Labour’s Paradoxical Interests and the Evolution of Corporate Finance
| Date | 01 March 1997 |
| Author | James Hawley,Andrew Williams,Teresa Ghilarducci |
| Published date | 01 March 1997 |
| DOI | http://doi.org/10.1111/1467-6478.00035 |
Because both unionized and non-union workers have pension fund
investments composing about 35 per cent of United States equity, workers’
role in the economy has a new dimension. This paper explores whether or
not this new role – employees as capital ‘owners’ – can be used by workers,
their organizations and representatives to raise labour standards in the form
of productivity-linked wage increases, improved working conditions, greater
job stability, and enhanced education and training, while at the same time
increasing economy-wide productive investment and therefore long-term
sustained growth. Is it possible for employees to leverage ‘labour’s capital’
to the benefit of workers as a group?
The rise of what we term ‘fiduciary capitalism’ has given institutional
shareholders new status and power over management. By fiduciary capitalism
we mean the dramatically increased importance of various fiduciary insti-
tutions (for example, mutual funds, pension funds, insurance companies,
bank trusts) which must, in the performance of their legal and ‘prudential’
duties, act in the interests of their ultimate beneficiaries in the ownership of
publicly traded equity and debt. However, though workers have entered
the manager-owner nexus as pension-fund beneficiaries, it is through the
emergence of fiduciary capital, the exercise of power and influence, that
labour’s traditional and narrower interests may be significantly altered by
their role as property owner.
The first part of the paper sets up this paradox and defines some dimensions
of this new position by examining labour’s role (and often lack thereof) in
United States corporate governance developments. The second part of the
paper examines whether corporate governance affects financial performance,
and whether institutional investors (and pension funds in particular) have
the ability to develop and implement plans aimed at solving problems such
© Blackwell Publishers Ltd 1997, 108 Cowley Road, Oxford OX4 1JF, UK and 238 Main Street, Cambridge, MA 02142, USA
* Department of Economics, University of Notre Dame, Notre Dame, Indiana
46556, United States of America
** Graduate Business Programs, Saint Mary’s College of California, PO Box
4240, Morage, California 94575, United States of America
26
JOURNAL OF LAW AND SOCIETY
VOLUME 24, NUMBER 1, MARCH 1997
ISSN: 0263–323X, pp. 26–43
Labour’s Paradoxical Interests
and the Evolution of Corporate Governance
TERESA GHILARDUCCI,* JAMES HAWLEY,**
AND ANDREW WILLIAMS**
27
© Blackwell Publishers Ltd 1997
as capital gaps for medium-size firms and to change management behaviour
that leads to longer-term investment, especially in augmenting employee
skills, training, and education, and in establishing greater loyalty between
the firm and its employees. Specifically, we investigate the question of whether
it is possible to simultaneously advocate firm-specific employee interests
(‘union’ interests in the older, narrow sense) while also pursuing employees’
long-term, diversified economy-wide interests as beneficial ‘owners’. In this
latter role, for example, employees have an interest in aggressively pursuing
technological change and innovation although it may be both job displacing
and job creating, while in the former role there is the inherent conservatism
of traditional unionism. This section also reviews the effect of corporate
governance reform on share prices and on more fundamental management
practices. The final section of the paper raises some issues from recent
European experiences.
LABOUR AS CORPORATE GOVERNANCE PARTICIPANT:
SOME QUESTIONS
One of the enduring findings of the industrial relations literature1is that
although unionized firms have higher productivity, the presence of a union
lowers the profit rates of firms. When strong unions represent workers in
innovative, high performing firms, the outcome tends to be positive in terms
of the growth of the firm, as described in macro-political-economy models
such as John Kenneth Galbraith’s notion of countervailing power,2or in
more micro-based approaches that show that unions and secure, represented
workers add value to corporations through co-operation.3Yet, in neither of
these models is the result necessarily wealth maximization for shareholders.
The positive effects are high skill levels, stable job growth, and a more stable
balance of power between labour and management. Yet, to the degree that
labour’s interests are those also of beneficial long-term owners, some
important macro trade-offs will confront employees and their representatives.
The growth of fiduciary capitalism re-concentrates what was formerly
widely dispersed equity ownership in the hands of a relatively small number
of very large institutional decision makers. The fiduciary duties of these
institutions increasingly mandate them to exercise the power of ownership.
However, because these institutions are so large, collectively they effectively
own a large fraction of most major companies. In the 1980s many institutional
owners (including pension funds) participated in hostile takeovers, ousting
management which did not take every action to maximize shareholder
wealth. Indeed, under the then existing interpretation of the law, private
pension funds were legally obligated to do so as an exercise of their ‘prudent
person’ role.4This harsh discipline often required dramatic sell offs and lay
offs to get quick cash to pay the debt of the new buyer. The market for
corporate control thus threatened both management and existing labour
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