937：6P
FINANCE AND LABOR: PERSPECTIVES ON RISK, INEQUALITY, AND DEMOCRACY
Sanford M. Jacobyt
We live in an era of financial development. Since 1980, capital markets have expanded around the world; capital shuttles the globe instantaneously. Shareholder concerns drive executive decision making and compensation, while the fluctuations of stock markets are a source of public anxiety. So are the financial scandals that have regularly occurred since 1980: junk bonds in the late 1980s; accounting and stock options in the early 2000s; and debt securitization today.
We also live in an era of rising income inequality and employment risk. The gaps between top and bottom incomes and between top and middle incomes have widened since 1980. Greater risk takes various forms, such as wage and employment volatility and the shift from employers to employees of responsibility for occupational pensions.
There is an enormous literature on financial development as there is on inequality and risk. But relatively few studies consider the intersection of these phenomena. Standard explanations for rising inequality--skill-biased technological change and trade--explain only 30% of the variation in aggregate inequality. What else matters? We argue here that an omitted factor is financial development.1 This study explores the relationship between financial markets and labor markets along three dimensions: contemporary, historical, and comparative. For the world's industrialized nations, we find that financial development waxes and wanes in line with top income
t Howard Noble Professor of Management, Public Policy, & History, UCLA. Thanks to J.R. DeShazo, Stanley Engerman, Steve Foresti, Dana Frank, Mark Garmaise, Teresa Ghilarducci, John Logan, James Livingston, Adair Morse, David Montgomery, Paul Osterman, Grace Palladino, Peter Rappoport, Hugh Rockoff, Dani Rodrik, Emmanuel Saez, Richard Sylla, Ryan Utsumi, Fred Whittlesey, Robert Zieger, and various interviewees. The usual disclaimer applies. I am grateful for support from the Price Center at the UCLA Anderson School and from the Institute for Technology, Enterprise, and Competitiveness at Doshisha University. This paper is dedicated to Lloyd Ulman: scholar, teacher, mensch.
1. IMF, WORLD ECONOMIC OUTLOOK: GLOBALIZATION AND INEQUALITY 48 (Washington, D.C. 2007).
17
COMP. LABOR LAW & POL'Y JOURNAL
shares. Since 1980, however, there have been national divergences between financial development--defined here as the economic prominence of equity and credit markets-and inequality. In the United States and United Kingdom, there remains a strong positive correlation but in other parts of Europe and in Japan the relationship is weaker.
What accounts for swings in financial development and inequality and the relationship between them? Economic growth is one factor. Another is the politics of finance. The model presented here is simple but consistent with the evidence: Upswings in financial development are related to political pressure exerted by elite beneficiaries of financial development. Political objectives include policies that favor financial expansion-and finance-derived earnings-and the shunting of investment gains to top-income brackets. Against financial interests is arrayed a shifting coalition that has included middle-class consumers, farmers, small business, and organized labor, upon which we focus here. When successful, these groups cause a contraction in the economic and political significance of finance, which registers in the distribution of income and wealth. In other words, politics drives the swings in financial development and mediates the finance-labor relationship.
Political contests occur not only in the public arena but also within firms. We expand the politics of financial development to include contests over corporate resource allocation through the mechanisms of corporate governance. Corporate governance affects the distribution of a firm's value-added among shareholders, executives, workers, and retained earnings. Here too, organized labor is an important player. In both public and private arenas, labor wields influence via its bargaining and political power and, more recently, via its pension capital.
Our historical framework draws from Karl Polanyi's classic study of markets and politics in the nineteenth and early twentieth centuries. Polanyi challenged economic liberalism by showing that market expansion in the West was not a natural development; it was embedded in politics and society. He also showed that markets are not self-regulating. Undesirable side-effects--instability, monopoly, externalities-can not be rectified by the market itself. As a result, every market expansion is followed by spontaneous countermovements to "resist the pernicious effects of a market- controlled economy." Polanyi called this the double movement: "the action of two organizing principles in society... economic liberalism, aiming at the establishment of a self-regulating market... [and] the
[Vol. 30:1718
FINANCE AND LABOR
other was the principle of social protection aiming at the conservation of man and nature as well as productive organization." Writing in the early 1940s, Polanyi could not foresee the relevance of his ideas to our present age. Today, laissez-faire ideas, including those about financial markets, again are with us, as are countermovements to contain the market's failings.2
The spotlight of this study is on the world's richest nations. Much of the material is based on the American experience, although there
are comparisons to Europe and Japan. Section I analyzes the mechanisms that link contemporary financial development to rising inequality and risk. Section II considers the political and ideological bases for post-1980 financial development and corporate governance. Section III focuses on the period from the late nineteenth century through the 1970s. It traces various movements to contain financial development, including the contributions of organized labor. Section IV takes us back to the present. It considers the efforts of the U.S. labor movement to re-regulate finance and reshape corporate governance, in part by using its pension capital. There is a larger story to be told about similar occurrences in other parts of the world but space precludes its inclusion here.3
I. LABOR AND FINANCIAL DEVELOPMENT SINCE 1980
Financial development since 1980 is unprecedented. The value of financial assets-bank assets, equities, private and public debt securities--increased from $12 trillion in 1980 to $140 trillion in 2005. Equities alone drove nearly half the rise in global financial assets during those years, with stock market capitalizations reaching or exceeding levels not seen since the 1920s. In rich countries, there were increases in stock market capitalizations relative to GDP and in
the share of gross fixed-capital raised via equity (Table 1). Along with this has come abundant capital that lowers debt costs, thereby permitting banks, hedge funds, and private equity funds to leverage small asset bases while using derivatives to insure against risk. One estimate is that collateralized debt obligations (CDOs) have a worldwide value of around $2 trillion, a portion of which evaporated during the recent meltdown. Although financial development is global, the wealthiest regions of the world-the United States and the
2. KARL POLANYI, THE GREAT TRANSFORMATION 132 (1944).
3. SANFORD JACOBY, GLOBAL FINANCE AND GLOBAL LABOR: POLITICS AND MARKETS
(in progress).
1920083
20 COMP. LABOR LAW & POL'Y JOURNAL [Vol. 30:17
United Kingdom, the Eurozone, and Japan-account for 80% of global financial assets. Finance has become a key sector of the American and British economies, accounting for over 15% of their GDPs and, in the United States, 40% of total corporate profits.
4
Table 1 Financial Development and Inequality, 1913-1999'
Financial Inequality Development
Stock Market Gross Fixed Capital Top 1% Capitalization as GDP Raised via Equity Income Share
share U.S. & U.K Eur. & U.S. & U.K Eur. & U.S. & Eur. &
Japan Japan U.K Japan 1913 .74 (.39) .55 .09 .15 .19 (.18) .19 1929 1.07 (.75) .65 .37 .30 .19 (.20) .16 1938 .85 (.56) .64 .05 .27 .16 (.15) .15 1950 .55 (.33) .14 .06 .01 .11 (.12) .10 1970 1.15 (.66) .22 .04 .20 .08 (.08) .09 1980 .42 (.46) .16 .04 .02 .08 (.09) .07 1999 1.89 (2.3) 1.32 .11 .21 [.081 .16 (.18) .08
198011929 .39 (.61) .27 .11 .07 .39 (.45) .46 1999/1980 4.5 (4.9) 83 2.8 10.5 2.1 (2.0) 1.1[3.41
Finance is vital to economic growth. It provides capital to sustain firms and households and mechanisms to mitigate risk. The relationship between financial development and growth is ambiguous, however. The effects vary by a nation's GDP level and the type of
4. Raghuram Rajan & Luigi Zingales, The Great Reversals: The Politics of Financial Development in the 2 0(J Century, 69 J. FIN. ECON. 13-15 (2003); CHARLES R. MORRIS, THE TRILLION DOLLAR MELTDOWN (2008); N.Y. TIMEs, Aug. 31, 2007; Diana Farrell et al., Mapping the Global Capital Market 8 (McKinsey Global Institute 2007).
5. The four European nations and Japan include two using the French legal system (France and Netherlands), two using the Germanic system (Germany and Japan), and one following the Scandinavian system (Sweden). Figures in parentheses are for the United States; figures in brackets exclude the Netherlands. Financial data are from Rajan and Zingales, supra note 4, at 13-15. Top share sources are as follows: United Kingdom: A.B. Atkinson, Top Incomes in the U.K. over the 20* Century, 168 J. ROYAL STAT. Soc. 325 (2005); United States: Emmanuel Saez Web site, http'i/elsa.berkeley.edu/-saez; France: Thomas Piketty, Income Inequality in France 1901-1998 (CEPR Working Paper 2876,2001); Germany: Fabien Dell, Top Incomes in Germany and Switzerland over the 20* Century, 3 J. EUR. ECON. ASSOc. 412 (2005); Netherlands: A.B. Atkinson & Wiemer Salverda, Top Incomes in the Netherlands and the U.K over the 20e Century, 3 J. EUR. ECON. ASsoc. 883 (2005); Sweden: Jesper Roine & Daniel Waldenstrom, Top Incomes in Sweden over the 2 0f* Century, (Stockholm School of Economics, working paper 602, 2005); Japan: Chiaki Moriguchi & Emmanuel Saez, The Evolution of Income Concentration in Japan, 1886-2005, (Northwestern University working paper, 2007). Data do not include capital gains.
FINANCE AND LABOR
financial development--credit markets, equity markets, or financial openness-under consideration. ' Other aspects of finance are more controversial. Investors and creditors are prone to herd behavior, whether optimistic or pessimistic, and to mercurial speculation on an uncertain future. Because perceptions of the future constantly are changing and because speculation involves leveraging, capital markets are prone to volatility and to periodic crises that can damage the real economy. There is also the matter of risk. Optimism--animal spirits--and the opportunities for diversification associated with financial development breed risk tolerance. Wall Street asserts that derivatives and other instruments have mitigated the dangers of high risk generated by financial development in the past. But the present financial crisis suggests the opposite: that hedging amplifies, rather than reduces, risk. Until recently, it was claimed that we were at the end of history-that financial crises, at least in advanced economies, were a thing of the past thanks to savvy central banking and savvier derivatives. Today the assertion appears to be another case of irrational exuberance.7
Another problematic aspect of financial development is its link to inequality.' The finance-inequality link occurs via the concentration
6. Levine & Zervos find that stock market liquidity is positively associated with growth but that stock market size has no effect. Arestis et al. show that the contribution of stock markets to growth is modest and that the effect attenuates in developed countries. An IMF review of the evidence on financial openness concludes that "it remains difficult to find robust evidence that financial integration systematically increases growth, once other determinants of growth are controlled for," a finding recently replicated by Dani Rodrik. Ross Levine & Sara Zervos, Stock Markets, Banks, and Economic Growth, 88 AM. ECON. REV. 537 (1998); Philip Arestis et al., Financial Development and Economic Growth: The Role of Stock Markets, 33 J. MONEY, CREDIT, AND BANKING 16 (2001); Arestis et al., Financial Development and Productive Efficiency in OECD Countries: An Exploratory Analysis, 74 THE MANCHESTER SCHOOL 417 (2006); M. Ayan Khose et al., Financial Globalization: A Reappraisal, 16 (IMF working paper 189, 2006); Dani Rodrik & Arvind Subramanian, Why Did Financial Globalization Disappoint? (working paper, Mar. 2008).
7. PHILIP T. HOFFMAN ET AL., SURVIVING LARGE LOSSES (2007); DAVID SKEEL, ICARUS IN THE BOARDROOM (2005); CHARLES KINDLEBERGER & ROBERT ALmBER, MANIAS, PANICS, AND CRASHES (2005).
8. The literature on finance and inequality largely deals with developing, not developed, countries: Clarke et al. and Beck find a negative association between financial development and inequality, although they examine credit provision, not equity markets; Baddeley finds a positive association between financial development and inequality; Das and Mohapatra show that stock market liberalization is followed by rising inequality, especially through the effects on top- income shares; and Goldberg and Pavcnik find that trade openness, which is correlated with financial openness, is positively associated with inequality. Claesssens and Perotti find that the relationship between financial openness and consumption smoothing by the poor is mediated by politics: when the rich have political control, the relationship is negative, which is consistent with our argument. Aghion explains how growth is hampered by inequality. George Clarke et al., Finance and Income Inequality: What Do the Data Tell Us?, 72 So. ECON. J. 578 (2006); Thorsten Beck, Asli Demirguc-Kunt & Ross Levine, Finance, Inequality, and the Poor (Working Paper, 2007); Michelle Baddeley, Convergence or Divergence? The Impacts of Globalisation on
20081 21
COMP. LABOR LAW & POL'Y JOURNAL [Vol. 30:17
of finance-derived incomes in the top brackets. Since 1980, the top 1% doubled its income share in the United States, reaching levels not seen since the early twentieth century (Table 1). Atkinson estimates that a rise of eight percentage points in the top 1% share--which occurred in the United States since 1980-can account for nearly all of the Gini coefficient's increase during this period. Of course, this does not prove that the former caused the latter.9
In what follows we consider three mechanisms by which finance affects risk and inequality: wealth ownership, finance-derived salaries, and corporate governance.
A. Wealth
After remaining stable during most of the postwar period, top wealth shares recently have trended upward in the United States. The average net worth-wealth minus debt-of the top 1% wealth class grew by 78% from 1983 to 2004, while for the middle 20% net worth grew by 27%. Financial development is related to wealth accumulation at the top. Non-residential assets are relatively unimportant for the median wealth bracket (24% of net worth), but for the top 1% they constitute 91% of net worth. Hence the recent decline in housing prices is shrinking the wealth owned by the median household. The top 1% owns 42% of net financial assets; the bottom 90% owns 19%. The income derived from owning financial assets- especially equities-has risen in recent years. Corporate payouts are up, as are opportunities for capital gains. (A dollar invested in an S&P index fund in 1980 would be worth $1500 today.) In 2004, the top 10% accounted for 61% of all unrealized capital gains. To the extent that the wealthy get better (including inside) information and realize larger financial returns than the less wealthy, their share of
Growth and Inequality in Less Developed Countries, 20 INT'L REV. APPLIED ECON. 391 (2006); Mitali Das & Sanket Mohapatra, Income Inequality: The Afternath of Stock Market Liberalization in Emerging Markets, 10 J. EMPIRICAL FiN. 217 (2003); Pinelopi Goldberg & Nina Pavcnik, Distributional Effects of Globalization in Developing Countries, 45 J. ECON. LIT. 39 (2007); Stijn Claessens & Enrico C. Perotti, Finance and Inequality.- Channels and Evidence, 35 J. COMP. ECON. (forthcoming); Philippe Aghion et al., Inequality and Economic Growth, 37 J. ECON. LIT. 748 (1999). A recent paper, however, focuses on financial development in wealthy countries over the past century and finds a positive association between financial development and top-share incomes, the same relationship considered here. Jesper Roine, Jonas VMachos & Daniel Waldenstrom, What Determines Top Income Shares? (SSRN working paper 1018332, October 2007).
9. A.B. Atkinson, Measuring Top Incomes: Methodological Issues, in TOP INCOMES OVER THE TWENTIETH CENTURY 18-42 (A.B. Atkinson & T. Piketty eds., 2007).
22
2008] FINANCE AND LABOR 23
finance-derived income will be greater than their share of financial wealth."
B. Financial Occupations
Of top 1% incomes, 45% derives from wages and salaries; 25%o from business income, and 30% from wealth (dividends, interest, capital gains, and rents). One might think that the last figure is an upper limit on the contribution of finance to top income shares. But the top 1% contains a large number of individuals who earn their salaries and their business incomes in financial occupations. These include investment bankers; commercial and trust bankers; managers of hedge, venture, private equity, trust and mutual funds, financial advisors and analysts; attorneys and accountants specializing in financial transactions; and top executives. Consider that the fifty highest-paid hedge fund managers in 2007 earned a total of $29 billion. Then there is the well-known phenomenon of skyrocketing compensation for CEOs and other executives. The lion's share derives from capital markets via stock options. In 1980, less than a third of CEOs was granted stock options; today options are universal for top U.S. executives. Individuals in finance-dependent occupations are estimated to account for as much as 40% of those in the top income brackets. In fact, the figure likely is higher because the estimate excludes some capital gains and some financial occupations.1'
C. Risk
Financial development affects the level of risk and its allocation among owners, creditors, suppliers, executives, and employees. Many
10. LAWRENCE MISHEL, JARED BERNSTEIN & SYLVIA ALLEGRETTO, THE STATE OF WORKING AMERICA ch. 5 (2006); FIN. TIMES, Feb. 22, 2007: Harry De Angelo et al.. Are Dividends Disappearing?: Dividend concentration and the onsolidation of earnings, 72 J. FIN. ECON. 425 (2003); Edward N. Wolff, Recent Trends in Household Wealth in the U.S. (Economics Department, NYU, 2007): Wojciech Kopezuk & Emmanuel Saez, Top Wealth Shares in the United States, 1916-2000 (NBER Working Paper 10399, 2004): Recent Changes in U.S. Family Finances, FED. RES. BULL. A1-A38 (2006).
