Trade union representatives in pension funds : treated as agents, but acting as stewards

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Trade union representatives in pension funds

Treated as agents, but acting as stewards

Master’s Thesis in Sociology

Track: Comparative Organisation and Labour Studies

University of Amsterdam

Student: Bart Bakker

Student number: 11010177

Supervisor: Dr. Johan De Deken (Universiteit van Amsterdam)

Second reader: Mr. Dr. R.J.A.M. (Rene) Hulst

Date: 14 August 2017

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Abstract

Both agency theory and stewardship theory were used and investigated in this

thesis. These theories are often seen as both competing and complementary.

Agency theory assumes goal conflict between the principal and agent, while

stewardship assumes goal alignment. The theories are used to investigate the

following research question: “To what extent are the goals of trade union

representatives in pension funds in alignment with the goals of the employees

they represent?” This question focuses on the Dutch pension system, where a

parity governance model is still common among pension fund boards. In this

study employees are seen as the principals who’s interests are represented by

trade union representatives in pension funds (the agents/stewards). This case

is especially interesting in theoretical terms since the principals form an

enormous group with different and sometimes conflicting goals. Besides

investigating goal conflict/alignment between the principals and

agents/stewards, potential agency problems are investigated. Three phases of

research have been conducted. In the first phase, secondary sources

(literature) are used to describe the context and the institutional framework in

which the agency problems might occur. In the second phase, goals and

interests from both the employees and representatives are explored with both

theoretical and rational reasoning. This phase was used as the basis for

interview guides. In the third phase, semi-structured interviews were

conducted. The interviews are divided into three groups: (1) employees, (2)

experts and (3) trade union representatives in pension fund boards. In total, 14

interviewees have been interviewed in 13 interviews. The ‘Grounded Theory

Approach’ (GTA) was used to analyze the data. The data from this research

indicates goal alignment between the employees and the trade union

representatives that embody the interests of employees. In fact, trade unions

and their representatives often know the ‘true’ interests of employees better

than the employees themselves. Trade unions take the collective goals of

employees into account and act in a paternalistic manner to protect employees

and their interests. No evidence of real agency problems have been found.

Trade union representatives fit the theoretical ‘ideal type’ of stewards quite

well. There is, however, a contradiction between how the representatives

behave and how they are treated, hence the title of this thesis.

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Acknowledgements

First of all, I want to express my gratitude towards my Thesis supervisor: Johan De Deken.

When following the master track of Comparative Organisation and Labour Studies, I had the

pleasure to follow various courses that were taught by him. In my experience, De Deken is

one of the most knowledgeable and inspiring teachers. De Deken changed my world view in

several ways and I cannot thank him enough for this. During the thesis project, he provided

me with ample (and patient) feedback, literature tips and a few interview contacts.

Next, I like to thank the interviewees in this thesis: Rene Hulst, Thijs Jansen, Chris

Driessen, Willem Jelle Berg, Rene Sterk, Jan Willem Dieten, Interviewee A (who prefers to

stay anonymous) and all the interviewees from interview group 1. Although these people did

not directly benefit from giving interviews, they generously shared their time and effort to

make this thesis possible.

Special thanks go to my mother Lieneke van Ark and my stepfather Richard van Ark,

who supported me both financially and in spirit throughout my studies. Last but not least, I

would like to dedicate this thesis to my partner, Janneke van Bergen. She is the one who made

me understand the importance of science in the first place. Because she encouraged me and

believed in my ability, I enrolled in a master program. During my studies she encouraged me,

cheered me up and supported me during difficult periods. Janneke, thank you for your

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1. Introduction

The Dutch pension system is often considered as one of the best in the world (Kemna, Ponds,

& Steenbeek, 2011), in terms of the high participation rate, the high level of pension assets

and the relative generosity of pensions (Van der Zwan, 2016, p. 150). However, recent events

have led to discussion and have raised questions about some of the building blocks of the

pension system. Due to multiple reasons (which will be discussed in chapter 5), many pension

funds were unable to adjust pension benefits to inflation and in some cases pensions had to be

cut. Trust in the Dutch pension system and pension funds fell dramatically after the dot.com

crisis in the 1990s and the crisis of 2008. After the latter crisis, rules and regulations became

more rigorous and monitoring was increased throughout the whole pension sector.

Clark and Bennett (2001) discuss the Dutch sector-wide supplementary pensions.

Among other subjects, they discuss pension fund governance and performance in the

Netherlands. The authors write: “Dutch pension-plan participants and beneficiaries are the

`principals' of their plans. Their agents are board members who are appointed by their

employee representatives (unions) and plan-sponsor employers.” (Clark & Bennett, 2001, p.

35). It is interesting that Clark and Bennett name the board members ‘agents’ and the

participants and beneficiaries their ‘principals’. Principals and agents obviously refer to

‘principal-agent theory’ (also known as agency theory) and ‘principal-agent problems’. In

agency theory, the agent is expected to act opportunistically and in a self-serving manner.

Goal conflicts between the agent an principal are expected as well.

Unfortunately, Clark and Bennett do not go into much more detail about the role of

these agents or the possible agency problems that come with them. They do, however, give

various examples of how interests among different groups of principals can differ. For

example, if a pension fund makes surplus returns, plan sponsors (e.g. employers) and current

employees have an unmistakable interest in using that surplus to reduce contribution rates.

Retiree groups on the other hand prefer added benefits and indexation. The authors further

state that: “In sector plans, it could be reasonably argued that the voice of ‘owners’

(participants and beneficiaries) in the management of the plan is muted by poor coordination

amongst large numbers of individual ‘shareholders’.” (Clark & Bennett, 2001, p. 37).

Another possible scenario is presented by Clark and Bennett (2001), in which the

representatives of older workers capture policymaking in a sector that is characterized by

long-term economic decline. The interests of older workers could well be focused on early

retirement and a high rate of income replacement. Such interests are in conflict with younger

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workers’ interests that are more focused on capital investment and long-term growth. In other

words, different groups of participants are likely to have different interests for which they

compete with each other.

