He therefore argued that:

The first requisite [of corporate accountability] is knowledge, full and complete; knowledge which may be made public to the world.

There actually were very few really big businesses in Roosevelt's time. The great trust movement of the period created only two industrial corporations with assets exceeding $500 million by 1909, and both of these, U.S. Steel and Standard Oil (New Jersey), were specialized to a particular industry.

In contrast, by the first quarter of 1971, there were 111 industrial corporations with assets of $1 billion or more. Although there are about 200,000 corporations and nearly 200,000 partnerships and proprietorships engaged in manufacturing, by the beginning of 1971 the 111 largest of these held at least 51 percent of the assets and 56 percent of the profits of all corporations engaged primarily in manufacturing; the 333 industrial corporations with assets of $500 million or more accounted for fully 70 percent of all industrial assets, excluding their unconsolidated holdings.

Indeed, by 1970, the two largest industrial corporations alone, had combined sales of nearly $40 billion, which is about as great (in constant dollars) as those of the over 200,000 manufacturing establishments operating in 1899.

Thus, there exists an extremely asymmetrical industrial structure, with the bulk of economic activity controlled by an elite of a few hundred enormous corporations and the remainder divided among 400,000 small and medium-sized businesses. And what is true of the industrial sector is increasingly true of the nonindustrial sectors as well.

But much more is involved than an increase in the absolute size of some American corporations and the growing share of industrial activity controlled by a relatively few large businesses.

Many large contemporary corporations operate across an increasing number of industries and across many national boundaries. Such multiproduct, multinational corporations enjoy much greater flexibility and discretion in deploying their resources than do their smaller, more specialized rivals.

The new dimensions of corporate control extend beyond the economic into the political. Corporate annual reports increasingly read like a state of the Nation address, and in some cases like a state of the world address.

Indeed, the tone and scope of a recent ITT annual report are not unlike what one might expect of a Prime Minister's characterization of the British Empire in its days of glory. ITT proudly proclaimed to its stockholders that its vast international organization:

is constantly at work around the clock-in 67 nations on six continents, in activities extending from the Arctic to the Antarctic and quite literally from the bottom of the sea to the moon ***

It might appropriately have added that its officers and directors have included such international men of affairs as former U.N. Secretary Trygve Lie. Director of ITT-Norway: former Belgium Premier Paul-Henry Spaak, a Director of ITT-Belgium; two members of the British House of Lords; a member of the French National Assembly; and, at home, John A. McCone, former Director of the

CIA, and Eugene R. Black, who is widely known in international economic and political circles, where he has held such important posts as President of the International Bank for Reconstruction, Special Financial Adviser to the Secretary-General of the U.N., and Financial Adviser to the Sheik of Kuwait, as well as board member of dozens of large corporations.

As perhaps the outstanding example-and success story of the modern multinational conglomerate corporation, ITT is a useful subject of an inquiry into the adequacy of existing corporate disclosure requirements.

ITT A CASE STUDY IN INADEQUATE DISCLOSURE

Although ITT is still not a household word, during the last decade it grew nearly eight-fold to become one of the world's largest international corporations, its assets grew from $1.1 billion in 1961 to $8.3 billion in 1970. The latter figure excludes properties valued at $527 million that are owned by NASA and the Department of Defense but operated by ITT.

Despite the enormous growth of ITT over the last decade we really know less about its constituent parts than we did in 1960, when it was still quite specialized. Each time ITT acquires a public corporation, it further diminishes our economic intelligence of American industrial organization, as the operating statements and balance sheets of the acquired companies are subsumed in ITT's consolidated statements. In 1970, ITT provided the public precious little financial information on its operations. Although it manufactured numerous products, it broke down its net assets into only four broad categories: "manufacturing," "consumer and business services," "telecommunications utilities," and "consolidated," with the largest share (49 percent) in the "consolidated" category. It did little better with respect to sales and income information, which were detailed as follows:

The product categories used in ITT's 1970 annual report obviously are far too broad for intelligent decisionmaking by investors, quite apart from their use for the other purposes discussed below. This inadequacy is of special current relevance in light of the recent antitrust consent agreement requiring that ITT divest Canteen Corp., Avis, Levitt, the fire protection division of Grinnell, and Hamilton Life and ITT Life Insurance divisions, a package reportedly involving sales of $1 billion.

According to trade reports, even financial analysts were baffled as to the probable impact of the divestiture on ITT's financial picture, as ITT's common stock fell from $62 before the settlement was announced to as low as $52.125 a share immediately following the announcement. ITT's reporting procedures recently were severely criticized by a leading financial analyst. Mr. David Norr, partner of the First Manhattan Co. and recently appointed to the Accounting Principles Board, criticized ITT's annual report for not reflecting retroactively the results of the many companies it had acquired.

Norr reportedly indicated that this was sufficient grounds for the New York Stock Exchange to halt trading in ITT securities.

Lest you assume ITT's financial reporting practices are below par for large corporations, let me remind you that for 4 consecutive years ITT received the top award of the Financial Analysts Federation for "excellence in corporate reporting." Obviously, ITT has much company when it comes to inadequate reporting.

THE SEC'S FAILURE TO REQUIRE ADEQUATE DISCLOSURE

For many years the SEC had a rule that corporations subject to its jurisdiction disclose insofar as practicable the relative importance of each product, service or class of similar products that contributed 15 percent or more to gross sales. This rule had long been criticized as being excessively broad.

