Source: Compiled from Hearings on Economic Concentration, Pt. 5, pp. 1971-74 principal divisions, he was able to point out that the profit rates were superior to the performance of what he regarded as "comparable" groups of companies. Revealing the actual performance of the electronics division also served to allay rumors that had ascribed to it even greater losses. Another case when management publicized its operations, and in detail, was cited by Abraham J. Briloff. It occurred when Ling-Temco-Vought broke up the Wilson Company, which it had previously acquired, into 3 component parts —one for meat products, one for sporting goods, and one for pharmaceutical and chemical products: When, in 1967, LTV determined to deploy old Wilson into the three little Wilsons they prepared separate and complete prospectuses for each of these three companies; each of these prospectuses included statements of income for each of these three entities showing what their separate sales, expenses, taxes and net incomes would have been-right down to the bottom line for each of the 5 years preceding the takeover and subsequent step-down. And to prove that these statements were all properly presented, each prospectus had its own "Opinion of Independent Auditors" addressed to the board of directors of the particular company. The certificate doesn't quibble-it says very explicitly that these pro forma income statements, for each of the 5 years there presented, were “in conformity with generally accepted accounting principles consistently applied." But the process did not end there, as LTV then decided to make a further breakdown of Wilson's meat-packing component. In Briloff's words, when it turned out just a few months ago to be even more in accord Ibid., Pt. 8, pp. 4783-84, testimony of Abraham J. Briloff. 606 PREVENTING FURTHER CONCENTRATION sell livestock in the East and Midwest; another, in the Midwest and West; All one needs to do is to review what the Wilson, sub-Wilson, and bor, for Concerted efforts to secure divisional reporting began with a recommendation by a professor of economics. Appearing before the Senate Anti ust Subcommittee on April 15, 1965, Joel B. Dirlam urged, "The relative | ofitability of different divisions and product lines should be brought out in order to appraise the competitive tactics utilizing diversification. We are operating i almost complete ignorance in this area where we do not know even the sale of many of the major firms in different lines, let alone the profitability or losses incurred in these lines." In addition to the light that would be shed on "comp_titive tactics" Dirlam also stressed the importance of divisional reporting for th allocation of capital. "I would speak also on behalf of the average investor who oes not know what he is buying into when he purchases one of these large divers fied firms. He has only the overall statement to go by. He judges then not the in lustry but the behavior of the firm itself, and he stakes his money on the mana ement with a minimum of information.” “ 67 The recommendation was transmitted to the Securities and F change Commission for comment. Given he agency's long-standing preoccupa on with matters of far less moment (often approaching trivia), its initial reaction was predictably adverse. On June 4, 1965, Chairman Manuel F. Cohen sent a memorandum to the Subcommittee, which while conceding that the agency possesses the necessary legal powers, set forth five reasons against instituting such a program. He expressed concern over i, “cost," over the problems of "allocation of overhead, research and developm. nt, taxes, etc.," over the possible injury to a reporting company's "competitive position," over the "problems of rulemaking,” and over the "liabilities which would be faced by registrants and accountants in furnishing such information." Furthermore, if things were just let alone, according to the memorandum, the problem would solve itself; some companies. it was pointed out, were already fur: ishing such information voluntarily, “a trend which we believe should be encouraged.” 68 A year later, however, the SEC had changed its mind. Appearing before the Antitrust Subcommittee on September 20, 1966, Chairman Cohen acknowledged that "changes have been occuring recently which have made it necessary for us to reconsider our requiremers in this area despite the difficulties we will have Ibid., Pt. 8, pp. 4733--4. Ibid., Pt. 2, pp. 769-70. RESTRAINING THE CENTRIPETA FORCES 607 to face." .” The “changes" referred to were the alterations in corporate structures resulting from the wave of conglomerate mergers. 