There’s something perversely predictable about corporate America’s response to, well, almost every event and economic trend these days.  September 11?   Protect the bottom line (usually just a euphemism for laying off as many employees as possible).  Worldwide economic recession?  Ditto (a practice that has left the business landscape littered with hundreds of thousands of jobs lost each month from major employers such as Disney, Dell, and Motorola). The economic boom of the 1980s and 1990s?  Invest the “fruits of prosperity” in the “future” (while controlling costs through that tried-and-true trio of benefit cutbacks, salary freezes, and, of course, even more layoffs).

Most recently, Enron’s beleaguered employees have captured the attention of Congress and the media.  But the sad reality at many large companies today is that jobs, paychecks, and all types of workplace benefits remain under siege—with little or no notice from the outside world.  How else can one explain that, for example, at Wal-Mart, when the cost to employees of health-care coverage rose by 30 percent in 2002, the company suggested that they use money from their 401K plans to help cover the cost.  Congress isn’t investigating that recommendation, despite the fact that the company apparently overlooked such negative consequences for staffers as additional income tax charges, tax penalties, and a loss of future retirement income.

Throughout the past two depressing decades, there’s been little resistance to the business world’s reliance upon employee-related cutbacks.  Chief executives such as “Neutron Jack” Welch of GE, “Chainsaw Al” Dunlap of Scott Paper, and Andy (“Only the Paranoid Survive”) Grove of Intel were lionized by the media and investors alike for the ever rising stock prices that seemed to inevitably accompany their slash-and-burn management styles.   Reengineering has ruled, leaving in its wake an American workforce that is underpaid, overworked, and resentful.   Yet few, very few, have been willing to challenge the new world order in which, we were all told, companies were best and most efficiently run for one reason and one reason alone: the benefit of their shareholders.

For those seeking a different type of management paradigm—the path to a fairer and more broadly based economic prosperity than any model currently proclaimed by those well-insulated and lavishly rewarded denizens of the U.S.’s executive suites— Working Capital:  The Power of Labor’s Pensions is a welcome addition to the business literature.   Its nine well-researched and remarkably comprehensive essays highlight a range of strategies by which U.S. pension funds, now containing more than $6 trillion within their coffers, have begun to mobilize their powers as investors to lobby for a new set of management priorities.  

The caliber of the strategies described in these 220-plus pages, not too surprisingly, varies widely.  Some seem particularly promising.  Service Employees International Union, for example, took advantage of its active involvement in a series of shareholder initiatives at Columbia/HCA, the health care company, to lobby successfully behind the scenes for an organizing agreement that recognized union representation (p.71).  Union Labor Life Insurance Company, a union-owned life insurance company, provided Super Shuttle, the airport van service, with $3 million in growth capital in return for a promise that its vans would be manufactured domestically by members of the United Auto Workers (p. 100).   Other strategies seem far too modest, excessively cautious, or even misguided, as when unions worked to help achieve the passage in 1998 of six “poison pills”—takeover defense protections for corporate CEO’s—on the somewhat dubious theory that since takeovers tend to hurt employees, the devil one knows is better than the unknown (pp. 74–75).  

Still, for those who believe, as I do, that the enormous world of institutional investors really does have the financial clout to force change upon corporate America, Working Capital will be a valuable educational tool.  My recommendation comes, though, with a caveat.  Readers of this volume must keep in mind some simple realities: pension funds are only one part of the institutional investor marketplace; other key players include insurance companies, banks, mutual funds, foundations, and endowments whose priorities are often very different from those of the labor movement. 

Even more significant, perhaps, is the fact that union influence at pension

funds—and thus, the labor movement’s ability to carry out the strategies detailed in this book—differs widely from one investment pool to another.   It’s strongest at the so-called Taft-Hartley funds, which are multiemployer pools of retirement savings (about half of whose trustees are typically union representatives).  But Taft-Hartley funds only hold about $247 billion out of the total more than $6 trillion pension universe.  Union influence is less clearcut, although potentially still a significant factor, at public sector pension funds (which hold $2.09 trillion) and collectively bargained corporate plans (which hold about $1.04 trillion)  (p. 166).    When it comes to the $2.88 trillion currently held in pension funds that are either individually directed (along the lines of 401K plans) or held in corporate accounts with no direct or indirect collective employee representation, potential union influence is probably close to nil.

Some background can help put this volume in perspective.  Working Capital is the result of research and conferences sponsored by the United Steel Workers of America (USWA)-supported Heartland Labor Capital Network, the AFL-CIO’s Center for Working Capital, and several foundations, including Ford and Rockefeller.  In his opening foreword, Leo Gerard, the international president of the United Steelworkers of America, describes this large group as a “grievance committee” whose grievance was “simple:  financial markets are cutting our throats with our own money, and it has to stop.”  The challenge for labor, he noted, is to “find ways that align workers’ savings with workers’ values.  We need to invest our deferred wages  [meaning, all those pension funds] in companies that provide good jobs in stable, strong communities” (p. viii).

