(morgan Lewis) Seiu Union Organizing Efforts At Financial Services Companies

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SEIU Union Organizing Efforts at Financial Services Companies April 2009 Introduction As reported in a April 20, 2009 press release issued the Service Employees International Union (SEIU), SEIU Pension Plans Master Trust (SEIU Master Trust) has recently sent letters to the boards of directors of 29 major companies demanding that the boards look into how executive pay was incentivized and determine whether bonuses were paid to executives based on false presumptions or economic metrics, or financial instruments that are now worthless. The letters further demand that the boards investigate whether their companies have legitimate and reasonable claims to recover and/or prevent the payment of executive compensation that was unjustly paid or approved for payment, and threaten shareholder derivative suits if the boards fail to properly discharge what the SEIU Master Trust describes as their fiduciary duties to investigate and prosecute these potential claims within a reasonable period of time. (A copy of the SEIU April 20, 2009 press release is attached.) The SEIU's Corporate Campaign Although these letters were sent on behalf of the SEIU Master Trust (described below) and carefully drafted to suggest they were sent solely on behalf of the SEIU Master Trust in its capacity as a shareholder, the threatened shareholder derivative suits are no doubt part of a broader corporate campaign that the SEIU is waging against financial services companies, with the ultimate goal of organizing employees in the industry, especially those most vulnerable to such efforts such as call center and branch-based employees. A corporate campaign is a multifaceted effort by a union to put pressure on a company to accede to the union's demands. The tactics used in corporate campaigns often include, in addition to shareholder actions, public demonstrations, negative advertisements, and other publicity designed to tarnish the company's image, efforts to persuade customers to boycott the company's products, personal attacks against the company's officers and directors, and efforts to generate political, legislative, and regulatory pressure against the company. The SEIU has recently orchestrated demonstrations and other publicity events against financial services companies, such as a coordinated series of protests at banks and other financial institutions nationwide on March 19 and its "ambush" of the Financial Services Roundtable meeting in Washington, D.C. on March 27. The SEIU's ultimate goal is not simply to deal with these companies on the executive pay issue, but rather to negotiate with the companies as the collective bargaining representative of large groups of employees in the industry. In order to achieve this goal, the SEIU will typically demand that the targeted companies enter into agreements that will facilitate and expedite the union organizing process. These agreements, commonly known as neutrality and card-check agreements, involve commitments by the company to remain neutral in any union organizing campaign (i.e., not oppose the union's organizing efforts) and to agree to recognize the union based on a check of authorization cards collected by the union, rather than using the National Labor Relations Board's secret- ballot election process. A private This White Paper is provided as a general informational service to clients and friends of Morgan, Lewis & Bockius LLP. It should not be construed as, and does not constitute, legal advice on any specific matter, nor does this message create an attorney-client relationship. These materials may be considered Attorney Advertising in some states. Please note that the prior results discussed in the material do not guarantee similar outcomes. ©2009 Morgan, Lewis & Bockius LLP card-check process is all the more important for the SEIU if, as it currently seems, the cardcheck provisions of the proposed Employee Free Choice Act do not pass Congress this term. The SEIU Master Trust The SEIU Master Trust is a trust fund that holds the assets of three jointly administered, multiemployer pension funds, commonly referred to as “Taft-Hartley” funds. Taft-Hartley funds are created pursuant to collective bargaining agreements and governed by a board of trustees with equal voting power between labor and management. Many Taft-Hartley funds have accumulated substantial holdings in publicly held securities. At the behest of the Department of Labor and others, many of the trustees on these funds have been instructed that they have a fiduciary duty to vote all proxies and to use their positions as shareholders to maximize the investment returns for the trust fund. As part of this process, some funds are now seeking to use their positions as shareholders to pressure corporate boards to examine their executive pay practices and, where appropriate, to bring actions to recover “excessive” executive compensation. Actions such as that being threatened against these 29 companies and their boards—especially the initiation of litigation—would typically require the consent of both the union trustees, which include SEIU President Andy Stern, and the employer trustees. Trustees of a Taft-Hartley fund, including the trustees of the SEIU Master Trust, owe a fiduciary duty of loyalty to plan participants and beneficiaries and must administer the fund for the "sole and exclusive benefit" of participants and beneficiaries. There is an obvious tension between the SEIU's interests as a labor organization and the union trustees' fiduciary duties to plan participants and beneficiaries, but this