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Labor Sharpens Its Pension Sword


On Oct. 28, several dozen union members rallied at Kroger Co.'s (KR) headquarters in Cincinnati, holding signs protesting the company's threat to cut health-care benefits for its striking supermarket workers in Southern California. But these protesters were not strikers, or even colleagues from their union, the United Food & Commercial Workers (UFCW). The picketers were members of 14 Cincinnati area construction unions. Stranger still, they were there at the behest of the Cincinnati Worker-Owner Council, a group of construction labor officials who are also trustees of union pension funds.

What was going on? The construction unions were using their pension funds, which own 5 million shares of Kroger stock, to help fellow unionists draw a line in the sand against health-care rollbacks. Their argument: Kroger's benefit cuts hurt shareholders -- including construction worker pensioners -- by sapping employee morale and productivity. "As owners, we need to provide for long-term value.... If there's this endless taking it out of the pockets of the employees, we don't think it will help Kroger's," says Ed Durkin, director of corporate affairs at the United Brotherhood of Carpenters.

Ever since John J. Sweeney took the reins of the AFL-CIO in 1995, he has been urging unions to use the power of their $350 billion in pension funds to become shareholder activists. Spearheaded by the AFL-CIO Office of Investments, labor has become one of the country's strongest voices for corporate reform, demanding independent boards of directors, mutual-fund accountability, and curbs on runaway CEO pay. But now a number of unions are upping the ante, using their pension holdings to pressure companies on bread-and-butter labor issues as well. Combining old-fashioned tactics such as picketing with their clout in the boardroom, unions are attacking employers on everything from health-care benefits to job outsourcing (table).

While a few unions have tried such tactics before, there has been a new burst of activism recently as they have become more comfortable wielding shareholder clout. Labor's efforts spell trouble for management, which could face a new wave of demands by shareholders of all stripes if the arguments catch on. But labor isn't exactly united around the more militant approach, either. Some union officials worry it could undermine the credibility that the AFL-CIO has so carefully cultivated with institutional shareholders by pushing governance and other traditional stockholder issues. "If the Securities & Exchange Commission thinks labor is starting to use its shareholder vote inappropriately, I fear there will be more regulation of us," says one labor staffer.

Still, officials at the AFL-CIO, the Carpenters, and other unions argue that their intent is precisely to redefine just what the interests of stockholders can be. Paying good benefits and respecting labor rights doesn't conflict with the idea of maximizing shareholder value but rather promotes it over the long term, argues William B. Patterson, the head of the AFL-CIO Office of Investment. Nor does this agenda threaten shareholders who disagree. "Other shareholders will vote no [on labor-sponsored proxy resolutions] if they think our demands are not in their interest," says Patterson.

ABRUPT DOWNGRADE. Labor has a long way to go to win over most institutional shareholders, but it's making some inroads. Even as the Carpenters took to the streets, Patterson's office hosted an analysts' call to make the case about the California supermarket strike. The Oct. 30 call was co-sponsored by J.P. Morgan Chase & Co. (JPM) and Smith Barney Citigroup (C) and featured UFCW Executive Vice-President Sarah Palmer-Amos. She may not have changed many minds, but labor's resolve did help persuade Smith Barney retailing analyst Lisa F. Cartwright to downgrade her assessment of Safeway Inc., one of the marketers involved in the labor dispute. Cartwright co-sponsored the call because "it's important for investors to understand the whole picture, even if they disagree with the union," she says.

Other unions have had some luck using their shareholder clout to aid in organizing drives. The Service Employees International Union (SEIU) has signed up hundreds of office-building janitors around the country by leaning on the state and local pension funds of their members who work in public-sector jobs. Many of the funds invest in large office buildings, often buying a majority stake. About a dozen, including the California Public Employees' Retirement System (CalPERS) and the Ohio Public Employees Retirement System, have adopted an SEIU-sponsored "responsible contractor" policy. These require the real estate companies that manage the office buildings to hire janitorial companies with "fair" wages and benefits. In practice, that often means the contractors must be union or allow the SEIU to try to organize the building. Says Bruce Perelman, a board member of the $27 billion Los Angeles County Employees Retirement Assn., which in December adopted such a policy: "Some [building] managers feel you pay people as little as you can, but we think that's not always the best idea from an investor standpoint."

Unions are walking a fine line when they use their retirement funds to pursue traditional labor goals as well as shareholder ones. The danger is that they can be accused of exceeding their duties as pension fund fiduciaries, says Vanderbilt University law professor Randall S. Thomas. But that's also labor's point: expanding the concept of fiduciary interest beyond simply maximizing short-run returns. As labor makes its case, more companies may face a new era of shareholder activism. By Aaron Bernstein and Amy Borrus in Washington, with Christopher Palmeri in Los Angeles


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