Getting from here to there, unfortunately, will take some big changes.  Pension funds, both public and private, currently own 45 percent of all publicly traded U.S. equity.   Yet, as Tessa Hebb, an independent economic consultant who cochaired Heartland’s research task force, comments in her introduction to this volume, “this fact of ownership has little impact on the practices of money managers or the operations of capital markets” (p. 2).   So long as unions continue to continue to act like any other investor—focusing purely on maximizing the day-to-day value of their stock holdings, regardless of what it takes to boost those prices—they likewise will have little impact on the scorched-earth strategies relied upon by today’s corporate managers. 

Indeed, Working Capital launches its argument with a powerful indictment of the role pension funds have played in supporting and even encouraging worker-hostile practices during the past two decades.  In an essay entitled “Collateral Damage,” Dean Baker, a research associate at the Economic Policy Institute, and Archon Fung, a public policy expert at Harvard University’s John F. Kennedy School of Government, examine the toll exacted upon workers, as well as the economy as a whole, by short-term trading strategies (those typically relied upon by pension funds and other institutional investors, who “churn” on average about 40 percent of their holdings each year in pursuit of quick investment gains).  They conclude,  “Funds generally flow to firms that show the greatest profit growth.  Financial markets do not care whether the basis of high corporate profits is low-cost child labor in Indonesia.  Nor do they care if firms use the threat of moving their operations overseas as a way to beat down wages and increase profits” (p. 14).  

This essay builds a compelling case, as its checklist of “collateral damage” includes reductions in new-skills training programs, shortcuts in worker safety measures, and other corporate practices that save cash (and presumably boost stock prices) in the short run despite eroding long-term prospects for stable, profitable business growth.  No list like this, of course, could be complete without the authors’ rehearsal of  the well-documented  role pension funds and other institutional investors have played in supporting the merger-and-acquisition binge of the past two decades. (Collateral damage:  “layoffs, pension fund reductions, and wage reductions for more senior workers” p. 25.) 

But after laying out their case, Fung and Baker conclude with an intriguing proposal—that the U.S. attempt to shift investors’ focus to a longer-term perspective through passage of a securities transaction tax, which would make stock churning excessively costly for institutional players and others. It’s difficult to imagine an American political regime that would support such a move, despite the overall economic benefits that would result from reducing stock market volatility and reinforcing long-term business planning.  But the authors allude to the existence of such a tax in the United States until 1964.  I would have liked to know more about its history, including the reasons for its elimination, in order to assess its potential viability in the future.

Despite minor omissions like this one, however, Working Capital is at its best when focusing on public policy issues—most especially, the regulatory and other forces that have helped undermine U.S. job conditions by encouraging pension fund managers to play it safe by pursuing only the most strictly defined and conservative of investment priorities (i.e., the same ones most other investors pursue). In her essay, “Overcoming Institutional Barriers on the Economically Targeted Investment Superhighway,” Jayne Elizabeth Zanglein, an attorney with expertise in both pensions and socially responsible investing, does a fine job of dissecting obstacles to change.  These include the mistaken belief, on the part of many pension fund managers, that their fiduciary responsibilities, as spelled out by the Department of Labor and U.S. courts, forbid them from taking into account any benefits other than short-term stock gains. 

According to this author, misconceptions like these abound, which is one reason this volume repeatedly recommends better education for pension fund managers and union leadership. But as Zanglein makes clear in a fairly intricate analysis of current case law and Department of Labor rulings, pension fund managers can comply with Employment Retirement Income Security Act (ERISA) regulations while still pursuing “collateral benefits,” such as safe workplace conditions, job growth, fair wage and benefit practices, and so on, “as long as the primary objective is to make a prudent investment with a competitive rate of return for plan participants and beneficiaries” (p. 189). They just need to be willing to work harder to come up with potential investments that satisfy both sets of goals.

            Again, some quick background: ERISA clearly dictates, among other things, the nature of the fiduciary role that pension fund managers must play, first and foremost in keeping the retirement funds that they invest safe for working people.  The authors of these essays make the point, in a number of different ways, that fund managers have been unnecessarily cautious in those investment strategies, because of a fear of running afoul of these rules and a failure to keep up with court rulings that have helped clarify acceptable alternative investment practices.

In a pension fund universe that can be directly influenced only to a very small degree by unions and their representatives, it’s not clear how to get pension managers to start experimenting with different investing patterns that might have the ultimate effect of helping to improve job conditions, much less to learn which type of investments will actually achieve these goals.   This second issue is a bigger problem, quite frankly, than Zanglein and her fellow contributors are willing to concede in this volume, although I don’t believe it need prove to be an insurmountable one over time. 

In an essay on “Social Funds in the United States:  Their History, Financial Performance, and Social Impacts,” Eric Becker and Patrick McVeigh, both investment professionals, point to the increasingly popular mutual fund strategy of socially responsible investing as a model with proven success.  A 1999 study found that nearly $1 of every $8 is now invested using social criteria (p. 44). Equally important, as these mutual  funds accumulate fairly long track records, their investment returns appear to be virtually identical to the larger universe of  nonscreened investments—good evidence that there’s no financial cost associated with socially responsible investing. 