How employee representatives (unions) deal with the various interests of the

participants remains an unsolved, yet important puzzle. Especially the employee

representatives who are acting on behalf of a trade union make the puzzle more complex as

they have to represent participants of various age groups, income groups, pensioners and have

to take the interests and ideals of the trade unions in account as well. Agency theory often

focuses on a single principal and various agents. In this thesis I will investigate a case with

millions of principals (employees) and agents who represent them - yet are employed by trade

unions. This thesis attempts to provide substantive theory about a principal-agent relationship

between an enormous group of principals with different and often conflicting goals and

interests and ‘their’ agents who represent these goals and interests.

1.1 Problem Definition

How trade union representatives handle the different interests of the various groups of

participants and employees in particular has not yet been researched much. It is interesting

that Clark and Bennett (2001) define trade union representatives in pension fund boards as

agents for the participants and beneficiaries who are defined as the principals. As will be

discussed in the theoretical framework, various principal-agent problems such as goal

conflict, opportunism, shirking and information asymmetry can be expected in principal-agent

relationships.

In this thesis I will investigate how trade union representatives in pension funds

operate. The main research question is: “To what extend are the goals of trade union

representatives in pension funds aligned with the goals of the employees they represent?” In

order to be able to answer this question, it is first necessary to know what the goals or

interests are of employees in terms of pension fund management. The next step is then to

know which goals and interests trade union representatives in pension funds have. By

comparing these interests, insight is gained about possible principal-agent problems and goal

conflicts in particular.

An extension of goal conflicts could be that the agents act opportunistically and or

shirk. Such behavior becomes more likely – according to agency theory - if there is a lot of

information asymmetry, in the case of perverse incentives and when the agents are not being

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monitored well enough. These and other agency problems will be discussed further in the

theoretical framework chapter.

Besides agency theory, there is also stewardship theory, which is often seen as both a

conflicting and a complementary theory. Stewardship theory and agency theory make very

different, and sometimes even contrasting, assumptions. While goal conflict is assumed in

agency theory, stewardship theory assumes goal alignment (Van Slyke, 2007). In this thesis I

will compare both theories and try to determine whether trade union representatives in

pension funds act more like agents or stewards. In other words, I will try to determine whether

there is a principal-agent relationship or a principal-steward relationship. Depending on the

type of relationship, the aforementioned theories offer various insights and predictions about

which problems are likely to be found and how these problems can be managed and prevented

properly. The type of relationship that I found is less black and white, however. The practical

implications for governance policy can be found in the thesis discussion.

Research questions

As stated earlier, the main research question for this thesis is: “To which extend are the goals

of trade union representatives in pension funds aligned with the goals of the employees they

represent?” The following sub questions will be used to further direct the research:

1. What are the goals and interests of employees in terms of pensions?

2. Is there a goal conflict between employees and trade union representatives?

3. To what extend do agency problems prevent that union representatives in pension

funds work in a responsible manner?

4. Do trade union representatives in pension funds have sufficient knowledge and

expertise to work responsibly?

5. How do trade union representatives view the presence of independent experts in

pension fund boards?

Obviously, when investigating how union representatives in pension funds do their jobs, other

factors that prevent union representatives from doing their work well might be found as well.

1.2 Relevance

Since most Dutch workers will become pensioners someday and will depend on their pension

income, it is clearly a relevant issue for the Dutch society that pension funds are well

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pensions could not be indexed for years or were even cut. As a result, participants and

pensioners lost their trust in their pension fund(s) and the actors who run these funds. Among

these actors are the trade union representatives in pension funds. These union representatives

are investigated in this thesis. Do they truly represent the employers and pensioners and are

their goals and interests aligned?

As there are many different groups of participants and beneficiaries in terms of

income, age, type of work and contract, health, et cetera, the interests and preferences of these

groups are likely to be different as well. As seven out of ten unionists are 45 years or older

and two thirds of all members are male, it becomes an interesting question whether trade

unions favor the interests of certain (member) groups or not. However, trade unions will need

to represent the interests of other groups as well if they wish to attract new members.

Obviously, people are more likely to become a member if they feel like their interests are

being well-represented. Low membership rates can be problematic as they can lead to a loss

of political, economical and negotiational power.

From a theoretical perspective, this case presents an interesting opportunity to use and

test both agency theory and stewardship theory in a very complex situation in which the goals

of millions of people have to be taken into account by the agents/stewards. Agency theory

assumes goal conflict and stewardship theory assumes goal alignment. How useful are these

theories when there are multiple principals with different and often conflicting goals and

interests?

Even more interesting is the possible scenario in which trade unions pursue strategic

goals that are aimed at protecting employees, while most employees do not see or understand

these goals. In light of the assumed goal alignment in stewardship theory, such paternalism is

an interesting phenomenon. Will trade unions pursue such goals in a paternalistic manner

because it is in the ‘true’ interest of the principals? Or will trade unions play like ‘good’

stewards, who only pursue the goals and interests of the principals, even if this could

ultimately hurt the principals?

1.3 Existing (empirical) studies

Clark and Bennett (2001) give an overview of Dutch sector-wide supplementary pensions. As

mentioned before, they also discuss pension fund governance in Dutch pension funds.

Interestingly, they choose to name pension fund participants principals and representatives in

the pension fund boards the agents. They do not give further reasons for doing so nor do they

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discuss possible agency problems. However, the authors do discuss ownership of the funds

and the ‘surpluses’ (e.g. profit, although pension funds call it a surplus since the funds are

non-profit organizations).

It is also of interest that the authors argue that the voice of participants and

beneficiaries in the management of the plan “is muted by poor coordination amongst large

numbers of individual ‘shareholders’.” (Clark & Bennett, 2001, p. 37). Like I am doing in this

thesis, the authors question how all the participants and beneficiaries can be well represented,

as there are so many different interests involved amongst them. This proposed problem leads

to the, as of yet unanswered, question whether all participants and beneficiaries are

represented equally and fairly. In this thesis I will investigate to what extend these interests

are in conflict with each other and how trade unions deal with such (conflicting) interests.

Keune and Payton (2016) give an extensive account on the Dutch welfare state and its

industrial relations. In a paragraph on industrial relations, the role of trade unions as social

partners is explained. The largest trade unions and employer organizations are mentioned. The

authors shortly mention that the social partners are represented in various advisory bodies and

manage pension funds. The text further elaborates on the financial situation of various

pension funds, asset allocation and tax rules.

