Is Organized Labor America’s Last Line of Defense?

April 6, 2010 - PRLog -- After a second financial crisis in a decade, due in no small part to corporate corruption, fraud and poor management (Enron, Tyco, Worldcom, Lehman Brothers, AIG, etc., etc.), why is it that the only ones standing their ground against these recent atrocities is organized labor?

The destructive effects of the financial crisis are evident – state and local pension assets declined by 27.6 percent from the end of 2007 to the end of 2008, wiping out $900 billion, according to the Government Accountability Office. The top 100 U.S. corporate pension plans saw their funded status drop by nearly 30 percentage points in 2008, giving up all gains of the previous five years.  American workers lost 40% or more in the downturn - a collective $2.1 trillion disappeared from 401(k) and IRA assets in 2008.

Yet, Americans are pointing fingers at the labor unions as they fight to protect their public pension plans, which have recently been reported as underfunded by trillions of dollars. The 10-year rolling annual rate of return for most of these public pension funds is a scant 3 percent.

In the mean time, corporate America continues to behave badly. Here are three examples of boards behaving badly taken from headlines on March 12, 2010 (Jim Kristie, April 2010):

1.) AIG wants to recoup millions of dollars in retention payments slated for employees who have already left the firm.

What is a board doing approving a multimillion-dollar compensation arrangement designed to reward executives to stay but will still pay them royally if they leave?

2.) The Black & Decker board felt there was no perceived conflict of independence in putting on a special committee charged with appraising the company's acquisition by Stanley Works — which would trigger an enormous payout to Black & Decker's CEO — a member who was significantly invested with the CEO in a personal real estate development.

What is a board doing permitting a director who is in bed with the CEO on a real estate deal to be on a special committee approving a huge payout to him — and not thinking that's a conflict of interest?

3.) What the Wall Street Journal describes as a "scathing report" has just been released on the collapse of Lehman Brothers, alleging transactions designed to distort a clear picture of the financial soundness of the firm; a follow-up statement from a lawyer for Lehman's then CEO, Richard Fuld, is saying: "Mr. Fuld did not know what those transactions were — he didn't structure or negotiate them, nor was he aware of their accounting treatment."

What is a chairman and CEO, well-documented for his hands-on role in running the firm, doing in saying that he had no involvement whatsoever in a tactic crucial to staving off the collapse of his company? Granting that he had no such involvement, why would he issue such a statement anyway — what kind of a reflection is that on his leadership to be claiming ignorance?

Its no wonder shareholder activism has increasingly moved from the fringes to the mainstream. In the current proxy season, activists are filing unprecedented numbers of shareholder proposals, addressing issues that include board structure and composition, the removal of anti-takeover mechanisms, enhanced disclosures on risk, leadership succession and the adoption of shareholder advisory votes on executive compensation.

In some cases, activists are engaging constructively with companies to seek agreeable solutions without the cost and distractions often associated with protracted proxy contests. In other circumstance, the gap between the two parties is too great to overcome and proxy fights and legal disputes seem to be the only recourse available.

But the problems extend beyond the public markets.

Public pension funds expect a 3 percent higher return on private equity investments than public markets. According to data from the Wilshire Trust Universe Comparison Service, the median returns on private equity investments for public pension funds with assets greater than $5 billion were negative 18.8 percent over one year, negative 2.8 percent over three years, and 2.4 percent over five years.

Fees paid to private equity managers and commissions paid to intermediaries have been a source of great frustration for public pension funds.  Private equity funds generally charge fees totaling 2 percent of the money they manage and then take 20 percent of the profits they generate.

When it comes to public pension funds, it appears that everyone on Wall Street has their hand in the cookie jaw.

Today, transparency into public and private companies is amorphous.  Information is often incomplete, irrelevant or outright incomprehensible. Officers and directors resist efforts to improve internal transparency for two reasons: culpability and accountability.

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To investors, information is knowledge, and knowledge is power.  Improved internal transparency from an independent third party arms investors with comprehensive information about the quality of the business and strength of the management team.  This information serves as a check and balance against the information provided by management as well as auditors and outside consultants.  

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