11. Data from Emmanuel Saez, tables A7 and As, at http://elsa.berkeley.edu/-saez; N.Y. TIMES, June 21, 2007; Los ANGELES TIMES, Apr. 25, 2007; N.Y. TIMES, Apr. 16, 2008: LUCIAN BEBCHUK & JESSE FRIED, PAY WITHOUT PERFORMANCE: THE UNFULFILLED PROMISE OF EXECUTIVE COMPENSATION (2006); Gerald Epstein & Arjun Jayadev, The Rise of Rentier Incomes in OECD Countries, in FINANCIALIZATION AND THE WORLD ECONOMY (Gerald A. Epstein ed., 2005); Steven N. Kaplan & Joshua Rauh, Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes? (NBER working paper 13270, 2007). The change in executive pay after 1993 is not explained by changes in firm performance or size. See BEBCHUK & FRIED, id.. After a long climb, payment of CEOs with stock options declined slightly in 2007. WALL STREET JOURNAL, Apr. 14,2008.
COMP. LABOR LAW & POL'Y JOURNAL [Vol. 30:17
U.S. employers offer policies that insure employees against labor- market risks: fringe benefits, wage smoothing, and employment security. A firm's financial structure will influence its decisions in this area. Debt, for example, raises risk and interferes with cyclical risk sharing. Ownership dispersion also matters. Blockholders, more prevalent in parts of Europe and Japan, are relatively undiversified so their risk preferences will be closer to those of similarly undiversified employees, whose main asset is their illiquid firm-specific human capital. As owners become more diversified, they will seek riskier investments.
In fact, this is what has happened with the rise of institutional investors, a heterogeneous group including mutual funds, trusts, insurance companies, and pension funds, the largest category. Institutional composition varies across nations, with pension funds more important in the United States and United Kingdom than other countries. U.S. institutional investors in 1960 owned 12% of U.S. equities; by 1990 they owned 45% and the share rose to 61% in 2005. Institutions today own 68% of the 1000 largest U.S. public corporations. Although institutional holdings rose over a long period, it was in the 1980s that institutions first began to flex their muscles as shareholder activists. Because institutional investors rarely own more than 1% of a company, they can and do press companies to pursue riskier business strategies such as heavy debt, the payment of which requires stringent cost-cutting. Indeed, institutional activism is associated with asset divestitures and with layoffs. This does not mean that institutions push firms to the edge of bankruptcy, but even a bankruptcy now and then would not do major damage to their portfolios."2
Institutional investors have never been the paragons of long-term investing that some claim them to be. Back in the 1980s, one CFO said that institutional investors "have the short-term, total-return objective as their primary objectives." Pension funds have always had myopic tendencies in some degree because of the short tenures of in- house fund managers. Recent changes in portfolio composition have accelerated short-termism. To raise returns above those provided by
12. MARGARET BLAIR, OWNERSHIP AND CONTROL 46 (1995); CONFERENCE BOARD, 2007 INSTITUTIONAL INVESTMENT REPORT (2007); IMF, GLOBAL FINANCIAL STABILITY REPORT 68 (2005); Michael Firth, The Impact of Institutional Investors and Managerial Interests on the Capital Structure of Finns, 16 MANAGERIAL & DECISION ECON. (1995); Sanford M. Jacoby, Convergence by Design: The Case of CalPERS in Japan, 55 AM. J. CONIP. L. 249 (2007). Total U.S. institutional assets of S24 trillion are owned by corporate pension funds (28%), public pension funds (11%), mutual funds (25%), trusts (11%), and insurance companies (25%).
24
FINANCE AND LABOR
indexed assets and to diversify beyond them, institutions are putting more money into "alpha" -riskier investments, some of them leveraged, with anticipated above-average returns and relatively low correlation with equity markets. These include private equity, hedge funds, real estate, commodities and micro-cap stocks. Only 30% of all pension fund assets currently are indexed, while some public pension funds have up to 50% of their assets in alternative investments. CalPERS, the giant California public pension fund, aims for an equity portfolio containing 40% alpha."
PE buyouts in 2006 involved more money than was being put into mutual funds, a total of nearly $400 billion. Although institutional investors supply capital for private equity and hedge funds, their demand for these vehicles is a permissive but not direct cause of the huge number of buyouts seen in recent years. The primary cause is low interest rates that permit takeovers to be financed with cheap debt. As compared to public companies, firms owned by private equity are more highly leveraged and have relatively short time horizons. On average, private equity's purchase-to-sale process takes around four years. To pay off debt during the holding period, a PE fund skims cash and sells its acquisition's assets, including business units that previously had smoothed product (and employment) demand. They also downsize their human assets. Five years after an acquisition, the average PE buyout has shed 10% more jobs than a comparable firm. The impact is economy-wide because PE funds currently account for 7% of U.S. private employment and 9% in the United Kingdomr.
4
Thus institutional investors and leveraged investment vehicles such as PE raise a firm's risk levels and shorten its time horizons. The results are wage and employment volatility and greater risk for employees of job loss and of pension adequacy. Investment projects with long-duration payoffs, such as employee training, are adversely affected. The decline in employee job duration is attributed by many economists to technology-driven shifts from specific to general technology that permit labor mobility. But another factor is the
13. Gary Gorton & Matthias Kahl, Blockholder Identity, Equity Ownership Structures, and Hostile Takeovers, (NBER working paper W7123, 1999); PENSIONS & INVESTMENTS, Nov. 15, 2004; PENSIONS & INVESTMENTS, Apr. 17, 2006; PENSIONS & INVESTMENTS, Aug. 21, 2006; BUS. WK., Sept. 17, 2007; Stephen J. Choi & Jill E. Fisch, On Beyond CalPERS: Survey Evidence on the Developing Role of Public Pension Funds in Corporate Governance (Fordham Law School, working paper, 2007).
14. WORLD ECONOMIC FORUM, GLOBALIZATION OF ALTERNATIVE INVESTMENTS (2008); WASH. POST, Apr. 4,2007; WALL STREET J.. July, 25,2007.
252008]
COMP. LABOR LAW & POL'Y JOURNAL
decline of employer training that has undermined the viability of career-type employment systems."5
D. Corporate Governance
Finance enthusiasts assert that giving shareholders a larger role in corporate governance promotes efficiency. When shareholders lack influence, executives build overstaffed empires, pay themselves too much and, to avoid conflict and enjoy a quiet life, overpay and coddle employees. When shareholders gain power, the effects are attenuated. Measures of shareholder power are statistically associated with downsizing and with lower levels of executive and worker compensation, outcomes that allegedly are efficient. 6
But owners, too, exacerbate inefficiency. They seek excessive payouts and burden firms with ill-conceived practices, like stock options, that promote instead of inhibit executive malfeasance.,7 The new field of behavioral finance calls into question assumptions of investor rationality. It shows that investors are prone to cognitive distortions such as myopia, overconfidence, and biased self- attribution. The findings undermine the claim that share price is a reliable criterion of performance and that shareholders consistently know better than executives and boards how to create value. Behavioral finance provides justification for practices that limit shareholder influence, such as takeover defenses.'8
15. Robert A. Moffitt & Peter Gottschalk, Trends in the Transitory Variance of Earnings in the U.S., 112 ECON. J. C68 (2002); CLAIR BROWN, JOHN HALTIWANGER & JULIA, LANE, ECONOMIC TURBULENCE: IS A VOLATILE ECONOMY GOOD FOR AMERICA? (2006); ECONOMIST, July 14, 2007; Boyd Black, Howard Gospel & Andrew Pendleton, Finance, Corporate Governance, and the Employment Relationship, 46 INDUS. REL 643 (2007).
16. Marianne Bertrand & Sendhil Mullainathan, Enjoying the Quiet Life? Corporate Governance and Managerial Preferences, 111 J. POL ECON. 1043 (1999); Henrik Cronqvist & Rudiger Fahlenbrach, Large Shareholders and Corporate Policies, (Fisher College, Ohio State University, working paper 14, 2006); Michael C. Jensen, Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers, 76 AMER. ECON. REv. 323 (1986). Note that the "lazy executive" view is an analogue to the economists' pessimism that employees are shirkers. Both assume that the pursuit of self-interest leads individuals to the sub-optimal quadrant of the prisoner's dilemma, an idea that originates in classical liberalism. For a different and more empirical view, see ROBERT M. AxELROD, THE EVOLUTION OF COOPERATION (1984).
17. Bronwyn Hall, Corporate Restnicturing and Investment Horizons in the U.S., 1976-1987, 68 Bus. HIST. REV. 110 (1994); Brian J. Bushee, The Influence of Institutional Investors on Myopic R&D Investment Behavior, 73 ACcr. REV. 305 (1998); Julian Franks & Colin Mayer, Capital Markets and Corporate Control, 5 ECON. POL'Y 191 (1990); Clayton Christensen & Scott Anthony, Put Investors in Their Place, BUSINESS WEEK, May 28, 2007; THE ECONOMIST, Apr. 23, 2005, at 71. Note that Michael Jensen recently recanted his faith in stock options. See http.//papers.ssrn.com/sol3/papers.cfm?abstract_id=480401.
18. A sampling of behavioral finance includes the following. Russell Korobkin & Thomas Ulen, Law and Behavioral Science: Removing the Rationality Assumption from Law and Economies, 88 CAL L. REV. 1051 (2000); ANDREI SHLEIFER, INEFFICIENT MARKETS: AN
26 [Vol. 30:17
FINANCE AND LABOR
When owners obtain greater influence, it generally brings them a larger share of value-added. However, this is not the same as an increase in value-added. First, downsizing does not boost productivity, although it raises shareholder returns and cuts labor's share, especially when downsizing is aggressive (i.e., when it occurs during periods of profitability). Second, wage cuts raise turnover and in other' ways can harm productivity, yet firms often focus only on compensation rather than unit labor costs. Third, when managers oppose takeovers, it is not always to preserve their empires but sometimes because of skepticism that takeovers will raise efficiency. The average takeover is not associated with pre-existing performance defects nor with subsequent profitability gains, even nine years after the event. Instead, the average takeover is driven by arbitrage of price imperfections and by tax benefits associated with leverage.'9
Earlier we observed the high proportion of individuals in the top 1% who come from finance-dependent occupations. Why have their salaries been rising so quickly? The standard explanation has to do with market forces: returns to skill of corporate and financial elites. Surely there is some truth in that. But finance-rela'ted incomes not only reflect value creation; there is also value extraction. Executives and shareholders take resources that otherwise would have been reinvested or returned to other factors of production. Shareholder resources also come from taxpayers, who subsidize the tax benefits associated with debt, capital gains, compensation of private equity and hedge fund managers, and more.'
INTRODUCTION TO BEHAVIORAL FINANCE (2000); ROBERT J. SHILLER, IRRATIONAL EXUBERANCE (2000); Ray Fisman et al., Governance and CEO Turnover: Do Something or Do the Right Thing? (SSRN working paper, 2005).
19. BEBCHUK & FRIED, supra note 11; WILLIAM J BAUMOL, ALAN BLINDER & EDWARD N. WOLFF, DOWNSIZING IN AMERICA 261 (2003); Gunther Capelle-Blancard & Nicolas Couderc, How Do Shareholders Respond to Downsizing? (SSRN working paper 952768, 2007); David I. Levine, Can Wage Increases Pay for Themselves? Tests with a Production Function, 102 ECON. J. 1102 (1992); Julian Franks & Colin Mayer, Hostile Takeover and the Correction of Managerial Failure, 40 J. FIN. ECON. 163 (1995); Andrei Shleifer & Lawrence H. Summers, Breach of Trust in Hostile Takeovers, in CORPORATE TAKEOVERS: CAUSES AND CONSEQUENCES (Alan J. Auerbach ed., 1988); Andrei Shleifer & Robert Vishny, Stock Market Driven Acquisitions, 70 J. FIN. ECON. 295 (2003); William W. Bratton, Is the Hostile Takeover Irrelevant? A Look at the Evidence (Georgetown Law Center, working paper 2007); Lynn Stout, Do Antitakeover Defenses Decrease Shareholder Wealth?: The Ex Post/Ex Ante Valuation Problem, 55 STANFORD L. REV. 845 (2002).
20. Regarding the effect of takeovers on labor's share of value-added, see Andrei Shleifer & Lawrence H. Summers, Breach of Trust in Hostile Takeovers, in CORPORATE TAKEOVERS: CAUSES AND CONSEQUENCES (Alan J. Auerbach ed., 1988); Jagadeesh Gokhale, Erica Groshen & David Neumark, Do Hostile Takeovers Reduce Extramarginal Wage Payments, 77 RESTAT 470 (1995); Martin J. Conyon et al., Do Hostile Mergers Destroy Jobs?, 45 J. ECON. BEHAV. & ORG. 427-40 (2001). The claim that technological change has made managerial skills less firm- specific fails to explain why executive compensation exploded in the Anglo-Saxon world but not
2008] 27
COMP. LABOR LAW & POL'Y JOURNAL
True, a portion of shareholder payouts find their way back to middle-class households via retirement plans. But even including these plans, the flow is a trickle. The wealthiest 10% owns about 80% of all equities, including pension assets. And when shareowners receive larger payouts, less is left for non-executive employees, which is one reason that labor's share of GDP has fallen and is smaller now than at any time since the mid-1960s. Within labor's share, there also has been a reallocation to top brackets. From 1972 to 2001, the top .01% saw their real earnings rise by 181%, whereas real earnings for the median worker fell by 0.4%. The result not only is inequality but income stagnation for the working poor and middle class.'
H1. ORIGINS OF MODERN FINANCIAL DEVELOPMENT
Why was there a surge in financial development after 1980? The standard interpretation is that market forces were unleashed. Higher levels of world trade spurred cross-border capital flows; deregulation and privatization created investment opportunities. The disciplinary effect of enhanced capital mobility whittled away the competitive barriers that had made companies fat and happy. With capital deepening came economies of scale that generated further financial development. Technological innovation, such as derivatives, created demand for risk-reducing instruments and for the talented individuals who could design them.'
But it would be naYve to think that financial development was due only to market forces. The financial industry is a paradigmatic example of a lobby that secures for itself benefits whose costs are diffused throughout the polity. The process might be called "deregulatory capture."
The workings of finance are recondite, unlike trade, and costs are not easily observed. Hence mobilizing voters around financial issues is difficult.
elsewhere. Bear in mind that hedge and private equity principals are guaranteed 2% in management fees, regardless of their performance. Compensation of fund managers also derives from a guaranteed 20% of any earnings ("carried profit"), which is taxed not as income but as capital gains, a favorable provision that also applies to venture capital and real estate partnerships.
21. Ian Dew-Becker & Robert J. Gordon, Where did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income (NBER working paper 11842, 2005); RICHARD FREEMAN, AMERICA WORKS 39 (2007); N.Y. TIMEs, Aug. 28,2006, Alan B. Krueger, Measuring Labor's Share, 89 AM. ECON. REv'. 45 (1999).
