by Daniel Pedrotty, Sep 11, 2006

Lots of recent news from the AFL-CIO Office of Investment team.

The AFL-CIO has urged the “Big Four” accounting firms to determine what role, if any, they had in the stock options backdating of client companies under investigation by the Securities and Exchange Commission (SEC) or Justice Department. As independent auditors, these firms are responsible for properly examining and verifying companies’ financial and accounting statements. 

In light of the recent stock options scandal, it is necessary for corporations to increase scrutiny of past audits and option grants to reveal any improprieties before regulators force them to do so. Union-sponsored pension funds hold approximately $400 billion in assets and are significant shareholders in many of the companies under investigation.

Stock options give the recipient the right to buy shares at a set price in the future. Recent scrutiny has centered on whether companies backdated grants to periods when the stock price was lower (while not disclosing their actions or taking a tax charge), ensuring a profit. Authorities also are examining companies that scheduled an option grant ahead of good news, or delayed it until after bad news. 

• Separately, a new study estimates the stock options backdating scandal may cost shareholders hundreds of millions of dollars. Three researchers at the University of Michigan estimated that backdating stock options between 2000 and 2004 helped sweeten the average executive’s pay by more than 1.25 percent, or about $600,000. But the fallout from the recent options investigations has caused those executives’ companies to fall in market value by an average of 8 percent, or $500 million each. ”For about $600,000 a year to the executives, shareholders are being put at risk to the tune of $500 million,” the study concludes.
• Trust Company of the West (TCW), a multibillion investment manager with a history of contributing to extremist campaigns and initiatives, did right by the tens of thousands of union members whose money it manages. Late last month, the company issued a policy statement labeled “TCW’s Perspective on Retirement Security.” The public statement included the position that “TCW is committed to the preservation of the defined-benefit system and the company will not support public policy efforts to undermine defined-benefit plans.” A copy of the updated AFL-CIO Retirement Security report is located here. (Defined-benefit pension plans are usually funded entirely by employers through tax-exempt contributions and automatically cover all qualified employees—and provide a far more secure retirement for working people than do defined-contribution plans. Find out more here.)
• Last week, the 1.4 million-member public employee union AFSCME won a significant legal victory that will give working families greater input in the process that determines who represents them in the boardroom. A federal appeals court said American International Group (AIG) improperly blocked a measure that would give shareholders with at least 3 percent of its stock the ability to nominate board members on AIG’s annual proxy. Right now, these elections resemble rubber-stamp exercises in which board members are rarely challenged (largely due to the expense) by more credible candidates. Now company owners are significantly closer to a vote on independent directors who will better represent their interests in the boardroom.
• A heads-up warning for all those ideologues who claim a 401(k) savings account gives America’s workers a more secure retirement than a traditional defined-benefit pension: A recent Boston College report indicated that private 401(k) retirement-savings plans have underperformed traditional company pension plans by one percentage point per year. As the study’s director acknowledged, if this “were true over a person’s 40-year work life, they would end up with 20 percent less at retirement.”

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