Chapter X

GENERAL OBSERVATIONS

A. INFORMATION DISCLOSED

stocks, bonds, mortgages, or other securities of such One of the striking, but hardly surprising, conclusions corporation, if the publication is owned by a corporation that can be drawn from a study of the responses is the (39 U.S.C. 3685). willingness of companies to supply for a questionnaire The Securities and Exchange Commission requires the information they are already required by law to make disclosure of holdings of executives and directors of corpublic, and correspondingly their reluctance in general to porations listed on security exchanges and of holdings of supply such information unless it is already in the public the beneficial owner of 10 percent or more of any class of domain. It confirms a widely recognized disinclination of securities of such corporations (15 U.S.C.° 477aa). corporations to disclose financial information. As a This requirement was rarely cited as a factor in responsivecorollary, it is striking to notice the difference in stock- ness of reporting corporations. holder reporting requirements among the various agencies National banks are required to submit on request to of the Federal Government, a difference which unquestion- the Comptroller of the Currency a list of all shareholders ably affects the extent of informativeness of the various of such banks and the number of shares held by each. Such kinds of respondents."

information is not, however, received on any regular basis Thus, the Interstate Commerce Commission requires or maintained by the Comptroller. railroads and pipeline companies to submit, on form 109, The two Dallas banks among the top 50 both submitted "Voting Powers and Elections” their top 30 stockholders. lists of their 30 largest shareholders largely, no doubt, The same kind of information is required by the Federal since such information is required by Dallas County to be Communications Commission of communications com

on public record. panies. Therefore it is not surprising that the most com

Clearly such diverse reporting requirements make it plete returns were from companies in these fields: i.e. 15 of 19 railroads, 4 out of 5 communications companies, degree of response from the industries subject to the

difficult to expect any semblance of comparability of and the one pipeline company, The Interstate Commerce Commission requires of

different regulatory agencies of the Federal Government. trucking firms and other freight companies the submission

B. CONFIDENTIALITY of the top 10 stockholders. This but no more was supplied by 10 of 14 companies; two proved to be subsidiaries of other companies, and two supplied the full 30.

Most of the respondents, including almost all who? Similarly,

the Federal Power Commission requires refused to divulge any stockholder information, and the major electric and gas utilities to report their top 10 majority of those who provided less than the top 30

stockholders with the amounts of their holdings, claimed stockholders, and the Securities and Exchange Commission requires, under the Public Utility Holding Company not be made public. There was a broad range of reasons

that the information requested was confidential and should Act of 1935, public utility holding companies to report cited. One company, Carolina Power and Light, indicated those stockholders with more than 1 percent of their

that it had reservations about identifying shareholders stock. Under these provisions, out of 45 companies 10 sent

without their consent because of its "tremendous capital the list of 10 largest stockholders, and four sent in those with 1 percent or more of the stock. Fifteen did send a full requirements for the 10 years ahead,” and thus "a grave report, ranking next to railroads and airlines in complete- interest in our Company."

concern about any action that would lessen investor ness of reporting. Fourteen of the remaining 16 sent in less information or no pertinent information. Two failed

Another, IBM, stated “We consider information on to respond.

individual stock holdings to be confidential, and that we The Civil Aeronautics Board, under section 407(b) of the

have a fiduciary responsibility to our stockholders to Federal Aviation Act, requires each airline to list the hold protect this confidentiality: For example, the by-laws ers of 5 percent or more of its capital stock. This was done

of our corporation restrict the availability of this type of by three of the companies. However nine, out of 17, did

information even to our own stockholders.” report fully; five gave a negative or no response.

Several banks cited Paragraphs 62 and 484 of the United Periodical publications are required to furnish the Postal States Code, Title 12 (Banks and Banking), as grounds Service with the identity of the owning corporation and for nondisclosure. These paragraphs read as follows: of persons owning 1 or more percent of the total amount of 1 See for example: Singhvi, Surendra S. Corporate management's

Paragraph 62. List of Shareholders inclination to disclose financial information. Financial Analysis Journal, v. 28, July-August, 1972: 66-73. This article presents the The president and cashier of every national case in support of the thesis that: “Corporate managements are banking association shall cause to be kept at all generally less inclined to disclose necessary information to the times a full and correct list of the names and investing public if disclosure is left to their discretion." * See Åppendix A, p. 197 for a more extensive discussion of this

residences of all the shareholders in the associasubject.

tion, and the number of shares held by each, in

the office where its business is transacted. Such

one individual to that of another. The books of a list shall be subject to the inspection of all the

corporation are private. They are not public shareholders and creditors of the association,

records open to the inspection either of the public and the officers authorized to assess taxes under

or a creditor of one of the stockholders. State authority, during business hours of each

It is of interest to note that there appears to be little day in which business may be legally transacted.