22. RAGHURAM G. RAjAN & Luica ZINGALES, SAVING CAPITALISM FROM THE CAPITALISTS (2003).
28 [Vol. 30:17
FINANCE AND LABOR
Foreshadowing recent financial development were the conglomerates of the 1960s and 1970s. Conglomerates are hodgepodge organizations of unrelated businesses, some of them purchased through hostile acquisitions. Despite the accolades showered on the M-form corporation, the raisons d'etre of conglomerates were not only administrative efficiency and risk diversification but also antitrust avoidance and finance-derived tax benefits. Hence conglomeration led to tighter linkages between business and financial strategies. The percentage of CEOs coming out of finance jumped in the 1960s and rose steadily thereafter. Decisions now were made by the numbers; CFOs came to dominate managers from line-related functions like operations and personnel, functions that were sensitive to non-quantitative intangibles such as internal resources and capabilities. CFOs, however, narrowly viewed (and view) strategy as the maximization of share price via financial engineering. Hence conglomerates left a legacy of financial hegemony in the corporate order.23
The slow death of the Bretton Woods system was another spur to modern financial development. The story starts in the 1950s, when London bankers sought to restore the pound's stature by weakening capital controls. Initially the effort was rebuffed by British governments committed to Keynesian policies. Wall Street too sought weaker capital controls to secure its global ascendance but also failed, at least initially. In the 1960s, however, several fortuitous events occurred. One was the emergence of the Eurozone, which developed from efforts by Anglo-American financial interests to evade capital controls and other regulations. Another was the decline of Britain and America's manufacturing prowess, which, along with fading memories of the depression, caused their governments to become more appreciative of the benefits of a strong financial sector. The decision to back away from Bretton Woods was not unanimous, however. In favor of freer capital movements were policymakers in central banks and treasury departments; opposing it were Keynesians who saw a threat to fiscal activism on behalf of full employment. President Kennedy allegedly said that it was "absurd" to shrink government spending for the sake of facilitating private capital flows.
23. JONATHAN BASKIN & PAUL J. MIRANTI, JR., A HISTORY OF CORPORATE FINANCE ch.
7 (1997); Andrei Shleifer & Robert Vishny, Takeovers in the '60s and the '80s, 12 STRATEGIC MGMT. 1. 51 (1991); DAVID HALBERSTAM, THE RECKONING (1986): Dirk Zorn et al., Managing Investors: How Financial Markets Reshaped the American Firm, in K.K. CETINA & A. PREDA, THE SOCIOLOGY OF FINANCIAL MARKETS (2006); Neil Fligstein, The Intraorganizational Power Struggle, 52 AM. Soc. REV. 44 (1987).
292008]
COMP. LABOR LAW & POL'Y JOURNAL
But elite financiers had access to top monetary officials, often former colleagues, and throughout the 1960s and 1970s they lobbied steadily for the abolition of capital controls.O
There were other attempts at financial deregulation in the 1960s. Wall Street's persistent complaints about the SEC led Richard Nixon to criticize the agency for its "heavy-handed bureaucratic schemes." Nixon's choice to head the SEC in 1969 was a diehard financial libertarian. Three years later Paul Samuelson complained that the SEC's indifference to financial concentration was "sad, if not scandalous." The advent of economic stagnation in the 1970s made it easier for finance-and other industries-to press for change. Major financial institutions like First National City Bank and Morgan Trust lobbied for deregulation, including repeal of Glass-Steagall. Their argument was that New Deal regulatory policies were strangling growth, a claim that became conventional wisdom not only for Republicans but also for centrist Democrats like Presidents Carter and Clinton. Carter kicked off a "deregulatory snowball" in finance when he signed a bank deregulation act in 1980. Under Ronald Reagan, financial deregulation intensified. The virtual demise of antitrust enforcement encouraged hostile takeovers and permitted the emergence of financial powerhouses like Citibank. Following their historic 1994 Congressional victory, the Republicans placed on their agenda proposals to scrap restrictions on margin buys by large investors and to limit lawsuits against allegedly fraudulent underwriters, executives, and accountantsO5 Although a Republican Congress repealed Glass-Steagall, it was Clinton's Treasury Secretary, Robert Rubin, who "plied the halls of Congress" in an effort to line up Democratic support. (The 1999 Financial Services Modernization Act that repealed Glass-Steagall came to be known as the Citigroup Authorization Act.) Shortly after its passage, Rubin resigned to become chairman of Citigroup. With Glass-Steagall out of the way, commercial banks like Citigroup were relatively free of regulatory oversight when it came to new business opportunities such as securitization and hedging.'
24. ERIC HELLEINER, STATES AND THE EMERGENCE OF GLOBAL FINANCE 81-122 (1994); James Hawley, Protecting Capital from Itself, 38 INT'L ORG. 131-65 (Winter 1984).
25. In 1995, Congress passed the Private Securities Litigation Act with near-unanimous support from Republicans and also from some liberal Democrats. Treasury Secretary Rubin favored the bill and, initially, so did Clinton. But Clinton later made a symbolic concession to consumers by vetoing the bill, knowing that Congress had the votes to override him, which it did. N.Y. TIMES, Dec. 20,1995.
26. DAVID LEINSDORF & DONALD ELTRA, CITIBANK: RALPH NADER'S STUDY GROUP REPORT ON FIRST NATIONAL CITY BANK (1973); Ernie Englander & Allen Kaufman, The End
30 [Vol. 30:17
FINANCE AND LABOR
Taxes are crucial to finance and to top incomes, a fact that never has been lost on the financial industry. For example, it worked closely with other business organizations to secure passage of the landmark 1981 tax reform act. The main lobbying group was the newly-formed Business Roundtable, which at this time included on its board financiers such as David Rockefeller of Chase Manhattan and Walter Wriston of Citibank. Citing supply-side theories, the Roundtable argued that tax cuts rather than government spending would remedy economic stagnation. The act contained a cornucopia of tax goodies, including more favorable treatment of corporate debt. The provision touched off the decade's leveraged buyouts, which proved a bonanza for corporate raiders and their financiers.
The 1980s also saw a net decline in top marginal income-tax rates; two-thirds of the decline in tax progressivity between 1960 and 2004 occurred during the Reagan presidency. Additionally, there were cuts in personal tax rates related to finance, including a 29% reduction in the capital-gains tax. Although the reduction was rescinded in 1986, preferential rates were restored in 1990 and made even more generous in 2003, when dividend rates also were cut. It is Republicans--going back to 1954-who consistently favor low rates on unearned income. When the GOP is in power, spending by corporate political action committees has an additional negative effect on unearned rates. These rate cuts directly affect inequality because they disproportionately benefit the top 1%. In the Anglo-Saxon nations, a 10% cut in the top investment rate is associated with a 0.4 percentage point increase in the top 1% income share.'
of Managerial Ideology, 5 ENTERPRISE & SOC'Y 417 (2004); JOEL SELIGMAN, THE TRANSFORMATION OF WALL STREET 382, 441 (1982); CHARLES GEISST, UNDUE INFLUENCE: HOW THE WALL STREET ELITE PUTS THE FINANCIAL SYSTEM AT RISK (1995); Thomas H. Hammond & Jack H. Knott, The Deregulatory Snowball: Explaining Deregulation in the Financial Industry, 50 J. POL. 3-30 (Feb. 1988); ROBERT KUTINER, THE SQUANDERING OF AMERICA 105 (2007); N.Y. TIMES, May 14, 1998; Robin Blackburn, The Subprime Crisis, 50 NEW LEFT REv. 63 (Mar. 2008).
27. J. Craig Jenkins & Craig M. Eckert, The Right Turn in Economic Policy, 15 SOC. F. 307- 38 (June 2000); Thomas Piketty & Emmanuel Saez, How Progressive is the U.S. Federal Tax System?, 21 J. ECON. PERSP. 3 (2007); BuS. WK., June 14, 2004: Dennis P. Quinn & Robert Y. Shapiro, Business Political Power: The Case of Taxation, 85 AMER. POL. SCI. REv. 851-74 (Sept. 1991); A.B. Atkinson & A. Leigh, Understanding the Distribution of Top Incomes in Anglo- Saxon Countries over the 2JA Century, (Australian National University, Working paper, 2004). In the 1980s, wealthy businessmen endowed tax-related thinktanks on both sides of the political spectrum. Grover Norquist's Americans for Tax Reform, launched in 1985, received support from the Olin and Scaife Foundations, while the Brookings Foundation, which swung from liberal to centrist in the 1980s, saw business donations rise from $95,000 in 1978 to $1.6 million in 1984. Brookings' fund-raiser at the time, a conservative Republican named Roger Semerad, said the gifts demonstrated that Brookings was "no longer tied to decades of ideology." A 1984 Brookings report advocated a cash-flow tax, the first step toward the long-sought conservative goal of substituting consumption taxes for progressive income taxes. The chief economist for the
312008]
COMP. LABOR LAW & POL'Y JOURNAL
The financial sector gave huge campaign contributions in its quest for financial deregulation: nearly $250 million between 1993 and 1998 alone. But it understood that money was insufficient to overturn existing regulations. Ideas mattered too. The 1970s and 1980s saw the ascendance of several major thinktanks promoting the interests of business and the rich. These ran the gamut from the Heritage Foundation (home to William E. Simon, Nixon's treasury secretary) to the American Enterprise Institute (on whose board Walter Wriston served). How "the power of ideas" caused tax and regulatory policy to move in a pro-business direction is a well-known story. Less well- known is the campaign to promote shareholder primacy and financial deregulation.m
Shareholder primacy asserts that maximizing shareholder value is the corporation's sole objective function. It is a break from previous legal doctrines that the corporation is an entity distinct from its shareholders. The earlier view held that boards and executives were legally autonomous from shareholders and could exercise independent business judgment on behalf of the enterprise as a going concern. Promotion of the shareholder-primacy doctrine, starting in the 1970s, came in tandem with a surge in hostile takeovers that circumvented boards and made direct appeals to shareholders to tender their shares. Economic justification for the doctrine was provided by agency theory, an old idea that now received scientistic grounding. As applied to corporate governance, agency theory did not constitute a rebalancing of the relationship between shareholders on the one hand and boards, executives, and other stakeholders on the other; it simply cut off the latter part of the scales. It offered an economic rationale for hostile bids, for stock options, and for other governance changes intended to raise shareholder influence. As the Council of Economic Advisers opined in 1985, takeovers "improve efficiency, transfer scarce resources to higher valued uses, and stimulate effective corporate management." The self-regulating market was born again."
U.S. Chamber of Commerce said the report "shows that we have won the philosophical revolution." BOSTON GLOBE, Mar. 31, 2006; Peter Bernstein, Brookings Tilts Right, 110 FORTUNE, July 23,1984, at 96.
28. THoMAS R. DYE, WHO'S RUNNING AMERICA 43 (2002); MARTHA DERTHICK & PAUL QUIRK, THE POLMCS OF DEREGULATION (1985).
29. MORTON J. HORwrrz, THE TRANSFORMATION OF AMERICAN LAW, 1870-1960: THE CRISIS OF LEGAL ORTHODOXY (1992); Stephen M. Bainbridge, Director Primacy and Shareholder Disempowernient, 119 HARVARD L. REV. 1735 (2006); Margaret Blair & Lynn Stout, Specific Investment and Corporate Law, 7 EUR. BUS. ORG. L. REV. 473 (2006); Simon Deakin, The Coming Transformation of Shareholder Value, 13 CORP. GOVERNANCE 11 (2005); CONNIE BRUCK, THE PREDATORS' BALL 261 (1988).
32 [Vol. 30:17
FINANCE AND LABOR
Agency theory and deregulatory dogma became increasingly influential in law schools and the courts. They traveled from economics to law over a bridge erected by conservative philanthropists. The annual "Pareto in the Pines" retreats were started in the 1970s to educate legal scholars about the applicability of neoclassical ideas to antitrust law, corporate law, and other fields. Later the students included regulators and jurists; by 1991 the Law and Economics Center at George Mason had given economics training to nearly a thousand state and federal judges. Funding for the seminars--and for academic research in law and economics--came from wealthy libertarian ideologues. The intent was to offer a platform to academic "norm entrepreneurs" whose ideas would legitimate deregulation and shareholder primacy. Institutional investors, too, took these ideas as their own and embedded them in codes of corporate governance that were thrust upon stock exchanges and foreign governments.
The politics of shareholder primacy go beyond law and regulation. The latter establish the boundaries for a different game played at the corporate level. Here the key players--workers, executives, and owners-press singly or in coalition for alternative forms of corporate governance with differing distributions of value- added. Following Gourevitch and Shinn, one may identify three games, each with a winner and loser: i) owners + executives vs. workers; ii) executives + workers vs. owners; and, iii) owners + workers vs. executives. The first game-what Gourevitch and Shinn label "class conflict"-was prevalent in the early decades of the twentieth century, with workers usually the losers. The second game-what I term "producerism"--gained currency during the postwar decades, when managers and workers, many of them unionized, replaced class conflict with cooperation to raise productivity; owners got the short end of the stick. The third coalition- "institutional capitalism"--emerged after 1980 as institutional owners pressed executives to focus on share price, thereby creating a bond between owners and worker-shareholders
30. Michael C. Jensen & William Meckling, Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, 3 J. FIN. ECON. 305 (1976); Cass Sunstein, Social Norms and Social Roles, 96 COLUMBIA L. REv. 903 (1996); J.P. Heinz, A. Southworth & A. Paik, Lawyers for Conservative Causes, 37 L. & SOC'Y REv. 5-50 (2003); USA TODAY, May 3, 2006. Many of the governance reforms sought by shareholder activists turn out to have little or no relationship to performance; some even have negative effects. Optimal governance is endogenous to a firm's idiosyncratic characteristics; the activists' formulaic approach is problematic. Sanjai Bhagat, Brian Bolton & Roberta Romano, The Promise and Peril of Corporate Governance Indices (University of Colorado, draft, Oct. 2007).
3320081
COMP. LABOR LAW & POL'Y JOURNAL
who own stock directly or through pension plans. But institutional capitalism is not the only game being played today. There is nascent class conflict because the median worker owns but a pittance in equities and because many executives--encouraged by stock options-have cast their lot with owners. Perhaps the most prevalent game today is the "war of all against all": executives exploit owners and workers; owners try to do the same to executives and workers. The vast majority of workers, however, is powerless; the result is income inequality and stagnation.
What about the situation outside the United States? Northern Europe and Japan since 1980 have experienced rapid financial development, with growth rates exceeding those in the United Kingdom and the United States, although Northern Europe and Japan started and remain at lower levels. What is crucial however is that despite recent financialization, top income shares have not increased by nearly the same extent as in the United States and the United Kingdom (Table 1). Why?3"
First, there is the fact that, in North Europe and Japan, unions retain greater influence than their American and, arguably, British counterparts. Lest this sound like class conflict, note that the former have relatively cooperative relations between workers, executives, and owners. This is relational capitalism or what David Soskice calls "the coordinated market economy" (CME). The CME is a fifth type of game, the obverse of the war against all. In CMEs, there remains support for the notion that corporations are not shareholder property but instead are going concerns belonging to the stakeholders who have invested in them. Hostile takeovers occasionally are resisted in European CMEs and remain rare in Japan. Foreign norm entrepreneurs--chiefly from the United States-have been less successful than at home in molding CME corporate law and regulation to suit their purposes.'
Table 2 shows the allocation of value-added under different corporate-governance regimes in Europe. Labor's share is relatively low in the United Kingdom and Ireland, where governance coalitions changed after 1980 in the direction of shareholder primacy. Conversely, labor's share is higher under the producerist and CME
31. In contrast to the Kuznets inverted-U curve charting inequality against industrialization over time, the post-1980 data instead trace out a sideways-Z.
32. David Soskice, Reinterpreting Corporatism and Explaining Unemployment: Coordinated and Uncoordinated Economies, it LABOUR RELATIONS AND ECONOMIC PERFORMANCE (Renatta Brunetta & Carlo Dell'Arringa eds., 1990); STEVEN VOGEL, FREER MARKETS, MORE RULES (1996).
