The Soul of Capitalism (Page 2)

The collapse of Enron and accompanying scandals became a great teaching opportunity, and the AFL-CIO organized the facts for reform, pushing politicians to think bigger about corporate governance, the disloyalty of money managers to their customers, the blindness of pension funds to what exactly they are investing in. Labor (ironically, given its reputation) reintroduced the language of prudential and trustworthy financial performance.

Most of its efforts are outside politics, however. It helps organize the shareholder proxy fights and lawsuits stirred up by shareholder activists from churches and issue groups, but the AFL also gets up close and personal with the money managers. State Street Global Advisers in Boston manages a lot of union pension money, but meanwhile, the firm made itself a leading advocate for privatizing Social Security. After CalPERS (the California Public Employees' Retirement System) and some other major funds indicated they were reviewing this apparent contradiction, State Street announced it was withdrawing from President Bush's Social Security coalition.

The AFL's Office of Investment won a pivotal victory for all mutual-fund investors in early 2003 when it persuaded the Securities and Exchange Commission to require that mutual funds must disclose how they vote the proxies in corporate-governance shareholder fights. Fidelity and Vanguard, the two largest mutual funds, led the industry in opposing the measure, and for good reason. These investment firms regularly vote against the interests of their own rank-and-file investors in order to curry favor with corporate managements. Why? Because the corporations hire them to manage corporate-run pension funds and 401(k) plans. If Fidelity and Vanguard vote against the corporate boards, they will lose lucrative contracts. If their votes against the investors are revealed, they will lose lots of them. Disclosure thus opens up a new front for leveraging corporate behavior and enforcing the fiduciary obligations in finance.

Morgan Stanley, the "all-service" financial house, provided one of the most blatant examples of how Wall Street firms betray their clients from organized labor. Three Morgan Stanley analysts issued an advisory on investment strategy in November 2002 urging investors: "Look for the union label...and run the other way." Labor officials were not amused. Scores of union pension funds hire Morgan Stanley for investment advice and park huge sums in the firm's various investment funds. As the labor clients raised protests, Morgan Stanley changed its tune, drafting a pro-union declaration for the AFL's approval.

The primary target for education and informed pressure, however, are the pension fund trustees, starting with the Taft-Hartley pension funds that are directly supervised by labor and management representatives. Until quite recently, most labor trustees have been as passive and conventional as their corporate counterparts. "The culture of the financial industry is intimidating," Blackwell explains. "The trustees are spirited off to conferences in Hawaii or wherever there's a golf course, and the fear of God is put into them on their fiduciary responsibility. On top of that, these trustees are workers. They don't have the time to become experts, or the technical and legal support to question the investing decisions. So we are providing that."

The Center for Working Capital, a research institute started by the AFL, now publishes its own data for pension trustees, much like the advisory materials from Wall Street firms, only it asks different questions. The "Investment Product Review" examines the Wall Street funds that claim to be "worker-friendly" and tells pension trustees which ones are authentic. Its "Key Vote Survey" rates the money managers on how they vote their fund's shareholder proxies on key corporate-governance issues. "If the money managers end up with a low rating, the money doesn't go there," Blackwell says. Eventually, he envisions, labor trustees will be putting some of their investment capital into the localized capital funds that are springing up--guided by the rank-and-file union members on the ground who know the community's problems and what makes sense, what doesn't. "The capital that belongs to working people should serve their purposes and values; right now it doesn't," Blackwell says.

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