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Safeway

Changing the Math

If the strike I’m about to describe had followed the typical, late twentieth-century pattern, it would have proceeded like this: First, the CEO would announce a steep pay cut for workers. The cut would be so sharp that it would be too demoralizing to return to work without a fight. Although the union leadership would fear failure, it would decide it had to take a chance at success. So the workers would strike. For weeks or more, they would march, and sing, and pump their fists in the air. The CEO would wait and wait, knowing exactly what the strike would cost his workers—more than it would cost him. That’s how he would play it, by the numbers, by the math, the dreaded math that was spreading throughout the body of American labor like a blight. The unions needed something to change the math and couldn’t see what that was. When was the last time labor had the math on its side? The 1950s? Maybe the 1960s? Not anymore. That’s why the CEO would be so confident. In time, the workers would vote to accept his offer and get back to work before things got even worse, to agree to some face-saving concessions and move on with their lives. The forgotten California supermarket strike of 2003–4 played out almost exactly like this, with one critical difference, a difference that lies at the heart of this book. Spontaneously, and almost by accident, that strike revealed a bold way for workers to change the math.

In 2003, Safeway Inc., a unionized supermarket chain facing competition from nonunion workplaces like Wal-Mart, sought to boost profits by cutting benefits for workers. At the time, Safeway operated more than 1,700 stores across the United States and Canada and employed 172,000 people. The company had been paying its workers in Southern and Central California twelve dollars an hour plus health benefits, while capping them at thirty-two hours per week, less than fulltime employment. Workers prized these benefits, which were the primary attraction of a Safeway job, given the low wages and the income cap created by the hour limit. But then the company proposed freezing worker wages and dramatically increasing the percentage of health insurance premiums employees paid, undercutting the main reason to work there. Safeway also sought to shift workers to a health plan that would place much of the risk of future medical-cost inflation on employees and set lower-tier wages for new hires. In October 2003, shortly after Safeway announced these cuts, 97 percent of the company’s employees, represented by the United Food and Commercial Workers union (UFCW), voted to go on strike.¹

At the time, Steven Burd was Safeway’s CEO. Burd took charge of Safeway in the 1990s on behalf of the private equity firm Kohlberg Kravis Roberts & Company (KKR), which had bought the business in 1986. But after KKR took Safeway public, Burd promptly went on a shopping spree, paying $3.6 billion from the company’s treasury to acquire three regional supermarket chains, Dominick’s in Illinois, Randall’s in Texas, and Genuardi’s in Pennsylvania, adding more than three hundred stores.² The acquisitions were catastrophic. Burd paid far more for the chains than they were worth, burdening the company with debt. Sales fell, and the company lost $828 million in 2002 alone, almost all of it driven by these failed acquisitions.³ Burd now faced a crisis of his own making. To get out of it, he hoped to make Safeway’s workers atone for his sins by cutting their pay.

But before making public his intent to cut worker pay, Burd quietly prepared to defend himself and his executive allies from the strike that would certainly follow. In retrospect, his preparations make him look like a medieval king using state-of-the-art techniques to defend against an attack on land without realizing that an attack was also coming by sea. Here, the attack on land was a traditional strike, for which Burd prepared ably. Ironically, these preparations made him even more vulnerable to the attack by sea that followed, a wholly unexpected labor-led shareholder revolt, devised by a combative and innovative union leader named Sean Harrigan.

Burd’s first move was to cash in on his own shareholdings. Upon announcing the strike-triggering pay cut, Safeway’s stock price would certainly fall. Beginning weeks before the strike, and continuing up until one week before he announced the cuts, Burd personally sold $21.4 million of Safeway stock after executing stock options. The company claimed that Burd’s transactions were planned long before the strike, and therefore not barred by insider trading laws. The government apparently agreed, because no insider trading investigation took place.⁴ Not surprisingly, Safeway’s stock price dropped after the strike was announced. Thus, Burd used a legal loophole to sell his shares just before announcing the strike-triggering raid on worker benefits, thereby avoiding the hit to his shares that all other Safeway shareholders would incur.⁵

Also, Burd did not ask Safeway’s executives to take the same pay cut he asked of its other workers. Quite the opposite—in December 2003, two months into what would become a five-month strike by Safeway workers, Burd granted eleven of the company’s top executives stock options worth $10 million. Following standard operating procedure, Burd and Safeway justified these grants by arguing that the company would not be able to function without these 11 crucial employees, though the company struggled mightily to function without the 59,000 striking employees who actually ran the 852 California stores affected by the strike. Steve Westly, the California state controller at the time, offered this understated description of the stock options: “[They were] the wrong message to send workers and shareholders.”⁶

Burd’s preparations for a showdown with Safeway’s workers went beyond announcing the benefits cuts after he completed selling his shares, or buying the loyalty of his management team with stock options. He also entered into a revenue-sharing agreement among Safeway subsidiaries Vons, Albertsons, and the Kroger Company’s store Ralphs, all of which were facing the same strike. The firms agreed to share costs and revenue to cushion the blow of the impending UFCW walkout. The agreement prompted a lawsuit by then California attorney general Bill Lockyer, who argued that it violated antitrust laws.⁷

Most importantly, Burd faced the strike knowing that he could count on Safeway’s board of directors to back him through a long, bitter, and extremely costly fight. His confidence was well-placed because the board was not the least bit independent.⁸ Today, thanks to working-class shareholder activists and others, no publicly held company listed on the New York Stock Exchange (NYSE)—as Safeway was at the time—would be allowed to employ a board like Burd’s; it would flunk the NYSE’s independence requirements. Because business relationships between directors and the company can corrupt and compromise a board’s ability to independently oversee and assess the CEO, the NYSE in 2004 finally required a majority of a board’s directors to meet independence criteria demonstrating that they are not the CEO’s stooges but can exercise unbiased judgment. For example, today, board members cannot be considered independent if they have previous or current business relationships with the company they serve as a board member.⁹ These criteria are still far too weak to make directors truly independent, but Safeway’s board was so badly compromised that it would have run afoul of even the all-too-flexible rules in place today.¹⁰

George Roberts, James Greene Jr., and Hector Ley Lopez, all A-list business tycoons, were three of these Burd friends. Roberts was one of the founders (along with his cousin, Henry Kravis) of the aforementioned KKR, the notorious buyout firm that owned Safeway before it went public. Burd first worked with Roberts as a management consultant for Safeway when KKR owned it, and Roberts eventually helped install Burd as president and CEO of Safeway after KKR took it public. Roberts still owned close to 8.7 million shares, or nearly 2 percent of Safeway’s stock. Greene was another member of KKR and a Burd colleague. Finally, Hector Ley Lopez was the general director of Casa Ley, S. A. de C.V, a Mexican supermarket company of which Safeway owned 49 percent, rendering it unthinkable that Ley Lopez could pose a serious check on Burd’s judgment or authority. All three of these men knew Burd personally before being selected for the board. Burd himself commented, “We’ve known Hector and the Ley family for more than 18 years, and have an enormous respect for their abilities as merchants,” upon Ley Lopez’s appointment.¹¹ All three would today have run afoul of the NYSE independence requirements. And after the unexpected shareholder “attack by sea,” all three would lose their Safeway board seats.

Not yet fully grasping his own vulnerability, Burd had every reason to confront the strikers with confidence. He had secured himself and his management team financially, developed corporate allies to share a war chest through the coming months, and seeded his board of directors with loyal allies and friends. Indeed, he had good reason to believe that he could emerge from the strike with his reputation enhanced for being a hard-nosed, superstar CEO who could make what Wall Street liked to call “the tough choices.”

