Reforms Could Embolden Employees
The truth about the reforms being rushed into law by Congress or commanded by the New York Stock Exchange is that they will shift power and influence to the true owners of U.S. public companies.
The owners are the more than 100 million Americans who hold more than $5 trillion worth of company stock through their pension funds, retirement plans and individual retirement accounts.
Through their retirement investments--along with about $2 trillion in the old-style defined benefit or guaranteed pension plans of large corporations, unions and state and local governments-- U.S. workers own more than 60% of the stock in all U.S. public companies.
Yet they have not exercised the power and authority that come with ownership, ceding control to corporate executives to manage companies as they see fit.
But a transfer of authority from executive suites to representatives of the shareholder-employees is occurring as Americans grow concerned about the erosion of their retirement savings.
“This summer will be a watershed period” for changing the ways companies are managed and report to shareholders, says John Biggs, chairman and chief executive of TIAA-CREF, the Teachers Insurance and Annuity Assn.-College Retirement Equities Fund--the nation’s largest pension fund, with more than $270 billion in assets.
Congress has approved legislation to crack down on misleading accounting and management practices and to hold corporate chief executives more accountable for the facts and figures reported to shareholders and the Securities and Exchange Commission. Independent directors will assert authority in company boardrooms.
And managers of the investment funds of millions of ordinary workers will have to “wake up and recognize their fiduciary obligation to represent the shareholders,” says Biggs, who has worked for the reforms now being written into law or mandated by the New York Stock Exchange and individual companies.
Change will come at a cost. For example, accounting changes that would require charging stock options as expenses could reduce earnings and probably stock prices for many companies.
But the executives have only themselves to blame. In many big companies with defined benefit pension plans, management failed to make contributions to their pension plans for several years because rising stock values had swelled the plans’ assets.
They put the money saved from pension plans into reported earnings, thus hiking their company stock price--and their own income.
But now, after 2 1/2 years of stock market losses, guaranteed pension plans have a huge shortfall that must be covered with catch-up contributions. Those contributions could total more than $70 billion and reduce the earnings of major U.S. companies in the next few years, says Robert Arnott, head of First Quadrant, a Pasadena firm that manages pension fund investments.
The effect of these charges and others to correct misleading accounting could reduce potential average returns on stock and mutual fund investments 3% to 4%, or roughly half the returns that were available in the late 1990s, Arnott says.
So the real impetus for reform at this time is not a “few bad apples” committing fraud, but the fact that corporate managements’ abuse of the system was widespread and has endangered the retirement savings of American workers.
To understand the context of what’s happening today, look back to a previous shift in responsibility. Through the 1970s, almost all pension plans were of the defined benefit or guaranteed variety.
But poor investment performance in the inflationary ‘70s imposed on U.S businesses greater and greater costs of maintaining such pensions.
So in the early 1980s, many companies began to foster new kinds of pension plans in which employees would invest in mutual funds or company stocks and the company would make matching contributions--but without any guarantee that beneficiaries would receive a fixed pension on retirement.
“Corporate America decided that defined benefit plans were simply too expensive, so they would convert to defined contribution plans under the rising market propaganda that they were freeing individuals to invest for themselves,” says Robert A.G. Monks, a longtime campaigner for corporate reform and head of the federal pension fund protection agency under President Reagan.
Employees took on the risks
but did not get much of the responsibility for managing the company or keeping it in sound financial shape. And the managers of investment funds seldom challenged corporate managements “because they depended on them for business,” says Biggs of TIAA-CREF, an 84-year-old organization that administers defined contribution pension plans for college personnel.
But that imbalance is changing because of the ongoing stock market downturn and the sheer weight of employee ownership.
Participants in defined contribution plans now number 58 million, with 42 million more covered by guaranteed or defined benefit plans and additional tens of millions invested in U.S. markets through IRAs. The constituency for reform is overwhelming.
New laws regulating corporate behavior will bring about reforms, but more meaningful changes will come as boards of directors and shareholders become more actively involved in company oversight, says Nell Minow, editor of the Corporate Library, a Web site devoted to corporate governance issues.
She commends the New York Stock Exchange proposals that would require directors to assert their authority and that would subject management stock awards to shareholder votes.
The balance will change, as CEOs operate under tighter direction from their boards and from the managers of the investment funds that own the stock. Investment managers will take a more active role in setting corporate policies covering management, compensation, benefits and other issues.
Reforms, which may sound merely technical, have a proud history of effectiveness, beginning with the original reforms after the market crash of 1929 that brought regulation--and integrity--to investment markets.
Subsequent reforms through the decades have succeeded in shoring up that integrity--a priceless asset--and in protecting the interests of the owners of U.S. business. These owners increasingly have been the very employees of U.S. business, who now are being emboldened to assert their authority.
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James Flanigan can be reached at jim.flanigan@latimes.com.
