Friday, August 22, 2003

Corporate Backlash

It started for me in 1997. There was a law review article outlining four arguments against the constitutionality of the Massachusetts Burma Law, which I had helped enact. Later, the corporate-funded National Foreign Trade Council used three of the four arguments in a lawsuit against Massachusetts. (Sadly the Supreme Court agreed with one of the arguments in 2000 and the law remains struck down to this day.)

Why do I mention this? Because I see a similar pattern today. When corporations fear the effectiveness of a law or a campaign that holds them accountable, they seek to take that tool away.

What concerns corporations today is the increasingly effective collaboration between nongovernmental organizations (NGOs), unions, foundations and socially responsible shareholders. There was a recent hue and cry at the American Enterprise Institute (AEI), a prominent corporate-funded neoconservative thinktank. Subtitled "Nongovernmental Organizations: The Growing Power of an Unelected Few," the powwow featured presentations that dissected the power of this vast left-wing conspiracy.

Much of the material was old rope simply cut and pasted from the presenters' previous work. However, one piece stood out for me: the paper by George Washington University professor Jarol Manheim entitled "Biz-War: Origins, Structure, and Strategy of Foundation-NGO Network Warfare on Corporations in the United States." The article outlined how shareholders, NGOs, foundations and unions have formed a network that has effectively harnessed investor pressure to hold corporations accountable. The piece even included a diagram illustrating the links between all the parties. As someone with over ten years working in this field, I can attest to its accuracy.

Since this AEI event in June, I have been waiting for the other shoe to drop. Having decried the power of NGOs and their shareholder allies, the corporations will next propose and then campaign for new legislation, lawsuits and PR efforts that seek to take away this key tool for corporate accountability.

One of the first soft thunks is an opinion piece in the March 2003 Harvard Business Review. "Reining in Activist Funds" is the title and prescription. In it the authors - Tracie Woidtke, Leonard Bierman and Christopher Tuggle - argue that shareholder activism by big public employee pension funds such as CalPERS "can actually depress the market value of companies the funds invest in." In their words: "Our review of the academic literature finds an array of studies suggesting that the stock market reacts negatively to firms that shareholder proposals that are apparently politically motivated."

Scary stuff so it might seem. However, I would imagine that, under expert scrutiny, the article's facts may be disputable or dated and the methodology flawed. This is no disinterested academic inquiry. This is just advocacy disguised as research and designed to justify the authors proposals to try to dismantle shareholder advocacy by public pension funds.

Woidtke et al propose to limit the the presence of elected officials on the boards of public employee pension funds. This aims to curb the power of elected state and city treasurers. This is aimed squarely at city and state treasurers. Not by concidence, these would include the treasurers of Connecticut and Vermont as well as the comptrollers of New York and New York State who, for example, have used their clout as pension fund trustees to press corporations to address their contribution climate change.

In addition, the authors propose to increase representation by fund beneficiaries and members with "demonstrated investment expertise." (The authors point to an Arizonan state statute as an "excellent model.") Sounds as good as Mom and apple pie, doesn't it?

Woidtke et al play to conservative-stoked antipathy to government and frame their arguments in terms of limiting "politicians." Of course, the effect would be to limit the role of the only pension funds trustees democratically accountable to taxpayers who pay for public employee pension plans.

Of course, one way to increase the representation of the pension fund beneficiaries would be to increase the role of union representatives as their accountable representatives. However, that is probably not what Woidtke et al have in mind.

The authors also propose increased regulation of shareholder proxy proposals filed by public employee pensions funds. This would include making it harder to re-submit proposals that do not draw significant shareholder support. Moreover, they recommend that shareholders filing resolutions should have to pay some of the costs to re-submit them after they have failed twice.

Corporations don't like the mess and cost of the very limited form of shareholder democracy that we enjoy in America. Corporate accountability costs corporate money. Why not just do away with democracy as an unnecessary burden on business?

The first of these proposals is not new. In 1997, a similar proposal by the Securities & Exchange Commission (SEC) was quashed after an outcry by public pension funds and small shareholders.

Corporate accountability advocates will need to watch out for - and defeat - state legislation in key states along the lines of the Arizonan model. Such legislation could well be sneakily introduced and largely enacted before it is widely known. Similar vigilance is required around proposed changes in SEC regulations around the use of shareholder resolutions.

As always, the price of liberty is eternal vigilance.

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