34 [Vol. 30:17
FINANCE AND LABOR
coalitions found elsewhere in Europe (and Japan). Since the mid- 1990s, Germany has modestly shifted shares from labor to capital but Japan has not. When it comes to capital sources and to dividends, there also is a split between Anglo-Saxon firms and others that continue to this day. Hence politics drives a wedge between finance and labor in Northern Europe and Japan but tightens the connection in more liberal economies.3
Table 2 Distribution of Net Value Added in Large European Corporations
199-1-199434
Labor Capital Government Retained Dividends Earnings
Anglo-Saxon 62.2 23.5 14.3 3.2 15.0 Germanic 86.1 8.8 5.1 5.2 3.0 Latinic 80.3 14.4 5.3 3.0 4.7 Average 79.0 13.7 7.3 3.6 6.1
Ill. THE DOUBLE MOVEMENT IN THE PAST
The late nineteenth and early twentieth centuries saw varied and spontaneous reactions to financial development: from farmers, workers, small business, and professionals. Space precludes a full discussion; the emphasis here is on organized labor in the United States. From the 1870s through the early 1900s, labor organizations were active in popular movements opposing the tight credit and deflationary tendencies associated with the gold standard. The movements ran the gamut from Greenbackers, radical Republicans, and free silverites to the Knights of Labor and the People's Party. Labor's initial effort to promote the greenback-the "people's currency"-came through the National Labor Union, the country's
33. PETER GOUREVITCH & JAMES SHINN, POLITICAL POWER AND CORPORATE CONTROL: THE NEW GLOBAL POLITICS OF CORPORATE GOVERNANCE (2005); JONAS PONTUSSON, INEQUALITY AND PROSPERITY: SOCIAL EUROPE VS. LIBERAL AMERICA (2005); RONALD DORE, STOCK MARKET CAPITALISM: WELFARE CAPITALISM (2000): Gregory Jackson & Hideaki Miyajima, Varieties of Capitalism, Varieties of Markets: M &A in Japan, Germany, France, the UK, and USA (RIETI working paper, June 2007); Gregory Jackson, Stakeholders Under Pressure: Corporate Governance and Labour Management in Germany and Japan, 13 CORP. GOVERNANCE 419 (2005).
34. Dividends and retained earnings do not equal the capital share because net interest payments and third-party shares are not included. Henk Wouter De Jong, The Governance Structure and Performance of Large European Corporations, 1 J. MGMT. & GOVERNANCE 5 (1997).
2008] 35
COMP. LABOR LAW & POL'Y JOURNAL
first amalgamation of trade unions. Trade unionists espoused the republican ethos that direct producers, including small owners, were the source of value creation, whereas financiers were cast as speculative parasites. This was an early expression of the idea that finance and the real economy operated in conflicting realms, at least during hard times. Labor not only distrusted concentrated financial power, it saw its interests as antithetical to those of finance. Labor opposed monetary stringency, condemned speculation that led to panics and depressions, and loathed the inequities associated with Gilded Age finance.=S
Popular movements against the gold standard could neither unify nor sustain themselves, nor could they muster the resources to win elections. The Knights of Labor, the Populist Party, and the Bryan campaign of 1896 were valiant efforts. But Bryan's 1896 anti-gold campaign was run on a shoestring. The collapse of the Knights and later on of the Populist Party brought a temporary halt to labor's financial activism.•
The political baton passed from agrarians and labor to Progressive reformers. Richard T. Ely, Thorstein Veblen, and Louis D. Brandeis were among the intellectuals who railed against financial monopoly. Brandeis criticized investment banking-"the money trust"'-in a series of essays published in 1914 as Other People's Money and How the Bankers Use It. His ideas overlapped with another strand in Progressive thought: an enthusiasm for social engineering. In a contemporaneous book, Business-A Profession, Brandeis predicted that corporations would become more efficient as a new class of technocratic managers separated itself from owners, eschewed class conflict, and adopted producerism in the form of scientific management and employee participation.'
Progressive jurists such as Brandeis advanced a pragmatic conception of the corporation that challenged conservative views.
35. Louis HARTZ, ECONOMIC POLICY AND DEMOCRATICTHOUGHT (1948); MARK ROE, STRONG MANAGERS, WVEAK OWNERS: THE POLITICAL ROOTS OF AMERICAN CORPORATE FINANCE 68 (1994); DAVID MONTGOMERY, BEYOND EoUALITY: LABOR AND THE RADICAL REPUBLICANS, 1862-1872,445 (1967).
36. LAWRENCE GOODwYN, THE POPULIST MOVEMENT 278-84 (1978); KEVIN PHILLIPS, WEALTH AND DEMOCRACY: A POLITICAL HISTORY OF THE AMERICAN RICH 239 (2003); RICHARD FRANKLIN BENSEL, THE POLITICAL ECONOMY OF AMERICAN INDUSTRIALIZATION, 1877-1900 (2000); KIM VoSS, THE MAKING OF AMERICAN EXCEPI'ONAUSM: THE KNIGHTS OF LABOR AND CLASS FORMATION IN THE NINETEENTH CENTURY (1994).
37. LOUIS D. BRANDEIS, OTHER PEOPLE'S MONEY AND HOW THE BANKERS USE IT (1914) [hereinafter BRANDEIS, OTHER PEOPLE'S MONEY]; LOUIS D. BRANDEIS, BUSINESS-A PROFESSION (1914); SAMUEL HABER, EFFICIENCY AND UPLIFT:. SCIENTIFIC MANAGEMENT IN THE PROGRESSIVE ERA (1964).
36 [Vol. 30:17
FINANCE AND LABOR
Ownership rights were held to be relative, not absolute. This required a balancing test to weigh claims made by shareholders against those of other claimants. Challenging assertions that the market was self- regulating, these legal realists argued that the market was embedded: "a social creation, a creature of law, government, and prevailing conceptions of legitimate exchange." The realists drew on a broad set of ideas, including those of the institutional economists, several of whom, like John R. Commons, had ties to the labor movement.38
Yet labor-at least the AFL-mostly was silent on the era's financial issues, whether the 1912 Pujo investigations or the backroom negotiations over the Federal Reserve. One reason is that after the 1908 Danbury Hatters case, the AFL's political efforts were absorbed with undoing the judiciary's repressive interpretation of anti-trust law. Another reason is that organized labor, unlike farmers or small business, had other options than legislation to tame finance. Lloyd Ulman has well described the process by which unions formed national organizations in response to the extension and interpenetration of markets. Collective bargaining gave labor the power to privately challenge shareholder claims. A third reason for labor's silence was its electoral weakness. As compared to European unions, the AFL was relatively small and did not form alliances with socialists, farmers, or the middle class. There were exceptions of course, chiefly at the local and state levels. Labor cooperated with the middle class in "sewer socialist" cities. And in the Midwest, labor participated in fusion parties or supported politicians like "Fighting Bob" LaFollette, Jr., who opposed "Wall Street dictatorship" and demanded nationalization of banks.39
When it came to financial politics, European labor faced different incentives than the AFL. In much of Europe there was proportional instead of majoritarian voting, which gave labor a political voice through labor and other left-wing parties representing worker interests. European labor was able to negotiate a quid pro quo wherein it supported trade and financial openness in return for a social compact mitigating the risks that openness brought. The
38. HORWITZ, supra note 29. 39. LLOYD ULMAN, THE RISE OF THE NATIONAL TRADE UNION: TBE DEVELOPMENT
AND SIGNIFICANCE OF ITS STRUCTURE, GOVERNING INSTITUTIONS, AND ECONOMIC POLICIES (1955); James Weinstein, Radicalism in the Midst of Normalcy, 52 J. AM. HIST. 773 (1966); Cedric Cowing, Sons of the Wild Jackass and the Stock Market, 33 BuS. HIST. REV. 138 (1959). The AFL had almost nothing to say about the gold standard during the 1910s and 1920s, whereas Britain's 1926 General Strike, in which 2.5 million workers participated, had at its heart the gold standard and the wage cuts attributed to it. Melvin C. Shefitz, The Trade Disputes and Trade Unions Act of 1927: The Aftermath of the General Strike, 29 REV. POL. 387 (1967).
20081 37
COMP. LABOR LAW & POL'Y JOURNAL [Vol. 30:17
compact was based on social insurance: for accidents, unemployment, sickness, and old-age indigence. The extensiveness of social insurance enacted before 1913 is positively related to a nation's level of openness in 1913. The United States, with majoritarian voting and a labor movement lacking political allies, was a social insurance laggard until the New Deal.ý
Only at the midnight hour-in 1929-did the AFL weigh in on finance. Five months before the crash, its official magazine demanded that "growth of speculative credit shall not be permitted to undermine business stability." It warned that inaction would have deleterious effects on wage-earners and, via underconsumption, on growth. When tax figures for 1929 were released, the AFL observed that the bulk of income gains since 1927 had gone to the top brackets. It blamed three factors: concentrated stock ownership, stock speculation that benefited the rich, and an uneven distribution of value-added due to excessively high dividends. But these words came late in the game, in fact, after the game was over."
The Great Depression hit the United States especially hard, impoverishing the middle class along with workers and farmers. This created a broader political coalition than existed in 1896 and helped put Roosevelt into office. The belief was widespread that financial speculation and graft had caused the stock market crash and depression. Antipathy to finance led to a myriad of investigations and regulations. The official leadership of the AFL played a minor role in these events. But parts of the AFL-and of the urban working-class
40. Michael Huberman & Wayne Lewchuk, European Economic Integration and the Labour Compact, 7 EUR. REV. ECON. HIsT. 3 (2003). Did social insurance spending affect top shares? For the three northern European countries shown in Table I (Germany, Netherlands, Sweden), social spending as a share of national income rose from an average of .61% of national product in 1900 to 2.9% in 1930, nearly a five-fold gain; top shares declined after 1920 of which some part likely was due to funding social programs. In France, social spending rose more modestly and top shares did not change. In the United States, social spending did not change at all between 1900 and 1930 and top shares rose after 1920. For all of these nations, however, the big rise in welfare expenditure did not occur until after the Second World War. By 1965 social expenditures in the three northern European countries stood at 21% of GDP. Peter Lindert, The Rise of Social Spending, 1880.1930,31 EXPLORATIONS IN ECON. HIST. 1 (1994); Jens Alber, Is There a Crisis of the Welfare State?, 4 EUR. Soc. REv. 190 (1988).
41. According to the AFL, between 19227 and 1928 capital gains rose by 70%, dividends by 7%, and wages by 1.5 %. At International Harvester-a bellwether corporation in its day- wages barely budged during the 1920s despite the firm's record profits. 36 Am. FEDERATIONIST 535 (May 1929); 37 AM. FEDERATIONIST 339-41 (March 1930); C.B. COWING, POPULISTS, PLUNGERS, & PROGRESSIVES: A SOCIAL HISTORY OF STOCK AND COMMODITY SPECULATION, 1890-1936,155-186 (1992); ROBERT OZANNE, WAGES IN PRACTICE AND THEORY 49 (1968).
38
FINANCE AND LABOR
more generally-were deeply involved in financial politics. Before the emergence of industrial unionism, the largest popular movements of the 1930s were led by demagogic populists like Senator Huey Long and Father Charles Coughlin. In a reprise of 1896, they blasted the money interests and called for the re-monetization of silver.42 Long attacked the nation's unequal distribution of wealth- "concentrated in the hands of a few people"-and tied it to the "God of Greed [worshipped] by Rockefeller, Morgan, and their crowd." Coughlin, too, asserted that "bankers and financiers are the chief obstacles to constructive change." Coughlins's heated rhetoric attracted millions of adherents from the same groups that had elected Roosevelt. Coughlin had close ties to the Detroit labor movement, including Homer Martin's anti-CIO faction in the UAW. Other labor leaders, such as attorney Frank P. Walsh, became Coughlinites. Coughlin was a skilled orator, who could connect a worker's problems to abstruse financial forces: "Your actual boss, Mr. Laboring Man, is not too much to blame. If you must strike, strike in an intelligent manner not by laying down your tools but by raising your voices against a financial system that keeps you today and will keep you tomorrow in breadless bondage." Coming from Louisiana, Long had less to do with organized labor, although his magazine reprinted speeches by AFL president William Green. 3
In the Senate, Long disrupted the Glass-Steagall deliberations by filibustering for three weeks until the bill included limits on branch banking. Meanwhile Coughlin angrily testified to Congress about financial "plutocrats." He demanded a silver standard and nationalization of the Federal Reserve, which led Congressman Wright Patman to sponsor a bill along those lines. Not only demagogues attacked finance. Fiorello La Guardia proposed that dividends be taxed as regular income. And the AFL chimed in, asking that Congress erect safeguards "against speculation that destroys wealth and business structure."44
42. ROE, supra note 35, at 42. Said Coughlin, "God wills it-this religious crusade against the pagan of gold. Silver is the key to prosperity--silver that was damned by the Morgans." WILLIAM E. LEUCHTENBERG, FRANKLIN D. ROOSEVELT AND THE NEW DEAL 101 (1963).
43. LEUCHTENBERG, supra note 42, at 103; ALAN BRINKLEY, VOICES OF PROTEST: HUEY LONG, FATHER COUGHLIN, AND THE GREATDEPRESSION 140, 150,171 (1982).
44. LEUCHTENBERG, supra note 42, at 54-56, 60; COWING, supra note 41, at 223; GEISST, supra note 26, at 68; PAUL STUDENSKI & HERMAN E. KROOS, FINANCIAL HISTORY OF THE UNITED STATES 363 (1952); Herbert M. Bratter, The Silver Episode: II, 46 J. POL. ECON. 802 (1932); ELLIS HAWLEY, THE NEW DEAL AND THE PROBLEM OF MONOPOLY 307 (1966); N.Y. TImEs, Dec. 13, 1937. Members of the House and Senate pressured Roosevelt to send Coughlin to the 1933 London Conference on the gold standard. In response to these political developments, Congress in 1934 passed the Silver Purchase Act, a mostly symbolic gesture.
2008] 39
COMP. LABOR LAW & POL'Y JOURNAL [Vol. 30:17
Congress and the Roosevelt administration spun a web of financial restraints, including the Securities Act of 1933 and suspension of gold convertibility, the Securities Exchange and Banking Acts of 1934, and the Investment Company Act of 1940. Some argue that these laws were designed by a New Deal brain trust that was deferential to finance and permitted regulatory capture. But limits on securities trading and financial centralization shrank the financial sector, starting in the 1930s (Table 1). Along with this came fewer opportunities for finance-derived incomes. The proportion of Harvard Business School graduates choosing Wall Street as their first position fell from 17% in 1928 to 1% in 1941. Not until the 1980s would fresh MBAs become as prevalent on Wall Street as they had been in the 1920s.45
Financial regulation also took hold in Europe and Japan. Some controls were adopted before the Second World War; other were adaptations of wartime practices. Thus the world's industrialized nations experienced what John Ruggie calls "a common thread of social reaction against market rationality," which caused a contraction of global finance between 1929 and 1980 (with a blip in the late 1960s). Top-income shares in Europe and the United States tracked these changes until 1980 at which point global finance started a new expansion phase. Now, however, top income shares in the United States and the United Kingdom started a steady climb that left Europe and Japan behind (Table 1).'
Producerism: The Bretton Woods treaty was part of the global regulatory web. It stemmed from concern that unregulated currency markets had harmed the real economy, an enduring idea in more respectable Keynesian clothing. Although the treaty negotiations did not include organized labor, labor leaders like Sidney Hillman and Walter Reuther publicly endorsed the agreement. Bretton Woods resonated with their beliefs in economic planning and international cooperation. They viewed it as a remedy for isolationist and laissez- faire tendencies on the right and for Communist influence on the left. The CIO campaigned to win public support for Bretton Woods and tied it to risk-mitigating legislation such as the Full Employment Act.
Daniel J.B. Mitchell, Dismantling the Cross of Gold: Economic Crises and U.S. Monetary Policy, 11 N. ANI. J. ECON. & FIN. 77-104 (2000).
45. Vincent Carosso, Washington and Wall Street: The New Deal and Investment Bankers, 1933-1940, 44 Bus. His. REV. 425 (1970); BARRY EICHiENGREEN, GOLDEN FETTERS: THE GOLD STANDARD AND THE GREAT DEPRESSION, 1919-1939 (1992); STEVE FRASER, EVERY MAN A SPECULATOR: A HISTORY OF WALL STREET IN AMERICAN LIFE 444--47,473 (2005).