Burd could look to contemporaneous examples of CEOs who fought their own workers and emerged both wealthier and with higher status, even if the companies themselves fared poorly. For example, Albert “Chainsaw Al” Dunlap fired 11,200 workers—more than one-third of the workforce—at Scott Paper during just twenty months as CEO in the mid-1990s, pocketing over $100 million before moving on to Sunbeam Corp., where he tried to break his own record, announcing 12,000 layoffs—50 percent of Sunbeam’s workforce—four months into his tenure. Other CEOs, like “Neutron” Jack Welch and Don Graber, similarly laid off workers: in Welch’s case, more than 100,000 at General Electric. These examples may have made Burd overconfident. He did not and probably could not foresee the ambush he was about to face—a labor-led shareholder campaign to oust him and his allies from control of Safeway. This campaign would leave Burd barely hanging on to his role as CEO and result in his friends and allies—the business grandees Roberts, Greene, and Ley Lopez—being removed from the board and replaced by independent directors sent to babysit Burd before he could do more damage. These blows and the unflattering press coverage that would accompany them are interesting and surprising in their own right. But what matters for this book is not the blows themselves but who delivered them.¹²

It was not the strikers, though they laid the groundwork for what followed. It was a group of Safeway’s labor and labor-affiliated shareholders and their allies who hit Burd hard after the strike. It was the California Public Employees’ Retirement System (CalPERS), the New York City Employees’ Retirement System (NYCERS), the New York State Common Retirement Fund (NY Common), the Illinois State Board of Investment (ISBI), the Massachusetts Pension Reserves Investment Trust (MassPRIT), the Connecticut Retirement Plans and Trust Fund (CRTF), the Oregon Public Employees Retirement System, and the Washington State Investment Board (WSIB) who revolted against Burd and his board after the strike ended.¹³ Almost all of Burd’s preparations against the strikers weakened his position vis-à-vis these shareholders.

Interestingly, a small number of powerful private investment managers quietly joined these labor and labor-affiliated shareholders, not because the investment professionals agreed with labor’s politics but because they managed the shareholders’ money. This last point, which I develop in later chapters, is crucial. Private investment managers like Blackstone and even KKR, whose politics and business practices might ordinarily place them in opposition to labor interests, may find themselves backing labor interests because they want to manage the trillions of dollars held in public pension funds—labor’s capital.¹⁴ The political implications of this are underappreciated and underexploited by labor.¹⁵

CalPERS, NYCERS, and the remaining painfully acronymed pension funds are not your typical investors. They invest the retirement savings of 30 million working and retired public servants like school teachers, police officers, firefighters, nurses, emergency medical technicians, sanitation workers, and more. Their much smaller union fund cousins invest the retirement savings of unionized private sector workers like carpenters, electricians, and construction and hotel workers. Their annual median salaries range from a low of $32,000 for construction workers to a high of $61,000 for police officers.¹⁶ These are the people I’m referring to when I use the term “working-class shareholders.” I recognize that there is a vast literature on the question of who counts as working class versus middle class, one that encompasses a broad array of concerns including income, level of education, race, gender, family networks, and so forth. Some of these workers may be classified as middle class just because they have pensions, though it’s important to note that, on account of these pensions, millions of public sector workers—40 percent of them—are not entitled to participate in Social Security.¹⁷ For almost all of these workers, loss of their jobs and pensions would leave them on the knife’s edge of poverty, if not impoverished. All share straightforward interests in maintaining their jobs and securing their retirements, interests that overlap with those of millions of other working people. And in their contests with corporate boards and managers, with hedge funds, and with private equity funds, the class distinction between them and their antagonists could not be clearer, however one characterizes it.

The workers who contribute to these pensions often elect peer workers to represent them on the funds’ boards of trustees. Public pension fund boards also have members who are state or local elected officials, including governors, state treasurers, state attorneys general, and mayors. In the smaller private sector labor union funds, corporate managers sit alongside worker representatives on fund boards. As individuals, the people who contribute their retirement funds to these institutions are not wealthy; they have modest salaries and modest pensions that, individually, add up to little economic clout. But combined, their pension funds add up to more than $5.6 trillion.¹⁸ That’s a sum of money that can intimidate even Chainsaw Al and make servants of Wall Street’s masters of the universe. That may sound like hyperbole, but it’s not. If there’s one general takeaway from this book, it’s that the long-predicted power of labor’s capital is becoming real, that it is already transformative, that it has only begun to realize its enormous potential, and that its friends are much less aware of that potential than its enemies.

Sean Harrigan was a union leader who occupied a unique niche at the time of the Safeway strike. He was the international vice president of the UFCW, the union that represented Safeway’s workers and called the strike. He was in charge of the UFCW’s West Coast operations and a former Safeway employee. He knew the company and its workers personally before moving onto a job in charge of organizing for the UFCW.¹⁹ But uniquely for a union leader heading into a strike, Harrigan held a commanding position in the world of labor’s capital—in fact, he had reached the pinnacle of that world. He was the president of CalPERS, which at the time had 1.3 million members and $166 billion in assets.²⁰

CalPERS is the largest pension fund in the United States, and one of the largest funds of any kind in the world. That was true in 2003–4, and it remains true today.²¹ Its power may be difficult to appreciate for those who are unfamiliar with it. Its influence is evidenced repeatedly throughout this book, but for now, it suffices to note that its massive size ($323 billion in assets today) makes it an investor that companies are loath to cross. It sits on a huge pool of capital that can make or break investments. Once invested, it has the power to challenge management actions through shareholder voting, litigation, and influence over other investors. There are only a small handful of funds in the world that are larger than CalPERS, and probably none that is as publicly aggressive. Then as today, to ascend to the presidency of CalPERS was to become one of the most powerful investment voices in the world. To reach that perch, Harrigan had to outmaneuver some of the savviest politicians in California. He defeated San Francisco mayor Willie Brown in a head-to-head battle for the presidency, outpolling him in an eight-to-four vote by their fellow board members. Brown’s candidacy had been backed by then-California governor Gray Davis, to no avail.²²

At the outset, I should note one startling fact about Harrigan’s involvement with this Safeway episode. While he openly participated in the strike, he denied involvement in the shareholder campaign that followed. I don’t believe that denial, and I don’t think he wanted it to be believed. At the time, Harrigan himself dropped several coy hints that he was more deeply involved than he could let on, and much of the evidence points in that direction. The union leader had strong legal reasons to disavow being a protagonist in the shareholder campaign that followed the strike, or at least in coordinating that campaign with the strike, for reasons I explain below. Perhaps more importantly, Harrigan’s participation would have violated a deeply held American taboo that worker pension funds are only supposed to care about their shareholder interests, to the complete exclusion of worker interests, interests that are often inseparable. In the Safeway fight, Harrigan appeared to violate that taboo.

Ultimately, the precise contours of Harrigan’s participation matter less than examining the Safeway fight to contrast two mechanisms by which workers can pursue their interests: a strike and a shareholder campaign. No other single historical episode offers a more direct way to compare the two. Still, because of the aggressive and transformative role Harrigan would play in these events, he, too, would lose his job, just like Roberts, Greene, and Ley Lopez. Harrigan was no saint. He was highly confrontational and abrasive, with a tendency to overplay his hand. I don’t write about him to hold him up as a paragon. I write about him because I believe that he, CalPERS, and their pension allies punched their way to a new set of tactics that must be refined and widely adopted if labor is going to reassert itself in the twenty-first century.

