Agency Costs, Corporate Governance, and the American Labor Union

Acute agency costs exist in unions as they do in other complex organizations. Specifically, union officials are imperfect representatives of the rank-and-file workers they ostensibly represent. Yet far less attention has been paid to addressing agency costs in the context of unions than in the context of public corporations, where the separation of share ownership and managerial control long has been the subject of intense scrutiny by academics and policymakers. By contrast, concrete suggestions for confronting agency problems in unions on the ground are few.

This Article posits that unions would be more successful in attracting new members and in securing benefits for existing members if unions could reduce agency costs. Workers who think that unions are corrupt and incapable of faithfully representing their interests in the workplace rationally will eschew union membership. The lack of focus on agency costs in the union context appears to be based on ideological and political considerations that conflate the interests of workers with the interests of union officials. But the interests of workers and union officials diverge in significant ways. Workers are concerned with job security, wages, and working conditions, and union officials are concerned with maximizing the private benefits of their office, often at the expense of workers.

To reduce agency costs, this Article proposes a strategy of policy arbitrage consisting of identifying effective mechanisms for controlling agency costs in the corporate context that can be transferred to the union context, and shows how such arbitrage could be accomplished. I identify four corporate governance mechanisms as particularly promising candidates for import into the union context. First, proxy advisory firms could be employed to provide rank-and-file workers with high-quality advice about how to vote in union elections. Second, existing disclosure obligations under the Landrum-Griffin Act should be both enhanced to include better disclosure of union officials’ compensation and “weaponized” by providing rank-and-file workers the right to vote up or down on such compensation through the provision of what are known in the corporate context as “say-on-pay” voting rights. Third, following Securities Exchange Act Rule 14a-8, union-voting procedures should be reformed to give workers the right to make proposals that are distributed, along with the union’s voting materials, at the union’s expense, to workers for their approval. Allowing rank-and-file workers to make direct appeals to other rank-and-file workers would enable workers to recommend internal governance reforms of unions and empower them to nominate rival slates of directors and officers for their unions. Finally, following well-established norms of corporate governance, unions should be required to have independent directors on their governing boards. The responsibility for nominating union directors, determining compensation for top union officials, setting internal governance rules, and selecting the union’s independent, outside auditors should be removed from the board as a whole and delegated to committees consisting of these independent board members.