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September 16, 2003
AFL-CIO Advocates Active Ownership as a Way to Enhance Shareowner Value
    by William Baue and Mark Thomsen

The AFL-CIO coordinates resolution filing, assesses managers' proxy voting records, and identifies worker-friendly investments for union pension funds.

While unions are most often associated with the political power they leverage, they also exert influence as institutional investors managing substantial sums in workers' pension funds. Unions associated with the American Federation of Labor-Congress of Industrial Organizations (AFL-CIO) act as fiduciaries for almost 1,500 funds with about $400 billion in assets.

"All of these funds collectively own a substantial portion of practically every company out there," said Brandon Rees, a research analyst with AFL-CIO's Office of Investment.

In order to protect and enhance these investments, the AFL-CIO practices what it calls "active shareownership." That is, it encourages the companies it holds to adopt pro-worker policies that it believes will foster sustainability and potentially increase the value of the stock.

"The AFL-CIO considers active shareownership as a part of fiduciary responsibility--it is a duty of trustees and it creates an opportunity to enhance shareowner value," Mr. Rees told "Union-sponsored pension funds are among the most active in putting forth resolutions, promoting dialogue initiatives, and pushing on regulatory initiatives."

The AFL-CIO recently launched the Capital Stewardship program to coordinate these shareowner action activities, particularly resolutions seeking to reform corporate governance. In the 2002-2003 proxy season, the program doubled the number of union resolutions from 200 to 400. In choosing where to file resolutions, the AFL-CIO looks for underperforming companies and those with significant corporate governance abuses, such as excessive compensation and directors that are not accountable to shareowners.

"The goal is to change corporate behavior, to make management more accountable," said Mr. Rees. "We feel executive compensation is one of the most important areas because it plays such an key role in determining executive decision-making."

"The most important reform has been calling for stock option expensing, followed by the indexing of stock options, and then the separation of the chair and CEO roles to facilitate board independence," added Mr. Rees.

In addition to these shareowner action activities, the AFL-CIO advocates conscientious proxy voting. Toward this end, it publishes model proxy voting guidelines that are publicly available. While some funds use these guidelines to vote their own proxies, most funds delegate proxy voting authority to investment managers or proxy voting consultants.

"Some funds send the guidelines to the manager and say 'we're monitoring your proxy voting,'" said Mr. Rees.

The AFL-CIO also supports proxy voting by compiling a Key Votes Survey, which is a review of investment managers and their voting performance on a select number of shareowner resolutions. The AFL-CIO has been publishing the annual survey since 1997.

"The Key Votes Survey allows for comparison of managers, as proxy voting is one component pension funds consider in determining which investment managers to hire and fire," said Mr. Rees.

Another guide the AFL-CIO publishes is the Investment Product Review, a list of investment vehicles that union funds can invest in that create "collateral benefits," or positive financial returns that also promote labor values. These vehicles include real estate and mortgages, public equity, private capital, and international funds.

"When an investment vehicle's marketing materials claim that the vehicle is 'worker-friendly,' we want to ensure that, indeed, the vehicle does what it says it is doing on the collateral benefit front," said Mr. Rees.

Unions focus much more on active ownership than they do on screening, or the sustainable and responsible investment (SRI) strategy of excluding or including companies in portfolios based on their social and environmental performance. There is no AFL-CIO policy either for or against screening.

"There are certain challenges that screening poses," explained Mr. Rees. "If I was going to screen on the basis of companies that didn't overpay their CEOs, I'd have trouble getting a diversified portfolio."

"Furthermore, when you are talking about labor issues, today's good company is tomorrow's bad company," Mr. Rees added. "We believe there is no ideal company; no company is perfect."


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