At over seven trillion dollars, pension funds are the primary drivers of today's financial markets in the United States and around the world. The earnings that workers defer for the sake of secure retirements feed financial decisions that in turn determine the quality of employment and character of goods and services those very same workers enjoy. Yet the institutions and individuals that manage pension funds often pursue narrow goals whose consequences undermine the very workers whose savings they tend. Can the long-term interests of workers be aligned with those of financial managers, or must labor and capital oppose one another in even the use of labor's capital? Can the interests of workers be considered equal to those who hold financial shares in enterprises?
There are an array of contemporary projects and promising strategies that aim toward a new financial paradigm that unleashes the power of pension fund capital and harnesses it to advance the interests of all stakeholders in the economy in equal measure.
First and foremost, this new paradigm requires widespread awareness and knowledge of the profound affects of pension funds. When these modern instruments were first bargained, no one foresaw the enormous influence they would come to yield by the beginning of the twenty-first century. In an article written in late 1999, Robert Reich examined institutions that were fading in importance versus institutions that were growing (Reich 1999). Along with giant corporations, the federal government and the military-industrial complex, he listed trade unions as groups in eclipse. Pension funds, however, were prominent members of the group with rising power. While Reich's portrayal arouses controversy, it juxtaposes two forms of collective action through which workers build quality lives for themselves and their families. While the successes of trade unions are a matter of historical record, the potential of pension funds remains largely untapped.
Trade unions allow workers to act in concert in the labor market, tilting the balance of power in an enterprise toward its employees and away from the owners. In the resulting bargains, workers gain among other benefits, higher wages, a more equitable distribution of income, and better working conditions than they could have secured by acting individually. But what happens when workers become owners? Through the rise of institutional investment and the explosive growth of pension funds, much of the industrialized economy is, in a way, already owned by workers.
U.S. capital markets are presently financed by over seven trillion dollars of workers' savings. This pool of assets represents the largest single source of capital in the world today. We have witnessed an explosive growth in pension funds in each decade since the 1950s, when the practice of private pensions spread through many sectors of the economy. During the last two decades alone this capital pool has grown by 400 percent. Pension funds today own 45 percent of all publicly traded equity in America. But this fact of ownership has little impact on the practices of money managers or the operations of capital markets. By and large, the source of capital has little bearing on its deployment across investment opportunities. Thus the fundamental shift in the ownership of capital has not resulted in a corresponding shift in the control of capital.
As early as 1978 in their book The North Shall Rise Again, Randy Barber and Jeremy Rifkin recognized both the danger and the opportunity that the growth of these enormous capital pools presented to working people and their representatives. But rather than being able to construct strategies that would allow working people to take greater control of their savings to create long-term wealth - the opposite has come to pass. During the 1980s and 1990s, narrow and often myopic money management practices have become ascendant in America. These habits are fueled by rapt attention to daily valuations in stock markets. Quarterly earnings announcements that signal even fractional changes in expected profits drive large swings in share prices. The idea that shareholders should reign has come to dominate corporate and capital market activity. According to this doctrine, short-term increases in stock valuation justify forms of distress such as closures of otherwise productive facilities, shifting work to lower-wage or less regulated regions, and selling off pieces of coherent business complexes.
A capital strategy for labor aims to inject the welfare of workers, broadly understood, into investment priorities. Pension fund trustees are the guardians of workers' interests. Their primary duty of loyalty is owed to the beneficiaries of each fund. Nothing in this article threatens this fundamental principle of pension fund management. Rather, pension fund trustees and money managers should broadly rethink how they can meaningfully pursue the long-term interest of plan beneficiaries.
The Worker-Owner View
A multi-dimensional understanding of financial practices that advance a long-term interest would constitute a distinctive worker-owner view of investment. Its most important objective is to maximize long-term market rates of return to ensure adequate retirement payments for workers. In this regard, the worker view does not differ from conventional investment priorities. In particular, below market-rate investments, sometimes called "social investments," undermine individuals' retirement security.
But the worker-owner view departs from conventional investment wisdom by expanding the options, methods, and principles that guide capital allocation decisions. Capital markets are neither perfectly efficient nor value-free. Therefore, those who seek to advance the long-term interest of workers inside financial markets must look beyond both the array of choices these markets presently offer and the narrow band of information they provide through price signals. Alternative investment practices and vehicles can better reward all the stakeholders in the enterprise: workers, shareholders, communities, customers, and the environment, to create wealth in the long-term.
Pension funds can advance a larger social agenda reaching beyond simple individual returns. Thus the worker-owner view is certainly not value-free, but neither are the institutions that currently control these funds. To hold, as many money managers do, that the quality of capital allocation depends solely upon its risk and return profile-and thus that impacts upon workers, the environment, and communities need not be directly considered-is not to be unburdened by values. Rather, it is to advance one particular value, the risk-adjusted rate of return, above all others. To claim a single-minded focus on risk-adjusted rates of return advances no agenda, or that all parties will eventually be well served by heeding this principle above all others, simply appeals to orthodoxy discouraging debate and reducing transparency.
