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Summary of Research Presentations - Bios of the Researchers

PROFILES OF THE RESEARCHERS

Dean Baker is currently a Senior Research Fellow at the Preamble Center and a Research Associate at the Economic Policy Institute, both in Washington, DC. Previously, he was a Senior Economist at the Economic Policy Institute. He does work in macroeconomics, financial markets, and Social Security. He is the author of the Economic Reporting Review (ERR), a weekly on-line commentary on media coverage of economic issues (http://www.fair.org/).

Eric Becker, CFA is an equity analyst and assistant portfolio manager and the editor of Investing for a Better World. Prior to joining Trillium Asset Management in 1993, he worked for Cultural Survival, a human rights organization. Eric serves on the board of Interlock Media, a non-profit human rights and environmental media organization. He earned his B.A. from Haverford College. He is a Chartered Financial Analyst, and is a member of the Association for Investment Management and Research and the Boston Security Analysts Society.

Michael Calabrese is the director of domestic policy programs at the Center for National Policy (CNP), a nonpartisan public policy institute in Washington, D.C. He served previously as general counsel of the Congressional Joint Economic Committee, where he organized hearings on pension investment in 1994, and before that as pension and investment counsel at the national AFL-CIO. He has an M.B.A. and law degree from Stanford University and took a B.A. in Economics and Government from Harvard College in 1979.

Archon Fung is a Senior Associate at the Center on Wisconsin Strategy (COWS) and will be an Assistant Professor of Public Policy at Harvard University’s John F. Kennedy School of Government in 1999. He writes on the deliberative-democratic reorganization of large public institutions such as urban school and police systems and environmental agencies. He co-edited Institutions of Justice: Constitutionalism, Democracy, and State Power (Edward Elgar, 1996) with Joshua Cohen. At COWS, he works on the Milwaukee Jobs Initiative, a project that moves vulnerable workers into family supporting careers and the Labor-Capital initiative to explore the responsible investment of worker pension funds. He recently earned his Ph.D. in Political Science from the Massachusetts Institute of Technology and took S.B.s in Physics and Philosophy from MIT in 1990.

Teresa Ghilarducci is an Associate Professor of Economics at the University of Notre Dame. She is a Presidential appointee on the Pension Benefit Guaranty Corporation’s Advisory Board and she was appointed by Indiana Governor Frank O’Bannon to serve on the Board of Trustees of the State of Indiana Public Employees Pension Fund. Professor Ghilarducci directs the Higgins Labor Research Center–a multidisciplinary center at the University of Notre Dame that focuses on scholarship and teaching about the living standards of workers. Her 1992 book, Labor’s Capital: The Economics and Politics of Employer Pensions, published by MIT Press, won an American Publisher Association’saward for business books of 1992. Also in 1995, she co-authored a study of multi-employer pension plans, Portable Pension Plans for Casual Labor Markets by Greenwood Press, with an introduction by former Labor Secretary Ray Marshall.

Tessa Hebb is Co-chair of the Research Task Force for the Heartland Labor-Capital Project. She is an independent consultant and President of Hebb, Knight and Associates. Ms. Hebb’s extensive background in public policy research includes her past position as Director of Research for the Federal New Democratic Party of Canada. As an independent economic consultant, Ms. Hebb has worked with the New Democratic Party of Canada to investigate new employment initiatives in the Netherlands and the European Union, trade unions both in Canada and the United States, and last year she completed a major project for Deloitte Touche Tohmatsu International that established a global database on the financial sector. In 1997, Ms. Hebb was asked to become President of the Douglas-Coldwell Foundation, a foundation for research and education in support of the social democratic movement in Canada. She is also the President of the Virtual Institute, an Internet based think tank that explores both current policy issues and the values that drive policy choices. She obtained her Bachelor’s degree from Carleton University and her Masters in Public Administration, specializing in International Finance, from Harvard University.

Jonathan Low is a Senior Research Fellow at Ernst & Young’s center for Business Innovation (CBI), a research and development organization focused on emerging trends and solutions. He is the leader of the CBI’s Performance Management initiative, one of five such initiatives at the Center. This initiative concentrates on valuation of intangibles including intellectual capital, organizational transitions and inter-enterprise collaborations. Jon also serves in a number of positions related to his work on the valuation of intangible assets. These positions include Co-Chair for Strategic Organizational Issues of The Broodings Institution’s Working Group on Measuring and Presenting Intangible Assets, Member of the Board of Advisors of The Intangibles Research Center at New York University’s Stern School of Business and Member of the Advisory Board of the Journal of the Investment Management Consultants’ Association. Jon is a Director of High Street Associates, Inc., Surface Coatings, Inc. and the Berome Company. He is a graduate of Dartmouth College and Yale University’s School of Management.