is a tension that the Employee Retirement Income Security Act (ERISA) largely permits within certain bounds. For instance, employers often serve as fiduciaries of their own pension plans even though there may be inherent tensions between the interests of employers and those of plan participants. Here, the SEIU's agenda is clearly to organize employees in the financial services industry, and it is using the SEIU Master Trust and fund assets (i.e., stock in targeted financial services companies owned by the pension funds) to further that union objective. While the conflict of interest may seem apparent, it could be difficult to prove a breach of fiduciary duty, especially where both union and employer trustees vote in favor of taking shareholder action and there is a potential benefit to the funds. No doubt the trustees will claim that such action will enhance shareholder value and therefore help secure the retirement benefits of participants and beneficiaries. What's more, even if a breach of fiduciary duty could be shown, the targeted companies have little if any ability to seek redress in the courts. Under ERISA, only participants, beneficiaries, fiduciaries, and the Secretary of Labor have standing to bring an action for breach of fiduciary duty, and ERISA's broad preemption provision makes it extremely difficult to mount a successful challenge under state law. There is no basis for a targeted company to bring a derivative suit on behalf of the SEIU Master Trust against the union or employer trustees. Alleged Obligation to Pursue Possible Recovery of Executive Compensation The SEIU Master Trust’s demand that each of the 29 companies pursue recovery of executive compensation already earned or paid is rooted in federal law but raises a host of legal and practical issues. Under Section 304 of the Sarbanes-Oxley Act, the CEO and CFO Morgan, Lewis & Bockius LLP 3 of a publicly traded company are required to disgorge bonuses and other incentive- or equity-based compensation received during the prior 12 months in the event of violations of federal securities laws, specifically where the company is required to prepare restated financials due to material noncompliance with the SEC's financial reporting requirements. The Troubled Assets Relief Program (TARP) imposed a broader set of requirements on institutions receiving TARP funds by mandating that the CEO, CFO, and three most highly compensated senior executive officers (SEOs) return bonus or incentive compensation paid on the basis of earnings, gains, or other criteria that are later proven to be “materially inaccurate.” The American Recovery and Reinvestment Act (ARRA) took the clawback rules one step further, applying the TARP requirements to SEOs and the next 20 most highly compensated employees and adding retention bonuses to the list of compensation to be recovered. None of these statutes, however, expressly provides a private right of action, and TARP and ARRA are so new the Treasury Department has not provided clear guidance on how they apply or would be enforced. Common law causes of action, such as the “faithless servant” doctrine, may furnish an avenue for recovering compensation, though the law in this area is relatively undeveloped. Litigation to recoup executive compensation already earned or received would also encounter potential obstacles under state law. Several states, including California, define “wages” so broadly that forfeiture of compensation that has already been earned, not to mention paid, may not be permitted. An issue that will surely arise in any such litigation is when the bonus or incentive compensation becomes wages—when it is initially earned or only after clawback conditions are satisfied. Companies are continually looking for ways to structure their executive compensation programs to permit clawbacks without running afoul of state wage payment laws. Recommended Steps to Protect Against the SEIU's Corporate Campaign and Union Organizing Efforts The companies that are targets of SEIU's corporate campaign should be prepared to deal with these issues both from a litigation standpoint and from employee and public relations standpoints. Based on our extensive experience helping financial institutions and other companies deal with corporate campaigns and union organizing efforts by the SEIU and other unions, including the SEIU's current union organizing efforts and corporate campaign directed at financial institutions, we recommend that executives and managers be provided training or at least guidance on how to respond to communications from the SEIU or other unions. Among other things, they need to understand that certain types of communications with union representatives and certain actions such as viewing signed union authorization cards can, in certain circumstances, create obligations and even bind a company to a relationship with the union. If you have any questions or would like more information about what such a training program would entail, please contact one of the following attorneys: New York David A. McManus Craig A. Bitman Gary S. Rothstein Philadelphia Steven R. Wall 212.309.6824 212.309.7190 212.309.6360 [email protected] [email protected] [email protected] 215.963.4928 [email protected] Morgan, Lewis & Bockius LLP 4 Steven D. Spencer Doreen S. Davis Robert J. Lichtenstein Robert L. Abramowitz Washington, D.C. Althea R. Day Joseph E. Santucci, Jr. Daniel L. Hogans Gregory L. Needles Chicago Charles C. Jackson Philip A. Miscimarra Princeton Richard G. Rosenblatt Rene M. Johnson San Francisco Daryl S. Landy Los Angeles Peter J. Hurtgen Dallas Paulo B. McKeeby Houston A. 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