70 Since that time divisional reporting has suffered the fate that seems increasingly to befall reform proposals of any kind-interminable delay finally followed by adoption in form but not in substance. The proposal was studied and restudied— by the Financial Executives Institute, by the Securities and Exchange Commission, by the Bureau of the Budget, by the Federal Trade Commission, and most recently by the White House. Finally, in 1970 the SEC required registered firms to report separate profit data for product lines representing more than 10 percent of the company's sales. This percentage standard had the obviously in equitable effect of requiring reports from relatively small divisions of medium-size concerns but of not requiring them from larger competitive divisions of much larger corporations. Moreover, the program suffers from a deficiency that has made the resultant reports of very little use to anyone for any purpose. In maxing their reports the companies are not required to use a standard system of classification such as that employed by the Internal Revenue Service1 or the company-industry categories of the Census Bureau. The result, a tribute to public-relation. imagery, has been a mélange of intriguingly named corporate segments, which conceal more than they reveal. They vary so greatly from company to company as to make it impossible to compare the performance of similar product line: in different companies or to derive statistical aggregates of any kind. That such would inescapably prove to be the case had been predicted in 1966 by Brandow: It would seem best to define the fields by which firms should report rather than to accept companies' own divisional organization. Some firms' divisions are freakish because of historical accidents or the like, and equally freakish divisions could be contrived for reporting if a purpose was to be served by it. Moreover, valuable statistical information about the economy will be lost unless reports by fields can be aggregated in a meaningful way. Again for statistical reasons, it would be desirable to mesh definitions of fields with the Standard Industrial Classification of the Bureau of the Census. Probably three-digit categories are at about the right level of aggregation for fields but closely related categories might be combined in some instances.72 An FTC staff study of 19 "line-of-business" reports submitted to the SEC is reported to have found that "large conglomerates included in the sample tend to define their lines-of-business so broadly that the profit information for the category is valueless." The report noted as an indication of their excessive breadth, that "the average number of lines-of-business per company was 5, while the average number of corporate divisions was 31." 73 Robert K. Maitz, professor of accounting at the University of Illinois, was retained by the Financial Executives Institute through its foundation to prepare a comprehensive study of the problem. For the results of his study of the conceptual proble ns involved see Financial Executive, July, Sept., Nov., 1967. "See Hearings on Economic Concentration, Pt. 5, pp. 2150–52. Quoted in the Washington Star, April 25, 1971. As an example of the way in which the use of the percentage standard favors very large concerns, the report quoted as citing the manufacture of refrigerators by General Motors: 'General Motors' profits in refrigerators, for example, would go unreported even though it produces Frigidaire, one of the industry's leading brands. Its sales of refrigerators would have to exceed $2.3 billion (10 percent of GM's total sales of about $23 billion in 1968) before it 608 PREVENTING FURTHER CONCENTRATION would be required to make a report.` In this connection it should be pointed out that according to the 1967 Census of Manufactures the total value of shipments of the entire household refrigerator and freezer industry was only $1.3 billion. RESTRAINING THE CENTRIPETAL FORCES 609 4. Bibliographical note: "Revised Indexes to ISIC" (International Standard Industrial Classification), Statistical Reporter, July 1971 REVISED INDEXES TO ISIC The United Nations Statistical Office has recently issued Indexes to the International Standard Industrial Classification of All Economic Activities. (Statistical Papers, Series M, No. 4, Rev. 2, Add 1. 247 pp. $4.50.) Section I reproduces the latest version (second revision, 1968) of ISIC; this has also been published separately as Statistical Papers, Series M, No. 4, Rev. 2. Section II consists of a list of the activities, commodities made or dealt in, services performed or abbreviated descriptions of establishments which characterize each fourdigit group of ISIC under the definitions of the groups in their numerical order. It contains about 8,500 index entries. Section III contains a general alphabetical listing of the entries appearing under each of the four-digit groups of section II. It also contains additional entries composed of modifications or rearrangements of the wording of the original title of activities. Section III contains about 12,000 entries. The indexes are designed to assist in adapting ISIC to the classification requirements of individual governments, in comparing national classifications to ISIC or in classifying data according to ISIC. Copies should be ordered by UN Sales No. E.71.XVII.8 from the Sales Section, United Nations, New York, New York, 10017. Government agencies should request the special discount as it is not automatically given. |