46. John G. Ruggie, International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order, 36 INT'L ORG. 387 (1982).
40
FINANCE AND LABOR
A growing number of labor leaders understood that the agreement- and Keynesianism more generally-would protect America's fiscal autonomy and its emerging welfare state.47
The labor movement scored a trifecta of high bargaining, organizing, and political power during the 1940s and 1950s. Rather than seeing labor as a special interest, middle-class households often, but not always, viewed it as a counterweight to forces that had caused the depression. With the ideology of self-regulating markets discredited, and with a broad base of support, the labor movement secured a variety of social programs: the G.I. bill, higher minimum wages, better unemployment insurance, and more extensive and expensive Social Security benefits (although labor gave up on national health insurance in the late 1940s in favor of employer provision). As earlier had occurred in Europe, labor's support for trade openness in the 1950s was due in some measure to these programs, although now the social compact also included countercyclical spending.48 To pay for it all, organized labor pursued redistributive taxation. It familiarized itself with the tax code's arcana: during the war, when it opposed a sales tax in favor of higher taxes on corporations and the wealthy, and after the war, when it demanded progressive tax cuts and the closing of loopholes benefiting the rich.49
Collective bargaining offered another method for changing the distribution of income and risk. Slichter dates the origins of a rise in labor's share of national income to the 1939-1950 period, when union wage changes became synchronized and unrelated to sectoral variations in productivity. The GM-UAW agreements of 1948 and 1950-the Treaties of Detroit proffered by management--sought producerist solutions to labor militancy by offering labor a guaranteed
47. N.Y. TIMES, Jan. 1, 1945; N.Y. TIMEs, Apr. 13, 1945; N.Y. TIMES, Feb. 13, 1945; NELSON LICHTENSTEIN, WALTER REUTHER: THE MOST DANGEROUS MAN IN DETROIT (1995); Patrick Renshaw, Organised Labour and the U.S. War Economy, 1939-1945, 21 J. CONTEMP. HIST 3 (1986).
48. While some believe that U.S. labor championed trade openness in the 1950s, in fact there was an undercurrent of anxiety as tariff levels declined. The Steelworkers' president proposed in 1954 an explicit social compact: workers, firms, and communities damaged by tariff reductions would be compensated with public spending built on the new welfare state, including special unemployment benefits, retraining, and early retirement covered by Social Security. Several of these items were included in the 1962 Trade Expansion Act. Daniel J.B. Mitchell, Labor and the Tariff Question, 9 IND. RELS. 268 (1970).
49. N.Y. TIMES, Apr. 8, 1943; N.Y. TIMES, Feb. 12, 1943; N.Y. TIMES, Apr. 8, 1943; N.Y. TIMES, Feb. 12, 1943; N.Y. TIMES, Apr. 22, 1944; STUDENSKI & KROOS, supra note 44, at 471; William L. Cary, Pressure Groups and the Revenue Code, 68 HARv. L. REv. 745 (1955); Boris Shiskin. Organized Labor and the Veteran, 238 ANNALS AMER. ACAD. POL. & Soc. Sci. 146 (1945); Robert M. Collins, The Economic Crisis of 1968 and the Waning of the 'American Century', 101 AMER. HIST. REv. 396 (1996).
2008] 41
COMP. LABOR LAW & POL'Y JOURNAL
share of real value-added. But labor, unlike management, saw the treaty formulas not as a fixed allocation of shares but as a base on which to add hefty new fringe benefits and wage gains outside the formula (e.g., when new or reopened contracts were negotiated). Labor's share of national income continued to rise through the 1970s, propelled by pay gains in the union sector. Hence the period from the 1930s through the 1970s witnessed a mixture of producerism and class conflict, at least in a ritualized form.•
Ownership changes facilitated labor's gains. The basic trend in postwar shareholding was toward dispersion; by 1965 individuals owned 84% of U.S. equities." Writing in 1941, legal scholar E. Merrick Dodd said that corporate governance had "reached a condition in which the individual interest of the shareholder is definitely made subservient to the will of a controlling group of managers." Fifteen years later, a team of economists found American executives professing producerist principles. Executives, it said, believe
that they have four broad responsibilities: to consumers, to employees, to stockholders, and to the general public... In any case, each group is on an equal footing; the function of management is to secure justice for all and unconditional maxima for none. Stockholders have no special priority; they are entitled to a fair return on their investment but profits above a "fair" level are an economic sin.2 The concept of management rights today refers to decisions that
management reserves for itself free of union influence. In the 1950s, however, management rights had an additional meaning. It was "designed to defend for management a sphere of unhampered
50. Robert Ozanne, Impact of Unions on Wage Levels and Income Distribution, 73 QJ. ECON. 328 (1959); Sumner H. Slichter, Do the Wage.Fixing Arrangements in the American Labor Market Have an Inflationary Bias?, 44 AL. ECON. REV. 322 (1954); HARRY C. KATZ, SHIFTING GEARS: CHANGING LABOR RELATIONS IN THE U.S. AUTOMOBILE INDUSTRY (1985); Frank Levy & Peter Temin, Inequality and Institutions in 211' Century America (MIT working paper, 2007).
51. BASKIN & MIRANTI,sipra note 23, at 232; BLAIR, supra note 12, at 46. Calibrating the decline in owner control is tricky. The TNEC investigations of the late 1930s showed blockholding persisting in many companies. Assessing subsequent blockholding depends on the choice of an ownership criterion conferring control as well as on assumptions regarding the influence of bank ownership and board memberships. Using a 10% criterion, Lamer found that 84% of the top 200 nonfinancial corporations in 1963 were under management control. On the other hand, Burch found only 40% under management control because he included holdings by families, trusts, and estates. ROBERT AARON GORDON, BUSINESS LEADERSHIP IN THE LARGE CORPORATION 38, 157 (1945); Marco Becht & J. Bradford DeLong, Why Has There Been So Little Blockholding in America? (Working Paper, 2004); PHILIP BURCH, THE MANAGERIAL REVOLuTION (1972); Maurice Zeitlin, Corporate Ownership and Control: The Large Corporation and the Capitalist Class, 79 AMt. J. SOc. 1073 (1974).
52. FRANCIS X. SuTroN ETAL, THE AMERICAN BUSINESS CREED 64-65 (1956).
[Vol. 30:1742
FINANCE AND LABOR
discretion and authority which is not merely derivative from the property rights of owners.""3 Managerial discretion included the allocation of value-added to retained earnings, shareholders, and employees.
Under the new balance of power, dispersed owners had few options to assert their claims. Annual dividend yields, for example, showed a downward trend from the late 1930s through the 1960s. Yet most executives did not exploit their autonomy so as to plunder. A database of CEOs for the period 1936-2003 finds a decline in real compensation for top executives in the early decades followed by pay sluggishness until the 1970s. In many companies, cash was plowed back into retained earnings to finance investment. This had the effect of reducing dependence on financial markets, moderating shareholder influence, and constraining financial development. The preference for retained earnings in some circumstances caused "slack" and wasteful spending, as agency theorists later alleged. But in other circumstances slack facilitated innovation and provided a buffer against shareholder short-termism.54
The era's producerist ethos went beyond the union sector. The proclivity to cooperate also could be found in large nonunion companies employing white-collar professionals who disdained-and would never join--unions. What motivated large nonunion employers to largesse? According to one study, executives believed that "the key to effective employee relations is the presence of trust and confidence between managements and employees. Such a climate is considered desirable for its own sake, and also because it fosters the efficient and effective long-run implementation of corporate strategy." That is, another reason for rent sharing with employees was management's belief that it induced cooperation that caused value creation. The view later was rationalized in the economic literature on the productivity consequences of practices based on long-term employment and on trust: firm-specific training, Lazearian wage profiles, and gift exchanges."
53. E. Merrick Dodd, The Modern Corporation, Private Property, and Recent Federal Legislation, 54 HARVARD L. REV. 924 (1941): id.
54. G.W. Schwert, Indexes of U.S. Stock Prices from 1802 to 1987, 63 J. Bus. 399 (1990); Mary O'Sullivan, Living with the U.S. Financial System: The Experiences of General Electric and Westinghouse in the Last Century, 80 Bus. HIST. REV. 621 (2006); Carola Frydman & Raven Saks, Historical Trends in Executive Compensation (MIT Working Paper, 2005); Nitin Nohria & Ranjay Gulati. Is Slack Good or Bad for Innovation?. 39 ACAD. MGT. J. 1245 (1996).
55. Charles Maier, The Politics of Productivity: Foundations of American International Economic Policy After World War II, 31 INTL. ORG. 607 (1977); FRED FOULKES, PERSONNEL POLICIES IN LARGE NONUNION COMPANIES 325 (1980). Some assert that the recent dismantling of these practices, although it may have contributed to inequality, nevertheless has
2008] 43
COMP. LABOR LAW & POL'Y JOURNAL
Arguably, a rising tide did not lift all boats; labor's share was unevenly distributed. Unionized workers fared especially well, as evidenced by a widening union-nonunion wage premium from 1950 to 1980, when it peaked at 30%. The union sector's payroll weight-its share of labor's share-was much larger than its employment weight. There were union-to-nonunion wage spillovers via the threat effect. But evidence of spillovers during this period is ambiguous. They occurred in some periods and industries but not others. In those parts of the nonunion sector where employee turnover was high and firm size modest, wage gains were smaller and less synchronized with union pay trends. Here management lacked an appreciation of cooperation and of what Slichter called "the relation between morale and the efficiency of labor." Arguably the most important innovation in postwar collective bargaining was the 1955 Ford-UAW agreement, in which the union demanded and won a guaranteed annual wage. This took the form of supplemental unemployment benefits (SUBs) paid by the company and coordinated with unemployment insurance. Not only did this shift risk from workers to owners, it placed an imprimatur on what had become a quasi-permanent employment relationship. Yet SUBs never spread to the nonunion sector. In fact, they were limited to a minority of workers in heavily unionized industries, the elite within the working-class elite. In other words, norms established in the union sector were circumscribed.56
The SUB agreements illustrate the peculiar structure of postwar risk protection in the United States. It was a two-tier affair in which private benefits, the legacy of welfare capitalism, sat on top of a modest public base. Corporate pensions supplemented, and were coordinated with, Social Security; employer medical insurance covered a hole in the social safety net. Unions were partly responsible for the two-tier system and their members benefited from it, as did some nonunion workers in large firms. The same groups enjoyed additional protection because their employers practiced countercyclical labor hoarding and wage smoothing.Y
raised efficiency. The evidence does not support the claim. C.W. Kim & A. Sakamoto, Does Inequality Increase Productivity?: Evidence From U.S. Manufacturing Industries, 1979 to 1996, 35 W•ORK & OCCUPATIONS 85 (2008).
56. RICHARD FREEMAN & JAMES MEDOFF, WHAT Do UNIONS Do? 53 (1982); Sumner H. Slichter, The Current Labor Policies of American Industries, 43 Q. J. ECON. 398 (1929); DANIEL J.B. MITCHELL, UNIONS, WAGES, AND INFLATION (1980); SUMNER H. SLICHTER, JAMES HEALEY & E. ROBERT LIVERNASH, THE IMPACT OF COLLECTIVE BARGAINING ON MANAGEMENT (1960). In the 1970s, SUBS covered 10% of unionized workers and none in the nonunion sector.
57. Robert Hart & James Malley, Excess Labour and the Business Cycle, 63 ECONOMICA 325 (1996); Robert J. Flanagan, Implicit Contracts, Explicit Contracts, and Wages, 74 A?*f. ECON.
44 [Vol. 30:17
FINANCE AND LABOR
Organized labor did not have much to say about financial regulation in the 1950s and 1960s except when it came to taxes or when it periodically denied that its pay gains were responsible for gold outflows.5 8 But organized labor nevertheless shaped the postwar financial order: its commitment to Keynesianism was a prop under Bretton Woods; it supported the regulatory state and taxes on unearned income; and its efforts in collective bargaining and contract administration were integral to producerist governance. In some respects, the United States during these years resembled the CMEs of Europe, although there were important differences in ownership, labor relations, and social spending59
IV. DOUBLE MOVEMENT REDUX
As the New Deal coalition broke down in the., labor found itself isolated. It was a Democrat, Jimmy Carter, who deregulated union strongholds such as the transportation and communications industries. But the situation went from bad to worse in the 1980s. The Reagan administration shut labor out of the executive branch. Employer hostility, encouraged by Reagan's PATCO actions and by intensified product-market competition, made it difficult for unions to gain new members. Financial markets also contributed to labor's debacle. Hostile takeovers and management buyouts were accompanied by downsizing on a massive scale. Pay norms in the union sector turned from "pushiness" to passivity. Labor's previous trifecta had transmogrified into a triple defeat.6"
With its house collapsing, labor focused attention not on capital markets but on trade (product markets) and on survival. In any event, it seemed that there was little labor could do with respect to finance
REV. 345 (1984); DAVID M. GORDON. RICHARD EDWARDS & MICHAEL REICH, SEGMENTED WORK, DIVIDED WORKERS (1982). In the mid-1970s, pension coverage among union workers was 91%; for nonunion workers it was 47%. Union workers were 14% more likely to have medical insurance and their benefit levels were more generous. FREEMAN & MEDOFF, supra note 56.
58. Labor also complained in the late 1960s that conglomerate acquisitions were causing layoffs and the transfer of jobs to nonunion regions. There is evidence to support the charge. N.Y. TIMES, Feb. 16, 1961; N.Y. TIMES, Feb. 13, 1970; N.Y. TIMES, July 1, 1973; Anil Verma & Thomas A. Kochan, The Growth and Nature of the Nonunion Sector within a Firm, in CHALLENGES AND CHOICES FACING AMERICAN LABOR (Thomas Kochan ed., 1985).
59. Ruggie, supra note 46; N.Y. TIMES, Feb. 16, 1961; N.Y. TIMES, Feb. 13, 1970; N.Y. TIMES, July 1, 1973.
60. Daniel J.B. Mitchell, Union vs. Nonunion Wage Norm Shifts, 76 AMER. EC. REV. 249 (1986). Congressional Republicans and supply-side economists revived the gold-standard debate in the 1980s, leading to formation of the Gold Commission, which issued a pro-gold report in 1982. Nothing happened, although the idea has recurred since then, as in the 1996 presidential campaign of Steve Forbes. Mitchell, supra note 44, at 101.
452008]
COMP. LABOR LAW & POL'Y JOURNAL
because of its weak bargaining power and political influence, except at the state level, where labor secured passage of anti-takeover legislation in a few states. The situation was eerily reminiscent of the 1920s. There was, however, at least one new factor: the trillions in pension assets over which unions had direct and indirect influence. In the late 1980s, labor awoke to the fact that these funds offered leverage to partially compensate for its other deficiencies.
The development of labor's financial activism is a complicated story, involving the interplay between financial markets, state and local government pension funds (SLPFs), and union-affiliated pension funds (UAPFs). SLPFs changed in the 1980s as they were freed of limits on their equity allocations, which permitted them to raise their equity stakes to accommodate funding gaps and demographic shifts. In search of higher returns and influenced by shareholder-primacy doctrines, the SLPFs became leaders of the shareholder rights movement. The UAPFs were and are somewhat different. They came more slowly to shareholder activism and gave it a different twist.,,
The largest and most active SLPF is CalPERS, which today has assets of almost $250 billion. (SLPFs have total assets of around $3 trillion.) CalPERS was one of the first institutional investors to pressure corporations to be more shareholder-friendly. To foster shareholder primacy, it advocated what were at the time standard remedies for instantiating shareholder primacy: greater board independence, lower takeover barriers, larger payouts to shareholders, and tighter links between CEO pay and share performance. CalPERS relied on a variety of tactics: proxy resolutions, public targeting of underperformers, and alliances with other owners, including corporate raiders. In 1985 CalPERS formed the Council of Institutional Investors (CII) to bolster its clout. The CII's initial members were other SLPFs. It later included UAPFs and corporate pension funds, although the UAPFs opposed the latter's entry and, later on, their leadership role in the CII. After the mid- 1990s CalPERS and some other large funds shifted to less visible methods of influence, such as relational investing and private equity.
