19 11 PART IV Bank and Trust of Boston appeared among the top 10 security holders of 21 utilities, using eight nominees. ELECTRIC UTILITY REPORTS TO THE FPC Bankers Trust of New York appeared among the top 10 Part IV of this report is a staff analysis of ownership security holders of 20 utilities, also using eight nominees. reports filed in 1971 with the Federal Power Commission Other banks with major positions in electric utilities by the 209 electric utilities which comprise the nation's were: largest industry. The FPC directs the companies to list, rank, and provide Number of addresses for the 10 security holders with the highest vot utilities in ing powers. which Forty percent of the electric utilities identified utility banks were holding companies, a few parent utility companies or among top 10 security Number of industrial firms as their principal owners. (Sometimes holders nominees members of the board of directors or a few others held nominal shares.) The parent companies' reports to the New England Merchants Securities and Exchange Commission, as noted previously, National.. do not provide much information on proprietary (voting) Bank of New York. 15 Continental Illinois National rights. Bank & Trust. 12 6 Five of the small utilities were owned by up to 21 per- Northwestern National, Minsons. Alpena Power Company (Michigan), owned prínci neapolis. 12 2 pally by one family, went beyond the FPC's requirements, United States Trust, New 12 2 and listed the voting rights of all 21 named, 'individual Girard Trust, Philadelphia.. stockholders. National Shawmut, Boston.. The information submitted by other electric utilities Chemical Bank, New York.... 10 6 varied widely. San Diego Gas and Electric, with 30,925 stockholders, named the New York banks and other institutional investors with major blocks of voting rights, in the “top 10” accounts. The holdings of other categories Banks frequently held 50 percent or more of the stock without using their nominee names. The UGI Corporation of institutional investors, such as insurance companies (Pennsylvania) provided details on its stock option plan, and investment companies, usually amounted to less than along with ownership data. 20 percent of the stock in the top 10 accounts. Nominees Hide Owners THE MULTIPLE LEVERS OF CONTROL Numerous utilities reported some stock in the name of an Inadequate Disclosure a Recurring Theme institutional investor and other stock, held by the same institution, in nominee name. Several utilities listed only Control of a small block of stock in a widely held com, nominees, with as many as three of those 10 nominees pany by a single or few like-minded financial institutions representing the same bank. provides them with disproportionately large powers within Thus, the "top 10" security holders were actually only the company. The House Banking and Currency Subcomthe top seven or eight. Additional stock may be held by mittee on Domestic Finance, in its 1968 study, Commercial these top seven or eight security holders in accounts Banks and Their Trust Activities: Emerging Influence on not reported as part of the "top 10. The report to the ICC the American Economy, considered a 5 percent or larger " , and SEC discussed on p. 5 showed that the holdings of holding of one class of stock significant in judging the Bankers Trust-apparently the foremost stockholder in potential influence of a bank trust department's stockthe Burlington Northern--were listed as Stockholder holding in a particular corporation. The subcommittee Number 6 (Hemfar & Co.), Stockholder Number 7 emphasized that "even 1 or 2 percent of stock in a publicly (Pitt & Co.), Stockholder Number 12 (Lehcor & Co.), held corporation can gain tremendous influence over a Stockholder Number 13 (Salkeld & Co.), Stockholder company's policies and operations." Number 24 (Pendiv & Co.) and Stockholder Number 26 (Barnett & Co.). Use of multiple nominees by the same CONTROL PRESUMED investor could result in a preeminent position within a company by an investor whose nominees are not even Congress has established various ownership percentages, listed among the “top 10." usually 10 percent, as the benchmark at which control by an institution or individual holding can be presumed. Bankers Use Nominees Most It is noteworthy that in 1970 sections 13(d) and 14(d) of the Securities and Exchange Act of 1934 were amended Banks used nominees more frequently than other institu- to reduce from 10 percent to 5 percent the levels of ownertional investors. The banks with dominant holdings in the ship at which a person seeking shares of a company would industries previously discussed were also preeminent in be required to report his holdings. This appears to reflect electric utilities. the feeling that at these levels such a person could acquire Chase Manhattan appeared among the top 10 security substantial leverage in the company. S. 2460, recently holders of 42 utilities, using four different nominee names. recommended by the ICC (see Proposed