35 cent. These projections are discussed in more detail in the Reporting No Burden final part of this paper. As individual company portfolio concentrations increase, these concentrations will tend to Some means will have to be devised to require instituspread more widely and deeply over industries that have tional investors owning 1 percent or more of a portfolio desirable characteristics for common stock investment by company to report that fact to the company itself in financial institutions. sufficient time to have that information included in its next annual report. The major problem is the widespread THE REASONABLENESS OF THE ONE PERCENT custom of institutional investors of holding shares in LEVEL FOR PUBLIC DISCLOSURE street name for convenience. Although larger companies may have the time and the staff to sift through the street Table 1 shows that the number of instances of concen- names and to learn the identity of the institutional holder, trated holdings increases at an increasing rate as the that task is often extremely difficult if not impossible. Inconcentration ratio percentage decreases. Within the IIS stitutional owners generally either know or should know sample, 577 instances of concentrations above the 1 per- the extent of their stock holdings in their portfolio comcent level were located. As remarked earlier, the sample panies. Reporting such information to their portfolio comwas so drawn that one could only make an educated esti- panies regularly would require such a relatively small. mate that the total number of institutional holdings at amount of time nd added outlay at time and cost the 1 percent level or above may be in the range of 3 to 5 could not be taken seriously as a defense against such a times larger than that of the sample. Numbers of portfolio reporting requirement. concentrations of 1 percent or more is probable in the 1,500 to 2,500 range. Such numbers are well within the CAB REQUIRES PUBLICATION OF INSTITUTIONAL OWNERSHIP limits of administrative feasibility and understanding. The CAB now requires publication in corporate annual CENTRAL PUBLIC DEPOSITORY reports of institutional ownership of their stock at the 5 percent level or above.38 From the individual company's point of view, most The 1 percent level of portfolio concentration as the companies that are subject to portfolio concentration threshold point for the regular reporting and convenient ratios of 15 percent or above would have to list, in their publication of such information appears reasonable. After annual reports, the names of 5 to 10 institutional owners some experience with this threshold level, administrative of their stock along with the number of shares owned. revisions that appear to be necessary should be conThe same information would have to be reported by the sidered. During the coming years the background basis for institutional investor, to the portfolio company and to a this threshold point will be changing, and reconsideration central public depository such as the Library of Congress, will be merited on that basis also. for each stock held at the 1 percent level or above. Table 6 shows the frequency distribution of instances in which the REGULAR DISCLOSURE USEFUL portfolio concentration was 1 percent or more for the 800 companies in the 1969 IIS sample. The tabulation is An argument might be made for moving the threshold limited to total portfolio concentration ratios of 15 percent down to 0.75 percent or even lower to provide stock traders or more for bank trust departments and regulated invest- and investors with additional information. Just how such ment companies. additional information may be of general use is difficult to envision. What most stock traders would prefer to know Table 6.–FREQUENCY DISTRIBUTION OF HOLDINGS OF is who bought or sold which shares yesterday, and what 1 PERCENT OR MORE OF THE OUTSTANDING COM. the buyers and sellers are going to do both during the MON STOCK IN THE SAME COMPANY BY INSTITUTIONAL present trading day and the next trading day. They would INVESTORS also like to have all of the information about each stock, as well as the basis of each trader's decision to buy, hold, or sell. The SEC, the exchanges, the National Association of Securities Dealers, the corporations themselves and the accounting profession have progressed rapidly in the 1. 1 past few years in furnishing more information, better quality information, and more timely information. Even 3. projected earnings will soon be published in large numbers 7 of corporate annual reports. Regular disclosure of port11 folio concentration information will be useful to investors 7. 10 and others, but there is very great doubt that portfolio 8. concentration information below the recommended I percent level will be of enough further use to warrant 10. its publication. 12. FULL AND PARTIAL VOTING RIGHTS NUMBER OF NUMBER OF 2. 4 5. 6. 12 9 13 wi wowo 11 13 14 15. 1 1 Number of stocks held in concentrations of 1 percent or above by an institutional investor. * Number of institutional investors holding given number of stocks at the 1 percent level or above. Source: Tabulation for 90 companies from Appendix D, Tables 1-A and 1-B. Based upon 1969 11 8 sample. Includes only those instances in which the portfolio concentration ratio is 15 percent or above. The special tabulations made of the IIS data which are being used for this study show both full and partial voting rights for bank trust departments. In numerous instanees * Civil Aeronautics Board, Part 245—-Reports of Ownership of Slock and Other Interests, op. cil. This report summarizes comment received on the preliminary proposal received from two scheduled air carriers, four financial institutions, the Aviation Consumer Action Project, and the Flight Engineers International Association 1 LACK OF INFORMATION 