there will still be many fights at annual meetings this spring. Public pension funds, with labor support, are mounting a major effort to withhold votes for Safeway CEO Steven Burd and two directors. The value of Safeway stock plummeted under Burd and corporate performance suffered while insiders profited. Investors also consider Safeway’s attack on union members in Southern California that prompted a 138-day strike last winter to be a bad business move.

Unions and other shareholder activists are filing resolutions on such issues as revealing corporate political contributions, splitting the roles of chief executive and board chairman, accounting for the cost of stock options, imposing strict limits on corporate pay and setting clear criteria for bonuses.

This may be the beginning of a paradigm shift away from the super-CEO toward broader corporate accountability, more transparent markets and less corruption, as AFSCME Director of Corporate Affairs Michael Zucker argues. If so, capitalists should thank labor unions for making the system function better for owners and, if labor’s long-term strategy succeeds, for workers as well.