SLPFs professed to be interested in long-term performance but disgruntled corporate executives said that the funds abandoned their long-term philosophy whenever raiders offered sufficiently juicy premiums for their shares. The SLPFs supplied capital for financing
61. TERESA GHILARDUCCI, LABOR'S CAPiTALu THE ECONOMICS AND POLITICS OF PRIVATE PENSIONS (1992).
46 [Vol. 30:17
FINANCE AND LABOR
hostile takeovers, which they justified in the same way as the raiders: that they were performing a public service by prodding underperforming companies to maximize shareholder value. When activist SLPFs targeted a company's management, it was followed by higher rates of layoff and asset divestiture than at comparable untargeted companies. CalPERS officially was on record that it preferred companies to improve shareholder returns without layoffs. But it was not averse to downsizing. Patricia Macht, a CalPERS official, told the New York Times in 1996, "There are companies that are fat, that have not taken a good look at the number of employees they need."62
It would be a stretch to call SLPFs worker-owner coalitions. Although many of those enrolled in SLPFs are public-sector union members, there are limits on union and worker influence because ultimate control of an SLPF resides with the government entity that created it. Also, none of the "workers" covered by SLPFs is employed by companies in which their pension funds invest. Hence the SLPFs sometimes take positions that are pro-shareholder but harmful to private-sector employees. Union leaders from the private sector will state off the record that SLPFs can pursue shareholder primacy because doing so will never hurt their members. (SLPF trustees retort that UAPFs ignore their fiduciary duties by favoring workers over retirees.)63
There are two types of UAPFs: funds for a union's own staff employees and Taft-Hartley multiemployer funds that are jointly administered by unions and employers. The Taft-Hartleys' inclusion of employers and their decentralized administration make them less activist than the staff funds. UAPFs, with combined portfolios worth about $450 billion, have only 15% of the SLPFs' assets. But their influence belies their size. They place greater emphasis than SLPFs on a corporation's employment responsibilities and on the negative aspects of financialization. For example, in 1989 the AFL-CIO opposed having pension funds invest in junk bonds whereas the CII, dominated by the SLPFs, supported it. Although UAPFs and SLPFs both criticize executive pay levels, the SLPFs are inclined to focus on
62. PENSIONS & INVESTMENTS, Feb. 6, 1989, Jacoby, supra note 12, at 249. 63. Sean Harrigan, former president of CalPERS, found out the hard way that SLPFs are
not worker funds. At the time of his appointment to the CalPERS board by Governor Gray Davis, Harrigan was a union official. He staked out a laborist path for CalPERS during his tenure on its board (1999-2004). But when Harrigan led CalPERS into conflict with California companies such as Disney and Safeway, Governor Arnold Schwarzenegger had him removed from the board.
4720081
COMP. LABOR LAW & POL'Y JOURNAL
damage to owners whereas UAPFs add to this harm done to employees. Yet the funds overlap and work closely on many issues. UAPF staff funds include unions that represent public employees, such as AFSCME and SEIU, while SLPFs from liberal regions have a relatively high proportion of unionized beneficiaries and stake out positions closer to the UAPFs'. In fact, because the UAPFs' holdings are usually quite small, they must rely on friendly SLPFs, including CaIPERS, to pressure companies and their boards to make desired changes.'
The architect of a distinctive UAPF approach was William B. (Bill) Patterson, field director for ACTWU in the 1970s. During the J.P. Stevens organizing drive, Patterson helped to develop the corporate campaign, in which a union pressures a company's major shareholders in hopes that they then will restrain anti-union managers. It was a logical progression from pressuring managers via owners to deploying labor's own pension assets for similar ends. UAPFs began utilizing their pension assets in support of traditional union objectives in organizing, negotiations, strikes, and against layoffs. Today that approach is still alive, especially at Change To Win (CtW) and the service-sector unions affiliated with it, such as SEIU, the Teamsters, UNITE HERE, and the Carpenters. (Patterson now runs the CtW Investment Group.) CtW's unions have quietly leveraged their pension assets to support organizing at companies such as Columbia Health Care, Manor Care (nursing homes), and Unicco (building services). Support from large SLPFs has proven crucial in several of these efforts, as has support from European public pension funds who own shares in janitorial and other companies.
As compared to the CtW unions, the AFL-CIO's national unions are less likely to engage in capital-market activities, including those based on traditional objectives. The AFL-CIO has more members in manufacturing, where organizing potential is low and where employers can threaten to move overseas, unlike in services. However, some industrial unions, such as the Steelworkers, actively pursue capital campaigns. SLPFs have no members in the private sector but they occasionally refuse to invest in firms that are in the privatization business, such as bus companies. Employers strenuously oppose labor's tactical use of its pension assets. Among other things, they have filed RICO suits and asked the SEC to ban union-
64. PENSIONS & INVESTMENTS, Feb. 6,1989; N.Y. TihES, Apr. 1, 1996. An exception is the SEIU Master Trust, which has assets exceeding S1 billion.
48 [Vol. 30:17
FINANCE AND LABOR
sponsored proxy resolutions during labor disputes. Union pension funds must be extremely careful lest they be accused of seeking collateral benefits that are inconsistent with fiduciary obligations.65
To avoid these problems, Patterson and others have tried to develop a pension model that will raise worker concerns, meet fiduciary standards, and attract support from other shareholders. As he said in 1993, "It's important to represent workers as stockholders as well as workplace advocates.., so employees are engaging companies with their view of shareholder value." What is called the "worker-owner" or "capital stewardship" philosophy has four parts. First is a search for investment criteria that protect worker interests while satisfying fiduciary law. Deterring investor myopia is offered as one such criterion because it promotes long-term investment in human and physical capital instead of excessive short-term payouts to executives and owners. Also, if two investments offer similar returns, labor will favor the company with better human resource management policies." Second, UAPFs seek to persuade other investors that pro- worker policies promote long-term value. Third, there is the hope that shareholder activism will give labor influence at the corporation's highest levels, a goal that has eluded it since the 1970s. Fourth, UAPFs advocate mainstream governance principles so as to establish common ground with other investors. Joining the activist mainstream gives labor a more positive image while at the same time tarnishing management's. 67
Like other institutional investors, UAPFs have demanded that corporations limit executive pay; hold binding, not advisory, shareholder votes on shareholder resolutions; and minimize takeover defenses such as staggered boards. Often unions and their federations
65. Paul Jarley & Cheryl Maranto, Union Corporate Campaigns, 43 INDUS. LAB. REL. REV. 505 (1990); Stewart Schwab & Randall Thomas, Realigning Corporate Governance: Shareholder Activism by Labor Unions, 96 MICH L. REV. 1018 (1998); PENSIONS & INYESTMENTS, Apr. 4, 1994; PENSIONS & INVESTMENTS, Sept. 29, 2003; Teresa Ghilarducci et al., Labour's Paradoxical Interests and the Evolution of Corporate Governance, 24 J. L. & SOC'Y 26 (1997); Interview with Carin Zelenko, Director of Capital Strategies, International Brotherhood of Teamsters, (Mar. 24,2008); BOSTON GLOBE, Sept. 26, 2002; THE DEAL, Apr. 30,2007.
66. On the relationship human resource policies and firm performance, see Alex Edmans, Does the Stock Market Fully Value Intangibles?, (Wharton School, working paper, 2007). There are three mutual funds that invest in union-friendly companies. Two of the funds are above their benchmarks over the past five years; one is below by one-half of one percent. Pro-Labor Mutual Funds Not Sacrificing Profits (2007), http://www.thestreet.comIpf/mutualfundinvesting/103812 02.html
67. PENSIONS & INVESTMENTS, April 5, 1993; Interview with Damon Silvers, Associate General Counsel, AFL-CIO, Mar. 26, 2007; THOMAS KOCHAN, HARRY KATZ & ROBERT MCKERSiE, THE TRANSFORMATION OF AMERICAN INDUSTRIAL RELATIONS (1986); Schwab & Thomas, supra note 65.
20081 49
COMP. LABOR LAW & POL'Y JOURNAL
use the ownership voice conferred by their staff pension plans to set the agenda for shareholder activism, while seeking support from Taft- Hartleys, SLPFs, and other institutional investors. Today UAPF activism has eclipsed that of the SLPFs; they file more shareholder resolutions than any other investor group. The problem here is that UAPFs frequently sound as if they are in favor of shareholder primacy; the nuances of the worker-owner philosophy are often difficult to perceive. Some UAPFs, however, have been leery of takeovers whose returns are predicated on short-term gains via labor squeezing. For example, the Teamsters' pension fund mounted a campaign against a private-equity acquisition of Borden in the 1990s.'
A turning point came in 1997, when the AFL-CIO created an Office of Investment to coordinate labor's capital-market activities. The federation hired Patterson to oversee these efforts. Almost overnight, the AFL-CIO became the center of UAPF activism. One of Patterson's first moves was to create a website called PayWatch, which allows employees to compare their earnings to those of their CEO. The site was extremely popular, getting over four million hits in its first year. According to AFL-CIO Secretary-Treasurer Rich Trumka, PayWatch offered employees a way to "vent their anger, anxiety, and outrage." Later the website added a feature called "Pick- a-Pension," which divulged CEO retirement packages and calculated how much health insurance they could purchase for uncovered families.'
The AFL-CIO's Office of Investment and the CtW Investment Group can be aggressively vocal on capital-market issues because neither has fiduciary obligations and therefore is free of legal actions by employer groups and an anti-union Bush administration!0 The CtW Investment Group is closely linked to the day-to-day concerns of CtW unions in their efforts to preserve union jobs or create new ones. The AFL-CIO, because of the federation's long tradition of national-
68. Schwab & Thomas, supra note 65. HOUSTON CHRONICLE, Apr. 17, 1994; PENSIONS & INVESTMENTS, April 3,1995; N.Y. TIMES, Mar. 12,1996.
69. PENSIONS & INVESTMENTS, April 23,1998; WASH. POST, Apr. 11, 1997; Bus. WK., Sept. 29, 1997; Bus. WK., Dec. 8, 1997. When Change to Win was created, Patterson left the AFL- CIO to take charge of CTW's new Investment Group.
70. A recent op-ed article by Eugene Scalia, former general counsel of the U.S. Department of Labor (which regulates UAPFs) charges that the UAPFs' shareholder activism does not maximize shareholder value. He urges the Labor Department to step up investigations of, and bring federal court actions against, UAPFs found in violation of their fiduciary obligations. The U.S. Chamber of Commerce has also been active in efforts to step up prosecution, while some employers have begun to file racketeering (RICO) lawsuits against unions that pursue corporate campaigns. Eugene Scalia, The New Labor Activism, WALL ST. J., Jan. 23, 2008, available at http://online.wsj.com/article/SB120105026345108353.html.
50 [Vol. 30:17
FINANCE AND LABOR
union autonomy, does less to directly support its constituent unions and spends more time gathering information, coordinating UAPFs, and lobbying on Capitol Hill. It issues "Key Votes" lists prior to proxy season that describe resolutions that various UAPFs intend to submit. The lists are circulated to UAPFs and SLPFs and to other institutional investors. Another coordinating effort is the AFL-CIO's Proxy Voting Guidelines, which are disseminated to UAPF trustees and their investment advisors. The guidelines espouse good governance practices such as board independence and shareholder accountability, but also embody a pro-worker view, what is called "the high road to competitiveness."'" They assert that long-term performance is a better metric than quarterly returns and that corporations have responsibilities to their "constituents"--not only shareholders but others who contribute assets to the enterprise."
The AFL-CIO cast itself in the limelight during the corporate scandals epitomized by Enron. In January 2002, the federation's Executive Council was the first group to respond to Enron by demanding that companies refuse to renominate any Enron directors on their boards. Two months later, Damon Silvers, the AFL-CIO's Associate General Counsel, appeared before the Senate Banking Committee to offer recommendations for reform. He called for an omnibus law to insure directorial independence, tighter regulation of accountants and analysts, and repeal of the law shielding executives and auditors from lawsuits. Several of Silvers' proposals were
71. Interview with Rich Trumka, Secretary-Treasurer, AFL-CIO, March 2007; IRRC CORPORATE GOVERNANCE BULLETIN, Apr. 2001; PENSIONS & INVESTMENTS, March 23, 1998; AFL-CIO, AFL-CIO PROXY VOTING GUIDELINES: EXERCISING AUTHORITY, RESTORING ACCOUNTABLILITY (2003); BUs. WK., Apr. 15,1993; Ron Blackwell & Bill Patterson, The Crisis of Confidence in American Business (Draft Working Paper, Mar. 2003). In 1999, AFL-CIO president John Sweeney issued a statement opposing Vodafone's hostile bid for Mannesman and endorsing the CME approach to governance, "The AFL-CIO," he said, "believes value is created over the long-term by partnerships among all of a corporation's constituents--workers, investors, customers, suppliers, and communities. Mannesman, and the European model of corporate governance under which it is structured, has allowed just those kinds of value creating partnerships to flourish." Press Release, AFL-CIO, Statement by AFL-CIO President John Sweeney on Mannesman Takeover (Nov. 22, 1999) (on file with author); THE ECONOMIST, July 14,2007.
72. Today a new realism is emerging in legal scholarship that challenges shareholder primacy and supports a more balanced approach. The neo-realists are at pains to point out that under law shareholders are neither the corporation's owners nor its sole residual claimants. Focusing on how the firm actually is organized, they observe that corporations are cooperative teams rather than the nexus of contracts portrayed in agency theory. To produce wealth, team members invest in firm-specific assets that are worthless if the firm goes bust. Hence all team members-not only shareholders--bear residual risk. It is a micro version of CME corporatism. With illiquid investments and little diversification, employees have the greatest incentive to monitor agents and may be best placed to do so. See, e.g., Margaret Blair & Lynn Stout, A Team Production Theory of Corporation Law, 85 VA. L. REV. 247 (1999); Lynn LoPucki, The Myth of the Residual Owner, 82 WASH. U. L.Q. 1341 (2004).
512008]
COMP. LABOR LAW & POL'Y JOURNAL
included in the Sarbanes-Oxley Act of July 2002. One expert dubs SOX "the most sweeping securities law reforms since the New Deal." The AFL-CIO hailed SOX and said it was needed to reform financial markets which "once were well-regulated but are now trapped in a destructive cycle where short-term financial pressures combine with the greed of corrupt corporate insiders." Harking back to the 1890s, it condemned markets for being "rigged to entrench and enrich speculators.., at the expense of employees, shareholders, and communities."
In what follows, we focus on UAPF activism in five main areas. Two of them-executive pay and board structure-are old chestnuts of the shareholder-rights movement. The others are proxy access, scrutiny of investment managers, and regulation of private equity and hedge funds. The UAPFs rely on higgling-using bargaining power conferred by their investments-and on political action.'
A. Pay
Ever-higher CEO compensation and scandals such as options backdating have kept executive pay at the forefront of UAPF activism. The AFL-CIO and CtW have called for regulations to prevent backdating and to force executives to return part of their pay if corporate earnings are revised. The proposals tap into public anger over stratospheric executive pay levels. In a recent survey of American households, 70% agreed with the statement, "When corporations are profitable, the benefits are not shared with workers but go only to the top." Even President George W. Bush has acknowledged the prevailing political winds. During a 2007 visit to Wall Street, Bush told the audience to "pay attention to the executive pay packages that you approve." Amazingly, he tied finance to inequality and made a point previously contested by conservatives.
73. FIN. TIMEs, Jan. 26, 2002; Damon A. Silvers, Testimony, to the U.S. Sen. Comm. on Banking, Housing, and Urban Affairs, "Hearing on Accounting and Investor Protection Issues Raised by Enron and Other Public Companies," 107 Cong., 2d. Sess., Mar. 20, 2002; SKEEL, supra note 7, at 175; Blackwell & Patterson, supra note 71; John C. Coates, The Goals and Promise of the Sarbanes.Oxley Act, 21 J. ECON. PERSP. 91 (2007). Labor's effort to capitalize on the scandals was hurt by the revelation that Robert Georgine, a long-time building trades official, personally profited from Ullilco's investment in Global Crossing's IPO. Bus. WK., Mar. 18,2002.
74. Schwab & Thomas, supra note 65; Damon Silvers, William Patterson & J.W. Mason, Challenging Wall Street's Conventional Wisdom, in WORKING CAPITAL THE POWER OF LABOR'S PENSIONS (Archon Fung, Tessa Hebb & Joel Rogers eds., 2001).
