On behalf of Wolf Popper LLP
Some readers may have noticed the recent New York Times op-ed, “The Real Reason the Investor Class Hates Pensions.” In it, Boston University law professor David H. Webber argues that pension funds, aside from their traditional roles of protecting and administering pension assets, have also become effective corporate activists, harnessing their large stakes in public companies to agitate for more shareholder power. Unsurprisingly, special interests—such as the Koch brothers and former Enron executives—have not taken kindly to this trend, pouring millions into “every form of political advocacy available” to replace pension funds with defined benefits to individual 401(k) retirement accounts that lack collective oversight power.
Adam Blander recently caught up with Professor Webber, who is promoting his new book, The Rise of the Working-Class Shareholder: Labor’s Last Best Weapon, which describes the pension fund movement to democratize our corporations as a “rare good-news story for American workers, an opportunity hiding in plain sight”. Below are excerpts from that conversation (edited and condensed for clarity) in which the professor explains why pension funds make for excellent class action representatives, what “economic voter suppression” means, and how the push favoring arbitration over traditional lawsuits and the push for pension reform are often two sides of the same coin.
Adam Blander: Can you give a few examples of litigation or corporate governance efforts that pension funds have undertaken recently? Particularly ones that not only had consequences for pensions’ own constituencies, but also for the broader stockholder base or broader public?
David Webber: Sure. First of all, I think that public pension funds and labor union funds have been the most important force in the corporate governance reform movement. Pensions funds played an absolutely crucial role in getting proxy access, particularly after the proxy access rule implemented under Dodd-Frank was struck down by the D.C. Circuit Court of Appeals [NOTE: “proxy access” is the policy allowing certain shareholders to include their own director nominees in a company’s proxy statement, which encourages more competitive elections]. It was the New York City funds with the help of some other pensions that picked up the baton and got proxy access at hundreds of companies.
The public pension funds were also behind the efforts to destagger corporate boards. Union funds were also very involved in pushing for majority voting. One fund filed something like 700 shareholder proposals for this.
What is majority voting?
Most board members run for an election uncontested. They are nominated by a nominating committee, which is basically the board nominating itself or its own replacement Most companies had plurality voting rules, which meant that if you’re running unopposed, even if you got only one vote, you could be re-elected. So, majority voting required some directors to win a majority of the vote, that is, fifty percent of shares plus one. This gives a lot of more power to shareholders because even if they are not running a competing candidate, they can still run a withhold vote campaign, and prevent board members from being reseated. This makes board members, even those running unopposed, more accountable to shareholders.
So all shareholders have benefited from pension fund efforts on the corporate governance front and the same is true on the litigation side. I have been involved in some studies, but there have been studies by other folks too that show that when a public pension fund serves as a [class action] lead plaintiff, that correlates with both high recovery for shareholders and lower attorney fees. In the “10(b)” [i.e. federal securities fraud] context, there is a presumption favoring whoever has the largest loss. This presumption is specifically designed to bring in institutional investors like pension funds. Well, the evidence shows that the presumption basically works as designed: the largest funds correlate with higher recovery and lower attorney fees for the class. And by the way, this result is not only for securities fraud lawsuits, but also for merger and acquisition deal litigation, like in Delaware. So that’s another example where public pension funds have stepped forward and played a positive role not only in protecting the value of workers’ own retirement funds but also everyone else who is in the market.
Regarding the efforts by some big business interests to limit the power of pension funds and the conflicting movement by pension funds to use their power to effect broader stockholder changes: is that a distinctly American dynamic, or are pensions in, say, Latin America or Europe facing similar issues?
I think that the U.S. is unique in that there aren’t that many jurisdictions that allow for shareholder proposals. Also, in many parts of the world, companies—even public companies—have a controlling shareholder, which is often a controlling family. In the U.S., we have a dispersed shareholder base which means there typically is no controlling shareholder, and the CEO and corporate management are therefore much more powerful. So, in the U.S. context, where shareholder-manager balance is more tilted in favor of managers, it does make sense to have shareholder proposals or other opportunities for shareholder input.
You’ve used the term “economic voter suppression” before. Would you explain what that means?
Yes. A lot of the big pension funds, like CalPERS [the California Public Employees’ Retirement System], the New York City funds, or the California State Teachers’ Retirement System, have been very involved in the corporate governance movement. Well, right now around the country many of these funds are being threatened by a drive to convert them into basically a million individually managed 401(k) accounts. The typical justification for this pension reform drive is concern about underfunding. But what I am very worried about is that the big collectively managed pension funds’ power in terms of shareholder activism or litigation stems from the fact that they are collective. CalPERS has over $300 billion in assets. So, when it calls up an investment manager or it approaches a company, whether it is to engage in some kind of activism or to hire a lawyer and bring suit, it has a lot of clout because of its size.
But if you were to break up a fund like that into millions of individually managed 401(k)s, the reality is that those of us who own 401(k)s: we hardly ever vote, we don’t know much about the fees we’re paying, we don’t know how much the CEO is paid, and we don’t know how our fund has performed relative to S&P 500. 401(k) holders are almost totally passive.
A pension in some ways is like a union. When you are in a union you have an organization that is bargaining on your behalf, and you have some collective power. But if you’re just an individual employee, you’re on your own and have very little power over your employer and consequently you get paid less, and you get treated worse. There is a similar analogy here which is that these big collective public pension funds are in a good position to protect themselves and to advocate on behalf of workers. But break them up into individualized accounts and you lose that clout. So that is what I call economic voter suppression. I view it as a way of silencing the voice of shareholders, and I think that certainly will be to the detriment of shareholders.
I presume you’d say this pension reform movement is similar to the movement by some business interests to limit the class action device?
Definitely. I think there have been clear attempts to limit class actions. The latest threat we are seeing, which has been hanging around for a few years now, is the mandatory arbitration provision. Everybody understands these provisions will kill the class action by breaking everyone up into one investor rather than letting investors proceed collectively. So every individual investor with a small claim will drop out. The point of mandatory arbitration provisions is not to shift the claims from court into arbitration, but to eliminate these claims entirely.
Is there a self-help aspect to your book? Meaning, do you identify any steps that individual pensioners should take, particularly those who may not be that well versed in the legal or financial minutia of these labor issues?
Yes, insofar as I am encouraging workers to be vigilant in protecting pension funds’ collective voice and not allowing them to be broken up into millions of individually managed accounts. Some of my advice is also geared more at the institutional level, where I suggest actions these funds can explore to retain some power, even if a shareholder proposal avenue or litigation avenue is closed off. A lot of these issues are also going to be decided at the ballot box in many states. In California, for example, there is talk of seeing a pension ballot proposal in 2018 or 2020. Workers and pensioners should be paying very close attention to these issues.