Still, it’s infinitely easier for a fund manager to screen out, say, tobacco or military stocks than it will be for him or her to decide which companies offer their would-be worker-investors promising investment potential plus collateral benefits without collateral damage.  After all, AT&T, for example, created jobs throughout much of the 1990s, at the same time that it was eliminating them like crazy and carrying out a range of benefit cutbacks.  Now, it may be that AT&T has developed such a reputation as a corporate bad guy that avoiding it would be an easy judgment call for a socially conscious pension fund manager.  But how would fund managers handle all those telecommunications and other large corporations that, throughout the past decade, have imposed massive cuts on their white-collar (but nonunionized) workforces, sometimes even while sheltering union workers from the worst of the cuts?  What about a company that cut its health care benefits but not its pension plan, or slashed pensions but avoided layoffs?

Big changes can only occur if pension fund managers are willing to set—and pursue—big, bold investment agendas. But it’s going to be hard work to figure out what those agendas should be and which sets of compromises will be, and won’t be, worth making.  As Becker and McVeigh acknowledge but scarcely analyze in their upbeat essay, the world of socially responsible investing is all about making compromises:  Microsoft and Intel, two firms with mixed records at best when it comes to employee relations, antitrust issues, and environmental impact get thumbs-up approval ratings from the socially conscious Citizens Index (p.60).  As the authors note, “Few funds have strict exclusionary screens on employee or labor relations” (p. 62); this can lead to such aberrations as the inclusion of Target (formerly known as Dayton Hudson) on some lists of approved investments because it has good community relations and a diverse workforce, despite a history of contentious relations with the United Auto Workers

(p. 63).  

For pension fund managers motivated to seek new and broader returns, the possibilities (and headaches) will be many, because there simply aren’t any easy answers in this investment arena. That’s most importantly the case because there are short-term costs,  despite the long-term benefits, associated with many of the corporate initiatives that improve job conditions.  I’d bet my bank account on the likelihood that few, very few, corporate investments will offer only collateral benefits without the prospect of damage, as broadly defined throughout this book.  Working Capital would have enhanced its value if it had more explicitly addressed these messy realities.

But the book does shed light on other complications. For one thing, there are apparently no easy answers when it comes to the question of how union funds can and should most effectively use their investment dollars as a force for positive change in corporate America.  Marleen O’Connor, a law professor and securities law specialist, offers an in-depth discussion of the varied role organized labor has played since the early 1990s in the shareholder rights movement.  In some cases, the impact has been dramatic:  As O’Connor reports, “The Teamsters and UNITE [Union of Needletrades, Industrial, and Textile Employees] succeeded in blocking off a spin-off at Kmart and pressuring management to remove the chief executive officer.  In the course of negotiations over these corporate governance matters, as a side benefit, Kmart agreed to accept a UNITE election victory in North Carolina” (p. 71).

But in other cases, results have been far more modest, in large part because of the politicking involved when union pension funds attempt to win shareholder resolutions.  As O’Connor points out, union funds generally need to partner with public pension funds in order to build majority coalitions.  That’s forced them to tread cautiously, focusing on popular issues, such as enhancing board of director independence, rather than trying to win support for, say, an organizing campaign or limiting CEO compensation.  Anything, she seems to suggest, is better than nothing:  “By focusing on certain ‘wedge’ issues that public funds support, unions can gain access to ‘behind the scenes’ meetings with managers.  During these meetings, it is commonly understood within the institutional investor community that unions may discuss labor issues as well as corporate governance matters”  (p.71).

But, hey, what about the obvious strategy?  Invest in companies to encourage and reward employee-friendly policies and sell stocks (or just avoid buying them) when companies don’t do right by their workforces.  It turns out that even this is more difficult than one might imagine. Even if Taft-Hartley funds (the only ones directly controlled by unions) were able to win this education battle and band together with public sector funds and collectively bargained corporate funds to invest with a new set of priorities, their total impact still might not be sufficient to prompt change within the vast world of publicly traded equities, so long as there are also so many other possible investors making their own buy-and-sell decisions.  

This is where an article by Michael Calabrese, director of the public assets program at the New America Foundation, a nonpartisan public policy institute, becomes useful.  He spends more than thirty pages detailing a wide range of union fund investments that have been made successfully in the  private equity universe, where the demand for capital is great and investor interest is relatively scant.  Here, he argues, union funds can make a big difference by providing companies with essential growth capital, in return for valuable concessions, such as the promise to use unionized suppliers or adopt a neutral stance during organizing campaigns.

Good point.  And whereas it’s hard to leave this volume with a sense that these kind of initiatives will change the overall nature of pension fund investing, at least in the short term, Working Capital leaves its readers with optimism  and plenty of promising ideas.