Part II

The Need for Disclosure Regarding Concentration of

Voting Rights Among Institutional Investors

BY

PROFESSOR ROBERT M. SOLDOFSKY

COLLEGE OF BUSINESS ADMINISTRATION

UNIVERSITY OF IOWA

AND

CONSULTANT TO SUBCOMMITTEE ON BUDGETING, MANAGEMENT, AND EXPENDITURES ACKNOWLEDGMENTS During the spring of 1973 I was a Visiting Professor of Finance at the College of Business Administration, University of South Carolina. When the unique opportunity to prepare an analysis of the special tabulation of the SEC data collected for the 1971 Institutional Investor Study Report was offered to me, Dean James Kane and Professor Richard Furst of South Carolina both encouraged me to accept the assignment. The College generously provided the resources needed to prepare a massive tabulation rather quickly and to type the extensive tables that accompany this report. Several hundred hours were spent in preparing these tabulations by the following graduate students at the College:

M. E. Abdel-Kader, David F. Bernthal, David T. Livingstone,

Clayton S. Long, William K. Lowry, Dennis L. Rebber, Susan M.

Webb, and James K. Weeks. Without the resources provided by the University of South Carolina and the time given to this project by the students named, this project could not have been completed. For any errors that may have occurred in the tabulations made from the basic source materials, and for all the interpretations of that material, I alone am responsible. The basic tabulations also contain much additional, unique materials that would be important both to scholars and for policy formation; these materials are still unanalyzed.

One deep regret is that such important data as those discussed in the body of the report do not become available in usable form until about 4 years after they have been collected. One can hope that such data will become available on a regular and timely basis in the near future.

Robert M. Soldofsky. (140)

SUMMARY

Common stock held by institutional investors has increased with amazing rapidity since 1950.

Bank trust departments comprise the largest segment of the institutional investors, which includes investment complexes insurance companies, and others.

By 1980, financial institutional stockholdings may be approaching half of the entire market value of stocks.

Government reporting requirements regarding stockholdings by institutional investors are inadequate, especially as regards banks.

Institutional investors may have significant impact on companies, including competitors, through voting of stock, loans, interlocking boards of directors, and negotiation of mergers.

Unique data, collected by the Securities and Exchange Commission and analyzed in this study, show the concentration of sole voting rights among unnamed institutional investors in named companies, including companies within the same industry.

Disclosure of holdings of 1 percent or more in a company by institutional investors would not be burdensome to report.

Disclosure--and disinvestment of large holdings over a period of time would help stabilize the market and reduce the likelihood of self-dealing and conflicts of interest related to nondisclosure.

The continuing growth of institutional holdings of voting stock increases the urgency for review of public policy in these matters.

(141)

Part II–The Need for Disclosure Regarding Concentration of Voting Rights

Among Institutional Investors

OBJECTIVES

on S. 448, before the Senate Subcommittee on Intergovern

mental Relations, Senator Lee Metcalf and Chairman The objectives of this paper are fourfold:

William J. Casey of the SEC discussed the inadequacy of (1) To disclose-within the limits of available data-the the corporate ownership data published in the Institutional voting rights to common stock held by institutional Investor Study Report of the Securities and Exchange Cominvestors where more than 1 percent of the stock is mission. During this interchange Chairman Casey agreed held by one institution;

to furnish and did provide data showing the extent of the (2) To demonstrate the extent of the holdings of a common stock holdings in almost 800 companies by: significant amount of voting stock, of several companies (a) the 50 largest bank trust departments, (b) the investin one industry, by an individual financial institution, ment advisors for the 71 largest registered investment such as a bank trust department or a regulated investment companies or complexes, (c) the 25 largest property and company;

liability insurance groups, (d) the 26 largest life insurance (3) To indicate the extent to which a small number of companies and (e) other lesser institutional investors, financial institutions may dominate the voting stock of a These data are the basis for the new information presented group of companies in an industry; and

and analyzed in the present study. The institutional (4) To discuss desirability of disclosure of information investors are not identified by name, but the companies regarding holdings of significant amounts of stock. in which they hold stock are identified.

The growth of institutional holdings will be projected to the year 2000. The final section of this report includes

THE INSTITUTIONAL INVESTOR STUDY some relevant historical data about the growth of the

STOCK SAMPLE market value of stocks and the growth of bank trust department stock holdings. Appendix 1 presents details

The sample of 793 common stocks used in the Instituof the extent to which the holdings of 90 attractive

tional Investor Study (IIS) report is composed of 562 stocks companies are concentrated in the hands of bank trust listed on the New York Stock Exchange (NYSE) and departments, regulated investment companies and other

American Stock Exchange (AMEX), and 231 traded financial institutions.'

nationally in the over-the-counter markets (OTC). The Appendix 2 presents the details about the concentration

NYSE sample included the 27 stocks listed there with the of holdings by financial institutions within broad industry the AMEX and 150 from the OTC. The remaining 318

largest market value and 198 drawn randomly, 100 from groups. The relative and absolute size distribution of holdings distributions or because they had been used in previous

stocks were selected for specific reasons such as secondary of portfolio companies by the bank trust departments, by regulated investment companies and other institutional

studies. investors included in the sample is reported in this paper. THE SPECIAL SECURITIES AND EXCHANGE A preliminary effort is made to show the extent to which such holdings may exist among all companies whose

COMMISSION TABULATION stock is traded on the organized exchanges and in the

The first part of the special SEC tabulation, provided to over-the-counter markets. Reasons for disclosure of such Senator Metcalf by Chairman Casey, listed each stock in information are suggested, and the most generally useful the portfolio of each of the financial institutions surveyed places for such disclosure are named. One related and as of September 30, 1969, the date for which the data were important issue considered is that of full and partial voting rights that bank trust departments have in securities that

? Regulatory Agency Budgets, Hearings before the Senate Subcom

mittee on Intergovernmental Relations of the Committee on Governthey hold.

ment Operations, 92nd Congress, 2d. sess., February 22 and 23 and DATA BASE

May 17 and 25, 1972 (Washington, D.C.: Government Printing
Office, 1972), pp: 443-456.

3 Institutional Investors Study (IIS) Report, the Securities and The basic data for this study were provided by the Secu- Exchange Commission (Washington, D.C.: Government Printing rities and Exchange Commission. During the 1972 hearings Office, 1971), vol. 3, pp. 1309-1310,