There are inefficiencies and systematic negative consequences of contemporary financial market operation. Just as carefully targeted investments can yield "collateral benefits" beyond monetary rates of return, contemporary financial transactions can result in "collateral damage." For example, myopic choices in rapid stock turnover and leveraged buy-outs (LBOs) can purchase short-term gains at the price of long-term losses. This short-term focus of investors causes some firms to attempt to increase their immediate appeal by de-emphasizing areas that enhance long-term productivity and growth, such as firm-based research and development, training and education of employees, and environmental safeguards. A preoccupation with short-term returns can also induce destructive behavior such as corporate downsizing, overseas job flight, employee lay-offs, and mergers and acquisitions. While such practices give rise to short-term increases in stock price, some research shows the majority of firms that undertake these activities lose value over the long run (Mercer 1998).
While so much of contemporary financial management erodes shareholder value there are an array of contemporary financial strategies within the labor movement and outside it that deliberately use capital markets to secure collateral benefits for workers, communities, other stakeholders, and the environment. These shareholder strategies include screening of investments and shareholder proxy voting as tools to change the behavior of large corporations (Hirschman 1970). Increasingly, workers are finding their ability to influence management comes through their position as company shareholders rather than workers.
Shareholder activism and the extent to which labor-shareholders can further their interests within the framework of the shareholder-dominated corporation is a subject of much interest. Often the accomplishments of labor-shareholder activism are political, rather than economic, with union credibility as institutional shareholders growing in the face of declining union membership and bargaining power. Trade unions have injected labor priorities into corporate governance agendas around issues such as training, executive compensation and the creation of sustainable shareholder value through high-performance workplace practices. Labor's shareholder activism promotes the establishment of standards to measure and disclose corporations' human resource values, thereby aligning the interests of workers and owners. The result is usually increased transparency, stronger corporate governance, and greater accountability on the part of management.
As a central worker-owner strategy institutional investors forge alliances with other company shareholders to advance the long-term health and viability of enterprises. But as the central feature of this strategy is the use of a shareholder position this path can be seen to reinforce a conventional shareholder mantra that raises the interests of shareholders above all others.
Economically-Targeted Investments
Direct investment in the economy through fund operation and management offers another contemporary strategy for labor's capital. Trade unions have a history in operating such funds, ranging from large commercial and residential funds that support union-built construction to more recently established funds that specialize in private equity. These funds aim to generate "collateral benefits" in addition to yielding market-based rates of return. Such investment approaches are said to have a double bottom line because they generate not only conventional returns, but also additional benefits for stakeholders such as more and better paying jobs, affordable housing, well-funded pension plans, and reduced environmental degradation. Collateral benefits can include enhanced workplace cooperation leading to increased productivity, or the delivery of products and services that might not otherwise occur without some intervention to correct a capital market failure.
In order to overcome the information barriers that cause capital gaps, institutional investors must create investment vehicles with unique characteristics and expertise that allow for the reduction of risk and uncertainty. Many alternative investment funds associated with worker-owners have access to information unavailable to mainstream investors and can better monitor these investments. Some of this comparative advantage stems from the relationship between investment vehicle sponsors and workers in the enterprise. Not only do worker-owner vehicles lessen the transaction cost of the investment; they also create a niche for themselves in the market by undertaking smaller sized investments where information costs are high.
But even where there is labor control of pension fund investment policies, such as we find in jointly-trusteed pension funds, many managers still hesitate to engage affirmatively in economically targeted investments. The chairman of the California Public Employees Pension Fund (CalPERS), one of the largest and most successful funds in the world, observers that ETIs are not an asset class in and of themselves. Rather, it is an investment perspective that allows some opportunities to be 'more equal' than others because they offer collateral benefits. For any ETI to be judged 'more equal' than the next available investment opportunity, it must deliver a market-rate of return with appropriate risk characteristics, and be fully compatible with the fund's investment plan. ETIs usually make up no more than 5% of any pension plan portfolio. Consistent with the prudence of a worker-owner view, ETIs do not irresponsibly or recklessly deploy workers' retirement savings. Indeed, these investments require high levels of knowledge and extreme due diligence. It is these informational and expertise requirements that prevent many pension funds, in particular jointly-trusteed pension funds, from taking advantage of ETI opportunities.
The greatest obstacle facing ETI investing today is the lack of education and expertise among pension plan trustees and their advisors. Although prudent ETIs are clearly allowed under ERISA, many trustees lack the basic knowledge to make informed decisions regarding ETIs. Many find that investment professionals, attorneys, and management trustees discourage ETIs out of unfamiliarity or perceived risk aversion.
Conclusion
There are several strategies through which organized labor might advance its capital agenda. These include popular and professional education of pension beneficiaries and trustees, establishing broader and deeper representation in fund governance, fostering constructive and creative relationships between organized labor and investment professionals, expanding labor-centered shareholder activist strategies beyond U.S. borders to influence foreign-based multinationals, and advocating for a more inclusive and transparent framework of corporate disclosure and securities regulation. Some tools in this mélange are already widely used, while others are still in development. Together, however, they offer a diversified mix of strategies through which to articulate and advance a distinctive worker-owner view of how labor's capital ought to be deployed in financial markets.
Workers' capital stands on the verge of a critical threshold. Whether it gains the power to advance its aims depends not on the benevolence of capital markets or corporate managers but on the ability of worker-owners to meet the challenge. A forceful worker-owner investment agenda requires worker-owners and by extension their trade unions and trustees to demand changes in both the current investment practices and the regulatory framework of pension plans. The next step along this path is to foster a range of institutional investors and financial market professionals who will help develop and then champion a worker-owner agenda. The exercise of labor's capital requires a paradigm shift to awaken this latent force and then the expansion of new expertise to wield it deftly and powerfully, thereby making capital markets maximize long-term value for working people.
