All Roads Lead To Wall Street
All Roads Lead To Wall Street
Calls for unions and activists to transform Wall Street from the inside have proliferated since 2008. But when progressives organize as shareholders, their good intentions inevitably run up against a fundamental obstacle: the bottom line.
In the wake of the financial crisis that erupted a decade ago, a new word entered the American lexicon: financialization. Once the province of niche leftist theorists, the term now graced the pages of the Wall Street Journal and the Financial Times, where it told a broader story of what went wrong. It wasn’t just a few overzealous bankers, but a widespread economic movement that produced the crisis. As even some mainstream economists concluded, finance had gone too far.
The popular idea of financialization reads as a kind of conquest, the proverbial vampire squid pushing its tentacles into every nook and hollow of society. Student debt, subprime mortgages, municipal privatization—all seem part of a comprehensive seizure of everyday life by Wall Street. There’s an entire subgenre of scholarly work on the financialization of x: poverty, law, food, education, nature, art, life. This story meshes with the well-worn idea of finance as fundamentally parasitic.
But this picture of financialization is incomplete without its countermovement. Finance hasn’t just extended its borders; other parts of society have come to it. Over the past generation, elements of labor, activism, and law have all taken a sort of pilgrimage to Wall Street. Unions set up offices devoted to shareholder issues. Pension funds became heavyweights in boardroom battles. Activists began lobbying banks to advance their pet issues. Securities law stepped in where ordinary white-collar enforcement gave up. This is the other side of financialization: the nonfinancial inviting itself into the power centers of finance.
The distinction is not trivial. Those who worry about the role of finance often treat it as adjunct to the productive economy. We have economists fretting over finance versus the “real” economy, and studies (from the IMF, no less) diagnosing nations with Too Much Finance. The problem then becomes one of “restraining” finance, as one would a rash.
But if we acknowledge the countermovement, the way social and political actors have bent themselves toward finance, the question is less one of restraint than wholesale restructuring. As long as political actors continue to require financial means for their social ends, the economy will remain financialized. Calls for labor and activists to dial up their engagement with Wall Street, which have proliferated since 2008, ultimately bolster the power of the financial system in its central task: to supplant democratic control with market logic.
Perhaps the clearest sign of financialization’s countermovement is the paradoxical emergence of pension funds as active enforcers of discipline and efficiency in the nation’s markets. As finance has spread over the American economy, labor—with its nearly $6 trillion in retirement assets—has made itself a crucial player within the investing community.
The result isn’t quite the “pension-fund socialism” imagined by business theorist Peter Drucker, who in 1976 worried that pension ownership of a quarter of the stock market made the U.S. “the first truly ‘Socialist’ country.” Nor do pension funds resemble the “Proxies for People” campaign proposed by Saul Alinsky, in which organizers would coordinate mass proxy votes in shareholder meetings—”the razor to cut through the golden curtain” of corporate management.
The system that has emerged instead, with all potential and contradictions, is ably documented in Boston University law professor David Webber’s new book, The Rise of the Working-Class Shareholder: Labor’s Last Best Weapon.
Webber argues that labor’s future depends on wielding the pension fund as a political cudgel. Pensions and their managers, he writes, represent “the only institutions and activists that have consistently delivered tangible benefits to working-class people in this country for decades.” As organized labor faces existential threats—particularly following the Supreme Court’s Janus decision—pension assets represent “a large stick lying on the ground, waiting to be picked up.”
It’s not that this weapon hasn’t been tested. During the last century, private-sector unions fought to control pension assets and to finance to labor-friendly projects—initiatives eventually stymied by anti-union legislation. Public pension funds have long promoted fair labor practices, local economic development, and even public housing finance. What’s changed is the turn from offering carrots to wielding sticks. Webber surveys the myriad lines of attack already taken by pension and union funds—or in economist Teresa Ghilarducci’s words, “labor’s capital.” Their influence today derives not only from sheer size, but from active interventions in markets.
In the late 1980s, public pension trustees began taking their shareholder responsibilities more seriously. Organized labor had used its financial power sporadically in preceding decades, through benefit trusts and plans managed jointly with employers (together a small share of labor’s capital). But in the 1990s organizations like the SEIU and the Teamsters set up special offices dedicated to shareholder advocacy. “There is no more important strategy for the labor movement than harnessing our pension funds and developing capital strategies so we can stop our money from cutting our own throats,” declared Richard Trumka in 1996.
In recent years, labor’s capital has scored a number of wins in the financial sphere: pushing private equity to commit to union-friendly projects; pressuring hedge funds to stop funding right-wing advocacy groups; lobbying for the 2010 Dodd-Frank financial reform bill to include measures highlighting executive pay; and helping rein in the imperial power of CEOs.