Two Early Harrigan Campaigns

To give a sense of the threat Harrigan and CalPERS posed to Burd, I want to briefly describe two other shareholder campaigns Harrigan led shortly before taking on Safeway. First, in fall 2003, barely six months into Harrigan’s tenure at CalPERS and just two months before the Safeway strike, the New York Stock Exchange revealed that it had granted its CEO and chairman, Richard Grasso, $187 million in compensation, most of it payable immediately. The NYSE was then a nonprofit organization, and the pay package probably made Grasso the highest paid head of a nonprofit organization in the country.²³ The NYSE board of directors and compensation committee that granted Grasso his pay package was composed of people he was supposed to regulate in his role as NYSE chair and CEO. The public rightly perceived his inflated compensation as a conflict of interest, arguably a payoff from the regulated to their regulator. The pay package was announced in the aftermath of the Enron and WorldCom debacles and in the midst of ongoing equity analyst scandals on Wall Street, in which then–New York attorney general Eliot Spitzer caught Wall Street analysts falsifying their research recommendations to please important clients. Grasso’s compensation provoked widespread criticism. For weeks, he fought hard to keep both his job and the money, appealing to the public’s patriotism by reminding them that he had reopened the stock exchange just a few days after 9 / 11.²⁴ It appeared that he would succeed.

Then Harrigan, joined by the head of the nation’s second largest pension fund, the California State Teachers’ Retirement System (CalSTRS), and the California state treasurer, publicly called for Grasso to resign and to forfeit his pay package. As Harrigan told The Guardian, “It was outrageous.… Here you have the largest stock exchange in the world that should set the absolute right example. Then you’ve got a guy like Dick Grasso who’s got this $188m package. I said it as clearly as I could: it was an example of the pig being in the trough and our job was to get him out of the trough.” Grasso resigned the next day.²⁵

Similarly, less than three months after becoming the head of CalPERS, Harrigan called for the ouster of one of the nation’s most high-profile and charismatic “imperial CEOs,” Michael Eisner, CEO and chairman of the board of Disney. Under Harrigan’s leadership, CalPERS spearheaded a shareholder revolt against Eisner, who had spent twenty years at the company. At the time, Disney had incurred a series of setbacks, including a stock price that had fallen 23 percent in five years, an SEC investigation over failure to adequately disclose board conflicts, and an infamous shareholder lawsuit against the company because Eisner paid his friend Michael Ovitz $138 million to serve as Disney’s president for less than two years. Eisner’s self-regarding mismanagement of the company incurred the ire of Roy Disney, a former board member and nephew of Walt, the company’s founder; the two main proxy advisory services, Institutional Shareholder Services and Glass Lewis; and, first among prominent shareholders, CalPERS.²⁶ CalPERS’s backing was the decisive turn. The fund, which owned 9.9 million shares, worth $260 million, announced that it would withhold votes from Eisner’s reelection to the board in the 2004 annual shareholder vote.²⁷

CalPERS’s decision to oppose Eisner came with a typically Harriganesque flourish: “We have lost complete confidence in Mr. Eisner’s strategic vision and leadership in creating shareholder value in the company.… Shareholders should send the message loudly and strongly that it is time for Disney to get a more focused strategy.”²⁸ Pension funds in New York, Massachusetts, and elsewhere quickly signed on to the withhold vote campaign against Eisner. Although not the first of its kind, prior withhold campaigns had often resulted in modest tallies that still led to the ouster of the board chair. For example, Time Warner boss Steve Case was forced to resign as chairman of the board after a 22 percent withhold vote the year before—meaning 22 percent of the shareholder electorate refused to vote for him. The Disney shareholder revolt resulted in an unprecedented 43 percent withhold vote for Eisner, demonstrating CalPERS’s ability to bring other shareholders along with it.²⁹ As a technical matter of corporate law, Eisner therefore still won reelection, because at least some shareholders voted for him in an uncontested election. But Disney’s surviving board members were not stupid. They registered the enormous shareholder disaffection with Eisner, deciding to retain him as CEO but stripping him of the chairmanship (while still leaving him on the board) and replacing him with fellow board member George Mitchell, the former Democratic U.S. senator from Maine.³⁰

For Harrigan and CalPERS, leaving Michael Eisner in place as CEO while denying him the chairmanship was not good enough. After the withhold vote, they called for Eisner to resign all of his positions—CEO included—and permanently sever his connection to the company. Six months later, Eisner announced that he would retire as CEO when his contract expired. Harrigan was still not assuaged. He demanded that Eisner resign from the board too, because “[Eisner’s] continued presence on the board would prevent the company from the clean break that is needed to restore investor confidence.” Eisner eventually resigned from the board as well.³¹

One cannot minimize the stunning nature of these two conquests by Harrigan. Shareholder revolts against sitting CEOs are extremely rare, and successful ones rarer still. For one person and one fund to lead the charge in taking down the CEO / chairs of the New York Stock Exchange and Disney—two of corporate America’s most iconic companies—within months of each other was an achievement of lasting historical significance, one that has been too quickly forgotten.³² These successes make it easy to imagine what Harrigan might have been thinking when Safeway’s Steven Burd announced his plan to cut pay for Safeway’s workers.

The Safeway Strike

From the beginning, for both Harrigan and Burd, their fight was about more than just the particulars of the new contract at Safeway. As Harrigan himself described it, “If they break our backs here, they will view this as an opportunity to pillage UFCW members and their union contracts throughout the country. This is a real watershed.”³³ Some might dismiss such claims as the hyperbole of conflict. But why wouldn’t UFCW employers try to do what Harrigan feared, for the same reason Burd did it: to increase profits by reducing labor costs? Harrigan and the UFCW needed more from this strike than just a fair contract for their workers. They needed to deter others in Burd’s position from attempting the same. To achieve that, they needed to change the math.

Once the strike began, with workers walking off the job at Safeway and other supermarkets across California, the UFCW took its case straight to the court of public opinion. The union took out newspaper ads in Washington, D.C., Baltimore, Denver, Seattle, and Northern California. Targeting workers and consumers, ads like these began appearing on the radio:

First, Safeway’s CEO Steve Burd sold about $20 million worth of company stock. Then, he forced me and seventy-thousand [sic] other workers onto the streets to save our families’ health benefits. We’re out of work—shoppers have been inconvenienced—and Safeway stock prices have taken a nose dive—but—Steve Burd is looking out for himself. It’s time to turn the tables—I’m Kathy Shafer, a twenty-eight-year Safeway-Vons employee. Send Steve Burd a message—please don’t shop Safeway when you see our picket lines. A message from the working men and women of the UFCW—we’re holding the line for healthcare for all working families.³⁴

The UFCW also began targeting an unusual audience in its public relations campaign against the company, one not typically sympathetic to unions and their strikes. In an advertisement in the Wall Street Journal, the UFCW attacked Burd’s poor management of Safeway: “Which is the most effective way to improve Safeway’s bottom line?” the ad asked. “A: Stop CEO Steve Burd’s mismanagement. B: Cut Health Care Benefits for Workers.” Quoting a Los Angeles Times editorial, the advertisement stated, “It would take [the healthcare costs of] the company’s local unionized workforce the better part of three decades to do as much damage to Safeway’s bottom line as Burd did with a single merger deal in 1998.” The text emphasized Burd’s incompetence (“He miscalculated again …”), arguing that Burd had alienated both workers and customers “in one of the richest markets in the country.” Finally, it concluded, “Stop Steve Burd before he loses even more money for the company.”³⁵

The Wall Street Journal ad is bereft of individual human voices, devoid of personal faces of the Safeway strike. Instead, it was designed to affect the opinions of people Burd actually cared about: investors and retail-sector analysts. It aimed to convince Wall Street Journal readers generally that Burd was incompetent, and to lead investors to question whether Burd should remain in his position.³⁶

The effectiveness of either of these ads is anyone’s guess, but they demonstrate a broader range of options available to labor than is typically deployed. Some audiences are more likely to respond to moral claims favoring workers, others to arguments about the bottom line for shareholders. There is little reason to confine appeals to one or the other, although some progressives find it distasteful to frame these issues in the language of shareholder interests rather than worker interests. People who take the position that corporations and shareholders are inherently exploitative are deeply uncomfortable with the idea of working-class shareholders. After all, what does it mean when workers own shares in companies run by other workers? What does it mean when worker-shareholders “exploit” other workers? When the exploited exploit the exploited? Are working-class shareholders a kind of “human shield” protecting the 1 percent, who are the real shareholders in our society?