36 partial voting rights amount to 1 to 2 percent of the out- vestment companies had assets of $4.7 billion; noninsured Under those circumstances no one in the 1950's-nor many in the 1960's--seems to have been concerned with sampled by the IIS report. In 8.2 percent of these cases the potentially explosive growth of institutional ownerthe bank is reported as having no authority; in another ship of common stock that would lead to significant po2.1 percent it consults in voting; in 7.3 percent of these tential voting control in two or more competing companies cases listed as partial voting authority the bank votes the in the same industry by a rather limited number of prestock if instructions are not received; and in 1.8 percent this coming development may have been overlooked was dominant financial intermediaries. One major reason that of the cases the authority differs among stocks within a given portfolio. This paper understates the potential the trust departments of commercial banks. the lack of detailed information about the stock held by voting power of bank trust departments in that only their The IIS report does not provide any direct tabulations sole voting rights have been tabulated. of the extent to which financial intermediaries hold stock Banks Generally Vote All Stock One Way in companies within the same roughly defined industries. However, the form of the data in the special tabulations The preceding summary of voting rights is not ade- prepared for Senator Metcalf from information collected quately instructive about what happens when stock is for the IIS report made possible the unique industry voted regularly on routine issues. The FCC inquired into analysis presented here. the matter of full and partial voting rights in the investi- Appendix D, Table 2, which has separate subtables for 19 gation it began November 25, 1969, and completed May 9, industries, shows the extent to which the same bank trust 1972. At the conclusion of its investigation the FCC reaf- departments hold stock in companies in the same industry. firmed its position that full and partial voting rights would be treated the same way. The testimony heard by the IMPORTANT LIMITATIONS FCC included oral presentations from the senior trust officers of four large banks; these officers were questioned few of the companies in some industries were included in One important limitation of these tables is that only a by the FCC commissioners after their presentations. The FCC Report and Order included the following statement: the basic 800-stock sample of the IIS. Another limitation, in terms of understanding the extent to which financial The Commission has adopted aggregation of intermediaries may be predominant among a number of ownership of stock in trust accounts where banks corporations in the same industry, is the fact that these hold any right, either partial or whole, to vote tables are prepared for bank trust departments only. For for the reason that any large position in itself the airline industry alone, a broader showing of instituhas the potential to be a force in management tional holdings in 1966 from an earlier study will be prebecause banks generally vote the stock one way. sented. The testimony in the comments and at the The 19 industries and the number of companies inadministrative conference by the trust officers cluded in each are as follows: clearly pointed out that the banks (where they hold the sole power to vote) generally vote all Number of the stock of a given company in the same way. 37 companies Appendix D in industry table No. Industry tabulations FURTHER INVESTIGATION WARRANTED 2-A... Airlines.. services. 2-C.--- Buildinginvestigation is clearly called for. If it turns out that the 2-D. Chemical and allied products.. person or organization whose stock is held by a bank trust 2-E. Conglomerates and aerospacedepartment rarely or never exercises his partial voting 2-F. Drugs, cosmetics, and toiletries. authority, the shares held with partial and full voting 2-G. Electrical equipment and elecauthority should be totaled in applying the recommended trical industry, 2-H.. Electric light and power. Insurance 2-K. Meat packing, food, and related products. 10 TWO OR MORE COMPETING COMPANIES 2-M... Office equipment/computers... 2-N.-.. Petroleum and gas production The amazingly rapid growth of the absolute and relative and distribution. 2-0. Primary metals and mining---amounts of common stock held by institutional investors 2-P Retail trade... did not start until about 1950. At that date regulated in- 2-0 Scientific instruments. 2-R. Transportation equipment and * 118, vol. 2, table V-13, p. 438. related products. 07 Federal Communication Commission, op. cit. The term "posi 2-8....... Wood, paper, and building tion” refers to the number and dollar yalue of shares held in the materials. stock of a corporation. 6 4 The industry groupings generally followed the clas- The bank numbered 1 does not appear in Appendix D, sification procedure used by the well known Value Line Table 2-A because it does not hold as much as 1 percent Survey. However, the industry groupings were limited by of the stock of any airline included in the sample. A the fact that the ITS was limited to 800 stocks and the convenient, arbitrary rule adopted in preparing Appendix present study focused its attention on only those stocks Table 2 was to list all the holdings (with full voting among the 800 held by bank trust departments for which rights) when any bank's holdings were as large as 1 perthe total portfolio concentration in 1969 was about 10 cent in any company in that industry. The case of bank percent or above. The amount of detail was limited by numbered 2, which held more than 7 percent of the stock the resources available to the investigator and a desire to in Trans World and Northwest