Labor counts win for corporate accountability reform

By DON McINTOSH, Associate Editor

In the campaign to reform corporate behavior, the Oregon Treasury Department is taking a very small step forward. Union leaders say it took over a year of lobbying, but this spring, the State of Oregon will take responsibility - for the first time ever - for how it votes the shares of stock that it owns.

Of the $32 billion invested on behalf of the Oregon Public Employee Retirement System (PERS), about $13 billion consists of stock of publicly-traded U.S. companies. That stock gives its owner the right to vote on proposals at annual shareholder meetings, but until March, the state had always left decisions on how to vote to the more than 16 investment management companies that it entrusts with the money.
For example, last year:
* Alliance Capital Management, which manages $900 million in PERS funds, voted against a proposal at GE to account for pension income;
* Wellington Management Company, with $400 million of PERS funds, voted against proposals at Halliburton and Duke Energy to make sure financial auditors are independent of company management; and
* Nicholas-Applegate Capital Management, with about $200 million in PERS funds, voted against a proposal to require shareholder approval before executive stock options could be re-priced.

Now, thanks to union member Joe DiNicola, the state will begin voting its stock directly.

DiNicola is a public employee - a corporate tax auditor for the Oregon Department of Revenue. He's also president of his union sub-local, and a member of the Executive Board of Service Employees International Union (SEIU) Local 503, Oregon Public Employees Union. A year-and-a-half ago, the board asked him to start attending meetings of the Oregon Investment Council (OIC) so that union interests would be represented. The OIC is a six-member body that includes State Treasurer Randall Edwards and PERS director Jim Voytko, responsible for deciding how the state treasury should invest funds like PERS.

DiNicola enlisted the support of Dennak Murphy, Western Region director of SEIU's Capital Stewardship Program. Murphy also attended OIC meetings, and last October the OIC agreed to have a day-long workshop on using shareholder votes to improve corporate governance. By December, the OIC was unanimous: They would contract with a company called Institutional Shareholder Services (ISS), which for $88,000 a year will provide recommendations on how the state should vote hundreds of questions that go before stockholders at annual meetings. But it's not clear that the new policy will change votes like ones described above. That's because the OIC chose the loosest of the different sets of criteria ISS offers institutional investors.

Under the principles ISS will apply on the state's behalf, ISS nearly always sides with company management unless a proposal clearly erodes shareholder rights or significantly harms returns. Plus, the OIC exempted PERS' largest pension fund account - a $7 billion account managed by Barclays Global Investors - from ISS oversight. Ron Schmitz, director of investment for the Oregon Treasury Department, said that's because the OIC is comfortable with Barclays' past judgments about votes.

As part of its campaign to use shareholder votes to reform corporate practices, the AFL-CIO identifies dozens of shareholder resolutions and uses them to rate the voting records of over a hundred investment managers. The AFL-CIO list includes resolutions opposing offshore tax avoidance, dishonest accounting, and excessive CEO pay, pension and severance packages. Barclays was rated 54 percent for 2002 - placing it in the middle tier. [Whereas the three firms mentioned above - Alliance, Nicholas-Applegate, and Wellington - had 82, 68 and 53 percent ratings, respectively. For the full listing and explanation of each rating, see "Key Vote Survey for 2002" on-line at www.aflcio.org.]

DiNicola wants the OIC to adopt a different ISS product - developed for its joint union-management trustee Taft-Hartley fund clients. That would bring the state closer to the "worker-owner" view of shareholder value espoused by the AFL-CIO, one which emphasizes management accountability and good corporate governance. Such a shift would be a significant departure from the OIC's long-held approach - a narrow interpretation of its legal responsibility which suggests that the OIC shouldn't look at anything except maximizing direct economic returns to the fund.

Several other states - notably California, Connecticut, New York, and Ohio - are far more activist than Oregon in using shareholder votes to reform corporate behavior.

Public worker pension funds in New York and Ohio have adopted a policy of not investing in companies that engage in the privatization of public workers' jobs.

California, with its public employee pension CalPERS, was the first to adopt a policy requiring its real estate investment managers to have a responsible contractor policy - paying prevailing wages for building construction and maintenance, and obeying all laws. CalPERS also favors "economically targeted investments:" Assuming the investments are equally profitable, the fund prefers to put money into things that benefit the state, like construction of low-income housing. And it's been a leader in pushing proposals to link executive stock options to actual company performance. In part CalPERS may be more activist because its board of administration includes pension beneficiaries. And its president, Sean Harrigan, is executive director of the United Food and Commercial Workers Region 8.

SEIU applauds OIC's move to vote its own proxies, but would like to see more.

"This is a good first step," DiNicola said, "but we'd like to see the council become more engaged in this issue personally."

Cleaning up Corporate America

Unions and union-sponsored funds were responsible for more than a quarter of the corporate governance reform proposals last year.

This year, unions are sponsoring a record 380 shareholder proposals, nearly double last year's number. The majority of this year's union-sponsored proposals focus on excessive executive compensation - including salary, stock options and pensions. Recent highlights include:
* On April 23, 65.4 percent of Raytheon Co. shareholders voted for an AFL-CIO proposal requiring stockholder approval of generous executive severance packages known as golden parachutes.
* On April 15, despite the vehement objections of management, a majority of U.S. Bancorp shareholders approved three union-sponsored resolutions to change the way the company reports stock options on its income statement, reform the process for shareholder votes and require shareholder approval of extraordinary executive pension benefits.
* On April 14, a majority of shareholders at Weyerhaeuser Corp. approved a Teamsters' General Fund proposal to change the way the company reports executive stock options.
* At Tyco's March 6 annual meeting, an AFL-CIO resolution to require shareholder approval of executive severance packages passed, and an AFSCME resolution to bring the company's headquarters back from Bermuda to the United States got 26 percent of the vote; last year, the proposal got 5 percent.

Dennak Murphy, Western Region director of SEIU's Capital Stewardship Program, said his union, which represents many public workers, is focusing its corporate governance reform efforts on public worker pension funds. Meanwhile, the Center for Working Capital - an AFL-CIO-sponsored non-profit founded in 1997 - has been training union trustees of Taft-Hartley pension and benefit funds to practice "capital stewardship."

There are about 300 public worker pension funds in the United States, with a collective $3 trillion in assets, and about 3,500 Taft-Hartley union-management trusts with a total of $392 billion in assets.

"Obviously this is potentially a very influential force in the way corporations do business, if we were to use our power," said Joe DiNicola, member of the SEIU Local 503 Executive Board who helped win a reform in how the state of Oregon votes its shares.

The challenge for advocates like Murphy and DiNicola is to convince trustees to make corporate reform a priority. A more conservative approach is the dominant one, Murphy said, among pension fund trustees.

"Many investment professionals and trustees are folks who are fairly conservative politically and not necessarily friendly to the interests of working people. There are people who believe that Jack Welch, former CEO of General Electric, deserves to have a $9 million a year pension."