Legislation, p. Morgan Guaranty Trust appeared among the top 10 233), would require reporting of 1 percent or more holdsecurity holders of 41 utilities, using 13 nominees. Manu- ings of any class of stock in a railroad having operating facturers Hanover Trust appeared among the top.. 10 revenues exceeding $5 million annually. S. 2506, the Oil security holders of 31 utilities, using five nominees. First and Gas Regulatory Reform Act of 1973 now being conNational City Bank appeared among the top 10 security sidered by the Senate Commerce Committee, would reholders of 29 utilities, using eight nominees. State Street quire oil pipeline applicants to report "the name and address of each shareholder with voting rights to ne per Burlington Northern, Continental Oil, and Exxon, along centum or more of the shares, together with the number with its significant stockholdings in each. Morgan GuarLand percentage of any class of voting shares of the entity anty also has directors on the boards of both Ford and which such shareholder is authorized to vote." General Motors, as well as significant stockholdings in The levers of control available to principal stockholders both of the auto manufacturing companies. derive from several sources. One of these sources, regarding which detailed information is presented here, is the pur- A Case History chase, sale, holding, and voting of stock. As prelude to our discussion of the other levers of control we note that, Among the reports of electric utilities to the Federal as in the case of stockholdings, a recurring theme is in- Power Commission which are analyzed in Part IV is that adequate disclosure by institutional investors, especially of Long Island Lighting Company (LILCO) which listed banks, to the Government, to stockholders, and even to Church Street Post office station in New York as the portfolio companies. address of five of its 10 top security holders. The listed address of two of the accounts was Post Office Box 1508— Information Not Included in “IIS” Report Kane & Co. and Cudd & Co., both nominees for Chase Manhattan. Three of the accounts—Carson & Co., Reing The SEC's Institutional Investor Study report concluded & Co., and Genoy & Co.-were listed at Box 491 at the that some institutions, particularly banks, have personnel same post office perhaps an arm's length away. All three and business relationships with portfolio companies which are nominees for Morgan Guaranty Trust, which was not may tend to reinforce any power conferred as a result of mentioned in the ownership report." stock holdings, create potential conflicts of interest and Kenneth Crowe, a Newsday reporter who shared a lead to misuse of inside information. The IIS report found Pulitzer prize, closely examined LILCO's ties with banks a strong statistical correlation between bank stockholdings and other institutions in a two-part series this year, which and personnel and business relationships. However, the also appears in Appendix F. He found substantial interSEC did not collect and publish information regarding the locks and credit arrangements between LILCO and four personnel and business relationships of identified institu- of the New York superbanks which hold large blocks of tional investors. Nor did it publish details regarding the its stock. He found a company (Stone and Webster) with personnel and business relationships of unidentified, long and close financial relationships with LILCO receivindividual institutional investors. ing a large contract from the company even though other qualified firms bid less. And he was told by the board Inadequate Information on Corporate Interlocks chairman of LILCO that he, the board chairman, was not Comprehensive and current information regarding such previously aware of any of these relationships and interrelationships between individual bank trust departments locks, and was astonished to receive the information. and their portfolio companies is difficult to assemble CONCLUSIONS AND RECOMMENDATIONS either from agency files or standard references. Some major banks were not responsive to a recent request by the Neither companies nor ordinary stockholders have Congressional Research Service of the Library of Congress information which they need to protect their own infor å report on their corporate interlocks with other terests, regarding stock ownership and the personnel and corporations, funds, and universities. business relationships between portfolio companies and Chase Manhattan did not respond to repeated re- institutional investors, principally banks. The Federal quests, written and oral, from the Congressional Research Government does not have sufficient information in these Service. Morgan Guaranty Trust supplied information areas upon which to base reasoned public policy. Much of regarding interlocks with publicly owned domestic cor- the information collected by Federal agencies regarding porations and domestic foundations and universities. stock ownership, displayed in public files and