Airlines and almost 5 permaintain the readability of this study. The data themselves cent of the stock in Eastern Airlines, merits considerable are quite revealing. Comments will be made about the thought. Eight of the 12 banks listed in this subtable hold airline and insurance industries only. The need for more 1 percent of the shares of two or more airlines. nearly complete studies of the industry ownership patterns that have developed, and will grow, merit continued and Debt, Control and Interlocks regular study. In view of the energy crisis Appendix D, Table 2-N, Petroleum and Gas Production and Dis- Two problems related to the range of the power of banks tribution, is also important to public policy consideration., are worthy of emphasizing. First, the commercial loan departments of these same banks are very likely to make Airline Holdings by Banks loans to all or most of these same airlines. The degree of independence of their judgments in stock investment and The extent of the 4, 8 and 12 largest holdings and in commercial lending activities merits further study. The the holdings of all 50 reporting bank trust departments of relations of a bank with its commercial borrowers may six important airlines is shown in Appendix D, Table 2-A. provide it with important financial information before such information is made available to other investors The holdings of 10 percent or more of several airlines by through other channels of communication. Second, banks two to four bank trust departments in itself may not be own different amounts of stock in suppliers competing for disturbing; further study of the appendix table shows airline business such as air frame and jet engine manuthe extent to which individual—but not identified-bank facturers. The extent to which interlocking relations trust departments hold parts of the voting stock of the between bank officers (or directors) and companies in same airline. Such study does raise new and vital issues. which substantial amounts of stock are held merits Note that banks numbered 2 and 3 hold more than 10 investigation. percent of the stock of Trans World, Northwest, and National Airlines. Banks numbered 2, 3, and 4 hold 1966 Institutional Ownership Pattern more than 15 percent of the stock of National Airlines, A study of 1966 ownership patterns of 10 airlines which and banks numbered 3 and 4 hold more than 7 percent presented the portfolio concentrations for both bank trust of Eastern Airlines. If partial voting rights were included, departments and mutual fund complexes is reproduced as these percentages would be somewhat larger. Table 7. Table 7-KNOWN CONCENTRATED HOLDINGS OF AIRLINE COMMON STOCK BY FINANCIAL INTERMEDIARIES—1966 (PERCENTAGE OF COMMON STOCK OWNED BY FINANCIAL INTERMEDIARIES) Table 7.-KNOWN CONCENTRATED HOLDINGS OF AIRLINE COMMON STOCK BY FINANCIAL INTERMEDIARIES-1966 (PERCENTAGE OF COMMON STOCK OWNED BY FINANCIAL INTERMEDIARIES)—Continued Investment com panies-Continued Wellington Manage ment (3). Keystone (5). Putnam Manage ment (4). Channing (2) Fundamental In vestors (2) Broadstreet (3) American Mutual, et al. (3). Lehman-One William Street (2). (1). Investors (1). (Newark) Insurance Company of North America (Philadelphia).. Total in named intermediaries.. Market value of common stock, Deo. 31, 1966 (in millions). 1 Data from U.S. Congress, House, Committee on Banking and Currency, Commercial Banks and Their Trust Activities, Emerging Influence on the American Economy, vol. I, staff report for the Subcommittee on Domestic Finance, 90th Cong., 2d sess., July 8, 1968 (Washington, D.C.: Government Printing Office, 1968). Data from United Statistical Associates, Stocks, vol. I of Corporate Holdings of Insurance Companies (New York: United Statistical Assoc., 1968). • Data from Arthur Wiesenberger and Company, Investment Companies—1967 (27th ed.; New York: Arthur Wiesenberger and Co., 1967). Source: Robert M. Soldofsky, Institutional Ownership of Common Stock: 1900–2000 (Ann Arbor, Mich. Bureau of Business, Graduate School of Business, University of Michigan, 1971), pp. 216-7. HOLDINGS NOT AVAILABLE OVERLAPPING OWNERSHIP WILL GROW The primary limitation of this table was that the bank These overlapping financial interests are clear. What trust department holdings of less than 5 percent was not their consequences may be for patterns of competition available. At this earlier date the Chase Manhattan Bank's within an industry are not so apparent yet. The fact, to trust department held over 6 percent of the common repeat, that institutional holdings of common stock are stock of six different airlines, and Morgan Guaranty held growing faster than the total market value stock leads to over 6 percent of two airlines. These two banks between the very likely result that such patterns of overlapping them held 13.7 percent of Trans World Airlines stock. The "ownership" will grow both in terms of the number of mutual fund complex, Waddell and Reed, held another companies involved and the extent of individual portfolio 4.9 percent, and the Fidelity Group held 3.1 percent of concentrations. Trans World. These four financial intermediaries held 21.5 percent of Trans World Airlines. Waddell and Reed Insurance Industry Holdings by Banks held 4.3 percent in National Airlines and more than 2 percent of the stock of the three other airlines. The Fidelity The improved outlook for the insurance industry somegroup owned 8.1 percent of National Airlines and 6.6 time between 1966 and 1969 made its common stock an percent of Northwest Airlines. Between them the Chase attractive investment to bank trust departments. The Manhattan Bank and Fidelity group held 16.5 percent extent of such holdings in 1966 cannot be estimated beof Northwest Airlines, and the four largest holders owned cause of the general lack of conveniently summarized inmore than 20 percent of its stock. formation. As shown in Appendix D, Table 2-1, in eight in MAY REDUCE TEMPTATION stances the four largest bank trust department holdings pass some specific proposals relating to industry portfolio were 10 percent or more of the stock of five of the insur- concentration patterns, institutional investors will start ance companies in the sample. Four of the 15 banks that adjusting their holdings. The pattern of the holdings of held at least 1 percent or larger concentrations of insur- mutual funds and bank trust departments is sufficiently ance company stocks held that percentage or more in at flexible so as to permit such adjustments within about a least two different companies. Banks numbered 26 and 3-year poriod. 