Patrick McVeigh is an Executive Vice President and senior portfolio manager for Trillium Asset Management (formerly known as Franklin Research & Development Corporation). In addition, he serves as managing editor of Trillium’s Investing For a Better World investment newsletter. He has been employed at Trillium since its founding in 1982. He also serves on the board of directors of SEED, a community development loan fund which supports new business development among the peasant community in Haiti. He has written and spoken extensively in the field of socially responsible investing.

Marleen O’Connor is a Professor of Law at the Stetson University College of Law. She has also practiced Securities Law as an associate at the law firm of King and Spalding in Atlanta, Georgia.  She joined the Stetson faculty in August, 1988. Her fields of interest include Real Property, Business Associations, Securities Regulation and Law and Economics. She has published several articles concerning the employees’ role in the corporate structure. Professor O’Connor graduated first in a class of 999 at DePaul University.

Mary O’Sullivan has been an Assistant Professor of Strategy and Management at INSEAD since January 1997. She completed her Ph.D. in Business Economics at Harvard University. Her broad research interests include political economy, the history of economic thought, and economic history. She is currently working on a book entitled Contests for Corporate Control: Corporate Governance and Economic Performance in the United States and Germany which will be published next year by Oxford University Press.

Joel Rogers is the John D. MacArthur Professor of Law, Political Science, and Sociology at the University of Wisconsin-Madison, where he also directs the Center on Wisconsin Strategy (COWS), a policy research institute and project incubator dedicated to promoting sustainable development. Rogers has written widely on American politics and public policy, political theory, and U.S. and comparative industrial relations. His most recent books are What Workers Want (Cornell University Press, 1999) and Metro Futures (Beacon Press, 1999). A longtime social and political activist, Rogers was the founder and first chair of Sustainable America, the Center for a New Democracy, and the New Party. A recipient of one of the MacArthur Foundation’s "genius" grants, he was recently identified by Newsweek as one of the 100 Americans most likely to affect U.S. politics and culture in the 21^st century.

Damon Silvers is an Associate General Counsel for the AFL-CIO. His responsibilities include issues involving corporate, securities and bankruptcy law, benefit fund investment policy, and mergers and acquisitions. Mr. Silvers works closely with the AFL-CIO’s Office of Investment and the Center for Working Capital and has represented the AFL-CIO and the Trade Union Advisory Committee to the Organization for Economic Cooperation and Development. Prior to working for the AFL-CIO, Mr. Silvers was a law clerk at the Delaware Court of Chancery for Chancellor William T. Allen and Vice-Chancellor Bernard Balick. Mr. Silvers has previously worked in the Mergers and Acquisitions Department at Credit Suisse First Boston, for the law firm of Cravath, Swaine & Moore, the Enforcement Division of the United States Securities and Exchange Commission, Monitor Company, a management consulting firm, and in the General Counsel’s office at the International Brotherhood of Teamsters. Mr. Silvers has also been the Assistant Director of the Office of Corporate and Financial Affairs for the Amalgamated Clothing and Textile Workers Union, and the Research Director for the Harvard Union of Clerical and Technical Workers, AFSCME. Mr. Silvers received his J.D. with honors from Harvard Law School and an M.B.A. with high honors from Harvard Business School. Mr. Silvers is a graduate of Harvard College, summa cum laude, and has studied history at Kings College, Cambridge University.

Jayne Zanglein is the J. Hadley Edgar Professor of Law at Texas Tech University. As an attorney, she has specialized in job-creating pension investments for the past 20 years. She was a member of Governor Cuomo’s Task Force on Pension Investments and co-chair of an ABA Task Force on Social Investing. Professor Zanglein has written numerous articles on ETIs, as well as a book written for the AFL-CIO: Solely in Our Interest: Creating Maximum Benefits for Workers through Prudent Pension Fund Investments. She currently coordinates the Investment Strategies for Employee Benefits program at the George Meany Center.

SUMMARY OF RESEARCH PRESENTATIONS

The pension savings of U.S. workers account for America’s single largest source of investment capital . Among other things, the disposition of these assets powerfully influences the country’s economic competitiveness and workers’ overall well being. In a year-long research effort, the Heartland Labor Capital Project found deep flaws in our pension system and the capital markets it feeds. However, the Project also detected a number of hopeful, even transformational, signs in the pension sector.