52 [Vol. 30:17
FINANCE AND LABOR
"Income inequality," he said, "is real. It has been rising for more than 25 years."75
The SEC's pay disclosure rules-for which the AFL-CIO lobbied-have uncovered various types of executive excess, including free personal use of corporate jets, which is permitted by 70% of companies. The New York Times said that the rules brought to mind Brandeis's quip that "sunlight is said to be the best of disinfectants" (from his post-Pujo book, Other People's Money). In the 2006 and 2007 proxy seasons, UAPFs sponsored the vast majority of advisory pay resolutions. Some sought limits on golden parachutes and executive retirement benefits; others demanded that executive bonuses be awarded only if performance was superior to a peer group. (PayWatch now carries case studies of egregious option grants and severance packages.) By far the most popular of the UAPFs' resolutions are those urging a "Say on Pay" by holding advisory shareholder votes on a board's pay proposals. Say on Pay resolutions have garnered an average positive vote of 43%, which is on the high side for advisory resolutions. To avoid negative publicity, some companies have agreed to privately meet with activist shareholders, including labor, to discuss their pay policies. This has brought labor unprecedented influence at strategic corporate levels. As one union official said, "Five years ago we would never have gotten in a corporate boardroom. Now we're regularly meeting with corporate directors about substantive issues.',
76
The House in 2007 approved a bill backed by the SLPFs and UAPFs requiring companies to offer a say on pay. The bill was sponsored by the new Democratic chair of the House Financial Services Committee, Barney Frank, who is sympathetic to the labor movement's financial agenda and a key figure in recent efforts to re- regulate financial markets. Damon Silvers attributed the vote to "increasing discontent in our country about income inequality generally and CEO pay specifically." Although Silvers' words echoed Bush's, the White House opposes the bill. As of this writing, prospects for its passage have improved due to revelations of the phenomenally high salaries paid to CEOs of financial companies damaged by the mortgage meltdown. Both the AFL-CIO and CtW
75. SAN DIEGO UNION TRIBUNE, Jan. 31,2007. 76. Bus. WK., Dec. 28, 2006; N.Y. TIMES, Apr. 8, 2007; BRANDEIS, OTHER PEOPLE'S
MONEY, supra note 37; AFL-CIO, KEY VOTES SURVEY: How INVESTMENT MANAGERS VOTED IN THE 2006 PROXY SEASON (2006); L.A. TIMES, Apr. 21, 2007.
2008] 53
COMP. LABOR LAW & POL'Y JOURNAL
have blasted executive pay at Countrywide, Bear Steams, Citigroup, and other firms.'
B. Boards
Less dramatic but no less important has been the continuing emphasis on board reform. UAPF proposals include demands to limit board interlocks, separate the CEO and chairman positions, and require boards to seek shareholder approval of takeover defenses. A new issue is majority voting for corporate directors unlike the present plurality system that ignores withheld and negative votes. In the past two proxy seasons, UAPFs took the lead in sponsoring resolutions for majority voting. The idea is supported by the CII and other institutional investors and received more than 70% shareholder support in the 2007 proxy season. Bowing to the inevitable, more than half the proposals were withdrawn after companies adopted some version the majority rule.7!
C. Proxy Access
Related to majority voting is proxy access for the purpose of nominating directors. UAPFs have proposed that long-term owners holding a minimum percentage of shares be given this right. Labor's hope is that owners will nominate directors who not only are independent but also knowledgeable about the company and the ingredients for its long-term success. Rich Trumka is more ambitious. He wants directors who are "worker-friendly," which might include workers themselves, who, he notes, are likely to be independent of management. "
Other institutional investors are allied with UAPFs on this issue; they see proxy access as an effective tool for board independence and executive accountability. It is also a way of making boards more transparent. As an AFL-CIO official says of proxy access, "You're opening up the kitchen inside these companies. That's a dark secret. That's a place where the insiders really play inside ball." AFSCME,
77. ATLANTA CONSTITUTION, June 6, 2007; FIN. TIMES, Apr. 1, 2007; BUS. WK., June 11, 2007; N.Y. TIMES, Mar. 7,2008; WVALL ST. J., Apr. 14,2008.
78. N.Y. TIMES, Mar. 7,2008; AFL-CIO, supra note 76. 79. Lucian Bebchuk, The Myth of the Shareholder Franchise, 93 VA. L. REV. 675 (2007);
Silvers interview, supra note 67; DAILY DEAL, Oct. 20,2003; Damon Silvers & Michael Garland, The Origins and Goals of the Fight for Proxy Access, in SHAREHOLDER HOLDER ACCESS TO THE PROXY BALLOT (Lucian Bebchuk ed., 2005); Interview with Daniel Pedrotty, AFL-CIO, March 2007, Mar. 26,2007; Trumka interview, supra note 71.
54 [Vol. 30:17
FINANCE AND LABOR
the AFL-CIO, and the CII submitted petitions to the SEC in 2003 seeking a ruling on proxy access. When the SEC issued a staff report later in the year, it identified two issues for consideration: Should proxy access be adopted and, if so, what ought to be the requirements for shareholders to obtain it? The SEC report elicited vociferous opposition from employers. The Business Roundtable warned that proxy access was "a thinly veiled attempt by labor unions and public pension funds to increase their influence over corporate America in order to further private agendas." But a wide variety of investors, not only pension funds, is seeking proxy access, as evidenced by advisory votes on the issue. Executives and boards, of course, strongly resist proxy access. After AFSCME introduced a proxy-access resolution at AIG, a scandal-ridden insurance company, AIG sued AFSCME and claimed that SEC rules prohibit such resolutions. The courts ruled in favor of AFSCME, which later came close to achieving proxy access at IHIP, where a bare majority (52%) of shares were cast against the proposal. For now, however, proxy access-once the holy grail-is dead. In December 2007, the SEC voted along party lines to permit companies to deny proxy access. But should there be a change in the SEC's political composition, the issue will come to life again.8"
D. Mutual Funds and Investment Managers
Because UAPFs and SLPFs are minority owners, they need allies. Mutual funds-whose share of U.S. equities is 25% and rising-are a logical place to look. Until now, however, the mutuals have not been shareholder activists. Most are subsidiaries of companies that sell financial services to business, such as administration of benefit plans, record keeping, and investment options for 401(k)s, usually their own mutual funds. Trumka calls this "a rigged system" and alleges that financial companies tell prospective clients, "make me your mutual fund for your 401(k) ... and I guarantee you the vote." The evidence supports Trumka's claim: the larger the share of fees a parent company derives from employer services, the less likely are the firm's mutual funds to adopt anti-management voting policies.8'
80. Interview with Ron Blackwell, Chief Economist, AFL-CIO, Mar. 26, 2007; Bebchuk, supra note 79; L.A. TIMES, Feb. 17, 2003; L.A. TIMES, July 26, 2007; FIN. TIMES, Apr. 1, 2007; CONFERENCE BOARD, supra note 12; N.Y. TIMES, Nov. 29, 2007. The SEC also has proposed doing away with nonbinding shareholder resolutions, which would eviscerate shareholder activism.
81. Trumka interview, supra note 71; AFSCME, FAILED FIDUCIARIES: MUTUAL FUND PROXY FUNDING ON CEO COMPENSATION (2007); Gerald F. Davis & E. Han Kim, Business Ties and Proxy Voting by Mutual Funds, 85 J. OF FIN. ECONS. 552 (2007).
552008]
COMP. LABOR LAW & POL'Y JOURNAL
Until recently, mutual funds did not disclose their proxy votes nor were they required to do so. In response to a request from the AFL- CIO, the SEC in 2000 considered to adopt a proxy disclosure policy. Investment companies selling mutual funds were opposed, even TIAA-CREF. To turn up the heat, Bill Patterson organized a demonstration outside Fidelity headquarters, protesting the firm's adamant refusal to disclose its votes. The timing was auspicious- mutuals were then being hit by pricing scandals-and in 2003 the SEC adopted a disclosure rule. Since then the AFL-CIO has published annual reports showing how mutual funds vote for items on labor's agenda. Sixty percent of the items are mainstream "good governance" issues; 20% have to do with the environment and the poor; and another 20% are employee issues."
In recent years, financial companies have lobbied to privatize Social Security and to turn public-employee defined-benefit (DB) pensions into defined-contribution (DC) plans. The threat is real. California's governor attempted to convert the state's SLPFs into DC plans, as have lawmakers in ten other states. The AFL-CIO now publishes reports listing the companies that donate money to politicians and advocacy groups backing privatization. In 2005, demonstrations were held at several of these firms, including Schwab and Wachovia. Letters were sent warning that the firms would lose labor's pension business unless they backed off. "We're seeking to pull Wall Street money out of the debate," said Bill Patterson, "Wall Street's covert funding of the drive to privatize Social Security is a conflict of interest because they stand to gain billions of dollars."'
The labor movement knows that its pension-fund leverage will decline in the future. Already more than 40% of AFL-CIO members have DC plans. Although the labor movement criticizes DC plans, it sees the handwriting on the wall and is quietly designing hybrid pension plans that would pool risk, integrate with Social Security, and provide portability. Whether or not hybrids come to pass, DC assets surely will grow and mutual funds will receive them. To keep its agenda alive, the labor movement must build ties to mutual-fund managers and align them with labor's emphasis on long-term value. Efforts to make mutuals more transparent are one step in this direction. Another is Trumka's proposal to put investor representatives on the mutual funds' boards. A different idea that
82. BOSTON HERALD, Dec. 3, 2002; AFL-CIO, supra note 76; AFL-CIO, RETIREMENT SECURITY: How DO INVESTMIENT MANAGERS STACK UP? (May 11, 2006).
83. FIN. TIMES, Mar. 8,2005; N.Y.TIMES, Mar. 17,2005.
56 [Vol. 30:17
FINANCE AND LABOR
some are batting around is to have a union-affiliated entity sell mutual funds.5 4
E. Private Equity Funds
Private equity funds (PE) are a throwback to earlier eras: to the takeover wave of the 1980s and, because of their collection of unrelated assets, to the conglomerates of the 1960s. The differences, however, involve scale and the source of capital; junk bonds then, easy credit now (at least until mid-2007). PE's modus operandi is to leverage its assets via debt, buy companies or their subsidiaries, take them private, dispose of corporate assets to pay off debt and to pay themselves, and sell out. How PE makes money is a matter of dispute. PE funds say that, because they are blockholders aiming for a future sale, they have an incentive to manage corporate assets so as to maximize long-term productivity. Critics charge that that the productivity effects of PE are undemonstrated and that PE derives its profits chiefly from the tax benefits of leveraged debt. Other sources of profitability include employee squeezing, the sale to PE of companies at below-market value by incumbent executives seeking post-buyout benefits, and aggressive cash withdrawals that are economically unjustifiable. For example, a coalition of PE firms bought Hertz for $15 billion and paid themselves a dividend of $1 billion six months later. Approximately 12% of PE investments are "quick flips" in which exit occurs in less than two years.
The great irony, however, is that pension plans today are the largest source of capital for PE. SLPFs account for 26% of PE capital raised in 2006 and some of them have as much as 17% of their total assets invested in it. For underfunded SLPFs, PE's high returns are too tempting to ignore.8 6 UAPFs initially did not invest in PE because they associated it with layoffs and because many PE funds did not
84. PENSIONS & INVESTMENTS, Sept. 9,2006; WALL ST. J., Mar. 3,2003. 85. Patrick A. Gaughan, How Private Equity and Hedge Funds Are Driving M&A, 18 J.
CORP. ACCT. & FIN. 55 (2007); ECONOMIST. Feb. 10, 2007; BUS. WK., Feb. 10, 2007; BuS. WK., Oct. 30, 2006; WASH. POST, Apr. 4, 2007: WALL ST. J., July, 25, 2007; WORLD ECONOMIC FORUM, supra note 14.
86. CalPERS earns 20% on its PE investments. One of them is the Carlyle Group, a controversial PE fund, 6% of which is owned by CaIPERS. Carlyle's main holdings are in the defense industry, where it is alleged to have profited from inside information about the planning of the Afghanistan and Iraq invasions. Other CalPERS investments also are controversial. In 1993 it placed $250 million in Enron's Joint Energy Development (JEDI) limited partnership. After selling the investment back to Enron (actually Chewco) for a large profit, CalPERs made a second investment in 1997 of $156 million. These were the off-book entities that helped cause Enron's collapse. SAN FRANCISCO GATE. Dec. 2, 2001; THE NATION, Apr. 1, 2002; SAN FRANCISCO CHRON., Mar. 21,2004.
2008] 57
COMP. LABOR LAW & POL'Y JOURNAL
want to do business with them. In 1999, UAPFs had only 0.1% of their assets in PE. At that point, labor-friendly investment managers began encouraging UAPFs to boost their PE holdings. Later the AFL-CIO issued guidelines advising UAPFs only to invest in PE funds that respect worker rights and are committed to preserving or expanding jobs. With this encouragement, and faced with underfunding of their own, the UAPFs turned to PE. As a share of portfolio, however, UAPFs invest less in PE and are more critical of it than the SLPFs. An association of SLPFs opposed a UAPF proposal to raise taxes on PE, although it later recanted.'
PE's first critics were transnational and European unions, especially in Britain, the largest PE market in Europe. One of labor's b8te noires is Permira, Europe's largest PE fund. After Permira purchased a British company in 2004, it laid off 3,500 workers and cut vacation time for survivors. Elsewhere, Permira announced a plant closure one month after buying the parent firm. Another target is KKR, from which British unions extracted a pledge to add jobs after KKR bought Boots. A recent TUC report to the government charges that PE funds exacerbate inequality and threaten long-term growth. It urges an end to PE's tax advantages and seeks measures to protect employees after buyouts.'
One reason that the U.S. labor movement was slow to criticize PE is that some unionized workers are the beneficiaries of PE investments. There is a part of the PE industry specializing in buyouts of unionized firms in troubled industries such as auto parts, coal, steel, and textiles. The best known investor here is Wilbur L. Ross, a wealthy billionaire and donor to the Democratic Party. Ross's firm makes its buyouts profitable with help from taxpayers. After an acquisition, it will declare bankruptcy, terminate the union's pension plan, and shift pension liabilities to the federal government. Job cuts are obtained by offering severance bonuses to dismissed workers; survivors are offered profitsharing. Says Ross, "We found that if you approach with a realistic request-in that you are not cutting them
87. PENSIONS & INVESTMENTS, May 4, 1998, Dec. 25, 2000, Sept. 29, 2003, Aug. 21, 2006; Dec. 11, 2006; WALL ST. J., Feb. 28,2007; WALL ST. J., Aug. 27,2007. BuYOUTs, Aug. 2,1999; BLOOMBERG NEWS, SepL 5, 2007; AFL-CIO, INVESTMENT PRODUCT REVIEW: PRIVATE CAPITAL (2002); Bus. WK., OcL 30,2006; ECONOMIST, Feb. 10, 2007; FIN. TIMEs, Aug. 28,2006; BUS. WK., Sept. 17,2007. State pension plans in 2006 held 4.4% of their assets in private equity, a 25% increase since 2001. WILSHIRE CONSULTING, REPORT ON STATE RETIREMENT SYSTEMS (2007).
88. DAILY TELEG., Feb. 27, 2007" THE GUARDIAN, Mar. 27, 2007; PENSIONS & INVESTMENTS May 14, 2007; TUC, PRIVATE EQUITY: TUC EVIDENCE TO THE TREASURY COMMITTEE INQUIRY (May 2007).