These are complex philosophical and political questions that reveal some of the inherent contradictions of labor’s capital, and I will attempt to address them as they arise.³⁷ But for the most part, I view these concerns as highly theoretical and mostly impractical, not least because labor’s capital exists. Nearly thirty million people directly depend on the $3–6 trillion in assets invested in these funds; tens of millions more indirectly depend on them.³⁸ There is no going back to a world in which labor and capital are mutually exclusive, lined up across a barren cavern of confrontation—at least not in developed economies.

My view is that working-class shareholder power is a vehicle for reintroducing the voices of middle- and working-class people into the corridors of power from which they have otherwise been exiled. And the increased exercise of this shareholder power can produce two basic changes: first, many more people could retain more of the economic surpluses that they themselves have created, restoring wealth to the parties that generated it; and second, markets, which are inherently structured to respond to shareholders, will respond to these middle- and working-class shareholders in ways that, by extension, will make them more responsive to middle- and working-class people more generally.³⁹

The case for expanding the power of worker shareholders within a market context treats the fact of working-class shareholders not as an inconvenient truth but as an important tool for rebalancing economic outcomes. Skillful use of such power is already transpiring and offers a promising way forward not just for labor but for middle- and working-class people more generally. Labor and progressives should double down on it, not walk away from it, and not let it be destroyed by the Kochs, the Arnolds, and others. Put differently, nothing is more likely to stop workers from storming the barricades than the rallying cry: “Workers of the World Unite! You have nothing to lose but your pensions.” These workers have skin in the game—not nearly as much as they should, but enough to enable them to fight for more. The rational goal for them to pursue is to identify and exploit genuine sources of real-world power to bend the current system toward their own needs, including allying, when it makes sense, with other shareholders, students, activists, endowments, environmentalists, impact investors, and mutual funds. The divergent fates of the Safeway strike and the Safeway shareholder campaign that followed illustrate the point.

A hint of that surprising shareholder campaign appeared early in the strike. In December 2003, the UFCW approached CalPERS, seeking its help with Safeway. This was akin to Harrigan appealing to himself for aid. CalPERS responded to the UFCW by writing a public letter to Safeway stating that the company’s “blatant disregard for quality of life issues for your long-term employees is having a significant impact on our investment in your corporation.” The UFCW embraced the CalPERS letter, publicly declaring its hope that it would encourage other investors to follow CalPERS’s lead.⁴⁰ Burd and Safeway brushed aside whatever threat the letter implied.

As the strike lingered on, a group of religious leaders tried to enter the fray. In late January 2004, three and a half months into the strike, these leaders, accompanied by workers and their children, traveled from Southern to Northern California to “personally deliver a message to Safeway Inc. Chief Executive Steven Burd.” Clergy and Laity United for Economic Justice, or CLUE, a group of four hundred religious leaders from Los Angeles, began their pilgrimage north with a rally at a Pavilions Supermarket in Sherman Oaks, California, where blessings were offered by Christian, Jewish, and Muslim leaders. The Los Angeles Times quoted Rev. Jim Conn, urban strategist for the United Methodist Church of Southern California, saying, “We are praying for this man, Burd, who has been so recalcitrant, so cold to his workers. He needs to know about the lives he is affecting.” The workers rode buses north to the accompaniment of Spanish songs by Fidel Sanchez of the Pico Union Shalom Ministry. They spent the night on the floor of a high-school gymnasium and arose early the next morning to go to Burd’s house in fittingly named Alamo, where they planned to deliver thousands of handwritten cards and letters asking him to relent on his negotiating positions.⁴¹

Cynthia Hernandez, a checker and stocker who was having difficulty providing for her family during the strike, said, “I want [Burd] to see our faces. I want him to know that we exist.” Burd didn’t feel the same way. He wasn’t home. And even if he had been, it would not have mattered, because the protesters were stopped a mile away from his house by the town’s sheriffs. Six clergy were allowed to approach the home, where they encountered private security and Burd’s personal representative. Together, they held hands and prayed. The workers left, and Safeway conceded nothing. The strike went on and on and on, with negotiations and mediations. Along the way, Safeway, Kroger, and Albertsons suffered a combined $1.5 billion in lost sales. Workers were also hurt, making just $25 a day paid by the unions. Toward the end, they were joined on the picket lines by Senator John Kerry of Massachusetts, the future secretary of state and shortly to be the Democrats’ presidential nominee for the 2004 election.⁴² Neither Kerry nor the company’s losses from the strike were sufficient to deter Burd from pursuing his cost-cutting course.

The strike finally ended after almost five months of struggle, making it the longest supermarket strike in U.S. history. As always after strikes of this magnitude, both sides declared victory. But the weight of the evidence suggests that the press, the workers, and even the unions themselves viewed Safeway as a defeat, at least internally. According to the Los Angeles Times, whose reporters closely followed the walkout, “The contract the negotiators crafted has been widely viewed as a victory for the supermarkets, especially because it includes a two-tier system under which stores will pay new hires much less in wages and benefits than veteran workers.” Similarly, the New York Times reported that “many union members complained Friday that the settlement gave no raises and meant a lower wage tier and skimpier health plan for new hires.”⁴³ There can be no dispute: Safeway supermarket workers were worse off than they had been before the strike. Thus, union leaders were forced to define victory not in terms of prestrike worker wages and benefits but in terms of how much worse off workers could have been in the absence of the strike. This arguably was a victory of sorts, but it didn’t feel like one, and no amount of spin could make workers feel otherwise.

Companies have always had greater economic resources than unions during strikes, but in recent decades, that gap has expanded dramatically. In the 1960s, one-third of American workers were unionized. Those workers paid dues, and those dues funded comparatively powerful union organizations. Today, barely more than 10 percent of the U.S. workforce is unionized, and most of those workers are in the public sector, working for state and local governments (and contributing to the pension funds that have become the source of working-class shareholder power and that would pounce on Burd shortly after the strike ended). A smaller workforce means fewer dues-paying members. Fewer dues means fewer resources to bring to a strike, the number of which has plummeted in recent years.⁴⁴ Fewer resources also means you cannot bargain as effectively. Ineffective bargaining means fewer union jobs at lower and lower wages, which means even fewer dues, and so on and so forth. The decline of unions has a ripple effect far beyond union members themselves, correlating with lower wages and greater economic inequality everywhere. Pick the metaphor of decline that most appeals to you. For me, it summons images of global warming and melting glaciers, in which massive and seemingly eternal structures that once scarred the earth find themselves in quiet but merciless retreat, only occasionally dramatized by an ice shelf collapsing into the ocean and creating a splash, but with most of the real damage done in the ceaseless, minute-by-minute cracking and grinding and melting that moves absolutely and only in the wrong direction. Were it not for the shareholder part of this story, the Safeway strike would have been just one more shelf collapsing unremembered into the sea of history.

Here are some more data points of interest, documenting a different, positive trend: As of June 30, 2015, CalPERS had $315 billion in assets, or $117 billion more than it had in 2004 at the time of the Safeway strike. It also had 400,000 more members than it did in 2004, for a total of 1.8 million members. The same is true for all of the other labor’s capital funds that would rally to the cause against Safeway. NYCERS’s assets have increased from $42.7 billion in 2004 to $63.6 billion in 2015, the NY Common from $136.4 billion to $197.9 billion, the Illinois State Board of Investments from $10.4 billion to $15.8 billion, MassPRIT from $34 billion to $65 billion, Connecticut Retirement from $31 billion to $40.4 billion, Oregon’s system from $51.7 billion to $68.8 billion, and the Washington State Investment Board from $57.2 billion to $85.1 billion.⁴⁵ The simultaneous decline of labor and the rise of labor’s capital suggests what the future of labor power must look like if there is to be a future for labor power at all. Like much twenty-first-century power generally, it will draw on shareholder power as a source.