shared with However, Morgan did not report interlocks with closely State agencies and the public, is meaningless or misleading held companies, foreign corporations or subsidiaries and despite the clear policy stated in the Federal Reports Act other affiliates of domestic corporations. Furthermore, of 1942 that information collected by Federal agencies Morgan supplied CRS only with interlocking positions, should be tabulated so as to "maximize the usefulness of without providing the names of the directors or officers the information to other Federal agencies and the public." who held them. The information needed regarding the several levers of Interlocks extend well beyond the election of an insti- corporate control is held by a few institutional investors, tutional representative to the portfolio company's board principally six superbanks headquartered in New York. of directors, or a portfolio company's official on the These institutional investors have the capacity to report board of the financial institution. Interlocks provide their holdings quickly and fully. Similar reports on major banks with levers throughout the industries in personnel and business relationships with portfolio which they hold major blocks of stock. These interlocks companies would be even easier to make. also extend into the Federal agencies which regulate port 1 LILCO's 1973 report to the FPC still reports Kane & Co. and folio companies, as was documented in the hearings by Cudd & Co. in Box 1508. The three Morgan nominees used in the the Subcommittee on Intergovernmental Relations which earlier report are not mentioned. However, Box 2010 at the Church preceded enactment of P.L. 92–463, the Federal Advisory Street Station is reported as the address of Douglass & Co. It is a Committee Act. nominee for Morgan, which is not mentioned in the ownership report, although Chase Manhattan and First National City Bank INTERLOCK DATA and Manufacturers Hanover Trust are named along with their nominees. Despite the inadequate response by_the two above 19 "We will know sometime today what our position was in various mentioned banks, the Congressional Research Service companies yesterday »-Edward T. Ryan, vice president, has developed current, if partial, interlock data on both Chase Manhattan, FCC Administrative Conference with the banks. These data appear in Appendix F (p. 385). It shows American Bankers Association, Sept. 1, 1970, Docket 18751. "Sure, we'll disclose as often as you like-every week, if necesthat Morgan Guaranty has directors on the boards of sary."-Roger Kennedy, vice president, Ford Foundation, Busifour major energy corporations, Atlantic Richfield, the negg Week, June 2, 1973. 12 PROPRIETARY OWNERS SHOULD BE IDENTIFIED UTTEOT OF CONCENTRATION nies), various other Federal and State regulatory commis sions, and the files of hundreds of universities, foundations, Congress and some Federal commissions have on and funds. occasion established limits on institutional levers of corporate control, principally regarding stockholders. But neither the Congress, nor the commissions, nor the executive branch can fully evaluate the total effect of con- Proprietary owners of 1 percent or more of the stock in centration—the impact of the several levers of corporate publicly held companies should be identified. Reports on control exercised by banks and other major investors their voting rights and their corporate personnel and finanthroughout industry groups and the economy as a whole. cial relationships should be filed, on a quarterly basis, with Meanwhile, the portfolio companies in which a few the Library of Congress. This information should be pubbanks have substantial influence make many decisions lished, for regulatory review and stockholder information. affecting public policy. Oil companies deal with foreign Straightforward and regular reporting of these matters nations regarding oil supply and cost. Pipeline companies will vastly simplify the job of regulatory commissions, and deal with the Soviet Union for natural gas. Utilities provide Congress with basic information which it always exercise the right of eminent domain. Milling companies needs and never has. It will also afford ample time and and the Soviet Union arrange grain sales which sharply minimum inconvenience to those stockholders who wish to affect domestic price, supply, transportation, and storage. discuss issues and candidates for corporate elections-prior These are momentous public issues in which Federal to proxy solicitation-with representatives of the large officials play a minor role, much of it after basic decisions institutional investors who usually cast the deciding votes. have been agreed upon by American companies and foreign governments. Stockholders Face Obstacles ALTERNATIVES FOR READJUSTING CORPORATE POWER Stockholders at present face formidable obstacles. ConThere are various alternatives for readjustment of siderable expense and effort is required, months prior to corporate decisionmaking power. They