Financial Markets and the Common Good

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Bibliographic details

• Authors: JOSEPH MCCARTIN
• Published: December 1, 2022

Overview

• Article: "Financial Markets and the Common Good"
• Author: JOSEPH A. MCCARTIN
• Publication: F&D Magazine
• Date: December 2022
• Summary focus: Review of Sanford M. Jacoby’s history of US labor’s strategies to mobilize pension-fund capital to influence corporate behavior.

Key findings

• 1970s belief: Labor activists thought mobilizing pension funds could "transform American capitalism" and modify corporate behavior.
• Early external expectation: Management guru Peter Drucker predicted “the accumulation of pension assets would bring socialism to the United States.”
• Main conclusion: Grand dreams of labor transforming corporate behavior through pension-fund investing “never materialized.”

Obstacles and contradictions identified

• Fiduciary duty constraint: Union pension fund trustees had a duty to maximize returns to ensure secure retirements for union members.
• Demographic and membership pressures: As union membership shrank after the 1970s, fewer unionized employers paid into pension funds, increasing pressure on trustees to maximize returns.
• Interest misalignment: Pensioners’ interests did not align neatly with those of active workers and unions; ensuring pensioners’ retirement security could conflict with activist investing.

Case study: CalPERS and the "cookbook"

• Actor: California Public Employees’ Retirement System (CalPERS), described as the nation’s largest public employee pension fund.
• Period: 1990s
• Strategy: CalPERS codified a set of corporate governance principles—labeled the “cookbook”—advocated by pension funds.
• Cookbook principles included:
  • limits on CEO pay
  • board member independence from CEOs
  • greater transparency in corporate financing
• Tactic: Pension funds pooled influence to advance these principles.

Outcomes and unintended consequences

• Mixed results from pension-fund activism:
  • Failed to narrow the compensation gap between executives and their employees.
  • Contributed to a shift in executive compensation from salary toward stock options.
  • Stock options incentivized executives to downsize and outsource work as means of inflating stock prices (and their incomes).
  • Pension funds’ shareholder activism helped legitimize the "shareholder value" worldview in equity markets.
• Systemic implications: The limitations of labor’s financial strategies were starkly revealed by:
  • the 2008 crash
  • the Great Recession
  • the 2010 Dodd-Frank financial regulation legislation, which "largely failed to rectify the dysfunction that labor had fought for decades to correct."

Notable exceptions

• Examples of successful financial activism:
  • Service Employees International Union (SEIU), through its Justice for Janitors campaign, deployed labor’s financial leverage to achieve breakthroughs.

Implications and assessment

• Overall assessment: Achievements of labor’s financial strategies "fell far short of grand 1970s dreams."
• Scholarly value: Jacoby’s volume is described as "unsurpassed as a starting point" for understanding both the urgent necessity and the enormous difficulty of making financial markets more accountable to the common good.

Source: Financial Markets and the Common Good — JOSEPH A. MCCARTIN, F&D Magazine, December 2022.

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• Financial Markets and the Common Good
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  • Financial Markets and the Common Good (PDF)