The Pension Funds Mobilize a Shareholder Campaign

The end of the strike at Safeway was not the end of the struggle. On the contrary, at some point during the negotiations, Sean Harrigan, or the UFCW, or both, threatened Burd with a shareholder campaign in connection with Safeway’s upcoming shareholder meeting in May 2004. As evidence emerged that this threat would become real, the public reaction was one of great skepticism. Initial reports indicated that any shareholder campaign against Burd would be viewed as a long shot.⁴⁶

The Chicago Tribune first broke the story on March 25, 2004. It reported that the Illinois State Board of Investment, which oversees the pension funds of the state of Illinois, was coordinating with several other large investment funds to oppose the reelection of Steven Burd and two other directors at the May 20, 2004, Safeway shareholder meeting. According to the Tribune, the ISBI took the “unusual step” at a March 5 meeting of its executive board, which voted to team up with other pension funds in an effort to thwart Burd’s reelection as CEO and chair of Safeway. “Safeway’s share price movement has been disastrous,” said Bill Atwood, the Illinois board’s executive director, introducing the theme. “It’s been one of the worst performers over the past five years.”⁴⁷

With this subtle but entirely persuasive shift in how to frame what went wrong at Safeway—what was wrong with Burd—the struggle took on a new dimension. The Tribune further noted that several funds were scheduled to appear at a press conference to announce the campaign later that week. In turn, Safeway accused CalPERS of being behind the press conference and the shareholder campaign, publicly hammering the point that Harrigan, CalPERS’s president, was also the executive director of the UFCW, which had just finished striking against the company. CalPERS, the Tribune article observed, had led the recent proxy fight against Eisner at Disney.⁴⁸

Beyond gaming the shareholder vote, Safeway had tactical reasons to publicly call out Harrigan for leading the strike and the shareholder campaign. The company wanted to intimidate Harrigan at the outset by putting him on notice that he was in legal jeopardy. As head of CalPERS, Harrigan had fiduciary duties to put the interests of CalPERS’s beneficiaries ahead of his own interests and those of any other organization.⁴⁹ Safeway was indirectly proposing to the media that Harrigan was using CalPERS’s power for the benefit of the UFCW and Safeway’s workers and therefore arguably breaching his fiduciary duties to CalPERS. Pay no attention to Burd’s abysmal performance, said Safeway, this is about Harrigan taking CalPERS on a joyride for the benefit of the UFCW. Of course, the reality is that Harrigan’s actions could be both—that CalPERS and the other funds were acting in solidarity with Safeway workers and in their own interests as shareholders in a troubled company.

This is an excellent example of how the game is played. The companies insist that the activists are only interested in labor issues, and the activists insist that they are only interested in shareholder issues, as if these two concerns were always mutually exclusive. Here, Safeway was following this playbook. It was using rules designed to protect workers to protect itself instead. It is hard to believe that Safeway suggested that Harrigan might have a legal problem because the company was worried about CalPERS’s beneficiaries. It wasn’t. It was worried about protecting Burd. But just because the company used this legal threat to protect itself doesn’t mean it was wrong on the law. Trustees like Harrigan are responsible for paying out pension benefits to workers over a thirty-year time horizon or more, and we do not want to let them stray too far from that mission. That leads to a constant debate over where to draw the line for such trustees—what they should and should not be able to do.

The threat from Safeway was enough to induce Harrigan to remain publicly silent for most of the shareholder campaign, though he did not formally recuse himself from it. Contemporaneous press reports indicate that he was involved behind the scenes. “Just because you carry a union card,” he said at the time, “doesn’t mean you have to recuse yourself.”⁵⁰

The shareholder assault that followed the strike emphasized two themes: Steven Burd incompetently engineered numerous failed acquisitions, destroying $20 billion in shareholder value and causing a 63 percent decline in the company’s stock price over five years; and because four out of nine board members were affiliated with KKR, and because eight out of nine board members had profited from separate business deals with Safeway, the board faced conflicts of interest that inhibited its ability to independently oversee Burd. Therefore, (1) Burd should be fired from the CEO position; (2) to prevent future abuses, the role of CEO and chairman of the board should be split rather than held by the same person; and (3) shareholders should oppose Burd’s reelection to the board and that of the two other directors whose terms had expired.⁵¹

Having identified the campaign messages and targets, the final task was to win the election. There were actually two campaigns: the public, formal campaign, and the private, informal one. By the public campaign, I mean the effort to rally the shareholder electorate to vote against Burd and the two other candidates up for reelection, William Tauscher and Robert I. MacDonnell. As is often the case in shareholder campaigns, its most important single target was an entity that actually had no right to vote at all: Institutional Shareholder Services, or ISS.⁵²

ISS is a powerful organization in the corporate world. To understand its importance to shareholder campaigns, consider the following hypothetical. Imagine if the endorsement of one newspaper in a U.S. presidential election could determine how one out of four voters cast their ballots. Such an endorsement would be the decisive factor in most elections. That is the role ISS played at the peak of its power in shareholder elections, and it is a role it largely continues to play today. Because large, diversified institutional investors (like pension funds) may hold thousands of investments in their portfolios, they are required to vote in thousands of elections every year. If they devoted sufficient resources to studying the issues and candidates in all of those elections, they would have time for nothing else. Therefore, they outsource most of the research to proxy monitoring services (the proxy is the shareholder ballot) like ISS or a smaller competitor, Glass Lewis. ISS makes recommendations on almost every election and proxy proposal, and many diversified institutional shareholders vote those recommendations. Empirical studies have shown that ISS alone can swing as much as 25 percent of the shareholder electorate with its advice.⁵³ With a yea or nay from ISS, either side in a shareholder fight is almost halfway toward its goal: an electoral majority.

Both the pension funds and Safeway management lobbied ISS for its recommendation. Hammering away at Burd’s poor performance and at the conflicted board of directors, the shareholder campaigners pushed ISS to back its efforts to unseat the three directors up for reelection. The tactic partially worked: ISS recommended a withhold vote for Steven Burd, that is, ISS recommended that shareholders oppose Burd’s reelection to the board of directors. But it offered no opinion as to whether Burd should remain as CEO, leaving that to the new board, and it did not recommend against the two other directors who were up for reelection. The other proxy advisory firm, Glass Lewis, recommended that the company split the roles of CEO and chair.⁵⁴ It was not a grand-slam home run for the shareholder campaigners, but with recommendations against Burd’s reelection to the board and in favor of splitting the role of CEO and chair, the shareholder threat to Burd went from a long shot to a significant challenge.

These recommendations ignited an all-out war between the campaigners and the company. Safeway was determined to protect its CEO. And the campaigners were unwilling to stop pursuing the other directors just because ISS recommended against doing so. This takes us to the private shareholder campaign that ran alongside the public one, a campaign that may have been just as effective if not more so. This one targeted board members who were not up for reelection, specifically George Roberts and James Greene, KKR founder and partner, respectively.

Ed Smith described for me what happened. At the time, Smith was international vice president of the Laborers International Union of America. He was also the chair of the ISBI and the Central Laborers’ Pension Fund, where he had served as a pension trustee for over twenty years. As part of the campaign, Smith and other pension fund leaders demanded a meeting with Roberts.⁵⁵ The meeting stood in sharp contrast to the non-meeting between Burd and the Safeway workers at Burd’s house in Alamo. The pension funds were not greeted by Roberts’s private security detail and a personal representative who offered to pray with them, but by Roberts himself in his office. The meeting was brief, to the point, and resulted in an immediate and tangible outcome.