consistency in the manner in which corporations conA copy of such list, verified by the oath of such

sidered themselves constrained by these and similar president or cashier, shall be transmitted to the Comptroller of the Currency within 10 days of

statutory provisions on stockholders lists. General Motors any demand therefore made by him.

refused to divulge the information provided by Ford Motor Company and Chrysler. IBM refused although

RCA reported fully. International Telephone and TeleParagraph 484. Limitation on Visitorial Powers

graph Corporation refused to give the information re

quested, but General Telephone and Electronics reported No bank shall be subject to any visitorial

fully. Lockheed Aircraft Corporation refused; United powers other than such as are authorized by law, or vested in the courts of justice or such as shall

Aircraft reported fully. Most Ohio corporations refused be or shall have been exercised or directed by

to supply the requested information, but Cleveland Congress, or by either House thereof or by any

Electric Illuminating Company and Cook United, a committee of Congress or of either House duly

retailing Cleveland establishment, did. Three of the seven

largest New York banks reported fully; four did not, authorized.

although some gave partial information. One Pennsylvania firm cited the Pennsylvania Business Considering the extent of response which was received Corporation Law, Paragraph 1308, Corporation records, in most industrial sectors, it seems probable that in many inspection, Section B of which reads:

instances the legal provisions cited by respondents were Every shareholder shall have a right to ex

used as an excuse for nondisclosure rather than being a amine, in person or by agent or attorney, at any

binding deterrent. reasonable time or times, for any reasonable

C. BANK HOLDINGS purpose, the share register, books or records or account, and records of the proceedings of the As the tabulations in this report make abundantly clear, shareholders and directors, and make extracts

trust departments of banks, and especially of the large therefrom.

New York City banks, are conspicuous among the 30 This has been construed in Pennsylvania courts to largest holders of most of the companies which responded mean that the right of inspection of corporation books is fully, or even in part, to Senator Metcalf's letter. This conopen only to one who is a bona fide shareholder in the centration of holdings suggests significant influence by corporation.

these banks in the management of the companies where The Ohio General Corporation Law, specifically Section they hold large blocks of stock. However, this is an area in 1701.37 C, was cited or referred to by most Ohio corpora-, which there is a great deal of ignorance. tions as grounds for refusing to give the requested stock- In the first place, as the addendum on nominee accounts holder information. This section reads:

spells out in greater detail (pp. 135–137), the holdings of bank Any shareholder of the corporation, upon writ

trust departments are of many different kinds. The Ameriten demand stating the specific purpose thereof,

can Society of Corporate Secretaries in its Nominee List shall have the right to examine in person or by

lists eight such categories:

(1) estates agent or attorney at any reasonable time and for

(6) safekeeping or custody any reasonable and proper purpose, the articles

(2) living and testamen- accounts (domestic) of the corporation, its regulations, its books and

tary trusts

(7) safekeeping or custody records of account, minutes and records of share- (3) pension trusts

accounts (foreign) holders aforesaid, and voting trust agreements, if

investment manage- (8) legal and common trust

ment accounts any, on file with the corporation, and to make

funds copies or extracts thereof.

(5) corporate trust ac

counts As a result, none of the large tire and rubber companies is included in the group of fully reporting companies.

In the case of estates, living and testamentary trusts, It should be noted that these State laws literally deal

and legal and common trust funds (categories 1, 2, and 8), with disclosure to stockholders and not to nondisclosure

the bank trust department normally acts as executor, to nonstockholders. Only by implication is this nondis

administrator or trustee and thereby exercises all incidents closure in the legislation.

of legal ownership, including the power to exercise voting One respondent, Bormann's Inc., of Detroit, Michigan, of pension trusts (No. 3 above), similar rights and respon

rights of the corporation stock shares it holds. In the case cited at some length from the opinion of the Delaware sibilities of the bank may obtain. However, the trust inCourt in the case of Allen v. Stewart, 7 Del Chancery 287, Struments often contain provisions reserving the voting as follows:

rights on stock so held to the management of the corporate * The requirement that transfers of stock creator of the trust, usually a designated management shall be made upon the books of the corporation group or pension committee. With respect investment can by no possibility be of benefit to any other management accounts and domestic and foreign safeperson than a stockholder of the corporation keeping or custody accounts (categories 4, 6, and 7 above), itself, for the simple reason that such transfers the bank acts in an agency or custodial capacity, and here are as secret and as private in their nature, so far the beneficial owners retain all voting rights with respect as the public is concerned, as would be the private to the stock so held. With respect to corporate trust acdelivery of a stock certificate from the pocket of counts (category 5 above), it was impossible to generalize.

