Corporate Governance Objectives of Labor Union Shareholders

Labor union shareholders have become increasingly vocal in matters of corporate governance, however, their motives have been subject to much debate in the academic literature and business press. I examine the proxy votes of AFL-CIO pension funds in director elections of 504 companies from 2003 to 2006. Using the 2005 AFL-CIO breakup as a source of exogenous variation in the union affiliations of workers across firms, I find that AFL-CIO affiliated shareholders are significantly more supportive of director nominees once the AFL-CIO no longer represents workers or represents significantly fewer workers at a given firm. Other institutional investors do not exhibit the same changes in voting behavior. This difference suggests that labor relations affect the voting patterns of some union shareholders. I also find that AFL-CIO funds are more likely to vote against directors of firms in which there is greater frequency of plant-level conflict between labor unions and management during collective bargaining and union member recruiting. The sensitivity of director votes to union conflict, however, decreases at firms in which the AFL-CIO no longer represents workers or represents significantly fewer workers. The evidence suggests that AFL-CIO affiliated shareholders vote against directors partly to support union worker interests rather than increase shareholder value alone. ____________________________________________________________________________________ I am thankful to my dissertation committee for their help with this project: Marianne Bertrand, Steven Kaplan, Joshua Rauh, and Morten Sorensen. I am especially grateful to Morten Sorensen for his guidance and encouragement. I have benefited from the comments of David Autor, Karen Bernhardt, Douglas Diamond, Eugene Fama, John Heaton, Anil Kashyap, Randall Kroszner, Gregor Matvos, Atif Mian, Adair Morse, Toby Moskowitz, Marcus Opp, Jessica Pan, Amit Seru, Amir Sufi, Luigi Zingales, and workshop participants at the University of Chicago, Graduate School of Business. I am also thankful to Daniel Pedrotty of the AFL-CIO Office of Investment, Greg Kinczewski of Marco Consulting, Edward Durkin of the United Brotherhood of Carpenters and Joiners of America, Michelle Evans of the AFL-CIO Office of Investment, Mary Cusick of the I.A.M. National Pension Fund, and Barry Burr of Pensions and Investments for providing data and institutional background. Research support from the Wesley C. Picard Fellowship is appreciated. Contact information: [email protected], 44 West 4 St, KMC Room 9-75, New York, NY 10012 Introduction Labor union pension funds, particularly those affiliated with the AFL-CIO, have recently come under scrutiny for their role in affecting boards of directors at U.S. corporations. Critics argue that unions use their shareholder clout to advance worker interests under the guise of pursuing shareholder value. For example, in response to the AFL-CIO's calls to overhaul Safeway's board and lower CEO pay in 2004, Safeway Vice President Brian Dowling claimed: Union leadership has threatened to attack Safeway CEO Steve Burd and individual members of Safeway's board as a pressure tactic to get better results during labor negotiations, and these union-backed pension funds are carrying through on that threat. – Safeway Proxy Materials, March 25, 2004 Union leaders counter that their behavior is intended simply to protect pension assets: Irresponsible directors must be removed to rein in excessive CEO pay that ultimately robs working families of their retirement security. – Richard Trumka, AFL-CIO Secretary-Treasurer, Press Release, April 15, 2004 Distinguishing amongst the various motivations of labor union shareholders is complicated because worker gains are often in line with shareholder value. Empirical identification requires a setting in which shareholders’ labor interests vary independently of factors that impact the return on equity. This paper exploits a natural experiment to test whether the governance objectives of some labor union shareholders are motivated by worker interests rather than equity value maximization alone. In 2005, the AFL-CIO (the central federation of labor unions in the United States) split into two groups because of power struggles within its leadership (Chaison, 2007). The AFL-CIO was greatly reduced in size as several of its member unions left to form a new organization — the Change To Win (CTW) coalition. As a result, the union affiliation of workers across many companies immediately switched from the AFL-CIO to the CTW. I examine the effects of this switch on the proxy voting behavior of two of the AFL-CIO’s main equity funds at annual director elections for 504 U.S. publicly traded corporations before and after the breakup (from 2003 to 2006). The votes cast by these funds are representative of the votes cast by AFLCIO affiliated union pension funds with holdings on the order of $100 billion in aggregate size. I measure how the AFL-CIO funds’ director votes change when the