Professor Bainbridge...on law, politics, religion, culture & food

Labor Unions as Shareholders

It has been a core tenet of my scholarship on shareholder activism that shareholder empowerment will result in greater rent seeking by certain subsets of shareholders. See, e.g., my Shareholder Activism and Institutional Investors. Now comes support for that proposition, ironically from Harvard Law School. Steven Kaplan blogs:

One of our Ph. D. students, Ashwini Agrawal ... noticed that in 2005, the AFL-CIO (the central federation of labor unions in the U.S.) split into two groups. Several of its member unions, representing roughly 35% of its members, left to form a new organization–the Change To Win (CTW) coalition. This exogenous shift in AFL-CIO membership allows Ashwini to examine changes in the voting behavior of AFL-CIO affiliated shareholders toward management and director nominees.

The results are striking. Ashwini finds that AFL-CIO affiliated pension funds are significantly more supportive of director nominees once the AFL-CIO no longer represents workers at a given firm (roughly 74% after versus 55% before). At the same time, AFL-CIO affiliated pension funds do not change their voting behavior when the AFL-CIO still represents workers at a given firm. Ashwini finds the opposite pattern in voting behavior for a pension fund associated with the CTW coalition. Finally, he finds no change in voting behavior for mutual funds.

These differences suggest that labor unions use their pension funds to pursue labor relations issues at the expense of shareholder value. And they suggest that there is some truth to the concerns that increased shareholder access might have unintended consequences.

It’ll be interesting to see what, if anything, the Harvard shareholder activist crowd - especially Lucian Bebchuk - make of this very important paper. Download the paper here.