The 1971 Institutional Investors Study Report by th institutions grow to mammoth size, they find Securities and Exchange Commission in its summary their opportunities for equity investments limvolume concluded that the trust departments of banks ited to the very largest publicly-held corporahave sole voting authority over stock constituting ap- tions, which are the only ones in which they can proximately 75 percent of the value of the common stock invest their millions without finding themselves, held in employee benefit accounts and have sole voting willy-nilly, in control because of the number of authority over about 55 percent of such stock in personal votes they can cast. If they could purchase trust and estate accounts.

larger percentage interests in smaller companies It is not possible from the information obtained from without automatically acquiring the control companies on their largest stockholders to ascertain the position they say they do not want, the access exact amount of voting authority that resides in each of the smaller companies to the principal equity nominee account. This would require extensive additional capital markets might be improved. information from the banks and other institutions with nominee accounts. Thus, the holdings reported herein are

Thus it could be suggested that this report is only an not necessarily the equivalent of voting rights.

opening segment of a study that would truly reflect the It would also be useful to attempt to ascertain to what impact of institutional stockholdings on management extent the judgment of trust officers is sought and/or operations and control

. This report documents the holdaccepted by beneficial stock owners where the bank is ings of many banks and other institutional investors in technically only in an agency or custodial position.

many of our leading companies. Even in this area, the There is another side to the coin that may be worth

extent of cooperation of companies addressed was limited. pursuing. There is considerable evidence that where they But beyond this

, first a separate investigation would be have voting authority bank trust departments almost needed as to what the actual voting rights pattern within automatically, vote with management the overwhelming each nominee account in each bank is, and how that voting majority of the time. Displeasure with management is

pattern was exercised in practice. Finally it would be more likely to result in selling shares than in voting necessary to investigate the actual impact of the voting against management. It is often the case, of course, that pattern; how it correlates with other relationships between selling on any appreciable scale would have a serious

the financial institution and the corporation, e.g. through impact on prices of shares of such a company; it thus loans, interlocking, directorates, and other formal and serves as a deterrent to selling by a bank trust department informal relationships. or other large institutional investor. Several authors have made the point that banks are

D. CEDE AND COMPANY very reluctant to use their voting rights to influence

It will be noted that in a large percentage of the cases management.

Thus, for example, Paul P. Harbrecht in his 1959 study, Cede and Company is listed as being among the 30 "Pension Funds and Economic Power”, issued by the largest shareholders, in fact in many cases the single Twentieth Century Fund notes:

largest shareholder. The significance of this fact needs to

be carefully assessed, as already noted. It is quite likely that certain large New York Cede and Company was started in 1967 and became banks will soon approach a point where their fully operational on February 24, 1969, as the nominee combined holdings of stocks for pension funds for the Stock Clearing Corporation, a wholly owned could give their opinions considerable weight in subsidiary of the New York Stock Exchange, which the councils of the larger corporations. While it is furnishes a central stock clearing service to numerous the policy of many large corporations to include member brokerage firms. Thus, it represented deposits provisions in their pension plans to prevent their in the New York Stock Exchange Central Certificate funds from gaining control of other corporations, Service (part of the Stock Clearing Corporation), by no such restrictive policy has yet been announced participating institutions. On May 11, 1973, the Central by the banks. Unquestionably, they will seek to Certificate Service was superseded by a new subsidiary, spread their stock investments widely to stave the Depository Trust Company, subject to regulation by off acquiring the responsibility of corporate direc- the New York Banking Department, making it possible tion as long as possible. But as the stock pur- for banks and other institutional holders of securities chases of the pension funds continue to grow, we as well as brokerage firms to become members. The can anticipate that at some time in the not-too- functions of Cede and Company, as the nominee now of distant future the banker-trustees are going to be the Depository Trust Company, remain essentially the faced with an uncomfortable choice. They will same as what they had been as the nominee of the Central have to buy into a position of authority in the Certificate Service. larger corporations or reject profitable invest

For example, as reported by General Electric, the ments in order to avoid the responsibilities that 2,822,602 shares listed under Code & Company (the third accompany large shareholdings.

largest holder of GE stock) represented holdings of 188 In a similar vein, David Ratner in 1970 wrote: participants. Similarly, American Airlines reported that

there were 144 member firms with shares in the Cede It would hardly lie in the mouths of the institutional managers to complain about being

name, none of which separately would be among the top

30 stockholders. deprived of votes that they have so clearly indicated they do not want. Reducing the voting

It is perhaps not surprising, in view of this relation

ship between Cede and Company and member brokerage power of large blocks of shares might actually

firms, that there has been some inconsistency in manner of make their investment job easier. As these

Ratner, David L. The government of business corporations; • Harbrecht, Paul P. Pension funds and economic power. New critical reflections on the rule of "one share, one vote." Cornell York, Twentieth Century Fund, 1959, p. 248.