include limitations annual meetings, for stockholders to comply with SEC on stockholdings, antitrust actions and Federal chartering rules, to receive consideration of modest, additional agenda of corporations providing disclosure and performance items or even one candidate for the board of directors, then requirements within the charter. to locate and present their case to the few institutional Another alternative is modification of the "one share, investors who by proxy and often casually will decide the one vote” rule in corporate voting. This rule has no basis outcome of the election. Because of these cumbersome in common law. Weighted voting, which reduces the procedures the typical corporate election today features voting power of large stockholders, was used in early a "Russian ballo”—bearing a single slate of nominees for American corporations and is still used in some foreign, the board of directors. Some company ballots do not even capitalistic countries today. Appendix G includes a dis- provide for casting a "No" vote. cussion and bibliography on modification of "one share, If Congress, like Salome, decides to lift the seven veils, one vote" by Julius Allen of the Congressional Research which in this instance shroud the ownership of stock, care Service of the Library of Congress and the Cornell Law must be taken that the lists of principal proprietary Review article on the subject by Professor David L. owners do not get lost in “Cede & Co.”, the nominee for the Ratner, a consultant to the Subcommittee on Budgeting, new subsidiary of the New York Stock Exchange, DeposiManagement, and Expenditures. They note Alexander tory Trust Company, which has replaced the Central Hamilton's prophetic warning to the Congress in his report Certificate Service division of Stock Clearing Corporation. on the National Bank: securities industry must not be permitted to render meanA vote for each share renders a combination ingless the effort to provide timely access to the voter between few principal stockholders, to monop- lists which are fundamental to affecting change within olize the power and benefits of the bank, too easy. corporate and political systems. James Madison espoused Federal chartering of corpora OVERSIGHT NEEDED tions and Hamilton urged weighted voting in corporations. Consideration of these far-sighted proposals by two of the Much can be done toward reaching the objectives sugFounding Fathers would be most appropriate as the gested above without new legislation. The regulatory comNation's bicentennial approaches. missions suffer from lack of oversight by Congress, the Office of Management and Budget and the General DISCLOSURE IS THE PREREQUISITE Accounting Office. OMB has been directed by Congress in various statutes Whatever solutions the Federal Government chooses to the mounting problems resulting from economic concentra to plan and promote the improvement, development, and coordination of Federal management information systems, tion, the prerequisite is the regular collection and dis to help agency heads develop consistent accounting closure of information from institutional investors on classifications and, with the Comptroller General and the stock holdings and the personnel and business relation- Secretary of the Treasury, conduct a continuous program ships between institutional investors and portfolio com- for the improvement of accounting and financial reporting panies. in the Federal Government. The 93d Congress, in approvEqually important, the information must be centrally ing S. 1081, the Alaska pipeline bill, provided GAO with available to the Federal Government and the public, at additional responsibilities for review of questionnaires sent one location, most appropriately the Library of Congress. to firms by the independent regulatory commissions, whose Such information, insofar as it is now reported, is scat- data collection has for years been impeded by the OMB, tered among three Federal banking agencies, 50 State its predecessor Bureau of the Budget, and industry adviinsurance commissions, the SEC (for investment compa- sory committees. The Civil Aeronautics Board has recently shown how a institutional investors. The collection of relevant informaregulatory commission, without new legislation, can get tion by other agencies can begin prior to enactment of new behind inaccurate and misleading ownership reports to the legislation. We intend to encourage such efforts. Federal Government and require quarterly reports from EDMUND S. MUSKIE, Chairman, Subcommittee on Intergovernmental Relations. on Budgeting, Management, and Expenditures. Part I Leading Stockholders of Major American Corporations in 1972 Based on Responses to an Inquiry of Senator Lee Metcalf to 324 Corporations REPORT FOR THE SUBCOMMITTEE ON INTERGOVERNMENTAL RELATIONS AND THE SUBCOMMITTEE ON BUDGETING, MANAGEMENT, AND EXPENDITURES OF THE SENATE COMMITTEE ON GOVERNMENT OPERATIONS BY JULIUS W. ALLEN ECONOMICS DIVISION THE LIBRARY OF CONGRESS JULY 28, 1978 |