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 SocialFunds.com. "Union-sponsored pension funds are among the
most active in putting forth resolutions, promoting dialogue initiatives, and pushing on regulatory
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
"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
"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
"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."