The shareholders told Roberts that his personal relationship with Burd was interfering with his ability to oversee the CEO and serve as a check on his authority; that the depth of the relationship between Safeway and KKR was a problem; and that it was time for Roberts to, as Smith put it, “get off the board.”⁵⁶ KKR managed billions of dollars in pension money, including Illinois pension money under Smith’s authority. Roberts’s failure to comply with the pension funds’ demands could jeopardize hundreds of millions, if not billions of dollars in pension fund assets under management for KKR.

This was an easy call for Roberts. He agreed to resign from the Safeway board and to take Greene with him. No shareholder vote on the subject was even necessary, because the shareholders that mattered—the laundry list of pension funds, several of whom were significant KKR clients—had already decided. Roberts and Greene were gone. Two out of three board members were finished before the fight began.

The shareholders’ successful private targeting of Roberts and Greene vacated two board seats that could be filled with people more independent from Burd than they were. But it also allowed Safeway to spin their departures as the company’s own idea. In turn, Safeway sought to undermine one of the key appeals made by the campaigners: that Burd and the board were not listening to shareholders and that therefore the company needed new board members who would reflect shareholder views. But we are listening, Safeway could reply: we have dismissed three board members. (In addition to Roberts and Greene, the company announced it would dismiss Ley Lopez.) The company also appointed one of its existing directors, Paul Hazen, the former CEO of Wells Fargo, as a new lead independent director.⁵⁷ The position of lead director is often proposed by management as a second-best solution to shareholders seeking to strip the chair role from the CEO. It leaves the CEO as head of the board but purportedly empowers another director to set the agenda for board meetings and act independently. These were significant concessions on the part of the company. But no sophisticated observer would conclude that it had taken these steps on its own, in the absence of the shareholder campaign.

Of the other two directors who were formally up for reelection, Tauscher and MacDonnell, Tauscher in particular drew the campaigners’ attention. Connecticut state treasurer Denise Nappier, who oversaw the Connecticut retirement plans and trust funds, had previously written a letter to the Safeway board pointing out that Tauscher, a purportedly independent director, “engaged in approximately $3.5 million in related-party transactions involving Safeway.” That meant he benefited from side deals with Safeway, undermining his independence as a board member. Given that Tauscher was the chairman of the firm’s executive compensation committee, and therefore set Burd’s pay, the fact that he was allowed—presumably with Burd’s approval—to profit from his dealings with Safeway could compromise his ability to fairly negotiate Burd’s compensation on behalf of Safeway, to say the least. The other board member up for reelection, MacDonnell, was yet another KKR man. These facts make it astonishing that ISS still backed the reelection of Tauscher and MacDonnell, but it did, helping them win reelection. Still, because Tauscher’s business relationships with Safeway created a conflict of interest in setting Burd’s pay, he was forced off the executive compensation committee. And MacDonnell was forced off the audit committee, ending some of the most blatant conflicts. Thus, the campaigners’ actions led to the removal of three close Burd allies from the board, the appointment of an independent lead director, and the removal of Tauscher and MacDonnell from sensitive committee positions. But the campaign did not result in the removal of Burd himself, who won reelection, largely on the argument that the board-level shakeup was due to his own renewed attention to shareholders.⁵⁸

With that, the Safeway fight ended, though its repercussions continued to reverberate.

Assessing the Significance of the Safeway Fight

In assessing what happened at Safeway and comparing the relative effectiveness of the strike and shareholder campaign, several noteworthy differences between the two become apparent. The strike was an extended episode in trench warfare, requiring the mobilization of tens of thousands of workers with scarce economic resources to support them, and resulting in significant disruption to the workers themselves, their families, and Safeway’s customers. The shareholder campaign that followed it was closer to a drone strike. It happened very quickly, it required the mobilization of comparatively few people and limited resources, and it was aimed directly at the top of the opposing organization. The parallels to other forms of twenty-first-century combat are striking—and suggest a need for labor to evolve its tactics to suit the times. That evolution is already taking place, though not quickly enough. These results do not suggest wholesale abandonment of strategies that were successful in an earlier time, just as the success of drone technology does not suggest the abandonment of conventional armies. But labor must expand its range of options to attain its ends.

The significance of the Safeway fight is twofold: first, it demonstrated the possibility of new tactics for deterring corporate misconduct by directly targeting the corporate officers that make destructive decisions; and second, it offered the opportunity to examine, in one coherent episode, the relative decline of the strike as an effective means of struggle, and the simultaneous emergence of a new, twenty-first-century approach, the shareholder campaign. In considering the effectiveness of the latter, I want to add one more point about the Safeway fight. I want to discuss not just what happened but what else could have happened. Specifically, I want to discuss the role of an offstage villain in this tale, Wal-Mart.

Although Wal-Mart was not a party to this dispute, its presence could be detected in all aspects of the fight. While Safeway’s economic harms were primarily the result of Burd’s misbegotten empire building and failed supermarket acquisitions, the imminent entry of Wal-Mart Supercenters into the California market motivated Burd to take a hardline position with Safeway workers—or, at least, it served as a convenient pretext for that hardline. (In fact, it took years for Wal-Mart Supercenters to enter the California market, but that didn’t stop Burd and Safeway from using the threat to extract concessions that enhanced profits at the expense of worker compensation.)⁵⁹

Wal-Mart’s ability to pay lower wages to its nonunion workers threatened not only Safeway but the UFCW too, which had an ongoing interest in Safeway’s success as a unionized workplace.⁶⁰ This is an important point to keep in mind for conservative critics of labor’s capital, who want to claim that it’s all about maximizing labor’s interests to the detriment of the company and other stakeholders. In fact, labor’s capital has an interest in investing in thriving companies that pay workers their fair share. Burd could and did argue that Wal-Mart’s lower wages would be passed on to its consumers in the form of lower prices, which would undermine Safeway’s ability to compete. The message to Safeway’s workers was, you can work for me for less than you make now, or you can work for Wal-Mart, or perhaps not work at all.

Given the Wal-Mart threat, one might think that fighting Burd was futile. Safeway workers would either have to be paid less, or not be paid at all, because the company would eventually be destroyed by the seemingly unstoppable Voldemort, Wal-Mart. But the shareholder campaigners had leverage over Wal-Mart for the same reason they had leverage over Safeway—because they, too, were Wal-Mart shareholders: CalPERS, NYCERS, all of them. For example, CalPERS’s comprehensive annual financial report for 2003 provides a snapshot of the holdings of its largest investment fund, the Public Employees’ Retirement Fund (PERF), as of June 30, 2003. (CalPERS manages fourteen separate funds but PERF is the largest.) According to this certified annual financial report, at the time of the Safeway strike, PERF owned 16,855,600 shares of Wal-Mart, which at $53.67 a share had a total market value of $904,640,000. PERF’s Wal-Mart stake was one of its top ten holdings.⁶¹

This introduces a dilemma. These funds, and the workers whose retirement proceeds they invested, profited from the same company that was undermining the economic well-being of other workers, including UFCW workers. One might ask, why were they invested in Wal-Mart at all? The automatic response is that Wal-Mart was a good investment, and pension funds are responsible for funding the retirements of their beneficiaries, not playing politics. That’s true. These funds must prioritize their obligation to fund the retirements of the folks who contribute to them. But that means prioritizing the economic well-being of their contributors, which does not always mean chasing the highest returns to the funds regardless of the disastrous economic consequences of those investments for those who contribute to them. One could view the pension funds’ investments in Wal-Mart as potentially “corrupting,” in the sense that such an investment can be a tool for allying labor with the very forces that most actively seek to undermine it. This is a serious concern, and one that drives some progressive skepticism toward labor’s capital.

I would argue that this concern, though real, is overblown and is a species of the problem faced by labor any time it gains actual economic and political power. The situation of labor’s capital in the United States is comparable to successful labor-funded and -influenced political parties in Europe and elsewhere, with the Democratic Party occasionally playing that role in the United States. Any worker-friendly entity that manages to become part of the power structure risks being tainted by it. In my judgment, this problem is far less troubling than facing no conflicts of interest because you have no power at all. Labor unions should be so lucky to once again face this dilemma in the United States, as they did in the 1940s, 1950s, and 1960s when they were the dominant force in the Democratic Party.