The following reports summarize the bad news and good news presented by researchers at Heartland’s second national conference.

TERESA GHILARDUCCI

America’s private pension system has grown enormously in recent years and now contains $7 trillion in assets. But despite its size, the system covers only 50 percent of U.S. workers. And the average monthly benefit pensioners receive is declining in real terms. In her essay "Who Controls Labor’s Capital and Why It Matters," Teresa Ghilarducci explored these trends and their root causes.

Ghilarducci found that the movement from defined benefit (DB) to defined contribution (DC) plans has been accompanied by a shift away from joint control of pension assets by labor and management representatives. With this shift in control, employer contributions to pensions have declined along with plan benefits, despite the nominal growth in pension assets. Ghilarducci also identified five "leaks" that threaten the stability of the current pension system: limited coverage of workers; conflicts of interests for pension trustees; high administrative costs for actively managed assets; inflation; and myopic investment strategies that undermine the health of firms and employment upon which pension contributions are based.

"Focusing on the DB-DC distinction alone may be misleading. It is more instructive to look for patterns of control, for union involvement in negotiating these pension plans. Pension plan generosity is a standard way to compare the eventual size of benefits for workers in DB plans. Between 1988 and 1996, DB generosity in plans where unions helped negotiate the pension increased by four percent. During the same period, DB plans in nonunion settings saw a decline in generosity by 10 percent. So unions really do make a difference in terms of the benefits that workers are receiving. The pension trend that matters is the one that explains the decline in pension security. The fall in worker control over pension assets and benefits explains that trend."

ARCHON FUNG and DEAN BAKER

In their essay, "Collateral Damage: Do Pension Fund Investments in Capital Markets Hurt Workers?" Dean Baker and Archon Fung examined ways that pension investment practices and embedded capital-market operating costs harm ordinary people. Current research indicates that relationships between U.S. shareholders and managers pressure the latter to pursue short-term business strategies that eventually render American companies less competitive than firms in countries with corporate governance relationships favoring longer time horizons.

Baker and Fung also reviewed the explosive growth in and consequences of corporate mergers and acquisitions (M&A). In 1988, U.S. firms consummated approximately 3,900 M&A deals, with a total value of some $350 billion. In 1998, Corporate America fashioned 11,600 M&A deals totaling $1.6 trillion. Of the more than half-million workers who lost their jobs in 1998, about one in ten were laid off due to an M&A. In the midst of these downward pressures on competitiveness and worker welfare, executive compensation has surged to unprecedented levels.

"A large percentage of institutional investors act on inadequate information. Institutional investing that looks only at normal accounting measures, earnings ratios and sales — and then trades on that information — doesn’t take into account deeper information about the strategies used by a firm or how it treats its workers. When institutional investors act on thin information, they stack the deck in favor of short-term performance. Managers respond to those incentives by under-investing in R&D, training, and capital equipment in order to boost short-term earnings."

"Skyrocketing CEO compensation is money out of people’s pockets. You can think of CEO compensation as money that otherwise would be firms’ profits or available for investment. Or if you like, you could think of this as money that might otherwise had been available to pay higher wages."

MARY O’SULLIVAN

In " Shareholder Value, Financial Theory, and Economic Performance," Mary O’Sullivan critiqued the dominant theory of corporate governance and proposed an alternative. The prevailing shareholder model of governance views investors as the "principals" in whose interests corporations should be run. When firms maximize shareholder value, say advocates, they also enhance the overall performance of the economy. However, a careful historical examination shows that the shareholder theory fails to explain real-world corporate operations. According to O’Sullivan, an organizational control model better accounts for how innovation and industrial development actually occur. In addition, the organizational control model provides a promising framework for forging worker-centered corporate governance strategies.

"In the sort of Milton Friedmanesque world we live in, there’s a notion that shareholders are the only economic actors who make investments without any contractual guarantee of return. Shareholders are the only ones who bear the risk of the enterprise making a profit or loss. Therefore only shareholders have an interest in allocating corporate resources to their best alternative use. Workers don't give a hoot whether the enterprise survives because they can always get another job, given that labor markets are perfect. The only people who can say this with a straight face are, of course, financial economists with tenure. But this is their argument: if you look after the interests of shareholders, you look after the interests of everybody."

