How Labor Funds Made Shareholder Activism Work in 2001
Union-backed pension funds, often referred to as labor funds, made shareholder activism more effective in 2001 by targeting the right companies and focusing on issues other investors already cared about. These funds used shareholder proposals to challenge executive pay and corporate governance practices.
The change was not more activity. It was better selection. Instead of filing broadly, these funds chose companies where the governance problem was clear and easy to explain. That made it easier for institutional investors to support the proposals.
This article draws on a 2001 IRRC newsletter on shareholder activism. Quotes are taken from the original publication.
Targeting replaced volume
Support for executive compensation proposals rose from 8.5 percent in 2000 to 13.45 percent in 2001.
Brandon Rees, a research analyst with the AFL-CIO’s Office of Investment, attributed the improvement directly to preparation and targeting. “Greater depth and better targeting created proposals that really resonate with issues that concern institutional investors,” he said.
Labor funds focused on companies where the facts were simple and the issue was already visible to other investors. This reduced the need to persuade and increased the chance of support.
Sprint showed how to win support
At Sprint, a proposal asking the company to adopt a no-repricing policy received about 46 percent support. Earlier repricing proposals had attracted much lower backing, including 11.2 percent in 2000.
Brandon Rees described the result as unusually strong for a large company: “For a company the size of Sprint, a mainstream company, to receive such a high showing is a real wake-up call to boards of directors who are contemplating abusive compensation practices.”
Jim Combs, director of Employee Benefits and Corporate Affairs at the International Brotherhood of Electrical Workers (IBEW), pointed to the clarity of the issue: “When you look at Sprint and look at what they’ve done it’s obvious why so many institutional investors voted with us.”
The proposal followed Sprint’s decision to allow executives to cancel stock options and receive new ones later at a lower price. This removed downside risk and weakened the link between pay and performance.
Jim Voye, an international representative for the IBEW, described the outcome as “definitely one of the highlights” of the proxy season.
Rees made the intended impact explicit: “We certainly hope this sends a clear message to Sprint’s board of directors that they need to adopt corporate governance reform.”
This was not an isolated concern. In a proxy contest notice at Comfort Systems USA, union investors argued that repricing or replacing underwater options “reduces executives’ incentive to work hard for shareholders” and “tends to mislead shareholders about the true value of an executive’s compensation.”
Executive pay drew broader support
At Bank of America, a proposal for performance-based stock options received 34.6 percent support, compared with around 11 percent the previous year.
Melissa Moye, first vice president and chief economist for the Trust and Investment Service of the Amalgamated Bank, observed the shift: “It appears that we have significantly higher votes on executive compensation proposals this year.”
Beth Young, a consultant working with multiple labor funds, reinforced the point: “This was a breakout year on the executive compensation issue,” she said, “with public funds more active than ever.”
Golden parachutes were addressed directly
Some funds targeted severance packages using a structured approach:
- Identify underperforming companies
- Review compensation disclosures
- Select cases with clearly excessive payouts
At Sierra Health Services, a proposal targeting a parachute worth four times compensation received 43.3 percent support. At Covanta Energy, a similar proposal received 33.9 percent support.
Con Hitchcock, an attorney representing the LongView Collective Investment Fund, highlighted the real outcome: “More significantly, by the time the proposal came to a vote, the board had changed its policy, announcing that it would limit such contracts to three years. The message is getting through in some areas.”
Industry focus improved outcomes
The Service Employees International Union (SEIU) focused on real estate investment trusts.
Steve Abrecht, executive director of the SEIU pension trust, described the response from companies: “Some were very interested in engaging with us,” he said. “REITs are very new to the area of corporate governance. Some were somewhat astonished that anyone was willing to engage.”
At Duke Weeks Realty, Abrecht noted management uncertainty during voting: “Remember that election down in Florida? We’re in a similar position – we don’t know the vote yet.”
Escalation became more direct
SEIU also led a “vote no” campaign at Eastman Kodak after the company failed to act on prior shareholder votes.
Abrecht described the situation bluntly: “No other corporation has disenfranchised the shareholder majority will so often and so consistently.”
He also reflected on the tactic itself: “We’re glad we did it. We got a decent vote given that this is a new thing to do, and given the obvious disadvantage that nothing appears in the company’s proxy statement.”
Dialogue remained important
Other labor funds focused on direct engagement.
Ed Durkin, special projects director at the United Brotherhood of Carpenters and Joiners of America, explained the approach: “This year was another good opportunity to engage in thoughtful dialogue with a significant number of companies.”
He added: “They listened, they heard us.”
These discussions also shaped future strategy: “[These conversations] helped us flesh out some points that we’ll be incorporating in future initiatives.”
Durkin noted one area of progress: “What we found is that companies are fairly responsive on that issue, and there is a recognition from companies now that audit committees ought to be comprised exclusively of independent directors.”
Regulatory limits remained
Some proposals were excluded by the SEC.
Jim Voye of the IBEW pointed to the change in approach: “In the past there’s never been a problem with these proposals.”
Steve Abrecht also noted increased scrutiny: “The SEC is starting to questions assertions made in supporting statements. In the future, we’ll be adding the phrase ‘in my opinion’ to those statements, and expect the proposals will get through.”
What changed
Labor funds improved shareholder activism by selecting better targets and presenting clearer arguments. That made it easier for other investors to support their proposals.
The result was higher votes, policy changes before ballots, and greater pressure on executive compensation practices.