Keune and Payton also compare two sectors: the automotive sector and the

supermarket sector. What stands out in this comparison is that the former sector is well

organized in terms of union organization and has a male-dominated sector with an average

age of 47. In PME, the pension fund of the automotive sector, there are 147.000 participants

and 167.000 pensioners receiving benefits. While the franchise

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of the sector was relatively

high in 2015 with 67% of the Dutch average annual income for that year, bargaining parties

agreed to decrease the franchise in the coming years. The supermarket branch is not well

organized in terms of union organization. About 70 to 80 percent of the employees in the

sector are under 21 years old, meaning that most workers do not build up any occupational

pension. Also, the franchise is relatively high compared to the average income in the sector.

All factors taken into consideration, most employees do not even reach the franchise threshold

and thus do not accrue pension rights.

Although not stated directly by the authors, it seems that participants and pensioners

are better off in the automotive sector, which is well organized in terms of trade unions and

1_{The franchise is the part of the salary over which no pension is built and therefore no pension premium is}

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employer organizations. What can be taken from the text is that it is important to look at the

composition of the labor force in terms of age, income and flexible work. These factors

influence who builds up an occupational pension and the pension management in pension

funds.

It is further discussed that investments in private equity can yield high short-term

gains for the pension funds, but that such investing can sometimes harm the companies,

economies and the maintenance of employment (and thus the participants who work there as

well). The authors note that representatives from social partners in pension funds should

protect participants against decisions that, in the long run, harm the participants.

Unfortunately, the authors do not further discuss how the pension funds are managed and how

trade union representatives in pension funds execute their work. How representatives are

monitored and whether they are in a position that allows opportunistic behavior is not

mentioned.

Finally, the Act on Improving pension fund boards in 2013 is mentioned. In 2014,

90% of pension funds still had a traditional biparty model. Keune and Payton note that it

remains to be seen to what extent pension funds will switch their governance models in the

future. The new criteria for pension fund board members that are set by The Dutch Bank are

mentioned as well. The authors interviewed various social partners about these new criteria.

The trade unions tended to be more critical about the banks influence on board selection

criteria. Why the trade unions were more critical is, unfortunately, neither explained nor

discussed. Not passing the test of The Dutch Bank means not being allowed into a board

position. In the past, trade union representatives have been criticized for lacking expertise in

board positions. This fact makes it even more interesting that trade unions are critical about

the new rules.

Keune (2017) focuses in his paper on the role that trade unions have played in the

development of occupational pensions in four countries, including the Netherlands. Relevant

for this thesis is that Keune looks at the preferences of trade unions and the institutional and

power resources that are available to pursue those preferences. According to Keune, Dutch

unions are mainly concerned with maintaining the value of occupational pensions. This is

especially true in the context of the of turbulent past with the financial markets. The paper

does not go into depth about other preferences or interests besides the obvious notion that

employees and unions want a good balance between short term wages and long term pension

payments (e.g. premiums).

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De Deken (2011) and Van der Zwan (2016) both give extensive accounts about the

Dutch pension system, developments since the 1990s and the role of social partners. Both

texts have been very valuable to me (hence the many citations in chapter 5) to get an

understanding of the pension system in general and various events.

1.3 Structure of the Thesis

Chapter 2 discusses the theoretical framework for this thesis. Two streams of theory (agency

theory and stewardship theory) are discussed and used in this research project. In chapter 3, I

explore the likely goals and interests of employees and trade unions from a rational and

theoretical perspective. This chapter focuses on some of the mechanisms behind certain

interests. Readers with limited time may choose to skip this chapter as it is mainly a stepping

stone for the interview guides that were used later on. The research design, methods and data

collection methods are discussed in chapter 4. In chapter 5, secondary sources (literature) are

used to describe the context and the institutional framework wherein the agency problems

(might) occur. The research results and partial conclusions for the sub questions can be found

in chapter 6. The answer to the main research question and the five sub questions are given in

the conclusion chapter (7), in whichnthe research is further discussed as well.

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2. Agency Theory and Stewardship Theory

Both agency theory and stewardship theory are used to better understand relationships

between principal(s) and another person/party that acts on behalf of the principal(s). The

employee wants to enter a contract with the trade union because the union has more

(collective) power, resources and expertise than the individual employee. A trade union does

not consist of a single person or agent/steward, but can be viewed as a single entity or

organization. In this thesis, the trade union representatives in pension funds (who are

employed by trade unions) are seen as the agents in agency theory and/or the stewards in

stewardship theory. The theories are used to diagnose and minimize problems in the

relationship. Agency theory and stewardship theory are often considered as both competitive

and complementary.

Depending on the context and situation, a contractual relationship can be more like a

principal-agent relationship or a principal-steward relationship. According to some scholars

(see for example Van Slyke (2007)), it is also possible that a principal-agent relationship

evolves towards or into a principal-steward relationship. Both theories offer specific problems

and/or benefits, solutions and assumptions.

2.1 Agency Theory

Agency theory departs from the perspective of the homo-economicus, rooted in economic

rationality. In this model of humanity, individuals are presumed to behave rational,

self-serving, opportunistic and are motivated by satisfying personal goals (Agarwal, Goel, &

Vashishtha, 2014; Podrug, Filipovic, & Milic, 2010; Van Slyke, 2007). Agency theory relies

on a few key assumptions. Some of these assumptions, which will be discussed below, can be

criticized as an overly negative characterization of an individual agent’s moral behavior (e.g.

self-interested and calculating). However, these assumptions can be used as an ideal type (in

the Weberian sense) of behavior. The other side of the ideal type is that of the steward, who

identifies with the goals of the principal and is presumed to be loyal.

Agency theory is concerned with the contractual relationship between two or more

people or parties. Jensen and Meckling (1976, p. 308) define an agency relationship as a

contract in which one or more persons (the principal(s)) engage another person (the agent) to

perform some service on their behalf, which involves delegating some decision making

authority to the agent. The contract is used as a metaphor to describe the principal-agent

relation (Podrug et al., 2010). The principal usually chooses to contract (e.g. start a relation

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with) an agent for their expertise (Shapiro, 2005; Van Slyke, 2007). By doing so, the

principal(s) delegate the authority to act on their behalf and their preferred course of action to

the agent.