So why didn’t these shareholder activists challenge Wal-Mart directly? As it happens, there is some mixed evidence suggesting they did, if behind the scenes. CalPERS’s comprehensive annual financial reports suggest that it sold a huge number of Wal-Mart shares during the Safeway strike, at least briefly, perhaps as a kind of warning shot. I already noted CalPERS / PERF’s large stake in Wal-Mart as of June 30, 2003, four months before the Safeway strike. In fact, Wal-Mart was CalPERS’s fifth largest holding. In CalPERS / PERF’s next comprehensive filing, dated June 30, 2004, Wal-Mart was no longer on the fund’s top ten list.⁶² In fact, it is not listed anywhere in the report at all. To drop off the list, the CalPERS / PERF’s stake in the company would have had to fall from $904,640,000 to—at a minimum—somewhere below $725,759,000, which was the size of its tenth-largest holding. (I cannot see how large the drop actually was. I can only tell that it fell below $725 million.) The drop is not explained by a fall-off in Wal-Mart’s stock price. The stock closed at $53.67 on June 30, 2003, and at $52.50 on June 30, 2004, nowhere near a large enough decline to explain the change in CalPERS’s Wal-Mart stake. If CalPERS sold zero Wal-Mart shares, the value of its holdings would have dropped from $904,640,000 to $884,919,000, which should still have placed Wal-Mart seventh on the list, ahead of Bank of America and behind American Insurance Group.⁶³ That means CalPERS / PERF would have had to sell, at a minimum, around $140 million in Wal-Mart stock in the period that coincided with both the UFCW strike and the shareholder activist campaign that followed, assuming that this document is correct. The size of this selloff—if it took place—may have played some role in the decline in Wal-Mart’s stock price during that time, something that the company’s managers would have noticed. (I say “if” because there are other publicly filed documents that seem to contradict the comprehensive annual financial report, though I note that the report was audited by Deloitte and Touche, a leading accounting firm.)⁶⁴

If the selloff did take place, it could have been just a portfolio rebalancing for diversification purposes. But it also could have been a tactical divestment either in an effort to punish Wal-Mart for its labor practices or at least to dissociate CalPERS from Wal-Mart at a time of high-profile labor conflict.⁶⁵ And if the divestment did not take place, then we are left with the original question about how worker funds should deal with investments that undermine workers. Divestment typically has three goals: to hurt the targeted company by putting downward pressure on the stock price, to harm the target through bad publicity generated by a high-profile divestment, and / or to protest some action taken by the company or otherwise dissociate the fund from that company.

The Safeway strike, the shareholder campaign, and the prospect of a Wal-Mart divestment—whether it occurred or not—suggest an array of legal and policy questions. Does there always have to be a pure business rationale for taking investment action, or can such action be taken for other reasons? And if a pure business rationale is always required, how can it be distinguished from, say, a labor rationale? In the American context, it is often taken as a given that a business case and only a business case for investment action is appropriate, though I argue that the law suggests otherwise. In contrast, European pension funds have a track record of divesting from companies that violate the funds’ labor standards, including Wal-Mart, never mind whether there was a pure business case for such divestments.⁶⁶ Most recently, seven such funds, including retirement funds in Denmark and Sweden, divested from budget airline Ryanair because of labor issues.⁶⁷ They said they did so for labor reasons, and did not offer an accompanying investment rationale. They do not share the American taboo against combining the two. In contrast, when the California State Teachers Retirement System divested from gun companies after the Newtown, Connecticut, massacre in which a gunman killed six teachers and twenty first graders, it was forced to take the extra step of arguing that there was a strong investment reason to do so, citing the future risk of greater regulation of gun companies in America because of massacres like these. That argument ignores the fact that U.S. gun sales often spike after massacres and that there appears to be little prospect for significant regulation in the near term that would reduce gun-company profits in America. I applaud CalSTRS’s divestment but question the investment rationale for it. The most likely reason for the selloff—moral outrage at profiting from the weapon used in the slaughter—is the reason that dare not speak its name.⁶⁸

Should U.S. pensions follow their European counterparts and divest over labor issues, as the Danish and Swedish funds did at Ryanair, or as many funds divested from South African companies over apartheid in the 1980s and 1990s? Should they ignore these concerns entirely, opting to maximize returns first, foremost, and forever? Is the answer somewhere in between, giving funds flexibility to consider labor issues alongside business ones in making investment decisions? What does the law require here? And law aside, what is the right strategy—to divest, or to remain engaged as an investor with the power to change investee behavior through shareholder campaigns or litigation?

For the sake of transparency, I’ll state outright that I do not think that federal or state law requires, or should require, funds to ignore the overall economic impact of a fund’s investments on workers in the name of maximizing returns. Obviously, returns are crucially important to the health of any pension fund and to worker retirement security. But consider the perverse situation of public employee pension funds maximizing returns—or at least trying to—by investing in companies that privatize their own workers’ jobs. It is literally the case that the pension funds of some firefighters, police officers, prison guards, teachers, public engineers, and custodians are directly funding private firefighting companies, private security firms, private ambulance corps, private prisons, and other companies that privatize public services, directly undercutting these public workers’ own wages and benefits. Arguably, the whole purpose of such firms is to undercut the wages and benefits of public workers. These investments may even undermine the fund itself, because job losses result in fewer fund contributors.⁶⁹ This point should be emphasized: maximizing returns in this context not only harms your own beneficiaries but can damage the fund through loss of contributors.

Despite these troubling facts, one prevalent view of fiduciary duty suggests that taking into account anything other than investment returns, even your own contributors’ jobs, is an extraneous consideration and even a breach of the fiduciary duty of loyalty.⁷⁰ I disagree and argue for a broader view of fiduciary duty that would require at least some assessment of how an investment could affect the jobs of your fund participants, and consequently, contributions they make to the fund (or that are made on their behalf by employers). The flip side of this same argument embraces proactive investments that create worker jobs, and therefore fund contributors, even if returns on those investments may be lower than competing investment prospects. I argue that it is entirely appropriate for trustees to consider workers’ economic interests beyond just maximizing returns to the fund, a view that has been at least implicitly blessed by two courts.⁷¹ And I further argue that when these interests conflict—that is, when worker retirement fund interests conflict with worker interests—they should not automatically choose one over the other. Instead, fund managers should assess whether siding with their shareholder interests or workers interests would be more economically beneficial to the fund’s participants, and act accordingly.

There is one very important caveat here: pension funds are, and should be, required to remain diversified, and nothing about my “worker first” view should permit a departure from diversification. That legal obligation exists both by statute and under the fiduciary duty of prudence.⁷² Any other approach would be not just illegal but insane. Combining diversification requirements with a worker-first view puts funds where I think they should be: broadly and conservatively invested in the market while still positioned to use shareholder influence to improve labor’s economic prospects.

At the opposite extreme from the narrow maximize-returns view, and stretching beyond the jobs-focused view I advocate, is one permitting investment decisions on almost any basis, including purely social or political considerations. For the left, it might be divesting from energy or tobacco companies. For the right, it might be divesting from companies that manufacture abortion pills or engage in stem-cell research. How far away from direct economic considerations should pension trustees be allowed to stray? These decisions affect the soundness of these funds, the retirement security of workers, and the potential cost to taxpayers in the (low probability) event of a bailout. Most of us reject the idea of letting trustees play pure politics with pensions, but where to draw this line is obviously not easy.