But the greatest victories have been in the boardroom. One direct way to bend the corporate will is to challenge its board of directors. Yet company bylaws have long made it practically impossible for anyone but the company’s own nominees to get on the ballot. The solution is proxy access, a policy that makes it feasible for investors to put their own challengers in the running. In 2014 a group of public pension funds led by the $160 billion New York City Employees’ Retirement System began pressuring companies to adopt proxy access, along with environmental and diversity policies. The campaign was a surprise success: The share of S&P 500 companies granting proxy access rose from 1 percent in 2014 to 65 percent today.
To Webber, such successes signal that pension funds are “the new sheriffs of Wall Street.” But the proxy-access victory also revealed the contradictions underlying this strategy. Crucially, the initiative didn’t upset capital writ large. On the contrary, as a Securities and Exchange Commission study later found, the first seventy-five stocks targeted by the coalition subsequently enjoyed an abnormal rise in stock prices. The investing class evidently values boardroom democracy, even if they’re less willing than pension funds to act on it. (For many institutions, this is about conflicts of interest: a mutual fund looking to invest a company’s 401(k)s probably doesn’t want to antagonize corporate management by demanding new bylaws or challenging incumbent directors.)
Labor’s capital thus fills a niche in financial markets. Pension trustees are naturally situated to antagonize management, yet because they don’t threaten profits, other investors can vote alongside them when convenient. This dynamic is evident in pension funds’ relative willingness to sue companies over insider trading and other misdeeds harmful to investors.
Yet such influence is, at best, attenuated. At worst, it leaves unresolved the basic tension between labor and the profits that sits at the heart of the pension system. The most dramatic illustration of this conflict arises in those rare cases when public-sector pension funds stay invested in companies that, following privatization, take the jobs of those same public pension beneficiaries.
Webber recounts the experience of public school employees in Louisiana and Massachusetts who saw their jobs handed to the contractor Aramark, whose stock their pension funds held. The Louisiana fund’s investment manager defended holding onto the investment; workers who saw their salaries halved and benefits slashed presumably enjoyed infinitesimal capital gains in their pension portfolios thanks to Aramark’s good fortune.
Occasionally, however, shareholder campaigns and on-the-ground labor struggles do coincide. Webber’s argument leans heavily on the 2003 strike of Safeway workers unionized with United Food and Commercial Workers. As it happened, Sean Harrigan, a top UFCW official, also served as president of the California Public Employees’ Retirement System, or CalPERS, the largest pension fund in the country. After the strike ended (unsuccessfully), CalPERS joined a shareholder campaign targeting Safeway’s CEO and two board directors. In the end, Safeway replaced three board members and enacted better governance measures. Compared to the “trench warfare” of the strike, Webber writes, the shareholder campaign was “closer to a drone strike.”
Yet Safeway remains an exception, largely because federal law requires trustees to base investment decisions in maximizing returns. Stock pickers may consider corollary issues like labor relations, but not if they threaten the bottom line—and even then, it’s risky. That’s why Harrigan, who Webber implies helped orchestrate the Safeway shareholder revolt, soon lost his position at CalPERS.
Webber’s central argument is that pension trustees should have more latitude in choosing investments—for instance, divesting of companies that privatize the jobs of fund participants. But these cases are outliers. The more fundamental conflict is that pension fund returns rest on restraining the wage and benefit demands of private-sector workers. As Ghilarducci has written in a coauthored paper: “In most cases, labor is left with the paradox: to promote its interests as labor may mean to harm its interests as owner—and vice versa.” Despite Webber’s attempts, it’s impossible to square this basic contradiction.
Where Webber’s book shines is in demonstrating how labor’s capital already influences the working of the financial system, notably in its efforts to improve governance. Yet it speaks to the ascendancy of finance that labor now devotes significant resources to ensuring the orderly flow of the returns on capital to its owners. If management were labor’s only adversary, pension funds might serve as a reliable weapon. But when it comes to confronting shareholders as a class, labor’s capital is more ally than antagonist.
The Activist Manifesto
Shareholder ferment has hardly been limited to labor. In activist circles, organizations increasingly address their social and economic concerns to Wall Street. Shareholder meetings, particularly at banks, have erupted with protest over everything from climate change to human rights to “anti-religious bigotry.” Earlier this year, a frustrated JPMorgan CEO Jamie Dimon called his annual meetings “a joke . . . hijacked by people who have only political interests.”