Law Review, v. 56, November 1970, p. 49. (See Appendix G, p. 393.)

reporting of Cede and Company's holdings. Most re- Stock Exchange in voting shares of record held by it. spondents apparently did not disaggregate brokerage Under these rules, stock of record cannot be voted for firm holdings within Cede and Company, and reported the benefit of others by members of the Exchange (or one lump sum attributable to Cede. Others disaggregated their nominees) unless the member firms have transmitted and listed only those individual brokerage holdings proxy soliciting material to the beneficial owners. Such within or outside Cede and Company that were among the member firms must vote such stock in accordance with top 30. Still others, notably several railroads, following the any voting instructions received from the beneficial form used in reporting to the Interstate Commerce Com- owners. Member firms may vote such stock in their dismission, listed in a footnote the number of shares held by cretion only if, after soliciting proxies, (1) no voting inCede and Company, but indicated that they are reflected structions have been received, (2) they do not have in holdings of brokerage houses where applicable. However, knowledge of any contest as to the action to be taken, and the amount held in each brokerage house account by Cede (3) the matter to be voted on will not affect substantially and Company was not disclosed. Another variation was to

the rights or privileges of such stock. indicate the amounts of the largest brokerage accounts within Cede and Company, as well as the total amount of

This leaves open the question as to the extent of actual the Cede and Company holdings, and then to subtract the voting of shares by Code and Company, the influence it Cede and Company holdings in the amounts reported by may exert on brokers or others in voting of shares, or the specific brokers, where they were among the top 30 holders. extent to which what voting rights it may have are not

According to the Depository Trust Company, Code exercised. These are all matters deserving of future and Company is bound by the rules of the New York investigation.

Chapter XI

CONCLUSION

The evidence on stock holdings which the respondents extent to which greater public disclosure and regulation to Senator Metcalf's letter provided and which is presented may be desirable. and analyzed in this report is both illuminating in what it discloses and perhaps even more disturbing in what it fails

MORE DETAILED INFORMATION NEEDED to reveal. It also points to the need for a great deal more information about institutional holdings as a basis for

In the first instance, much more detail on the holdings public policy in the interest of protecting investors and of particular institutions is needed to determine the role preserving competition.

which their holdings permit them to play. In some cases The Senator's letter of inquiry requested only the a bank or other institutional investor holds complete simplest of information on stockholders, solely a listing of fiduciary power, with full voting rights and authority the 30 largest stockholders of record of 324 of the largest to buy and sell securities. At the other extreme, it has companies of the country. And yet this information was purely custodial or agency responsibilities, with no rights supplied by only 89 companies, or 27 percent of the total. to vote stock or to buy or sell. There are considerable While reasons of confidentiality were cited in a large variations in between. Not only is it important to learn number of cases as a reason for nondisclosure, as discussed the legal rights pertaining to the exercise of authority in above, the inconsistent nature in which this nondisclosure handling stocks by various institutional holders, but fully was applied makes one skeptical, at least, as to the sound- as important is the need to ascertain how these rights are ness of the position of those who refused to submit data actually exercised. A small beginning was made in this on these grounds.

direction by the Securities and Exchange Commission's

Institutional Investor Study report of 1971, but even here VARIATIONS IN REPORTING REQUIREMENTS

little information was obtained as to how an institution

actually exercised its voting rights, what were the factors It was also striking to note the wide variations in current that determined its buying and selling of particular blocks reporting requirements by different Federal agencies as to of stock, and how its holdings were reflected in the decisionmajor stockholdings of companies subject to particu making policies of the corporations where its holdings are regulatory jurisdictions. These variations help explain the substantial. differential in the extent to which companies in various Not only in Congress and among many members of the industry groups complied with the Senator's request and public, particularly the investing public, but even in the suggest the need for far more consistency in the law than financial press and in financial circles, there has been currently exists.

growing concern over the well-documented rise in the Even the limited information which does appear in this dominance of the institutional investor and the relative report as a result of the responses to Senator Metcall's decline of the small shareholder. But appropriate remedies letter is sufficient to confirm in graphic detail the enormous have been difficult to come by. This is due, as this report size of institutional holdings of stock in major American makes abundantly clear, in large measure to the paucity corporations and, by implication, the vast influence which and inadequacy of available information. Clearly informathese institutions have or can have in the financial markets tion along the lines suggested above must be obtained. of the country and the managements of these corporations. Just as clearly, judging from past experience, there will

It is obvious, however, that much further information is be determined resistance in the institutional investment required in order to make an accurate assessment as to the community against voluntarily supplying such informaactual power and influence which banks, brokers, and tion. Thus a challenge to the Congress exists to ascerother institutional investors exert on corporate and tain what information should be required, how it can be financial management behavior, the effect which they most effectively obtained, and the extent to which it thereby have on the entire American economy, and the should be made public.

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