JON LOW

Jon Low presented recent work from the Ernst & Young Center for Business Innovation on the impact of intangible assets on the value of the firm. His presentation, "Valuing Intangibles: Results and Implications" explained the fundamental shift from an engineering model of the economy to a biological model. Today, the determinants of value are changing and the price of a firm’s stock is more often influenced by intangible assets than by traditional financial performance. For example, a company’s human capital often provides a more accurate predictor of its future stock price than does its earnings. This holds true for small firms during initial public offerings just as it does for large mature corporations. Ability to innovate is a second predictor of future success. Investing in firms that have these attributes is key to providing real long-term benefit for pension plan beneficiaries.

"When we came up with the ten most important non-GAAP, non-financial measures in determining the value of the firm, more than half of them generally related to workforce contributions. The key point is that the contribution of the employee determines the value in a successful IPO."

JAYNE ZANGLEIN

Economically Targeted Investing seeks both a market rates of return and collateral benefits for investors, workers and communities. Responsible investors who have added ETIs to their portfolios have discovered they can yield enormous financial and social benefits. But for the most part, asset managers have not pursued these investments aggressively. In "Overcoming Institutional Barriers on the ETI Superhighway," Jayne Zanglein explained why.

According to Zanglein, seven common misconceptions about law, administration, performance and politics thwart the growth potential of ETIs. She proposes a three-step strategy to overcome these unjustified misconceptions and increase ETI activity to the full extent allowed under the existing regulatory framework. First, said Zanglein, investment professionals and trustees need to be educated about ETIs. Second, asset managers should utilize existing ETI vehicles such as pooled funds, linked deposit programs, and community oriented venture capital programs. Third, new institutions must be established to benchmark ETI performance and promote the best practices employed in the field.

"A few years ago the Department of Labor came out with an interpretive bulletin that said, "Yes, you can make an investment in an ETI. It’s exactly like any other investment you might make. The only difference is you have to make sure you have a return that's commensurate with the risk you have accepted. And you have to make sure to compare it with similar investments with similar risk characteristics and look at all the available investments out there that you could have made."

MICHAEL CALABRESE

Though ETIs still lag their potential, labor organizations have an admirable history of using targeted investment strategies. In "Building on Past Success: Labor-Friendly Investment Vehicles and the Promise of Private Equity," Michael Calabrese documented how specialized union funds have financed construction projects that provide competitive returns and ancillary benefits for plan participants. Against this backdrop, Calabrese examined the more recent trend of corporate and public pension funds making equity investments in small private companies.

Due to the impressive financial returns from these investments, large corporate and public sector pension funds now allocate an average of five percent of total assets to private placements. But few private sector union pension funds make such allocations at all. One fund that does is ULLICO — the Union Labor Life Insurance Company. ULLICO’s experience shows that private equity investments in young, entrepreneurial companies can yield not only premium financial returns but also the leverage to obtain covenants requiring union neutrality and card-check recognition, union-built construction, environmentally sound policies and other corollary benefits.

"What I’d like to focus on is the power of direct investing in smaller, nonpublic companies. Private-placement debt and equity are increasingly a critical source of capital not only for start-up firms but also for middle market firms, firms seeking buyout financing, and firms in financial distress. Whose money is in this market? Bill Gates and hedge funds, certainly. But half of all private equity capital, much more than $100 billion, is supplied by corporate and public pension plans. Yet, jointly trusteed, Taft-Hartley funds barely have a toe in this market. That is really a lost opportunity not only for the beneficiaries of the funds but for the labor movement, too. Because private equity investing offers a surprising degree of social as well as financial leverage."

PATRICK McVEIGH

In "The Recent Growth of Socially Responsible Investment," Eric Becker and Patrick McVeigh explained that screened stock portfolios have become an increasingly widespread method of ethical investing. The use of this tool gathered momentum in the 1970s and 1980s as investors sought to end South African apartheid and promote environmental protection. Gradually, screens employed by social investors incorporated concerns over tobacco, alcohol, weapons, human rights, and labor relations. Between 1984 and 1996, the total assets invested in "socially screened" mutual funds increased thirty-fold, outpacing overall market growth.

Critics have alleged that screening compromises managers’ ability to generate competitive returns. But in exploring the history, practices, and performance of social investment initiatives, Becker and McVeigh showed that this is not generally true. In 1998, for example, 14 out of 20 screened funds beat a Lipper benchmark equity fund. However, social screening does have significant limitations. Though many funds include workplace concerns among their screens, only one fund focused primarily on worker-related issues was available to retail investors in the United States in 1998.

