A coalition of clergymen gathered in a Decatur, Georgia parking lot this spring and called for a boycott of one of the state’s iconic companies — Home Depot. The perceived sin was one of omission. Home Depot had failed to directly oppose a new Georgia voting law that makes voting more difficult and grants the state legislature more control over election administration.
A polarized political climate is landing many corporate executives in the uncomfortable position of needing to publicly respond to controversial government policy. At least in Home Depot’s case, one could argue that their hostile stance toward labor unions (this anti-union video appears to be produced by the company) is at least partly to blame. And the investors that ultimately employ these executives need to take the time to evaluate the alignment of their interests with those of the potentially unionized workers with whom they are assumed to be in opposition.
There is a consensus that unionization has a negative effect on the equity value of companies, at least over the medium term. Lee and Mas estimate the average hit to share prices at about 10%, on average, over a four-year period. Though, the same research shows a more modest effect in cases where the unionization vote margin is narrow. For institutional investors, fiduciary obligations might end the consideration of union support here. But this cost must be weighed against potential benefits.
The chief good of private sector labor unions may be a healthier democracy. In an age of rampant disinformation, unions can offer their members a trusted source. Rather than simply serving as a collective voice, Kim and Margalit find that unions influence members’ policy preferences. Reiff believes this influence may provide an important antidote to demagoguery, highlighting the recent failure of racist and xenophobic candidates in France and Germany who were opposed by most unions.
If one accepts this virtue of unions — a bulwark against authoritarianism — they are as invaluable to investors as to the rest of society. In a world where all workers are represented by unions that provide a preferred source of information, companies like Home Depot may be less likely to face the prospect of alienating customers because the political footballs currently being thrown their way won’t exist.
Reiff goes so far as to argue that labor unions are a basic institution that makes our society more likely to be just. He notes that unions may lobby for legislation and government action, serve as a check on management incompetence and corruption, and ensure compliance with the law that may prove more effective and more efficient than outside regulation.
Investor support of unions as a basic institution in a just society is consistent with the school of thought that asset owners need to focus as much on the underlying systems that support capital markets as they do the inner workings of companies. A case for such thinking is made by Lukomnik and Hawley in their recent book, Moving Beyond Modern Portfolio Theory. Unions embedded within larger companies can act as an internal watchdog with respect to the environmental and social impacts of business operations. In the same way management is an agent of shareholders’ financial interests, unions may help serve as agents of shareholders’ non-financial concerns.
A skeptical stock investor might judge the threat to democracy insufficient to accept a reduction in the value of their holdings with labor unionization, even if they accept the premise that unionization can make society more just. But nearly all investors hold diversified portfolios with fixed-income securities in addition to equity investments. If bonds behave differently than stocks in the presence of unions, the financial impact on the overall portfolio might be less of a concern.
In fact, Chen and his colleagues find unions are correlated with higher values for corporate bonds. This might be because companies with unions are less likely to engage in the types of risky behavior that end up in business failure. Managements of such companies are under greater scrutiny and have less incentive to “go for broke.” Gomez and Tzioumis show that union presence is associated with lower levels of executive stock awards. For most employees outside of the C-Suite, work provides a steady income stream similar to a long-term bond while the business survives. So perhaps it should be unsurprising that employees represented by unions and creditors are largely aligned.
The question of whether investors should support labor unions may turn on asset mix and time horizon. If the time horizon under consideration is short, and the investor only holds equity, the decision to oppose unions is obvious unless there is a risk that some authoritarian government is going to seize their assets. I would argue that few investors fit this profile. Most are diversified across asset classes and have horizons that span decades, even if they hold certain securities for shorter periods. For them, the prospective social gains of private sector labor unions may come at a modest financial cost. But if democratic institutions appear to be under attack, as they are currently, the choice to support unions as a defensive measure becomes compelling.
The decision to back unions should be even easier for universal asset owners for whom the externalized environmental and social costs of business activity weigh down returns by dampening portfolio “beta.” Individuals that primarily own index funds can be put into this camp too. If labor unions are effective in mitigating environmental and social costs more generally, they may more than make up for the potential wealth transfer between shareholders and workers that results from widespread unionization.
Investor support for broader labor unionization may contribute to a “more perfect union.” But if and when such a consensus is reached, implementation challenges will remain. Third-party asset managers are often guided by shorter-term incentives and typically handle only a portion of a client’s assets. It would likely fall to the largest institutional investors like public pension funds to drive such a shift in thinking among asset managers.