How Union Workers’ Money Funds A Union Buster
Mellody Hobson, Starbucks chairwoman and president of Ariel Investments. (AP Photo/Ted S. Warren)
As Starbucks tries to bust a union, its chairwoman’s firm is making huge fees off unionized workers’ retirement savings.
As Starbucks wages an aggressive anti-union campaign resulting in the firing of 16 pro-union workers, the company’s chairwoman has been running an investment firm raking in millions in fees from unionized workers’ pension funds while delivering subpar returns to retirees.
Starbucks chairwoman Mellody Hobson has been publicly defending the coffee giant’s union-busting activities. She recently told Starbucks shareholders that while “we absolutely understand and recognize the right of our partners to organize,” the company will refuse to stay neutral in union elections because that “limits our ability to speak to our partners in certain ways, and that goes directly against the DNA of the company.”
At the same time, Hobson is leading Ariel Investments, which manages more than $640 million in assets for Chicago-area pension funds, earning the firm more than $3 million annually in fees. The members and retirees of those pension funds are overwhelmingly represented by unions — including the same one, SEIU, that is seeking to organize Starbucks workers.
In effect, Chicago-area union members are financing — with fees and poor returns — Hobson’s career, all while she helps lead a Fortune 500 company working to block a union drive and prevent a landmark victory for the larger labor movement.
“Decades of underfunding of public pension funds has effectively held working people and retirees hostage to asset managers that actively work against the interests of working people, while not delivering what they’ve promised,” Samir Sonti, a professor of labor and urban studies at the City University of New York, told The Lever.
An Evangelist For Active Management
Hobson is well known for her friendship with the Obamas, her marriage to Star Wars billionaire George Lucas, and her deep ties to Chicago’s political machine. Less known is her success convincing pension overseers to funnel unionized workers’ retirement savings to her investment management firm, all while she leads a publicly traded company that is hostile to the labor movement.
Hobson’s balancing act between finance, anti-union capital, and labor has been predicated on her sales pitch to pension officials about “active management” — which seeks to beat the market by actively picking stocks — that proponents insist deliver better results than low-fee stock index funds. Hobson told an audience in 2019 that investors “will understand that it is worthwhile to pay for an active return.”
If that was true, Hobson and pension officials might be able to insist that big returns for union workers’ retirement funds justifies funneling money to a top official of Starbucks even as the company now tries to block a union.
But the investment results tell a different story:
The Chicago Teachers’ Pension Fund, which serves 90,000 active, inactive, and retired unionized teachers and principals, has $79 million invested with Ariel as part of a foreign stock strategy. According to fund documents from late last year, over the past five years, the Ariel strategy returned 4.5 percent, compared with the MSCI index of foreign stocks returning 8.8 percent. The difference cost the pension fund about $16 million.
The Illinois State Universities Retirement System, with 240,000 mostly union members and retirees, has plunged $129 million in the same strategy, while the Cook County pension, with 40,000 nearly entirely unionized members and retirees, has put in $121 million.
The Chicago municipal employees’ pension fund, with more than 30,000 unionized members and retirees, has invested $109 million into Ariel’s Small Mid-Cap strategy of domestic stocks, which by Ariel’s own admission has returned 12.1 percent over the past 10 years, compared to the S&P 500’s return of 14.6 percent over the same time period — a difference of more than $2 million per year.
The Chicago Water pension fund, with 4,500 union members and retirees, has put in $103 million into the same strategy, while the Chicago Transit Authority pension fund, with 18,000 union members and retirees, has put in $66 million, and the Laborers' Annuity and Benefit Fund of Chicago, with more than 7,000 union members and retirees, has put in $37 million.
“The problem with active management is that the overwhelming majority of active managers underperform net of fees,” Ted Siedle, a former attorney with the Securities and Exchange Commission (SEC), the financial industry’s top regulator, told The Lever. “That has been constant for decades. It’s never a surprise, it’s to be expected. Anyone who thinks that’s going to change is delusional. You would know going in that the likelihood that your active manager is going to outperform indexes is extremely slim.”
Siedle’s criticism has been echoed by Berkshire Hathaway CEO Warren Buffett, who has said that by pursuing active management, investors are “certain” to get “worse-than-average results.”
New leadership at the SEC appears to share Buffett and Siedle’s concerns. William Birdthistle, a law professor who was tapped in 2021 to lead the Division of Investment Management at the SEC, is a skeptic as well. As he told the South Bend Tribune in 2017, by exiting active management, “What would you be giving up? High fees with no assurance of positive returns.”
“An incredibly small number of active managers beat the market consistently,” Birdthistle continued. “The alternative — investing in low-fee index funds — is the most sensible conclusion.”