In this thesis, employees are viewed as the principals and trade union representatives

are viewed as the agents.

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Agency theory is used to investigate the relationship between them.

The agent is hired/asked to make decisions that will help to accomplish the goals and

missions of the principal, thus maximizing the benefits for the principal. However, the agent

has his/her own goals, which – at least in agency theory – often diverge from the principals’

goals (Shapiro, 2005).

Eisenhardt (1989) states that: “Agency theory is most relevant in situations in which

contracting problems are difficult” (Eisenhardt, 1989, p. 71). She specifically names three

situations in which such difficulties occur: (1) when there is goal conflict between principals

and agents; (2) when there is outcome uncertainty (e.g. outcomes are hard to measure); (3) in

cases of unprogrammed or team-oriented jobs in which evaluation of behaviors is difficult

(e.g. monitoring behavior is difficult). The first situation of goal conflict will be researched in

this thesis. As will be explained later on, it is likely that there is a certain extend of outcome

uncertainty and difficulty with monitoring of behavior when trade unions are seen as the

agents.

Following the economic model of behavior, the theory is characterized by various

assumptions: (1) there is a goal conflict between the principal and the agent, and (2) there is

information asymmetry between the principal and the agent, and (3) principals and agents

have different propensities to risk taking (Eisenhardt, 1989; Podrug et al., 2010; Van Slyke,

2007). The focus of agency theory lies on correcting (possible) opportunistic behavior on the

side of the agent – and thereby reducing agency costs - that can result from exploiting the

information asymmetry.

Agency costs are defined as “the sum of (1) the monitoring expenditures by the

principal; (2) the bonding expenditures by the agent; and (3) the residual loss.” (Jensen &

Meckling, 1976, p. 308). Jensen and Meckling also mention a fourth (4): compensation costs

(e.g. remuneration and monetary incentives). In the above definition, residual loss stands for

the reduction in welfare of the principal that is a result of divergence between the agent’s

decisions and those decisions that would maximize the welfare of the principal. Shapiro

2_{This is just one of many possible principal-agent relationships in the complicated interrelated relations in}

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(2005) names other, more specific sources of agency costs such as: adverse selection

(attracting low quality agents), shirking (not working hard or trying to do just the minimum),

corruption and moral hazard problems.

Critique on agency theory

The main critique from most scholars on agency theory is that the theory departs from the

homo-economicus behavior model. This model is often seen as one-sided, as it negatively

characterizes the agents’ behavior as (overly) rational, self-serving, opportunistic and

extrinsically motivated. The behavior-model ignores that agents might be loyal and can

identify with the organization, its mission and its goals. The possibility that some agents may

perform responsibly due to self-actualization needs, personal achievement or to receive love

and respect has already been discussed.

Agency theory’s strength is that it helps to diagnose and offer solutions for situations

where one or both parties do act rational and self-serving (see for example Davis, Schoorman,

and Donaldson (1997, pp. 38-40)). Once conflict of interests and information asymmetry

problems are allayed, agency problems will mostly be solved. The potential and validity of

agency theory decreases once most agency problems are solved. At that point, stewardship

theory becomes more valid and useful (Podrug et al., 2010).

There is more critique on agency theory in general and on specific parts of agency

theory literature (see for example Shapiro (2005)). Some of the critique has led to changes,

expansion or improvements of the theory. For example, Eisenhardt (1989) and Wright,

Mukherji, and Kroll (2001) propose various situations in which some of the stricter

assumptions can be relaxed. Davis et al. (1997) offer stewardship theory, which will be

discussed next, as both a competing and complementary theory.

2.2 Stewardship theory

Stewardship theory was introduced as a means of defining relationships based upon other

behavioral premises than agency theory (Donaldson & Davis, 1991). Stewardship theory

takes as a point of departure the perspective of self-actualizing individuals who behave

pro-organizationally and collectively. The latter perspective has its roots in psychology and

sociology (Davis et al., 1997).

Stewardship theory has its own assumptions which are very different, sometimes even

opposite, from the agency theory assumptions. While agency theory assumes goal divergence

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between principal and agent, stewardship theory assumes goal convergence between principal

and steward on the basis of shared goals and trust (Van Slyke, 2007). Davis et al. (1997)

acknowledge that goals of a steward may not always be perfectly aligned with those of the

principal. However, it is still assumed that the steward places greater value on cooperation

over defection and other expressions of self-serving behavior. The reason for this, according

to Davis et al., is that in the stewards perception: “[…] the utility gained from

pro-organizational behavior is higher than the utility than can be gained through individualistic

self-serving behavior.” (Davis et al., 1997, p. 25).

Stewards are assumed to be motivated by intrinsic rewards such as: trust, reputational

enhancement, reciprocity, discretion and autonomy, level of responsibility, job satisfaction,

stability and tenure, and mission alignment (Davis et al., 1997; Van Slyke, 2007). Obviously,

stewards need an income to survive just like everyone else, but monetary incentives are not

the main motivational drivers for stewards. Following the perspective of self-actualizing

individuals, stewards view the successes of the organization as (personal) accomplishments.

Costs for monitoring and (pecuniary) incentives are diminished as they are not the main

motivators for pro-organizational behavior.

While agency theory seeks to increase control over agents, stewardship theory focuses

on structures that facilitate and empower rather than those that monitor and control (Davis et

al., 1997). Since the goals of the stewards are assumed to be aligned with those of the

principals, empowering governance structures and mechanisms are appropriate. Control over

a steward can even be counterproductive since it can lower the stewards’ motivation.

According to Argyris (1972, p. 52): […] work satisfaction is bound up with the degree to

which the worker can exercise his judgment on his job and thus have some control over how

he spends his time and effort.” At a later point, the author states that not having such control

seems to be the most important condition of strong dissatisfaction. This perspective makes

perfect sense from a stewardship theory point of view where people are seen as

self-actualizing individuals.

2.3 A closer look at trade union agents/stewards

Goal divergence or goal convergence?

