Agency Costs, Corporate Governance and the American Labor Union

Abstract

Acute agency costs exist in unions as they do in other complex organizations. Specifically, union officials are not perfect representatives of the rank-and-file workers they ostensibly represent. Far less attention has been paid to addressing the agency costs in unions than has been paid to addressing agency costs in the context of public corporations, where the separation of share ownership and managerial control long has been the subject of intense scrutiny by academics and policymakers. By contrast, context, concrete suggestions for confronting agency problems in unions are few on the ground.

This Article attributes the secular decline in union membership and power largely to unions own inability to control agency costs. Specifically, workers who think that unions are corrupt and incapable of faithfully representing their interests in the workplace rationally will eschew union membership. The lack of focus on agency costs in the union context appears to be based on ideological and political considerations that tend to conflate the interests of workers with the interests of union officials, notwithstanding the fact that these interests often diverge in significant ways with workers’ focused on job security, wages and working conditions, and union officials focused on maximizing the private benefits of office.

By way of solution, this article proposes a strategy of policy arbitrage consisting of identifying effective mechanisms for controlling agency costs in the corporate context that can be transferred to the union context and showing how such arbitrage could be accomplished. I identify four corporate governance mechanism as particularly promising candidates for import into the union context. First, proxy advisory firms could be employed to provide rank-and-file workers with high quality advice about how to vote in union elections. Second, existing disclosure obligations under the Landrum-Griffen Act should be both enhanced to include better disclosure of union officials’ compensation and “weaponized” by providing rank-and-file workers the right to vote up-or-down on such compensation through the provision of what are known in the corporate context as “say-on-pay” voting rights. Third, following Securities Exchange Act Rule 14a-8, union voting procedures should be reformed to give workers the right to make shareholder proposals that are distributed, along with the union’s voting materials, at union expense, to workers for their approval. Allowing rank-and-file workers to make direct appeals to other rank-and-file workers would allow workers to recommend internal corporate governance reforms of unions and empower them to nominate rival slates of union directors and officers for their unions. Finally, following well-established norms of corporate governance, independent directors should be introduced to union boards of directors and the responsibility for nominating union directors, determining compensation for top union officials, setting internal governance rules, and selecting the union’s independent, outside auditors should be removed from the board as a whole and delegated to committees of these independent board members.

Keywords: labor law, labor unions, corporate governance, agency costs

JEL Classification: D31, D63, K20, K22, K23, J50, J51, J53, J00, J01, J21, J24, J08, M14