The history of the term “activist shareholder” illustrates these shifting tactics. The phrase arose in the 1960s, when Vietnam protesters, environmentalists, and religious groups began crashing annual meetings to challenge polluters and war profiteers with shareholder resolutions and protest chants. Critics like Saul Alinsky dismissed these activists as little more than “minor irritants,” but the success of the South Africa divestment campaign indicated their potential.
They didn’t stay in the limelight for long, however. As corporate raiders entered the scene in the 1980s, “activist shareholder” transformed from liberal do-gooder to Gordon Gekko. In financial circles, “activist” lost its political valence and came to mean any large investor, often a hedge fund, seeking corporate change through stock maneuvers. When a CNBC host barks the word activist, this tends to be who they have in mind.
Now, somewhat farcically, the term has come full circle. This year, authors Frank Partnoy and Rupert Younger—a financial law professor and a partner in a corporate advisory firm, respectively—published The Activist Manifesto, a full revision of The Communist Manifesto that “imagine[s] what might happen if shareholder activists joined forces with political, social and corporate activists as a united front.” The authors explained in the Financial Times:
There is a strand of activism running through not only the Arab Spring, Trump, Brexit and Macron, but also through hedge funds pressuring underperforming companies, companies themselves advocating for change, environmental groups targeting polluters and social platforms such as Change.org and so on.
The document itself is no more coherent. The authors maintain their predecessors’ concern with inequality—as well as three-quarters of the original text—but their attempt to recast the Manifesto in terms friendly to capitalism leaves it garbled and unconvincing. “Bourgeois and proletarians” becomes “Haves and Have-Nots.” Other changes are simply baffling, such as “wage labor” to “democratic rhetoric.” The confused definition of “activist” leads to a vision of Sierra Club boosters, Egyptian Salafists, and hedge fund titans closing ranks around shareholder resolutions at Fortune 500 companies calling for, say, gender diversity on the board.
Yet the exercise does has one useful outcome: its identification of finance as the locus of social change. Much of the Activist Manifesto would be laughable if so many progressives had not already embraced the same message.
The Manifesto continues a long trend of borrowing terms from emancipatory movements and applying them to finance. In 2009, Chuck Schumer sponsored the Shareholder Bill of Rights Act. In 2012 came the “Shareholder Spring,” a wave of shareholder votes against CEO pay packages. The battle for proxy access comes under the heading of “corporate suffrage”—Webber calls pension funds “the new Suffragists.”
Meanwhile, advocacy groups increasingly use stockownership to pursue progressive goals. SumOfUs, founded in 2011, describes itself as a community of people devoted to “investing their money to take on the corporations that put profit over people and planet.” In 2013, billionaire hedge fund manager Paul Tudor Jones formed JUST Capital, which ranks stocks based on company ethics. For less engaged investors, every major asset manager now markets funds that focus on environmental, social, and corporate governance issues. These ESG funds now house about a quarter of professionally managed assets invested worldwide.
Activist investors’ main tool is the shareholder resolution, which nearly any investor with at least $2,000 in stock can propose. Though non-binding, resolutions serve to convey investor priorities to management. This year, a consortium led by a group of nuns has won two campaigns to have gun manufacturers issue reports on the risks of their business. And dozens of energy companies have faced calls to assess climate impacts on their business. Even ExxonMobil has given in to these demands. Yet Exxon’s case shows how Pyrrhic these victories can be. When the company released its first analysis this year, one financial research firm called it “a finely crafted public relations piece designed to deflect criticism and placate investors.”
Investor proposals have an even more fundamental limitation. Although the SEC allows shareholders to weigh in on executive pay and matters of social policy, their resolutions cannot infringe upon the “ordinary business operations” of a company, the nuts-and-bolts decisions that make up the core of a profit-making enterprise. Boardroom gadflies might cajole ExxonMobil into putting out a report on its climate preparedness, but they can’t force it out of Canada’s oil sands or the deep seas of the Arctic. Following the resolution on issuing a gun violence report, the CEO of Sturm and Ruger defiantly declared, “What the proposal does not and cannot do is force us to change our business.”
Still, shareholder resolutions can be a hassle for CEOs. That’s why this year the business lobby finally felt moved to engineer a grassroots group to parry investor activism. The newly minted Main Street Investors Coalition, backed by the National Association of Manufacturers, claims ordinary mom-and-pop investors have been “marginalized for too long,” and calls for managers to “focus on maximizing performance ahead of pursuing social and political objectives.”