Without actual data, is too much guesswork to determine whether there is (much) divergence

of goals and interests between employees and the trade union representatives in pension

funds. As stated in the previous chapter, only 17.8 per cent of all employees have a trade

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union membership. Trade unions use questionnaires, discussion meetings and digital voting

systems among their members. It is thus likely that trade unions know quite well what the

goals and interests of their members are. However, older employees (especially men) are

overrepresented in most trade unions. Such overrepresentation might give a biased impression

of the goals and interests of the total employee population, since there are far more employees

who are not a trade union member.

Trade unions representatives act as agents/stewards for multiple principals

(participants), who in turn have various goals and objectives. In other words, the agents are

serving multiple ‘masters’ and some of these ‘masters’ have conflicting interests. Adams

(1996) – mentioned by Shapiro (2005) – uses the term ‘hydra factor’ to depict a situation in

which multiple principals (or agents) disagree or compete over interests and goals. Because

there are multiple principals with different (and sometimes conflicting) goals, it might be

difficult to reconcile the mixed messages and conflicting instructions in the first place. These

mixed messages about goals and interests might pose a problem for both agents and stewards.

Since there are multiple principals with different goals and interests, it is hard to

determine at this stage whether goal conflict or goal alignment is likely. In the next chapter I

will investigate the various interests of employees and other participants. The likely goals

trade union representatives in pension funds and trade unions as organizations will be

investigated in the next chapter as well. By comparing all these goals and interests, it will be

easier to determine whether goal conflict or goal alignment is likely and where specific

problems can be expected.

In order to determine whether goal conflict is likely, it is necessary to know whether

trade unions know about the goals and interests of both their members and non-members. If

the goals and interests of non-members are known by trade unions, the next question is

whether the goals and interests of members and non-members are represented equally. It is

possible that trade unions pay more attention to the goals and interests of their members than

non-members. These questions will be investigated during the interviews and the results are

discussed in later chapters.

Shirking

As mentioned before, agency theory assumes that agents are likely to be work-averse and

shirk (Jensen & Meckling, 1976). Stewardship theory on the other hand assumes that stewards

are motivated to work and will not shirk. What can both theories tell us about the likeliness

that union representatives in pension funds will shirk?

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Jensen and Meckling (1976) mention that when an owner manages his [or her] own

firm, the owner can be motivated by other factors than monetary returns as well. Among other

things they mention personal relations (“love”, “respect”, etc.) with employees. However,

there is no mention of such non-monetary incentives in the context of a principal-agent

relationship. With other words, agency theory assumes that agents are likely to shirk unless

control measures are taken.

According to Wright et al. (2001) some agents may perform responsibly in order to

satisfy their self-actualization needs or because they yearn for personal achievement.

Receiving love and respect for responsible work may also motivate some agents. The authors

therefore present two scenario’s, which they call propositions. In the first scenario the agent

prefers to shirk and does not enjoy performing responsibly. This is essentially the classic

agency theory assumption from Jensen and Meckling. In the second scenario the agent does

enjoy working responsibly because of his/her need for love, respect, and self-actualization

that comes with employment. In this scenario, agents do not shirk (as much) and the goals are

more aligned.

Wright et al. (2001) propose to expand agency theory by relaxing its assumptions in

certain situations. I am critical about doing so, as it will contradict with the homo-economicus

model which is the foundation for agency theory. The second scenario fits the behavior-model

and psychological mechanisms of stewardship perfectly however (see for example Davis et al.

(1997) for a comparison of both theories).

Even if a behavior-model is used in which the agent wants to work responsibly in

order to receive love and respect, there can be situations in which the agent cannot or does not

receive love and respect. It is also possible that the agent does not derive utility from

receiving love or respect from the principal (or other agents/stewards) for a job well done. In

such situations, the assumption about shirking from agency theory may still be valid (Wright

et al., 2001), regardless of the behavior-model that is used.

Following the theory above, two questions must be asked: (1) can union

representatives in pension funds achieve self-actualization needs in their work? And (2) can

they receive love and respect for responsible work? Self-actualization is a term that is not

specified much by Wright et al. (2001). The authors mention self-actualization needs that are

“compatible with Maslow’s (1943) theory of human motivation” (Wright et al., 2001, p. 418).

Self-actualization according to Maslow refers to what a person's full potential is and the

realization of that potential. Maslow describes it as a desire to accomplish everything that one

can, to become the most that one can be (Maslow & Murphy, 1954). With such a loosely

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defined concept, union representatives in pension funds can probably achieve certain

self-actualization needs in their work. But is such a concept even useful in the first place?

In a critical review on Maslow’s theory, Wahba and Bridwell (1976) conclude that

there is very limited, if any, empirical evidence for the theory. Some limited evidence is found

for the self-actualization need, but the concept is too vague. The authors concluded that: “[…]

theories of self-actualization, particularly that of Maslow, suffer from vagueness in concept,

looseness in language, and lack of adequate empirical evidence.” (Wahba & Bridwell, 1976,

p. 233). Although Maslow’s theory is still popular, as a (future) academic, I cannot ignore

such critique and will thus not use the self-actualization theory.

Union representatives in pension funds are in a position in which they are being

watched by other representatives, colleagues and their trade union. Receiving love and respect

for responsible work thus seems possible in this case. The reputation of representatives is also

at stake in the case of irresponsible work. From a theoretical perspective, union

representatives in pension funds are then not likely to shirk much.

Incentives

Agency theory and stewardship theory have different perspectives on what types of incentives

are efficient and how agents/stewards are motivated. First I will discuss the incentives in both

theories. Next I will look at the incentives that are used in an actual pension fund board and

Accountability Counsel.

Incentives in agency theory

Various incentives such as rewards, punishment and monitoring can be used to motivate the

agent to work in line with the goals of the principal(s) and to comply with the performance

standards. Both positive incentives and negative incentives (penalties or sanctions) can be

used. Since agency theory uses the homo-economicus perspective on human behavior, the

focus is on extrinsic rewards that are tangible, exchangeable commodities with a measurable

market value (Davis et al., 1997). Well known examples of extrinsic incentives are piece

rates, commissions, bonuses and stock options. Some examples of sanctions are: not receiving

award fees, non-renewal of the contract and reputation damage (Eisenhardt, 1989; Shapiro,

2005).