"We found that there was $1.2 trillion involved in this socially responsible field, which equals nine percent of all money that's under professional management in the United States. Nearly one out of ten investment dollars in the country is being invested with some sort of social criteria attached to it. Most of the social funds screen on a wide range of issues, including environment, labor relations, human rights, as well as a host of others. Most will avoid investments in companies that have poor union relations, such as those appearing on the AFL-CIO boycott list or those that have a history of union-busting tactics."

MARLENE O’CONNOR

In "Labor’s Role in the Shareholder Revolution," Marleen O’Connor described corporate governance initiatives devised by unions to complement their targeted investing programs. As a group, unionized pension plan participants and beneficiaries have submitted a significant portion of all shareholder resolutions. More importantly, they have one of the highest success rates in gaining passage of (or management concessions to) their proposals.

For the most part, union shareholder activists have focused on traditional corporate governance issues such as redeeming poison pills, limiting executive compensation, and promoting board independence from management. Labor’s position on these issues frequently elicits support from other institutional investors favoring good governance practices. In recent years, the AFL-CIO has begun to play a more active role in directing and assisting union shareholder activities. If these efforts succeed and unionized workers become one of America’s largest blocs of organized shareholders, labor stands to gain substantial influence over a wide range of corporate policies.

"Things have dramatically changed in the last ten years. Today, when scholars discuss American corporate governance, proposals for the German system of co-determination are no longer mentioned at all. This is because the shareholder-value mantra has really taken over. There is an overwhelming consensus that the board of directors should be focusing on shareholder value exclusively. My thesis is that corporate governance rights will trump labor laws in importance and that shareholder rights are going to become a focal point for labor-management relations in the 21st century. I also think that issues concerning employment relationships, such as training and downsizing, raise significant social policy. Shareholders should be allowed to debate these issues too."

TESSA HEBB

In "Canadian Sponsored Investment Funds as a Model for ETIs," Tessa Hebb chronicled Canadian experiences with economically targeted investment. Following the success of Quebec’s Solidarity Fund (see PAGE XX), labor sponsored investment funds (LSIFs) developed throughout Canada. By early 1998, the total investment in LSIFs had grown to $4.6 billion and accounted for 54 percent of Canadian venture capital. These investments have generated rates of return that meet or exceed those of comparable asset classes. Moreover, LSIF assets have helped diversify workers’ retirement portfolios, bankrolled job creation and retention, and supported regions’ competitiveness in emerging economic sectors.

According to Hebb, the application of workers’ intelligence and resources is primarily responsible for the direct and collateral benefits of LSIFs. Hebb explained how LSIF financing has transformed the relations between labor and management at target firms and encouraged open accounting, sound environmental practices, and even worker ownership. In providing capital for competitive local economic development, LSIFs enhance the quality of investment in financial and social terms by financing only responsible firms and then by prodding those firms to become better still.

"We know that there's a lot of debate in the U.S. over economically targeted investing and whether it causes investors to get a lower rate of return. Critics say that you cannot be driven by market rates of return and seek collateral benefits. But research shows that argument just doesn’t hold up. We are able to look at the Canadian LSIFs to prove this point. The research shows funds having a defining set of characteristics that includes sponsorship and control by an organized labor body, and a broad social and economic social agenda, actually outperform LSIFs that do not have those characteristics."

DAMON SILVERS

In "Challenging Wall Street’s Conventional Wisdom: Defining a Worker/Owner View of Value," Damon Silveres, Bill Paterson and J.W. Mason examined the challenges that a worker/owner view of the firm poses for traditional accounting and reporting practices just as it challenges the short-term outlook of most money managers. While organized labor has sparked successful shareholder activism and the growth of labor investment vehicles, roadblocks remain to a more complete program of capital stewardship. Workers’ assets continue to be underorganized. And worker/owners continue to have only limited access to the information they need to make long-term investment decisions. To eliminate these roadblocks and better align the interests of fund managers with plan beneficiaries, labor must expand trustee education, increase workers’ voice in fund governance through collective bargaining, and push for greater transparency in fund governance.

"We see four challenges. The first and foremost is to organize our money. The second is to improve the legal and regulatory environment. The third is to move our initiatives from being about process to being about substance. And finally, we need to bring all these efforts to bear on the challenge of shaping where the money goes and what decisions are made with it. We need to go global. The labor movement in the United States needs to have a common dialog with the labor movements in Europe, in South America, Asia, and Africa about the global capital market that we all live in."