10/1/07

Will U.S. defend ERISA from AFL-CIO?

The SEC is debating a change in the proxy rules for corporate shareholders, and to understand the perils look no further than the new AFL-CIO campaign to strongarm business into providing "universal health care." Big Labor is trying to use its proxy leverage to sway business into endorsing a political goal that may be contrary to shareholder interests.

It's no surprise that unions would back the Democratic agenda for government-run health care. What's new is that labor won't do this only through the political process. According to an article in Financial Week that quotes Dan Pedrotty, the director of the AFL-CIO's office of investment, the union plans to try to influence - really, intimidate - corporate boards with proxy fights. It also intends to ask companies to file reports on political contributions by directors and executives, especially those who support candidates who oppose universal care.

These threats should raise eyebrows at the U.S. Labor Department. The 1974 Employee Retirement Income Security Act - or Erisa - requires that union officials who administer pension funds do so in a way that protects and enhances retiree assets. Labor Department guidelines allow shareholder activism, but only as long as there is a "reasonable" expectation that pension-fund actions are "likely to enhance the value of the plan's investment in the corporation."

American businesses are already struggling with rising health care costs. If they are suddenly forced by proxy resolution to spend even more, the cost will have to come out of their bottom lines, and by extension their share price. There is thus no "reasonable expectation" that such policy by proxy would enhance the value of a pension's investment. Quite the opposite.

Labor Department guidelines also make clear that fiduciaries are barred from subordinating the interests of their plan members to "unrelated objectives." Forcing companies to support federal legislation for "universal coverage," or to disclose the personal political activities of management, is about as "unrelated" to the retirement security of workers as it gets. The late Peter Drucker once called this "pension-fund socialism."

This is also a warning for Securities and Exchange Commission Chairman Chris Cox, who continues to consider a "direct access" rule that would give certain shareholders more power in determining the makeup of corporate boards. The biggest supporters of this rule are union-dominated pension funds, which claim this is about greater "shareholder democracy." But as the AFL-CIO's health-care campaign makes clear, the real goal is getting corporate boards to embrace labor's political agenda.

If unions want more generous health-care benefits, they have the right and power to bargain for them with management. The labor movement did that with great success with steel companies, carmakers and airlines, at least in the short run. In the longer run, they've made their companies less competitive by imposing huge legacy costs. But if management agrees to those costs, and shareholders are willing to hold stock in the company, so be it. It's their money.

Pension fund assets, by contrast, belong to the workers, not to the liberal activists at the AFL-CIO or to state treasurers and other politicians seeking Big Labor's endorsement. A direct access rule would only give these minority shareholders greater power to turn boardrooms into a new battleground for policy debates that rightly belong on Capitol Hill, or at union-management negotiations.

This new union political strategy has been revealing itself for some time. In 2004, the California public employees' pension fund (Calpers) withheld its support from Safeway's CEO as payback for his tough bargaining with unions. In the 2004 Presidential campaign, some pension funds threatened to sell their investments in financial firms that supported Social Security reform. And now comes the AFL-CIO, threatening to wreak boardroom retribution on any company that fails to support some version of HillaryCare, or its Barack Obama equivalent.

Union workers might well oppose this agenda, if they understood what was going on. But most of them merely pay their dues and get on with their lives. The Labor Department and SEC have no such excuse. Both should be using the latest AFL-CIO campaign to lay down some limits for union leaders who want to risk their members' retirement money in pursuit of a partisan agenda.

(online.wsj.com)

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