Rewarding an agent for good behavior or a positive outcome usually represents costs

to the principal, while extra effort on the side of the agent is rewarding for the principal. The

assumption is that more effort is directly related to better results (Eisenhardt, 1989). Of course

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there can also be situations in which more effort does not necessarily lead to better results or

where more effort is simply not possible.

Incentives in stewardship theory

Stewardship theory assumes that stewards are motivated mostly by intrinsic rewards like trust,

reputation, autonomy and higher levels of responsibility (Davis et al., 1997). Van Slyke

(2007) also mentions job satisfaction, stability and mission alignment with the principals.

Obviously, stewards are paid, but the incentives are focused more on the intrinsic motivations

of the steward. Trust and reputation are used as incentives for alignment and monitoring as a

potential sanction but one that is far less coercive than in agency theory.

Incentives in the pension fund ABP

I will use the ‘Algemeen Burgerlijk Pensioenfonds’ (ABP) as an actual case here. The ABP is

a sector pension fund for government and education and is the largest pension fund in the

Netherlands. According to estimations of the ABP

3

, every one in six Dutch citizens will

receive a pension from the ABP now or in the future.

The board of the ABP currently consists of a Chairwoman and twelve members. Four

members represent employees, three members represent pensioners and five members

represent employers. The annual remuneration of the ABP is as follows:

€ 100.000: chairperson; € 70.000: Vice-chairperson; € 60.000: other board members;

€ 15.000: commission investment policy; € 10,000: committee for pension policy, risk

and audit committee. A member can maximally earn 100.000 euro.

The ABP also has an Accountability Counsel which consists of 48 members. 19 Members

represent employees, 13 members represent pensioners and 16 members represent employers.

Members of the Accountability Counsel receive the following allowance/fee for their work:

316 euro for each consultation meeting with the board or meetings in the own circle; and 158

euro for each committee meeting.

Most Dutch pension funds use a remuneration policy in which the salary of board

members is never higher than the so-called ‘Balkenendenorm’ (130% of a ministerial salary).

The above remuneration figures give us an idea of the extrinsic incentives for representatives.

In comparison, the remuneration for board members is generous in comparison to the annual

3_{Mentioned on the website of the ABP,}_{https://www.abp.nl/over-abp/onze-organisatie/wie-we-zijn.aspx}

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gross modal income for 2017 in the Netherlands. The gross modal income is 37.000 euro

according to the Central Planning Bureau (CPB). However, the remuneration in pension funds

is quite sober in comparison to the remuneration for board members in financial institutions

like banks and (health) insurance companies.

Trade union representatives in pension funds are formally employees of their

respective trade union. In other words, the remuneration does not go directly to the trade

union representative, but he or she earns a wage from the trade union. It could therefore be the

case that representatives actually earn more or less than the formal remuneration figures

mentioned earlier and the ‘vacatiegelden’ (the compensation for attending meetings). I will

further investigate this during interviews with trade union representatives.

Intrinsic incentives that might motivate representatives, such as love and respect have

already been discussed earlier under the heading ‘shirking’. Other intrinsic incentives that fit a

principal-steward relation are difficult to measure and will therefore be investigated during

the interviews.

Reputation and trust

Agency theory usually refers to reputation as a bonding mechanism or as a contract enforcer.

Reputation can be used to promote and ensure goal alignment (Van Slyke, 2007). To prevent

adverse selection, principals are likely to prefer agents with a good reputation. It is thus

beneficial for agents to have a good reputation, as this helps them to get more and/or better

assignments. Agents with a good reputation are also trusted more, and therefore monitored

less rigorous than agents who do not have a good reputation. Trust between agent and

principal can be built by repeated interactions over time in which goals and behavior are

consistent with what is expected. Sharing information - and thereby decreasing information

asymmetry - also helps to build trust. However, agency theory assumes that the agent acts in a

self-interested manner and should thus not be completely trusted.

Stewardship theory on the other hand assumes that a steward’s actions are aligned

with the principal’s interests and stewards can therefore be trusted. The way in which trust,

reputation and monitoring are used, influences how contract relationships are managed (Van

Slyke, 2007). These factors can thus be used to research what kind of relationship there is

between participants and trade union representatives.

According to van Dalen and Henkens (2015), trust in the Dutch pension system and

pension funds is slowly recovering after the crisis. From the 2.103 fully completed

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2014. Trust had risen from 42% to 48% in 2011-2014. According to a research sample from

Mercer (2016) among 823 participants of pension funds, the pension funds receive an average

of 5.9 for trust (on a scale from 1 to 10). While pension funds have tried to restore trust, the

level of trust has hardly changed between 2015 and 2016.

In both studies mentioned above, trust is measured for pension funds as complete

institutions and/or individual organizations. Whether trade union representatives are trusted

more or less than other actors in the funds remains unknown. It is clear however that the level

of trust in pension funds is low in general. As a result, rigorous monitoring of board members

who run the pension funds can be expected.

Monitoring

The agent often has more information than the principal and the agent can exploit such an

information asymmetry for self-gain (which is then called a moral hazard). Due to the

information asymmetry, it can be difficult for the principal to verify whether the behavior of

the agent is aligned with the goals of the principal or not (Eisenhardt, 1989; Shapiro, 2005).

Since the principals have less information than the agent, principals should – according to

agency theory) utilize tools such as monitoring and information systems.

With monitoring, the behavior and/or performance (outcome) of the agent is measured

to check whether the agent acts in line with the principal’s goals. Agency theory prescribes

that monitoring is necessary for principals to ensure the alignment of agents. Van Slyke

(2007) concludes that vigilant monitoring helps to decrease opportunism on the side of the

agent. Eisenhardt (1989) comes to a similar conclusion: “When the principal has information

to verify agent behavior, the agent is more likely to behave in the interests of the principal.”

(Eisenhardt, 1989, p. 60).

Problems can occur when the ‘objective measures of performance’ used in monitoring

do not correlate well with the agents’ own perception of organizational performance

(Amirkhanyan, Kim, & Lambright, 2010). Because principals often cannot directly observe

agent behavior, they have to “rely on imperfect surrogate measures, which can lead the agent

to displace his behavior towards the surrogates in order to appear to be behaving well”

(Mitnick, 1992, p. 79). To be effective, performance measurement information must be

timely, accurate and valid (Romzek & Johnston, 2005).

