Exercising the 'Governance Option': Labor's New Push to Reshape Financial Capitalism

Abstract

New forms of stockholder activism call into question longstanding assumptions underpinning our system of corporate governance. Scholarship has largely failed to explain the basis for these new forms and, in particular, the differences among activists. Activists are not one undifferentiated mass. Small activist hedge funds, as well as large union sponsored or influenced pension funds, both use governance mechanisms to influence corporate behavior. Pension funds, however, have a different set of incentives than hedge funds. The beneficiaries of these funds cannot easily switch between consumption and investment by buying or selling their holdings in firms. Thus, instead, institutional investors exercise an embedded “governance option” found within shares of common stock to engage with firms. Organized labor, in particular, now uses its influence in pension funds to motivate progressive change by corporations. This form of activism has the potential to alter the balance of power between workers and capitalists in the era of financial capitalism.

Keywords: firm, market, financial capitalism, corporate governance, stockholder activism, pension funds, labor unions