Union Pension Activism: In Whose Best Interests?

(December 28, 2012) – Union pension funds manage more retirement assets in the United States than public pensions—$3.5 trillion to $2.8 trillion.

Union pensions may be using the financial clout that comes with these assets to inappropriate ends, according to two researchers from Stanford’s Rock Center for Corporate Governance.

David Larcker and Brian Tayan’s recently published paper, “Union Activism: Do Union Pension Funds Act Solely in the Interest of Beneficiaries?” looks into shareholder activism by union retirement systems.

“Shareholder activism is an important mechanism for imposing market discipline on the decisions of corporate executives and directors, and union pension funds take an active role in this process,” the authors state. “Are union-sponsored proposals made solely in the interest of their pension beneficiaries? Or are they used to further social and political priorities that are important to union leadership?”

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In exploring these questions, the researchers point out that the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), for instance, has tended to be active with companies involved in labor disputes.

Between 2004 and 2011, the paper notes, the union group filed six proposals at Comcast, a company targeted by the International Brotherhood of Electrical Workers. “Similarly, the AFL-CIO filed 11 proposals at largely non-union Wal-Mart and Target, while filing only three at unionized grocery store chains Safeway and Kroger.”

Furthermore, Larcker and Tayan go on to point out that the AFL-CIO’s proposals are generally not supported by other shareholders. “For example, a proposal that companies advocate on behalf of US healthcare reform in 2009 received only 5.5 percent support among the 18 companies where the proposal was filed.”

(Of course, the AFL-CIO’s proposals may be unpopular among other shareholders without running counter to union members’ best interests.)

Union pension funds are not the only institutional investors who may get active on behalf of more than increased returns.

Earlier this month, New Zealand’s $17 billion sovereign wealth fund excluded three companies from its portfolio for their roles in the Israel-Palestine conflict. The fund passively held shares in firms that transgressed its relatively strict responsible investing policy due to “their involvement in constructing Israeli settlements…and a separation barrier in the Occupied Palestinian Territories.”

Read Larcker and Tayan’s entire paper here.

(December 26, 2012) – Investment consulting giant Towers Watson is set to acquire Oxford Investment Partners, pending regulatory approval.

This acquisition would substantially boost Towers Watson’s asset management capabilities, bringing it in more direct competition with Mercer as a full-service management/advisory firm. Towers Watson is now responsible for the day-to-day management of over $57 billion for investors globally.

“We are always looking to respond to the changing needs of our clients and bringing OXIP [Oxford Investment Partners] into Towers Watson is another such example,” Chris Ford, Towers Watson’s head of investments for Europe, the Middle East and Africa, said in a statement. “We are meeting the need of clients to gain access to a spread of best-in-class managers across a diverse range of asset classes, but in a simple and cost-effective way. We have been the sole investment advisor to OXIP, and a member of its investment committee, since its establishment in 2006. This acquisition is testimony to the continuing strength of our relationship with OXIP’s investment professionals, who will all remain engaged in managing the OXIP funds.”

The seven-year-old Oxford bills itself as a “boutique wealth management firm,” and manages roughly $1 billion on behalf of pension funds, foundations, and university endowments, among other entities.

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This transaction is the culmination of a six-year advisory relationship between the two financial services firms.

Karl Sternberg, one of Oxford’s founders, said he was pleased with the deal. “We are delighted to be joining Towers Watson as the logical next step in a long and close relationship. We will continue to focus on the business of achieving optimal risk-adjusted returns from a diversified portfolio of assets; something we have not wavered from since we started doing so for a group of Oxford colleges in 2006.”

The financial terms of the deal have not been disclosed. Towers Watson has said the acquisition will not change its earnings expectations for the 2013 fiscal year.