Measuring outcomes and agent behavior is never certain (due to the information

asymmetry) and can be costly (Van Slyke, 2007). In some cases, monitoring is expected to be

too costly, meaning that the expected costs of monitoring are higher than the expected costs of

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the moral hazards that might occur when no or less monitoring takes place. Rigorous

monitoring can also be perceived as a sign of distrust that can lead to reduced motivation and

work effort on the side of the agent. In some cases then, especially when effective monitoring

is difficult, less monitoring is preferred over rigorous monitoring (Mitnick, 1992). When little

organizational monitoring takes place, monitoring can still occur through media, citizen

and/or member feedback. Such monitoring is known as fire alarm monitoring.

Depending on the chosen governance model, various supervision mechanisms like a

Supervisory Board, an Advisory Board, a Stakeholder Body and an Accountability Body are

used for monitoring in pension funds. Obviously, representatives will watch each other as

well. Finally, trade union representatives in a pension fund are watched by their own union as

well. Representatives are thus monitored in various ways and misbehavior is likely to be

noticed and disciplined. As stated before, such rigorous monitoring might be a result of weak

trust.

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3. Expected goals and interests of employees and trade unions

In this chapter, the likely goals and interests of individual employees and other pension fund

participants, trade union representatives in pension funds and trade unions as organizations

are discussed. Theory and rational thinking are combined to create expectations, which in turn

are used to determine whether goal conflict is likely and situations in which such conflicts can

be expected. In order to go through the various interests in a systematic manner, this chapter

starts with the general interests of individual participants. These interests can vary, and even

conflict, as different groups of participants have different goals and interests as well. Next, the

expected goals and interests of trade unions representatives and trade unions are discussed.

After mapping all these interests, the interests can be compared to each other so that possible

goal conflicts can be determined. This chapter further serves as a guide for the interview

questions.

3.1 General interests of employees

Financial interests of individual employees

Individuals can have multiple interests, which are sometimes in conflict with each other. In

terms of financial interests, employees want a generous pension and certainty. The first option

to make pensions more generous is to simply pay more pension premium. There is, however,

a tradeoff between higher/lower pension premiums and higher/lower wages. If employers pay

less premium, they can pay a higher wage and vice versa. A good balance between these two

is important. Not paying enough premium can lead to pension shortages in the future. Higher

wages on the other hand are of course enjoyable for employees. Higher wages also increase

the purchasing power of people, which can be beneficial for employers as well, as this allows

them to sell more products and services to the same group of people.

When both wages and premiums are relatively low (as in most low-wage jobs), the

tradeoff becomes even more interesting. A good example of such a situation is the collective

employment agreement for Dutch cleaners that was made in 2014. The pension of a cleaner is

quite small and a small difference in the premium can thus have a big effect in the long-term.

However, most of the old-age provision of cleaners is from the basic flat-rate pension (AOW).

The average workers’ pension depends for 50 per cent on occupational pensions, while

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2014). In this case, even the trade unions accepted a lower pension premium in exchange for a

higher wage.

Another way to make pensions more generous is by increasing the return on

investments. However, in this case here is a conflict between risk and returns. Under normal

market circumstances, when less risk is taken, expected returns are lower, albeit more certain.

When more risk is taken, returns can be higher, but at the cost of certainty. There is thus a

tradeoff between certainty (e.g. risk) and the return on investments as is shown in the

simplified graph below. As the graph shows, the possible returns are higher when more risk is

taken. Obviously, returns can be negative as well, meaning that losses can also be greater

when more risk is taken.

Graph 3: Risk/Return Tradeoff

Source: evolutionofinvesting.weebly.com

Kahneman and Tversky (1984) have demonstrated that people have a tendency to

prefer avoiding a loss to acquiring an equivalent gain. In other words, people prefer to ‘not

lose’ €50 euro over gaining €50 euro. In another paper Tversky and Kahneman (1992)

demonstrated that losses are psychologically perceived about twice as powerful as gains. The

first expectation is therefore that: most employees will prefer certainty (e.g. not risking big

losses) of their pension over possible higher returns (e.g. chance of a more generous pension).

Age

While the interests of pensioners are not the main interest of this thesis, I will discuss them

here shortly because pensioners are represented in both trade unions and most pension fund

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governance models. Pensioners benefit when current premiums are higher. Higher premiums

will increase the total pension assets, which in turn increases the chance of indexation.

Obviously, pensioners themselves do not have to pay premiums anymore. This therefore leads

to an interesting situation in which pensioners only benefit if current employers and

employees pay higher premiums. Rationally speaking, (selfish) pensioners will therefore push

and vote for higher premiums, since they are only paid by others.

Pensioners are expected to be more risk-averse than other actors when it comes to

investments of pension funds. High returns make indexation more likely, but other than that,

pensions are not likely to become more generous towards pensioners. Instead, history shows

that it is more likely that contributions will be lowered at times when funding rates are high.

For example, during the stock market boom of the 1990s, pension funds had very high

funding rates. At that time, premiums were lowered and some funds even granted employers

so-called contribution holidays or refunds for earlier contributions (De Deken, 2017).

Compared to younger employees, older employees and especially pensioners are hit

harder when pension funds make large short-term losses. For example, the dot.com crisis and

the 2008 financial crisis have led to various pension cuts and delayed indexations. Although

assets are capable of recovering within a few decades, pensioners will suffer now. In other

words, compared to young employees, pensioners actually run a higher risk of (immediate)

negative consequences if pension funds take more risks.

The age of an individual is an important contextual factor for determining which

interests are seen as the most important. A young employee for example might not think a lot

about the future. He or she might therefore prefer to pay a lower premium and earn a higher

wage. According to Odum (2011) most people have a stronger preference for immediate

payoffs (also known as instant gratification) compared to later payoffs (also known as delayed

gratification). “Delay discounting is the decline in the present value of a reward with delay to

its receipt.” (Odum, 2011, p. 1). With other words, the more time it takes before people will

receive a reward, for example a generous pension, the less valuable the reward will be

perceived. As time passes by and the reward comes nearer (in terms of time), the reward will

be perceived as more valuable. This cognitive bias can lead to situations where people make

choices today that their future selves would prefer not to have made.

