Should Labor Abandon Its Capital?

Public pension funds and labor union funds (together “labor’s capital”) have faced years of criticism from both the left and the right. The current battle between ESG and anti-ESG advocates, and the introduction of legislation at the state level trying to redefine the fiduciary duties of pension trustees, is just the latest round in a series of fights over pensions that go back to the 1970s.

Laissez-faire conservatives and anti-ESGers argue that pensions have become politicized and that pension underfunding threatens taxpayers. They alternate between attacks on what these funds may invest in (by trying to narrow fiduciary duty) and attempts to undermine the funds’ very existence (by scattering them into millions of individually managed 401(k)s). On the other end of the political spectrum, leftists consistently criticize labor’s capital for undermining worker interests by fund­ing financialization and the growth of Wall Street. They call instead for pensions to be replaced by a much larger social security system.

In my book, I argued that labor’s capital can be used to advance the interests of workers as both workers and savers, primarily engaging with more conservative criticism of pensions. In a new article, I respond to several criticisms of that book, primarily engaging with leftist critiques of pensions as somehow fatally compromising the interests of workers. I argue that while these critics of labor’s capi­tal make some reasonable points, none justifies a retreat by labor from implement­ing capital strategies or the wholesale abandonment of the current pension regime.

The idea that labor’s capital can be used to advance the interests of labor has been around for decades. At the theoretical level, labor can use the power inherent in shareholding – vote, engage, sue, sell – to influence its inves­tees in ways that advance worker interests. Some of the empirical evidence suggests that labor’s capital undermines labor. But other evidence suggests the oppo­site – that it can advance the interests of labor if properly deployed. Struc­turalist critiques that insist labor’s capital is playing a rigged game, that it can only contribute to forces that are hardwired to undermine workers, have failed to explain those historical instances when labor’s capital has fulfilled its promise. Those instances include implementation of responsible contractor policies favoring union labor in construction and real estate projects, generating both financial returns and new pension contributions. They also include shareholder proposals and proxy voting that directly and indirectly benefit workers.

In addition, to the extent that the exercise of labor’s capital to date has disappointed the high expectations of its advocates – and not every­one agrees it has – plausible culprits are shareholder primacy and an exces­sively narrow interpretation of fiduciary duty. Both of these constraints have been seriously contested in recent years. Stakeholderism is challenging shareholder primacy both rhetorically and in reality, and a proper and more capacious view of fiduciary duty is reemerging. The anti-ESG backlash is itself the best possible evidence that labor’s capital can be deployed in ways that critics are far too quick to dismiss. The fact that anti-ESG advocates defend their position by reference to protecting jobs is itself a significant and telling departure from its earlier, returns-only view.

No doubt, there are valid criticisms of labor’s capital.  But if properly deployed,  it remains a potent weapon for workers to exercise voice in capital markets and corporate boardrooms.

This post comes to us from Professor David H. Webber at Boston University School of Law. It is based on his recent article, “Should Labor Abandon Its Capital? A Reply to Critics,” available here.