The experience opened the eyes of Leo Gerard, 54, one of the two labor leaders and now the president of the United Steelworkers of America. "I saw small industrial communities in southwestern Pennsylvania weren't recovering from the destruction of the '80s," he says. "Part of it was that capital wasn't being made available to them."
Yet union pension funds have nearly $7 trillion in assets under management. Gerard and others feared most of the money was going into the stocks of companies that were exporting U.S. manufacturing jobs overseas, rather than those struggling to provide decent jobs in the U.S. "That's our money, and we were tired of getting beaten over the head with it," Gerard says.
TURNING THE TABLES. Result? These days, the Steelworkers and the AFL-CIO are trying to turn the tables by raising venture capital from their own pension funds. They've organized the Heartland Labor Capital Network, based in Pittsburgh, for which Landmark Partners, aninvestment firm based in Simsbury, Conn., is raising $75 million from Taft-Hartley pension funds. The money has been pledged by the United Steelworkers of America, the Union of Needletrades, Industrial & Textiles Employees, and the Union of Electrical Workers. Landmark is trying to woo other Taft-Hartley trustees. Created by the Taft-Hartley Labor Act of 1947, these multiemployer funds are jointly administered by labor and management.
Heartland Labor Capital won't judge its investments purely on their rate of return. It will also weigh other factors, such as ratings by the Center for Working Capital. The Washington, D.C. think tank grades pension-fund asset managers on the social values behind their investments. A book published in May, Working Capital: The Power of Labor's Pensions (Cornell University Press), outlines the intellectual underpinnings for the fund's philosophy. Its main tenets: Involve labor in business decisions, create good jobs, build affordable housing, and safeguard the environment.
The idea is to create a "double bottom line" that takes into account social concerns as well as financial ones, says Tessa Hebb, an official at the Centre for the Study of Training, Investment & Economic Restructuring at Carleton University in Ottawa and one of the book's editors. Trustees often worry that adopting such a philosophy might violate their fiduciary responsibilities. Gerard points out that once a pension fund is generating enough to pay workers' retirement benefits, trustees have fulfilled their fiduciary obligations and there's nothing preventing them from investing additional funds in Heartland-style investments, even if their return is lower.
5% TARGET. Gerard would like to see at least 5% of the $400 billion sloshing around in Taft-Hartley pension funds moved into investments that maintain or even create high-paying union jobs. "If we could get to 5% on a regular basis, you could do a lot to revitalize small and medium-sized industrial corporations in this country," he says.
Heartland's backers have been holding seminars for pension-fund trustees since 1999, and have seen some $2 billion moved into the union-friendly investments Heartland favors. For example, $15 million of the $210 million managed by KPS Special Situations Fund LP, a New York investment firm, is from the multi-employer pension funds. The hope is to promote deals like the one KPS funded when Champion Intl. Corp. failed to find a suitable buyer for seven paper and packaging plants. With KPS's backing, workers at the Asheville (N.C.), company traded a 15% wage and benefit cut for 40% ownership in a new company, Blue Ridge Paper Products.
Another example is Heartland Industrial Partners (unrelated to Heartland Labor Capital Network), an investment firm run by David Stockman, a former budget director in the Reagan Administration. While Stockman was at the New York investment bank Blackstone Group, he engineered the takeover of American Axle & Manufacturing, a big Detroit-based auto-parts company. The deal saved a number of union jobs, earning the goodwill of many union leaders. When Stockman left Blackstone, grateful union leaders persuaded Taft-Hartley pension-fund trustees to ante up $25 million of the $2 billion Stockman has raised at his new firm.
CANADIAN MODEL. Heartland Labor Capital is modeled on the Solidarity Fund launched in 1983 in the Canadian province of Quebec during a severe economic downturn. The Quebec Federations of Labor convinced the provincial government to create an investment pool using workers' savings. The goal was to create jobs and offset a capital shortage that was hurting small and midsize companies. The Quebec plan gave workers a 40% tax credit, since reduced to 30%, for investing in the fund.
Many Canadian business leaders bitterly opposed the Solidarity Fund, but it took off anyway. Today, it numbers more than 480,000 investors and $4.6 billion in net assets. Companies that accept the investments must submit to a so-called social audit of health and safety standards as well as environmental and employment practices. "Our objective was jobs, jobs, jobs, jobs, jobs," says Fernand Daoust, who headed the fund for many years.
The fund hasn't done badly as an investment, posting a 7.2% average annual return over the last 10 years. Factoring in the fund's tax-protected status, that's probably as good or better than the 10.4% annual compound return achieved by the Toronto Stock Exchange during the same period. Hoping to emulate the Quebec fund's success, 10 specialized funds, 17 regional funds, and 87 local funds have since been set up around Canada.
OBSTACLES. However, the U.S. labor movement has a long and checkered history of trying to promote investments that create jobs -- without nearly the success of the Quebec fund. And, indeed, the Heartland Labor Capital Network lacks some advantages that helped make the Quebec fund work. Heartland investments have no government support and offer no tax credits, for one. Also, there's stronger union support in Canada. About a third of Canadian workers are union members, vs. only 10% in the U.S.
Another big difference: The funds that are Heartland's lifeblood are run by hard-nosed pension fund trustees -- not ordinary workers -- and they likely won't want to use investments to save jobs if overall returns are lower.
Still, Tom Croft, 50, director of the Pittsburgh-based Steel Valley Authority, is optimistic. He's the labor leader who went along with Gerard when the idea for Heartland was born. And he contends that the fund is already giving workers a new kind of hope. "You don't have to just imagine what you're against, now you can begin to say what you're for," he says. For organized labor, that's a welcome change. By Anne Michaud in Pittsburgh