Therefore, the situation is different for an older employee who is almost at his or her

pension age. As the pension age comes near, the pension will be viewed as more important

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(and interesting). As the time until reaching the pension age shortens, the bias of delay

discounting becomes less of a problem. A younger individual might be fine with the

economic discourse that is used by many financial experts which states that investments in

riskier products tend to lead to higher returns in the long-term. Although the products (such as

stocks) are more volatile than, for example bonds, there will be plenty of time for the

investments to recover in the case of a temporarily decline of asset value. This is an example

of such economic reasoning and discourse:

“Stocks have what economists call mean-reverting returns, meaning that over long

periods of time, high returns seem to be followed by periods of low returns and vice

versa. On the other hand, over time, real returns on fixed-income assets become

relatively less certain. For Horizons of 20 years or more, bonds are riskier than

stocks.” (Siegel, 1994, p. 33).

However, an older individual might want more certainty, since his or her pension age is

nearing and there is less recovery time left for investments. An older individual is therefore

more likely to rely on a discourse like:

“The impact of a stock market crash leads to a sudden and massive loss of capital

which cannot easily be absorbed, restored and neutralized. It causes the disruption we

witness now for so long. It takes such a long time to pick up again and recovery is

slow and limited. The thought that pension funds can tolerate as long-term investors

the impact of a short-term stock market crash, is a painful misunderstanding.” (Bosch,

2014, p. 12).

The reasoning above leads to expectation 2: Compared to younger employees, older

employees and pensioners are more risk-averse about the tradeoff between certainty and a

higher return on investments.

Moral interests

Pension funds invest money in a wide variety of companies, countries (e.g. government

bonds), infrastructure, real estate, commodities, derivatives, et cetera. People might prefer

certain investments over others for moral reasons. For example, people who care about the

environment might prefer investments in wind farms over oil companies. In socially

responsible investing (SRI), they try to combine both financial returns and ‘social good’ to

bring about a positive social change. There is also a subset of SRI called "impact investing",

by which the investments are consciously used to create a positive social impact. On the other

hand, there are also investments that are morally debatable. For instance, the so called ‘sin

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stocks’. These are stocks from companies that produce products like alcohol, tobacco or

‘services’ like gambling.

Another matter that has led to numerous moral debates is investing in weapons

manufacturers like Lockheed Martin and General Dynamics. The media play an important

role in informing people and shaping the public opinion of such matters. An example is the

documentary ‘Het clusterbom gevoel’ (The cluster bomb feeling), which aired in 2007. The

documentary discusses that pension funds and insurance companies invested millions in

companies that produce cluster bombs and companies that pollute on a grand scale. Various

interest groups, like the peace organization PAX, are campaigning against such investments.

Although participants of Dutch pension funds have no direct influence on the investments of

the funds, pressure from morally outraged groups can influence rules and behavior.

4

There are also companies like Boeing that produce both commercial and military

products. It gets even more complex when a company does not produce weapons or weapon

systems, but does provide raw materials or components to companies that do produce

weapons or parts that are (also) used for weapons. A supply chain may in some cases be very

long and complex, making it difficult to say where one has to draw the boundaries on moral

grounds. However, not all people know or care much about moral issues. Some people are

happy as long as pension funds produce stable and high returns.

Strategic interests

(Domestic) Investments can also be used in a strategic way to create and maintain jobs or to

increase domestic productivity. Investing in infrastructure for example can create jobs and the

infrastructure can be beneficial for all users. However, strategic investments may not yield the

highest return. In cases like this, a tradeoff must be made between high yield and other

benefits. Strategic investments therefore have a more collective character. Here a comparison

to taxes can be made. An individual probably does not like paying taxes, but from a collective

perspective, tax collection is required for a safe, efficient and social society. In the long run,

both employees and employers can benefit from strategic investment if they lead to the

creation and maintenance of jobs. To receive an occupational pension, one needs to have a job

in the first place.

4_{Since January 1, 2013 Financial institutions (including pension funds) that are established in the}

Netherlands may no longer invest in companies that produce, sell or distribute cluster munitions, or crucial parts thereof. Monitoring and enforcement is done by the AFM.

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News and other media on pensions

The news and media are often quite negative about pensions and pension funds in particular.

Examples are documentaries like: ‘Het clusterbom gevoel’ (The cluster bomb feeling) in

2007, ‘Het verdwenen pensioengeld’ (The pension money that disappeared) in 2011, ‘Het

Pensioensprookje’ (The Pension Fairytale) in 2012 and a series of documentaries called

‘Zwarte Zwanen’ (Black Swans) from 2013, 2015, 2016 and 2017.

The media, examples of which are mentioned above, highlight negative aspects of

pensions. These aspects therefore become more prominent to those who consume these

media. When the media feature certain aspects of pensions, they gain a more easily accessible

position within people’s minds. Research suggests that people have a tendency to

overestimate the likelihood of events if they come to mind easily (Kahneman, 2011, p. 17).

Kahneman calls this cognitive mechanism the ‘availability heuristic’. Following this

reasoning, expectation 3 is: People who follow news and media about pensions more closely

are generally less trusting and confident that their pensions are safe and secure than people

who do not follow such media.

Socioeconomic position

The socioeconomic position of an individual at a certain age affects health in later stages of

life. This mechanism is known as ‘social causation’. Conversely, health at a certain age

affects the education career, labor market position and earned and saved income in later ages.

The latter mechanism is known as ‘health selection’ (Bartley, 2016; Kunst, 2010). Some

rational predictions for interest preferences can be made by taking these mechanisms into

consideration.

Individuals with a higher education might expect to live longer and thus benefit more

from a generous pension than someone with a lower life expectancy. Paying a higher

premium now for a more generous pension later, is thus more ‘interesting’ for people who are

healthy and for those who have a higher education. People with a lower life expectancy might

prefer to pay a lower premium and receive a higher wage now.

Income and living costs are important contextual factors for other reasons as well. An

individual who has a high income might not miss a small part of that income that is paid as a

premium. However, the situation is reversed for people who have to live from a small wage.

Another factor that might influence one’s preferences regarding the height of the premium is

the amount of children they have. Children increase current living costs and one might

Trade union representatives in pension funds : treated as agents, but acting as stewards