Labor in the Age of Finance: Pensions, Politics, and Corporations from Deindustrialization to Dodd-Frank

Published by EH.Net (December 2021).

Sanford M. Jacoby. Labor in the Age of Finance: Pensions, Politics, and Corporations from Deindustrialization to Dodd-Frank. Princeton: Princeton University Press, 2021. xii+368 pp. $35 (hardcover), ISBN 978-0-691-21720-8.

Reviewed by Laura J. Owen, Associate Professor of Economics, DePaul University in Chicago, for EH.Net.

Sanford M. Jacoby’s Labor in the Age of Finance examines the attempts of unions in the past half-century to use their voice as investors to increase membership and address issues of concern such as executive pay. Using their pension assets and their power as stockholders, unions pushed corporate boards for change. By seeking change through public persuasion that could affect stock prices, unions bought into a model of shareholder primacy and embarked on a path of “Financial Activism.”

Pension funds began to shift their investments from bonds to stocks in the 1970s. The initial thinking was that pension fund activism would encourage long-run decision making by CEOs and protect worker interests. Pension funds of public sector workers (such as CalPERS) and multi-employer plans representing private sector workers pushed firms to adopt certain corporate governance principles on board membership, executive pay and shareholder rights, what Jacoby refers to as the “cookbook.” By rating companies on these principles, large institutional investors advocated for changes that supported union membership drives and checked CEO abuses. However, in using their power as shareholders, pension funds would reinforce the idea of shareholder primacy and reveal the conflicts between what was good for workers and what was good for the returns on pension fund investments.

Pension funds used their power as shareholders to advance union membership when they pushed firms to accept neutrality agreements and card checks. Jacoby’s discussion in chapter 3 of the Service Employees International Union’s (SEIU) “Justice for Janitors” campaign is a good example. SEIU targeted Real Estate Investment Trusts (REITs) who were both owners of large office buildings and recipients of substantial pension fund investments. SEIU pushed building owners to pressure their janitorial contracting firms into accepting neutrality agreements, meaning the firms would not interfere with SEIU attempts to organize their workers.

Other changes to corporate governance would require new Security and Exchange Commission (SEC) rules on proxy voting. Following the dot-com bust and Enron scandal, unions found common ground with other shareholders in pushing for more accountability. One area of focus was CEO compensation and the “say on pay” movement that would give investors an advisory vote on executive pay. Unions expressed concerns about inequality as seen in the widening gap between CEO and average worker earnings. One solution was to tie executive compensation to the performance of the firm through stock options. However, tax provisions and lax SEC rules led to stock option abuses, with CEOs taking on more risk to generate higher short run returns. These actions would be good for their pay and for investors with more short-run horizons but came at the expense of more long-run investors (such as pension plans) and workers.

In chapter 8, Jacoby examines the intersection of pension funds, private equity and hedge funds, demonstrating again that what was good for the returns on fund investments was not always in the best interests of all workers. The AFL-CIO rated some private equity firms as worker-friendly and the SEIU used their investor power to obtain agreements on worker treatment standards. Unions in Europe took a much stronger stance against private equity and claimed the U.S. pension plans had a conflict of interest due to their investment in private equity. Public pension plans provided 27% of the capital of private equity firms on the eve of the financial crisis, though corporate and multi-employer plans were invested as well. Plan managers were attracted to the high yields of private equity even when they came at the expense of union employees at purchased firms. This tension was particularly acute between public pension funds and private sector union workers.

The financial crisis and the Great Recession would wreak havoc on investment returns, leaving many pension plans underfunded. Calls for reform would ultimately lead to the passage of Dodd-Frank and re-regulation. The Tobin Tax, a tax on financial transactions designed to discourage short-term trading, did not make it into Dodd-Frank, but the Shareholder Bill of Rights was included. While labor had a voice in the reforms, shareholder primacy (which had encouraged fund managers to take on more risk) was not fundamentally challenged.

In the Epilogue, Jacoby suggests that labor moved away from shareholder activism in part because it worked to increase shareholder rights but failed to produce the sought-after improvements for workers. Both CEOs and shareholders have an interest in seeing short-run increases in stock values, whereas workers benefit from a more long-run approach. Stock buybacks are a good example: favored by CEOs and investors for increasing share prices, but often leading to less investment in the firm and workers. Broader efforts to support workers (such as SEIU’s Fight for $15) had success in changing public policy but did not increase union membership. In 2019, the Business Roundtable released a document outlining the responsibility of corporations to all of their stakeholders, not just their shareholders. Whether this is a real shift from shareholder primacy remains to be seen, as does the impact of the pandemic on unionization.

In addition to the story of labor’s involvement in financial activism, readers of this book will encounter numerous lessons of value. These include a “Primer on Pension Plans” (at the end of chapter 2), which outlines the differences between various defined-benefit plans. In chapter 6, “Executive Pay,” readers will gain insight into the intricacies of using stock options as executive compensation, why economists favor their use, and how option expensing rules and time frames often led to abuses.

Jacoby takes the reader through a series of events that illustrate the contradictions inherent in labor’s financial activism. In the end, he seems somewhat ambivalent about union involvement and turns instead to how rising inequality has appeared to increase public support for unions. My reading of the evidence is that rather than retreating from this arena, unions could play a role in shaping policy that would insure the interests of workers and investors are balanced. As long as labor controls financial assets, they can push for a governance model that rejects shareholder primacy and promotes the interests of all stakeholders.

Laura J. Owen is Associate Professor of Economics at DePaul University in Chicago, Illinois. She has published articles on labor turnover and part-time work and is a co-editor of The Many Futures of Work: Rethinking Expectations and Breaking Molds.

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