Those objectives can be quite specific. In recent months, New York Times business columnist Andrew Ross Sorkin has led a campaign to cajole banks and mega-investors into using their market power to fight gun violence—specifically by acquiring the financially troubled Remington Outdoor and either euthanizing it or transforming it into “the most advanced and responsible gun manufacturer in the country.” Soon after the school shooting in Parkland, Florida, a headline read: “Big Investors Have Clout. They Can Use It With Gun Makers.” Later, Sorkin’s appeal grew more direct: “Please, Please Buy This Gun Company.”
When the notion of the activist investor first arose, such demands would have seemed fantastical. In 1966, Marxist economists Paul Sweezy and Paul Baran declared the idea of shareholder control of corporations “a dead letter,” a notion echoed by John Kenneth Galbraith. Since then, however, investors have consolidated their claims over the productive capacity of the economy, and activists have accepted Wall Street as an avenue for social change. These forays may get results here and there, but they rest on one crucial limitation: they can’t touch profits.
All Law Is Securities Law
Financialization has seen perhaps its most surprising countermovement in law enforcement. The legal apparatus now addresses a wide variety of white-collar wrongdoing—from public disinformation campaigns to sexual harassment coverups to antitrust violations—through the narrow lens of securities law.
This phenomenon has been encapsulated in the maxim “all law is securities law,” coined by Matt Levine, whose popular Bloomberg newsletter Money Stuff gently ribs Wall Street while providing some of its wittiest apologia. Levine, a former mergers and acquisitions lawyer and Goldman Sachs investment banker, explains: “If a public company does a bad thing, chances are it has also violated the securities laws by failing to disclose that bad thing, and so the Securities and Exchange Commission has a universal jurisdiction to investigate whatever badness it can find.”
This could just be the path of least resistance. As Jesse Eisinger carefully documents in The Chickenshit Club, the organizational complexity and legal might of corporate America, combined with some lucky breaks in the courts, have raised the costs of prosecuting individual corporate wrongdoers. Congress, meanwhile, has lost both the ability and the desire to legislate against novel corporate misdeeds. When News Corp secretly spends over $30 million to cover up its executives’ sexual harassment, or when ExxonMobil is revealed to have lied for decades over its knowledge of climate change, nonfinancial regulators have little to offer.
Into this vacuum step financial regulators. Prosecuting a securities law violation over failure to disclose doesn’t require the government to prove a separate crime occurred. It suffices to show that the underlying issue was material to shareholders—that is, potentially damaging to the bottom line, reputationally or otherwise. Thus probes into News Corp’s settlements and ExxonMobil’s climate lies follow shareholder rights law. In this context, the problem with Roger Ailes’s decades of abusive behavior or with Exxon’s similarly long record of covering up climate science isn’t the harm they caused in themselves—it’s that they misled shareholders.
Levine sees the issue in terms of expediency:
In a world of dysfunctional government and pervasive financial capitalism, more and more of our politics is contested in the form of securities regulation. Disagreements about climate change and gun control have become matters of securities law; problems like income inequality and blood diamonds have been addressed through securities-law disclosure requirements.
Still, there’s a simpler way to understand “all law is securities law.” Since the shareholder revolution of the 1980s, investors have become the most powerful stakeholders in American business. Nearly a third of wealth held by the top 1 percent consists of corporate equity. It should be no surprise that the regulatory apparatus bends in this direction.
One thing that all of these strategic movements into finance share is their ultimate impotence. In each case the active players make a show of challenging corporate and financial power, but the field is tilted against them. SEC penalties become a simple cost of doing business. Resolutions put forward by shareholder activists cannot, by law, affect profitability. Pension funds run up against the limits of fiduciary duty and most primordial of capitalist antagonisms, the capital-labor split.
Yet the growth of these tactics reflects a rational response to the tectonic shifts in the structure of the political economy underfoot. Such a strategic movement exists also on the left. In Jacobin, J.W. Mason has outlined a program to socialize finance that includes objectives like postal banking, public credit ratings, and the disempowerment of shareholders. In terms echoing John Roemer’s market-socialist plan, People’s Policy Project founder Matt Bruenig has championed an American social wealth fund, taking the growth of low-cost index funds as a “proof of concept.” (It’s worth noting the plan has been criticized for downplaying the familiar capital-labor conflict that pension funds face.)
In these accounts, subverting financial power becomes an end in itself, rather than a tactic for achieving some other goal, as in Webber or Partnoy and Younger. If the outsized power of finance underlies the problems faced by labor, environmentalists, and egalitarians of various stripes, then there seems little to be gained seeking admittance into the highest levels of financial marketplace.
Owen Davis is New York-based journalist who focuses on finance and economics.