However, the SEC remained unmoved to change until after Senator Philip Hart's Senate Subcommittee on Antitrust and Monopoly held hearings in 1965 on the subject, and threatened to introduce legislation directing the SEC to require divisional or some other more definitive form of segmented sales and profit reporting.

SEC Chairman, Manuel F. Cohen, subsequently informed Senator Hart the SEC already had the authority to require adequate disclosure and that it was considering doing so.

During the next 4 years, there was considerable discussion and controversy in the business community, particularly among public accountants, a number of whom had long been critical of this and other SEC reporting requirements. But the greater part of the accounting fraternity opposed stricter rules.

Finally, September 4, 1968, the SEC issued a proposed rule that would have required, among other things, corporations to report the sales and net income of each class of related or similar products which contribute 10 percent or more to sales or net income.

Although the SEC made no systematic, independent analysis of the proposed rule, evidence was presented demonstrating that the proposed rule required little meaningful data from the largest corporations.

The SEC, evidently not wishing to be confused by any facts, apparently was much impressed that practically all industry sources objected to even the proposed rule. The result was passage of a watereddown version of the original proposal.

Not only did the SEC permit large corporations to report financial details of only their very largest product lines, but it failed to adopt rules guaranteeing comparability in reporting. Rather than establish reporting criteria of its own, SEC gave management discretion in deciding what constituted meaningful product categories.

It did so on the premise that:

Management, because of its familiarity with company structure, is in the most informed position to separate the company into components on a reasonable basis for reporting purposes. Accordingly, discretion is left to the management to devise a reporting pattern appropriate to the particular company's operations and responsive to its organizational concepts.

The SEC rules require much more detailed disclosure from small corporations than from large ones. As noted above, international conglomerates the likes of ITT need disclose few details of the sources of their profits. Nor is ITT unique. Many other large companies give even fewer financial details than ITT. For example, Minnesota Mining & Manufacturing Co., which has thousands of products and 1970 sales of $1.7 billion, is, for earnings purposes, a single product company. Its rationale for interpreting the SEC reporting rule this broadly is that all but 5 percent of its sales are products related to the technology of coatings and bondings.

As already noted, SEC's reporting rule has a strong bias requiring much more detailed reporting by small companies than by large companies. An example will illustrate the point. Suppose you wished to obtain financial information concerning the nature and scope of electrical components manufactured by various manufacturing firms. From ITT's financial reports you would learn that it is an important manufacturer of various electrical components, TV sets, radios, phonographs, and tape recorders.

However, ITT combines sales and earnings from its electronic and electrical equipment with those from home freezers and household appliances, air conditioning, disc brakes, and industrial pumps. As a result, ITT electrical products are lumped in a broad category of industrial and consumer products with combined sales of $1.8 billion. Nor would you learn anything of significance about various electronics products from the public reports of General Telephone & Electronics. GTE reports all of its electronic revenues and earnings in a single category-Sylvania-with combined sales of $816 million. Yet, Sylvania manufactures literally hundreds of different products, in some of which it is a leading producer.

Consider, in contrast, what you can learn about the operations of small electronic corporations. Some small companies are so specialized that all of their sales are in a single, narrow-product line. For example, PEC Industries, Fort Lauderdale, Fla., reported that all of its 1970 revenue of $948,205 came from the sale of printed circuit boards.

Although other small companies make more than a single line, they make public quite detailed product information. For example, Nucle

onic Products Co., Inc., Canoga Park, Calif., with 1970 sales of $6.3 million, breaks down its sales as follows:

Semiconductor components---

Passive components (resistors and capacitors).
Electromechanical switches--

Percent of sales

60

38

8882

Of course, if Nucleonic Products or PEC Industries were acquired by ITT, their operations would become lost in the corporate bowels of ITT and never be heard from again—unless ITT decided it was in its interest to do otherwise.

It is for this reason that product and other information that is readily available for most small companies is shrouded in secrecy for the large corporation.

The failure of the SEC to require adequate reporting argues forcefully for adopting a more direct approach to the question of corporate secrecy. Because the SEC has repeatedly demonstrated an inability to perform responsibly in this area, I think a new legislative mandate is required.

Additionally, even were the agency to perform more responsibly in the future than in the past, new legislation is required because the SEC's authority is restricted mainly to financial disclosure relevant to protecting the investor.

THE FTC'S QUARTERLY FINANCIAL REPORT PROGRAM

Nor are the SEC's shortcomings unique. Every effort to obtain more meaningful information about large corporations meets vigorous opposition, even when the information is not made public.

Currently, powerful business interests are trying to prevent the FTC from requiring more detailed financial information for its quarterly financial reports on manufacturing, which provide profit and financial information on manufacturing corporations.

The statistical information generated by this program is used widely by Government agencies, especially for national income accounting purposes, and by thousands of corporations. The report has over 10,000 paying subscribers.

Although this is the most reliable and timely source of such information, its quality has deteriorated sharply since the program's inception in 1947. Information on many individual "industry" categories is becoming all but meaningless as large corporations spread their operations over more and more lines.

To eliminate this defect, the FTC requested permission of the Office of Management and Budget (OMB) to obtain from large corporations reports by line of business rather than consolidated reports for the entire corporation.

To date, OMB allegedly has rejected the proposal because the information requested was of a confidential nature and corporations would have difficulty providing it.

Recently I attended a conference at which a senior official of the Financial Executives Institute took credit for having "squelched" this FTC effort. In subsequent discussion he clarified his statement by adding that he did not take sole credit for this accomplishment. In

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