Hedge Funds and Labor Are Not Bedfellows
Two SEC proposals have billionaire activist hedge funds up in arms and pulling out all the stops—including falsely claiming organized labor is opposed to the important proposals. Industry opponents will showcase their disdain at an upcoming Investor Advisory Committee (IAC) meeting scheduled for Sept. 21.
These rules—one on beneficial ownership and another one on swaps—would narrow loopholes hedge funds use to: 1) secretly build large ownership stakes in public companies; 2) engage in what is in essence legalized insider trading before disclosures of large ownership stakes are made public; and 3) use their newly-acquired ownership stake to extract value and boost short-term returns at the expense of long-term value. This strategy hurts workers, companies, communities, and regular investors by leaving companies in a weakened state that ultimately results in fewer jobs, worse pay, losses to long-term investors, and a declining U.S. economy.
With their predatory but wildly profitable practices on the line, billionaire hedge funds are mobilizing. So they conjured up a false narrative that labor was opposed to the SEC’s proposals because they would supposedly, somehow be bad for workers. The press initially picked up and ran with this narrative, and so did three members of Congress under the leadership of a member who is a top recipient of hedge fund donations.
Why would hedge funds create this narrative? Brandon Rees, deputy director of corporations and capital markets at the AFL-CIO, has an answer: “Activist hedge funds don’t view themselves as being particularly sympathetic parties so they’re seeking strange bedfellows to support them.”
The AFL-CIO and eleven unions set the record straight by expressing their strong support for the proposals, noting that the rules would benefit workers and their pension funds without interfering with their engagement with companies on environmental, social, and governance (ESG) issues as shareholders. Six senators, led by Senator Tammy Baldwin, subsequently submitted a comment letter in support of the rules making similar arguments.
Even though the record had to be set straight, this is not the first time labor has spoken out against activist hedge funds. “[E]ven a cursory search of the AFL-CIO’s website would find an executive council statement going back to 2007 that was highly critical of activist hedge funds and particularly the secrecy around it,” said Rees. Indeed, labor has plenty of reasons to be critical. For example, a study of over 1,300 activist hedge fund campaigns found that they trigger significant decreases in their target companies’ workforces.
Additionally, the Communications Workers of America and SOC Investment Group published a report a year ago that detailed the impact of activist hedge funds on productive companies. The study focused on Elliott Management and found that investors who keep stock for three years after an Elliott campaign will lose money—most likely because activist hedge funds often extract cash for short-term returns while leaving companies in a weaker long term position.
To obscure their role in fighting SEC rules, hedge funds appear to have used an academic institute at least partly funded by hedge fund money, according to Institutional Investor. AFR’s own senior policy analyst Andrew Park, himself a member of the SEC IAC, noted that the institute is “representing the interests of different groups that don’t want to put their face on what’s trying to be done here.”
The main argument being made by the institute to support their contention that the proposed rules would be bad for labor—that the proposed definition of “group” would chill shareholder activism by labor and public pension funds and ESG shareholder activism in general—is nonsense.
First, labor and pension shareholder activism is not usually about control. As the labor comment letter notes, workers’ pension plans routinely collaborate on shareholder proposals, “vote no” campaigns focused on particular directors, and shareholder-company engagement strategies. None of these activities are intended to influence control of a company.
Second, even when control is involved, ESG activism is often done with small ownership stakes that don’t trigger disclosures. Indeed, the letter by senators in support of the rules notes that the ESG wins identified by opponents were achieved through engagement by investors with a less than one percent ownership stake. The Institutional Investor piece also discusses the most prominent case: the proxy fight led by Engine No. 1 against Exxon that three of the largest U.S. pension funds supported. As the article notes, the four investors did not collectively own 5 percent of Exxon.
Third, as the letter by senators points out, the rules could even facilitate corporate social responsibility, as research has shown hedge funds are more likely to target companies with high levels of corporate responsibility, “perhaps because hedge funds consider spending associated with benefits to society at large wasteful.”
The SEC should finalize these critical rules as soon as possible. While it may decide to clarify the “group” definition—especially in light of the confusion hedge funds have sown—they should not heed billionaire hedge funds’ advice to discard the rules altogether. It’s time to close regulatory loopholes that hurt everyday investors and incentivize actions that hurt workers, consumers, and communities. Billionaire hedge fund profits are a price labor and the rest of us are more than willing to pay.