28, which were probably not among the larger banks in The objective is to seek to prevent the continuing the group of 50 included in the IIš sample, particularly growth of industry portfolio concentration patterns which liked insurance company stocks. will develop in the absence of legislation. Reducing the One point of substantial concern is that the book value shift in economic power to a small number of financial of the equity interest of insurance companies themselves institutions is important in the economic organization of may be only about one-third to one-fourth of the assets the nation and especially to the location of power within that they own. The high leverage ratio of insurance com- and over corporations. panies, which is appropriate for their industry, nevertheless gives the owners of insurance company shares a potential influence over additional vast financial resources. The diversity of opinions among the 10 to 20 or more Bank-Insurance Company Relationships large institutional investors who may control very substantial proportions of the stock of significantly The potential dangers from the influence over insurance competing companies in the same industry may reduce the company loans and stock portfolios that might flow from temptation to coordinate the activities of the portfolio a bank trust department's complex community of interest companies through legal means. In many major industries, with specific insurance companies could well lead to fur- such as broadcasting, air transport, insurance and oil and ther investigations and probably to legislation before the gas there are highly skilled regulatory agencies looking serious potential dangers result in any questionable ac- out for the public interest. Unfortunately, the number of tivities. Note that banks numbered 26 and 28 between such regulatory bodies is likely to increase because of such them owned about 11 percent of Aetna Life and Casualty, problems as that of maintaining the integrity of the enover 9 percent of Connecticut General Insurance, and vironment and pressing upon the physical limits of over 8 percent Hartford Fire surance. Since the IIS available resources of many types. report, Hartford Fire has been merged into the Interna- The growth of patterns of concentrated stockholdings tional Telephone and Telegraph Co. (This action was within an industry by very large financial intermediaries approved by the Connecticut Department of Insurance is one which to date seems to be beyond the scope of existin May 1970). Bank numbered 28 owned over 5 percent ing antitrust laws. Direct legislation in this now area of of two multibillion dollar insurance companies. national concern is needed before the problems become In order to prevent undesirable financial communities more intense and greater divestitures would be required of interest among financial intermediaries, over several to restore desirable competitive patterns. companies in other industries, additional study might well be undertaken in the near future. One bizarre problem is LONG-RUN GROWTH OF INSTITUTIONAL the potential ability of one group of financial intermedi STOCKHOLDINGS aries, such as commercial banks or insurance companies, to build a substantial stock voting position in another The growth of the relative and absolute amount of stock group of financial intermediaries. held by financial intermediaries should be viewed from a Any recommendations that may result from inquiries long historical basis in order to construct a long-run into the holdings of bank trust departments, regulated projection. Both the historical and projected views show investment companies and other financial intermediaries the fact that institutional holdings of shares is growing over nonfinancial corporations should be applied equally faster than the total market value of the shares of U.S. to each type of institution. One further point is that mean- companies whose stocks are available to the general ingful regulations should be applied to mutual fund public.88 The inevitable result of the past and future complexes, that is, to groups of mutual funds that are conditions, that load to the more rapid growth of instituunder common management control. tional holdings of common stock than the total market value of U.S. traded stocks, is an increase in average portHoldings Can Be Adjusted Downwards folio concentrations and their spread through an increasing number of industries. Possible future legislation dealing with industry concen- The original 1970 projections for the institutional holdtration patterns is likely to result in some stock disin- ings of stock for the years 1980 and 2000 from a 1968 vestment, but such disinvestment could take place over a base data are shown as Table 8. period of up to 3 years after the enactment of these recommendations. The FCC has used such a procedure. Soldofsky, op. cit. chapter V, Growth of Stock Ownership by Financial Iniermediaries to the Year 2000, pp. 73-104 and pp. 208– In fact, if it becomes clear that the intent of Congress is to 222. |