We return to these considerations throughout the book. But I summarize my framework for analysis here. We can imagine two basic ways of assessing how pensions—or, for that matter, any investors—make investment decisions. The first is economic analysis; the second is political, social, or moral analysis. By economic analysis, I mean analyzing the economic costs and benefits of an investment to the investor. By political / social / moral analysis, I mean analyzing how particular investments align or clash with the investors’ other values. The extent to which jobs and labor issues should be considered by pension funds can fit into either category, as a question of economic interest or as a question of moral and political values. Which category they fall under has significant legal and policy implications.

Most of my focus is on economic criteria. My argument is that fund trustees should broaden their economic perspective beyond blindly maximizing returns that can undermine their own workers’ jobs and the fund itself, to a more holistic view of workers’ economic interests in their investments. Ironically, departing from the narrow maximize-returns view does not necessarily entail accepting reduced returns. There is a substantial body of evidence—contested evidence, but evidence all the same—suggesting that environmental, social, and governance sensitive investment portfolios actually obtain higher returns than maximize-returns portfolios do. (Social and governance criteria often take labor concerns into account anyway.) Regardless, the “worker-centric” view includes considering workers’ interests in their jobs and benefits in making investment decisions, within the overarching framework of remaining diversified. Ultimately, in the extreme case, that means allowing funds to trade off investment returns for other economic benefits like jobs and increased contributions to the fund, insofar as the reduced investment returns are offset by these other economic benefits.

The most important reason why I favor this approach as a matter of law and policy is that it would allow pensions not just to manage the challenge of privatization but to use their pension power to create jobs and contributors. There is no greater opportunity to do so than the prospect of massive infrastructure spending in America. Although it has not yet come to pass, both President Donald Trump and Senate Democrats have embraced a proposed trillion-dollar infrastructure investment program.⁷³ Even if this remains nothing more than political talk in the near term, some significant spending on infrastructure seems almost inevitable in the United States, given its current decrepit state. Talk in the political sphere has already prompted significant capital-raising efforts in the private sector focused on infrastructure. Worker-first would empower pensions to shape such investment by giving them additional legal cover to pursue the hiring of union labor or “prevailing wage” compensation for workers on any infrastructure project in which they invest. Such union workers would in turn contribute to these pension funds, creating a virtuous circle and potentially delivering an adrenaline shot to the ailing labor movement.

This worker-centric view stands in contrast to efforts to destroy these pensions entirely, converting them into individually managed 401(k)s. Much of the contemporary debate over pensions is shaped by the widespread perception that these funds are underfunded and that they are imminently at risk of requiring a taxpayer-funded bailout. It is unquestionably true that a small number of local pension funds are in bad shape. But the view that most public pension funds face an imminent catastrophe of underfunding is a perversion of the truth. It treats the worst-case scenario as inevitable and ignores evidence that most of these funds stand on a firm financial footing. It relies on a kernel of truth for some pension funds to paint a broad picture of public pension funds in crisis. It puts the most pessimistic spin on the future uncertainty of pensions. It insists that real but manageable problems with modest solutions are actually huge problems requiring radical reform. It ignores the primary cause of pension underfunding, which is the decades-long refusal of employers to pay their obligations to workers. And it is a view that has received far more traction than its competitors because it has been widely promoted by Charles and David Koch’s Americans for Prosperity, and John Arnold’s Laura and John Arnold Foundation, among others. Most damning of all, this view has been used to justify turning public pension funds and labor union funds into individually managed 401(k) funds or the equivalent, even though there is strong evidence that 401(k)s leave workers with insufficient retirement assets.⁷⁴ The drive to replace pensions with 401(k)s or individual retirement accounts (IRAs) would not only jeopardize the retirement security of millions of Americans. It would destroy the very activism described in this book. That’s not a bug of pension reform but a feature.

Safeway’s Aftermath

Burd remained Safeway CEO for nearly a decade after the strike, finally retiring in 2013. He left the company fourteen months before it was acquired by supermarket rival Albertsons (which in the interim had been bought by Cerberus) for $9.2 billion.⁷⁵ Burd received $7.5 million in stock for that deal and made in excess of $100 million during his time as Safeway CEO.⁷⁶ In contrast to Burd, Harrigan lost his CalPERS job by the end of 2004. Leading fights against Richard Grasso, Michael Eisner, and finally Steve Burd earned Harrigan a long list of powerful enemies. When Republican Arnold Schwarzenegger defeated Democratic incumbent Gray Davis in a California gubernatorial recall election in 2004, those enemies saw an opportunity to take down Harrigan. Widespread media reports suggested that Governor Schwarzenegger pressured the California Personnel Board to cause Harrigan’s “unceremonious firing,” as the New York Times described it, though Schwarzenegger denied involvement. Still, as the Times reported, “tempestuous as his short reign may have been, Harrigan did well by CalPERS shareholders, raising the fund’s assets to $177 billion from $116 billion in less than two years.” Harrigan, as you might have guessed, did not go quietly. He published an op-ed in the Los Angeles Times, “The Corporations Couldn’t Tolerate My Activist Voice,” touting his and CalPERS’s accomplishments, accusing Schwarzenegger and the U.S. Chamber of Commerce of ousting him, and proclaiming the rise of the corporate governance movement—the shareholder movement to reform corporations from within.⁷⁷

Although Harrigan’s career did not end after he lost the CalPERS presidency, he never regained the prominence he had attained in his twenty-two months leading the fund. He subsequently served as president of the Los Angeles Fire and Police Pensions Board, a significant fund with over $10 billion in assets, but still far less prominent and influential than its statewide counterpart. Harrigan ultimately resigned from that board along with another board member—a billionaire former finance chair for the Republican National Committee named Elliott Broidy—after an SEC investigation over pay-to-play allegations. A mania of such charges occurred in 2009–10, but the allegations were never substantiated against either man. Harrigan has since disappeared from public view.⁷⁸

In the decade following the Safeway fight, working-class shareholder power would expand massively. Many of the barriers confronted by the Safeway shareholder campaigners would collapse in the face of pressure brought by the generation of shareholder activists that followed Sean Harrigan, Ed Smith, and Denise Nappier. These fighters would strip Burd’s peers of many of the tools he manipulated to entrench himself, vastly increasing business leaders’ accountability to shareholders like CalPERS. Among these activist achievements, but by no means the only one, was the successful advance of “proxy access” (the subject of the next chapter) through a torturous, dozen-year fight that continues to this day. These new activists would also successfully fight for the CEO-worker pay rule, which requires companies to disclose how much their CEOs are paid relative to the median company worker—a rule that initially appeared to be vulnerable under the Trump administration but that now appears safe, at least in the very near term.⁷⁹ Shareholder activists would decisively win the fights to destagger corporate boards and institute majority voting in director elections. They would successfully lobby for the most important provisions of the Dodd-Frank Act. They would deploy new tactics to force hedge funds and private equity funds to prioritize the needs of working-class shareholders or face harsh economic consequences. And perhaps most importantly, they would learn to use their shareholder power to help create more jobs for workers.

In so doing, these activists would learn to advance the interests of workers by doing what any politically mature movement does. At times, they would advance worker interests directly. That is particularly true in their long-overdue conflicts with hedge funds and private equity funds, where they would push back against funds trying to undermine pensions, kill worker jobs, and charge excessive fees (though this last fight would come much later than it should have). At other times, the activists would advance their own interests by simultaneously advancing the interests of others. That is true of the leadership role these activists would come to play in the corporate governance movement, the movement to make corporate managers more accountable to long-term shareholders, mostly entities that are looking to pay out retirement benefits over a thirty- to forty-year time horizon. As leaders of the corporate governance reform movement, working-class shareholders have represented the interests of all long-term, diversified shareholders, including themselves but also mutual funds, foundations, and others. In so doing, these funds have not only enhanced the value and power of their own retirement funds but have made themselves indispensable to almost everyone else in the market. Those alliances will hopefully reap rewards as labor’s capital faces increasing legal and political challenges in the near term.