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ordinarily be voted by the bank as fiduciary by executing question arises as to the independence of action a proxy in the name of its nominee, the record owner of a given bank will exercise if its so-called competithe shares.

tor banks have important stock positions through Similar rights and responsibilities of ownership attach to nomince property held for accounts in category (c), trustee for

The Patman Study (the House Small Business pension trusts, and similar trusts held for employee benefit

Committee report cited immediately above) purposes. However, it often occurs that the trust instruments creating such relationships contain provisions

quite properly raised a number of important reserving the voting rights on stock so held to the manage

questions regarding the independence of action

of a given bank if its competitors have important ment of the corporate creator of the trust, usually a

stock position in it through nomince holdings designated management group or pension committee.

* additional investigation of this question is With regard to categories (d), (f), and (g), the bank

needed.11 acts in an agency capacity for the legal owners. Such owners retain all voting rights with respect to stocks so held. Where nominee registration is employed for stocks held under agency safekeeping, or custody relationships of

Despite this lack of firm data on nominee holdings, the such kinds, the execution of proxies on behalf of the

conclusions in various studies leave little doubt that they nominee to vote stocks so registered would be exercised by the bank in its fiduciary capacity, but only upon the

permit bank influence which could be substantial. The

existence of sizeable blocks of stock held in the name of written authority and direction of the legal owner of the securities.

one or more nominees of a bank gives that bank consider

able power in the way it exercises the voting rights it has With respect to category (e) corporate trust accounts, it

itself and the influence it is in a position to exert on was impossible to generalize. It was the feeling of the Board

beneficial owners where it occupies an agency role. of Governors that voting of virtually all stock held in nominee names under corporate trust or corporate agency

The Institutional Investor Study Report of the Securelationships would be subject to the written direction of

rities and Exchange Commission for example concludes,

in part: the management of the corporation concerned.

In the SEC Institutional Investor Study Report, cited Among the securities that a bank trust departabove, it was estimated that of the total assets admin- ment can choose to hold are stocks in companies istered by the 50 largest bank trust departments employee with which the bank has commercial banking benefit accounts (category (c)) represented 41 percent,

relationships. It appears that increased demand personal trust and estate accounts (categories (a), (b), and deposits by a company at a bank were, to a (h)] 40 percent, and agency accounts (categories (d), (f), statistically significant degree, associated with and (g)] 19 percent.8

larger holdings of the company's stock by the In summary the SEC study concluded, "The trust de- bank's trust department.12 partments have sole voting authority over stock constitut

There appeared, according to this study, to be less ing approximately 75 percent of the value of the common

significance to loans to a corporation by a bank's comstock held in employee benefit accounts, and have sole mercial department as a factor in trust department holdvoting authority over approximately 55 percent of such ings of stock of that corporation. stock in personal trust and estate accounts." 9

In its conclusion to Chapter 15-C, “Institutional Relationships with Portfolio Companies-Concentration

of Stock Holdings,” the same study finds: There still remain large areas of lack of information. It

Concentration analysis establishes that instiis not clear to what extent the judgment of trust officers is tutions, particularly banks, have the potential sought and accepted by beneficial stock owners where the bank is technically only in an agency position. Nor is it

economic power to exert significant influence over

many of the companies whose securities comprise manifest how strictly trust departments exercise their

their portfolios. Most of these companies in which voting authority exclusively in terms of the greatest high concentration of institutional stock holdings benefit, short and long run as they see it, for the beneficial

exists are large companies. stock owners, or to what extent they are influenced by

Ordinarily, however, it is necessary to aggregate bank lending practices, directorships held by bank officials,

the holdings of several institutions before these advisory posts held by bank officials, or other considera

holdings constitute a substantial percentage of tions in attempting to affect corporate policy. Thus it is not surprising that the literature on nominees contains

any company's outstanding shares. While such

statistical aggregation may disclose potential such comments as:

economic power by a group of institutions, it does It is apparent that there is no easy way to

not permit the inference that institutions will, in judge the precise significance of nominee stock

fact, act together or that the power of any one holdings *'* * Aside from actual power over

institution will necessarily be augmented through the stockholdings, the question arises whether

concerted action with other institutions." the nominee holdings as a matter of practice constitute a consolidated and unified block

Other conclusions of this study may be quoted more relative to matters of management. The further

briefly: & The above percentages in the aggregate would also include 10 U.S. Congress. House. Select Committee on Small Business, category (e) which cannot readily be classified into any one of the op. cit., p. 17. three groupings in the SEC since it overlaps the second and third 11 Fischer, Gerald. op. cit., p. 88. category. Source: U.S. Securities and Exchange Commission, 12 U.S. Securities and Exchange Commission, op. cit., p. 38. op. cit. p. 35.

13 U.S. Securities and Exchange Commission Institutional Investor Ibist., p. 3.5.

Study Report, v. 5, p. 2561.




To the extent that an institution holds a large

This concentrated voting power can obviously percentage of a company's outstanding shares,

be used for many purposes, among them the conit may be able more readily to mobilize the ad

trol of boards of directors and officers, as well as ditional shares needed to approve or disapprove

influencing the policies of the corporation in à corporate proposal. These institutions as a

which the stock is held. When these holdings group appear to have substantial power which

involve the stock of a competitor institution might be exercised through voting.'

such voting control could significantly affect the The Study found that institutions as a group

degree of competition between institutions. When

these holdings involve the stock of one's own inhave a record of voting involvement that dis

stitution the serious possibilities and problems, plays relatively little opposition to management, At the same time, the extent of their informal

among others, of self-dealing and self-perpetua

tion of management in office must be considered. participation in corporate affairs remains largely

This is one reason why the extent of bank stockunknown: institutions concede that they mily

holdings held and controlled in one degree or find it desirable or necessary to interject their views into the corporate decision-making proc

another by banks and trust companies, as well

as by other financial institutions, is of major ess, but report relatively few instances in which

significance in any study of the structure and they did so.

economic power of the banking industry within

the American economy. (p. 804) JIOUSE BANKING COMMITTEE CONCLUSION Finally, the staff report for the Subcommittee on Domestic Finance of the House Committee on Banking and Currency, “Commercial Banks and Their Trust Activities: At this stage, then, it seems fair to conclude that the Emerging Influence on the American Economy,” duted stocks held in nominee accounts of banks' trust departJuly 8, 1968, may be cited as follows:

ments and in other institutions do in fact put these instiIt is important to note that while an individual

tutions in a position where they can exert significant inwho holds a few or even a few hundred shares of

fluence, through voting and otherwise, on corporate stock in a corporation having several thousands

decisions and policies. or millions of shares outstanding does not re

At the same time, largely unknown is the extent to gard his voting right as significant, a corporate

which these institutions actually use the power the nomtrustee who can combine the voting rights of

inee accounts provide to influence corporate decisions, hundreds or thousands of such small holdings into how far they simply support management, how far the significant voting power regards the voting right trust department accounts influence, or are influenced by, as a very valuable asset.

bank loans to and deposits by major corporations. 14 Ibid., p. 2750.

These are all difficult questions that would be worthy of 15 Ibid., p. 2763.

further exploration.


Part II

The Need for Disclosure Regarding Concentration of

Voting Rights Among Institutional Investors






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)

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