[Vol. 30:1758
FINANCE AND LABOR
[union members] just so management can live in the lap of luxury- and if you have a quid pro quo so that they can share in the profits, you get along reasonably well." In steel, the unions were successful in reaching these deals; in coal, where unions are weaker, deals were harder to come by. It remains to be seen what kind of agreement will be reached between the UAW and Cerberus, the giant PE fund that recently purchased Chrysler. Cerberus has a reputation for making deep job cuts and transferring health-care risks to VEBAs. It is yet another irony that Cerberus counts among its investors several large SLPFs.89
Low-wage service workers are especially vulnerable during and after a PE buyout. They are easier to replace and less likely to be unionized than other workers. One of the first American unions to launch a public campaign against PE was SEIU, whose members come from low-wage service industries often targeted by PE. Blackstone, the largest PE fund, owns nearly 600 large office buildings whose janitors are or could be SEIU members; Cerberus and other PE funds are major players in the hotel industry; and Carlyle owns the nursing- home giant Manor Care, whose 60,000 employees the SEIU is seeking to organize. SEIU uses a combination of tactics to put pressure on PE funds. Andy Stern, head of SEIU and of CtW, has approached the funds and offered to tone down SEIU's criticism of PE tax breaks if the funds agree to treat workers fairly, which might include neutrality during an organizing drive. It uses street theater to personally embarrass PE executives and reveal facts about PE funds that can hurt their public image, such as their reliance on Chinese and Middle Eastern capital. SEIU has a Web site that tracks Blackstone's activities and it publishes reports on PE deals that involve labor squeezing, such as layoffs at Hertz and KB Toys.9"
The AFL-CIO's approach to PE is less tactical. After Blackstone announced its 2007 IPO, the AFL-CIO's Rich Trumka filed two statements with the SEC criticizing the IPO for tax evasion. The AFL-CIO is working with its friends in Congress to regulate the industry. Barney Frank has held several hearings on PE and says that the funds are causing "gross imbalances." He notes that a recent
89. N.Y. TIMES, Sept. 18, 2005; WASH. POST, June 10, 2007; IHT, May 15, 2007; LABOR NOTES, June 2007; Theresa Ghilarducci, The New Treaty of Detroit (The New School, New York, Economics Department, working paper).
90. WORLD ECONOMIC FORUM, GLOBALIZATION; WORKFORCE MGT. (May 7,2007); THE
INDEPENDENT, Apr. 2, 2007; SEIU, BEHIND THE BUYOUTS: INSIDE THE WORLD OF PRIVATE EQUITY (Apr. 2007); Andrew L. Stern to U.S. House, Committee on Financial Services, May 16, 2007; WASH. POST, Apr. 4,2007; WASH. POST, Apr. 18,2008. The Chinese government recently purchased a $3 billion stake in Blackstone.
2008] 59
COMP. LABOR LAW & POL'Y JOURNAL
buyout of Tommy Hilfiger led to the replacement of unionized janitors making $19 per hour by nonunion workers earning $8 per hour. Both the House and the Senate are considering bills to raise tax rates on PE principals and investors. Liberal legislators and the labor movement hope to show an anxious middle class that they are forcing the rich to play by the rules; PE is an economic wedge issue.
The AFL-CIO has other reasons for speaking out. Its Office of Investment fears that some UAPFs are investing overly large amounts in PE just when PE is past its peak. Says Damon Silvers, "What we are trying to do in this environment is to put some distance between the labor movement and the hunger of our funds for return."'" Some are urging that UAPFs become principals of, rather than investors in, PE funds, an approach being tried in Canada.'
F. Hedge Funds
The labor movement also has targeted hedge funds, which have assets of over $1.5 trillion. The figure understates their influence because they are the single largest trader in the equity markets. The funds have broadened their hedging strategies from stocks and foreign exchange to riskier assets like subprime debt, an investment that caused the demise of several giant hedge funds in 2007-2008. Hedge funds today are making corporate acquisitions, blurring the line between them and PE. Some are even going public. Late in 2007, Och-Ziff, a $30 billion hedge fund, listed itself on the NYSE, making the firm's founder a multi-billionaire.9
As with PE, hedge funds have attracted considerable pension- fund capital; SLPFs invest relatively more than UAPFs. After the giant hedge fund Amaranth collapsed, it was revealed that SLPFs had invested several hundred million dollars in it. At this point the AFL- CIO asked the Senate Banking Committee for new rules regarding hedge-fund transparency, trading tactics, and taxation. The following
91. Silvers interview, supra note 67. 92. Richard L Trumka to John White (SEC) and Andrew Donohue (SEC), May 15, 2007
and June 12, 2007; N.Y. TImES, May 17, 2007; INV. NEWS, May 29, 2007; FIN. NEWS, May 28, 2007; WASH. PoST, Apr. 4, 2007; N.Y. TIMES, Sept. 6, 2007. The AFL-CIO is demanding that the SEC classify PE and hedge funds as investment companies, which means that they would face corporate, not partnership, tax rates, as called for in the Senate's Baucus-Grassley bill. More stringent legislation is being proposed by Barney Frank and other House members that would tax a PE manager's carried interest as ordinary income instead of capital gains. However, prospects for quick action in the Senate are fading because of heavy lobbying by the PE industry. LAT, Oct. 10, 2007.
93. N.Y. TIMES, Nov. 14,2007. Hedge funds own 55% of Stelco, a unionized steel producer in Canada. Stelco's CEO is a former associate of Wilbur Ross, causing the union to fear that the funds will cut jobs and pensions. TORONTO STAR, June 2,2007.
60 [Vol. 30:17
FINANCE AND LABOR
year Barney Frank offered a bill along these lines. Sensing a shift in the political winds after the recent financial meltdown, one influential Wall Street executive has proposed a plan that accepts some regulation of hedge funds, but falls short of what Frank and the AFL- CIO have proposed. (Similarly, Treasury Secretary Henry 'Paulson's recent blueprint for the regulation of investment banks seeks to preempt a more comprehensive approach proposed by House Democrats.) Damon Silvers of the AFL-CIO characterizes the financial community's preemptive plans as "an attempt to weld together two contradictory ways of thinking. One is what Treasury has learned over the past year, and the other is the pre-existing deregulatory agenda coming out of the business community."94
V. CONCLUSIONS
Today as in the past, conservatives proclaim that financial development is a free-market phenomenon unrelated to politics and best left free of them. Benefits of finance are touted; costs are downplayed or portrayed as inevitable. The recurrence of financial crises and of popular movements to restrain finance, however, suggest an opposite conclusion: that there are costs--inequality and risk being two of them--and that they are not inevitable. Sophisticated conservatives recognize a connection between finance and politics but it is the old classical doctrine that financial development weakens the chokehold of vested interests such as unions, entrenched managers, and the state.
Yet financial elites themselves are a vested interest. Financial markets flourish when elites can goad governments to favor finance, as was the case with the gold standard and the Federal Reserve system, and with more recent deregulatory efforts. Financiers not only are lobbyists; they also are norm entrepreneurs. To take one example, Wilbur Ross is funding a bipartisan group, the Committee on Capital Markets Regulations, which has issued well-publicized reports calling for "smarter" regulation, protective limits on financial litigation, and a rollback of Sarbanes-Oxley. One corporate law
94. Around the same time as Amaranth came another hedge-fund scandal-share lending-in which investors loan their shares to hedge funds seeking shorts or to throw a proxy contest in the direction of their bets. It emerged that CalPERS had earned $130 million in a single year through this practice. N.Y. TIMES, Aug. 24, 2007; Richard L. Trumka to Senators Richard C. Shelby and Paul Sarbanes, Senate Banking Committee, July 25, 2006; WALL ST. J., Jan. 26, 2007; N.Y. TIMES, Mar. 15, 2007; L.A. TIMES, July 12, 2007; Henry T.C. Hu & Bernard Black, The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, 79 USC L. REv. 811 (2006); N.Y. TIMES, Apr. 15,2008.
612008]
COMP. LABOR LAW & POL'Y JOURNAL
expert describes the committee as "an escalation of the culture war against regulation.""9
Conservatives portray financial markets as democratic; they help the masses, not only the elite. Financial regulation therefore has perverse effects. It harms less affluent households who are the true beneficiaries of financial development: "The financial revolution is opening the gates of the aristocratic clubs to everyone... it puts the human being at the center of economic activity." (Identical claims about finance's democratizing effects were made in the 1920s.) An oft-cited example is the availability of credit for purchasing homes and smoothing consumption. Without doubt, a broad spectrum of households benefits from deeper credit markets, even from payday lending. However, the reality is that credit disproportionately benefits elites. Consumption inequality has risen, not fallen, since 1980. Sub- median households face particular difficulties when their income shrinks due to job loss. The median high-school dropout facing unemployment has liquid assets worth only 5% of the income lost through unemployment-not much to borrow against-versus 124% for college graduates. For sub-median households, it is not credit but government safety nets such as unemployment insurance and food stamps that are their primary resources for smoothing.'
Another benefit cited by conservatives is the spread of shareholding within the middle class, those straddling the median. Ostensibly it has made these households more affluent, tolerant of risk, and supportive of financial deregulation. A recent study uses cross-national data on shareholding by household quintiles and identifies nations in which the median household has a propensity to own shares. Because these nations-the United Kingdom and the United States-have relatively unregulated financial markets, the authors infer that "the existence of a financially solid median class may be essential for democratic support for a market environment." The problem is that the authors fail to examine the value of the
95. Kaplan & Rauh, supra note 11; RAJAN & ZINGALES, supra note 22; Marco Pagano & Paolo Volpin, The Political Economny of Finance, 17 OXFORD REV. ECON. POL'Y (2001); N.Y. TIMES, Oct. 20, 2006; N.Y. TIMEs, Dec. 1, 2006. The Committee is a blue-ribbon group whose roster includes prominent financiers, business leaders, and academics, such as R. Glenn Hubbard (Columbia), Hal C. Scott (Harvard), and Luigi Zingales (Chicago).
96. ALBERT 0. HIRSCHMAN, THE RHETORIC OF REACTION: PERVERSITY, FUTILITY, JEOPARDY (1991); Adair Morse, Payday Lenders: Heroes or Villains? (SSRN working paper 999408, 2007); Rajan & Zingales, supra note 4, at 92; COWING, supra note 41, 177-80; Claessens & Perotti, supra note 8; Susan Dynarski & Jonathan Gruber, Can Families Smooth Variable Earnings? 229-03 (Brookings Papers on Economic Activity, 1997); David Cutler & Lawrence Katz, Macroeconomic Performance and the Disadvantaged 1-74 (Brookings Papers on Economic Activity, 1991-92).
62 [Vol. 30:17
FINANCE AND LABOR
middle quintile's shareholdings relative to debt. In the United States, the middle quintile owns shares-directly or indirectly via pension plans-worth $7500, which account for 5% of its assets. Its debt, mostly from mortgages but also from credit cards, stands at $74,000. Now take the average household from the top 1%. Its shares are worth $3.3 million and account for 21% of its assets. Debt stands at $566,000. So let's compare: The median household has a debt/equity ratio of 9.9; the top 1% has a ratio of 0.17. One need not be an economist to predict who will be leery of unregulated finance and who will welcome its risks. Recent efforts to rectify the imbalance between finance's costs and benefits are not "strange," as conservatives allege, nor are they evidence of an anti-liberal conspiracy. 97
Conservatives assert that coordinated economies-where owners, executives, and workers cooperate in the pursuit of value creation- lack the discipline needed to sedulously pursue efficiency. Again the claim is a throwback, in this case to anti-labor ideologues like Henry C. Simons, who criticized New Deal producerism as a "flagrant collusion between unions and employers." Yet the empirical evidence does not support the claim that relational governance sacrifices growth. Between 1960 and 1980, CNIEs on average grew faster than the liberal economies. If the period is changed to 1980-2000, the edge goes to the liberal economies. But even during those years, some liberal economies (Australia and Canada) grew less rapidly than some CMEs (Austria, Belgium, Finland, Norway, and the Netherlands).
The conservatives' infatuation with finance has unintended (dare we say perverse?) effects. First, by causing a lopsided distribution of productivity gains, financial deregulation and shareholder primacy foster resistance to productivity improvements because employees think that the game is not worth the candle. Employee dissatisfaction and distrust in employers are at all-time highs. Second, financial development is associated with trade and financial openness, which make economies more volatile. While the risks associated with openness can be mitigated by social insurance, efforts to strengthen America's tattered social compact are, ironically, being undermined by finance-induced inequality. Rising top-income shares cause the rich to separate from the commonweal and to withdraw their support for public spending. In the past, social compacts offered public
97. Enrico C. Perotti & Ernst-Ludwig von Thadden, The Political Economy of Corporate Control and Labor Rents, 114 J. POL. ECON. 169 (2006); MISHEL, BERNSTEIN & ALLEGRETrO, supra note 10, at 261; RAJAN & ZINGALES, supra note 22, at 18. After 2001, subprime mortgages were touted as a democratizing force that was bringing homes within the reach of those who previously could not afford them.
632008]
COMP. LABOR LAW & POL'Y JOURNAL
education and social insurance as cushions against risk. In our more inegalitarian age, the compacts give less in return for liberalization than before.98
The efforts of organized labor to reshape capital markets over the past twenty years have often been disappointing. Fissures in the labor movement--between the federations, between the federations and their unions, between SLPFs and UAPFs, and between local unions and their internationals-have hindered the coordination of labor's many separate pools of capital. And there is as yet no distinctive, strategic vision guiding the labor movement's activities in this realm.
Nevertheless, the volatility of financial markets over the past seven years has created an opening for labor to restrain financialization and shareholder primacy. The middle class is concerned about stagnant incomes, fearful of risk, and dubious that the game is fair. Labor is the main group connecting the dots between those concerns and the casino capitalism that is the financial system. During the recent subprime crisis it was CtW and the AFL-CIO who were the loudest voices alleging incompetence and greed on the part of America's financial titans-the people running Bear Stearns, Citigroup, Merrill Lynch, and Morgan Stanley. Just as business leaders and laissez-faire were lionized in the 1920s and laughed at in the 1930s, so today we are witnessing a similar kind of delegitimation.
Labor has other potential allies than the middle class. Corporate liberals like John Bogle and William Donaldson share labor's concern that financial short-termism is harming the economy's growth prospects. And there is an entirely new and promising phenomenon: labor organizations around the developed world are cooperating more closely on capital-market issues by sharing ideas, leveraging their pension capital, and pressing for regulation at the national and transnational levels. Both the AFL-CIO and CtW are participants in this effort.
The outcome of the contests between financial elites and these new coalitions is uncertain. The elites have enormous monetary
98. RAJAN & ZtNGALES, supra note 22, at ch. 11; Henry C. Simons, For a Free-Market Liberalism, 8 U. CHI. L. REv. 202,206 (1941); PONTUSSON, supra note 33, at 5; DANM RODRIK, HAS GLOBALZATION GONE Too FAR? 62-63 (1997); Geoffrey Garrett & Deborah Mitchell, Globalization, Government Spending, and Taxation in the OECD, 39 EUR. J. POL RES. 145 (2001); Kenneth F. Scheve & Matthew J. Slaughter, A New Deal for Globalization, 86 FOREIGN AFFAIRS (July/Aug. 2007), available at http://www.foreignaffairs.org/20070701faessay86403/ Kenneth-f-scheve-matthew-j-slaughter/a-new-deal-for-globalization.html. Concerned about declining support for financial and trade openness, the Financial Services Forum, representing the nation's twenty largest financial institutions, recently issued a report urging the government to do more to reduce risk and inequality in U.S. labor markets. Peter Gosselin, U.S. Action on Free Trade is Left Hanging, L.A. TiMES, Aug. 20,2007, at A-13.
64 [Vol. 30:17
FINANCE AND LABOR
resources for lobbying, public relations, and other activities. And, as the logic of regulatory capture predicts, they will strive harder than the average citizen to influence the course of current regulatory efforts. 99 But a successful re-regulatory coalition, as emerged during the New Deal and exists in other nations, can neutralize the power of financial elites.
The present does not repeat the past but it rhymes. The New York Times says that we are in the midst of a new Gilded Age and a new populism. The current financial crisis is putting government intervention and regulation back on the political agenda with a level of urgency not seen since the 1930s. Financialization also has brought the labor movement back, not like the 1930s, but nevertheless with a political and public relevance that make premature the claims of its demise.1" Today finance is the master. Will it once again become the servant? The outcome depends on the politics of the double movement.
99. Daron Acemoglu & James Robinson, Persistence of Power, Elites, and Institutions, 98 AER 267 (Mar. 2008). As during the Clinton years, donations by the financial services industry to Democrats, including Obama and Clinton, are dwarfing contributions to the GOP. L.A. TIMES, Mar. 21,2008.
100. N.Y. TIMES, July 15,2007; N.Y. TIMES, Mar. 23,2008; N.Y. TIMES, Apr. 11, 2008.
2008] 65
COPYRIGHT INFORMATION
TITLE: Finance and Labor: Perspectives on Risk, Inequality, and Democracy
SOURCE: Comp Labor Law Policy J 30 no1 Fall 2008
The magazine publisher is the copyright holder of this article and it is reproduced with permission. Further reproduction of this article in violation of the copyright is prohibited.