One of America’s largest unions is spoiling for a fight with the world’s financial giants. In early May, the Service Employees International Union (SEIU) hired Grant & Eisenhofer, a law firm that has recovered more than $12 billion for institutional investors, to issue letters to AIG, Goldman Sachs, American Express, Citigroup and 25 other investment firms that hold the majority of SEIU employees’ pension funds.
The letters demand a detailed account of how executive bonuses are calculated. The union argues that these bonuses – close to $5 billion since 2005 – are out of line with the performance of executives, who in 2009 have lost nearly a half billion dollars from the pension fund.
“The economic metrics used by the boards in justifying these compensation payments were worthless,” said Stephen Abrecht, executive director of the SEIU Master Trust, in a statement announcing the action. He warned that if companies’ boards of directors do not meet fiduciary obligations to shareholders, “the SEIU Master Trust reserves the right to take legal action.”
The result of this fight in the financial arena may set a precedent for how companies determine bonuses and whether bonuses can be “clawed back,” forcing executives to return money.
“We’re setting a standard to a large extent,” Abrecht says. “Investors should expect sustainable, predictable returns. Our goal is preventing these kinds of crises.”
In 1933, the Supreme Court ruled in Rogers v. Hill that executive compensation must be reasonably commensurate to services rendered, laying the groundwork for shareholder challenges. But plaintiffs often face an uphill battle, and over the years, courts have tended to rule in favor of corporations in cases challenging executive compensation.
Under the “business judgment” rule covering executive pay, corporate boards are presumed to have acted in good faith unless a plaintiff can show that a board “breached its fiduciary duty of care or duty of loyalty to the company, or acted in bad faith,” says attorney Louis Anthony Pellegrino.
That won’t be an easy task. Currently, compensation review boards are selected by boards of directors – from their own ranks – to determine how executives are paid, including bonuses. In other words, the people who decide compensation for one executive may have that same executive on a board deciding their own compensation. This leads to an incestuous relationship that benefits the executives to the detriment of shareholders and the public. By shedding light on how compensation decisions are made, the SEIU says it hopes to publicly embarrass the institutions and force Congress and the courts to take remedial action.
The bonus fight is part of a larger campaign to call America’s largest corporations to task for shirking their fiduciary duties to stakeholders. A week prior to their call for transparency on executive compensation, SEIU Secretary-Treasurer Anna Burger sent an email to millions of Americans asking them to sign a “taxpayer proxy card” to stop Bank of America from predatory lending practices and from blocking their employees’ right to unionize.
“After failing our economy, it is time taxpayers have a greater say in banking reform and for Bank of America to be a partner instead of a toxic asset as we work to create real solutions to the banking crisis,” Burger wrote.
The union is soliciting testimonials from small business owners who have been denied or squeezed on loans by big banks that took taxpayer money and failed to increase lending. They are also starting a campaign focused on the miserly wages banks pay most of their employees.
“The banks have to stop thinking short-term gain versus long-term value,” Abrecht says. “We want to make sure they have nowhere to hide.”
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