June 27, 1973
Page 21738
THE SECRECY OF CORPORATE OWNERSHIP
Mr. MUSKIE. Mr. President, the current issue of the Indiana Law Review contains a significant article written by Senator METCALF. In this article, entitled "The Secrecy of Corporate Ownership," the Senator notes that–
Faceless, anonymous institutions control most of the stock in America. But the extent of that control is not known.
He also maintains that–
Corporate documents have never been public records. Although corporations are often described as creatures of the state, they have never been treated as creatures of the people.
Senator METCALF'S remedy for this situation is full disclosure of the major stockholders in all large corporations.
Mr. President, I commend this article to my colleagues, and I ask unanimous consent that it be printed in the RECORD.
There being no objection, the article was ordered to be printed in the RECORD, as follows:
THE SECRECY OF CORPORATE OWNERSHIP
(By LEE METCALF)
I. INTRODUCTION
Last year, Safeway carried an article entitled "Who Owns Us?" in its bi-monthly magazine. That article described the easily identifiable stockholders, the small investors. Safeway characterized those "typical" participants in the great American dream as follows:
"They are the retired couple on the corner lot; they are the young couple who put a small inheritance in trust for their new baby; they are the store manager in Kansas, the mailman who serves his store and the truck driver who brings his supplies. They are the farmer who sells us lettuce and the rancher who raises beef. They are the local policeman and the boy next door who is away at college."
But, when the author of that article put romance aside and cited facts and figures, a different picture of Safeway ownership emerged. Stockholders with less than 100 shares constituted forty-eight percent of the total stockholders and represented only four percent of the total ownership. Nearly fifty percent of the stock was held by some of the largest insurance companies, pension funds, mutual funds, banks, and trusts in the United States.
Safeway's situation is not atypical. Faceless, anonymous institutions control most of the stock in America. But the extent of that control is not known. Even the Safeway advanceman did not tell the whole truth about ownership of his company's stock. He may not have known. The officers of Safeway, however, were most cooperative in providing additional information on the company's stockholders, and they should be commended for their public disclosure. Other corporations, including such giants as IBM, ITT, GM, Standard of New Jersey, and Texaco, would not supply information on their stockholders when this writer requested it.
The facts show that one institutional investor, Chase Manhattan Bank, holds and votes almost ten percent of Safeway's stock in just one of the three accounts of that bank listed among Safeway's top thirty stockholders. President Mitchell of Safeway and Mr. Stanton of his staff were most cooperative in verifying this fact. Somebody at Chase stamped "Kane and Company" on a proxy, and that proxy voted almost ten percent of the total stock.
II. THE INVISIBLE "NOMINEE" SHAREHOLDERS
Kane & Co. has a lower profile than even Chase Manhattan Bank. A nominee for one of the numerous accounts at Chase, Kane & Co. does not even enjoy the sturdy brick walls and efficient tellers that give a bank personality. Instead, its character is shaped by the constant flow of sales and purchases that define the world of an investment account. It only exists on paper, and that can be a very nebulous existence.
Kane & Co. is joined in the investment world by such luminary and original "stockholders" as Cede & Co., "fronting" for the Stock Clearing Corporation, a wholly owned subsidiary of the New York Stock Exchange; Pace & Co., standing in for the Mellon National Bank and Trust; and Carson & Co., Powers & Co., and Teggee & Co., all pseudonyms for Morgan Guaranty Trust.
Other "stockholders" include Fiver, Forco, Octo, Oneco, Treco, and Twoco – devised perhaps by some computer operator – all code words for the Prudential Insurance Company.
These code names or "nominees," representing some of the biggest investors in the United States, can be traced directly to the institutional investors of our country, especially bank trust departments. Concentration of stock control is a frightening fact of the modern economic scene.
The massive institutional investors' study report by the Securities and Exchange Commission, which was printed in 1971 as House Document 64, almost came to grips with the problem. The study analyzed concentration of stockholdings of the 230 largest institutional investors in 800 representative companies listed with the New York and American Stock Exchanges or traded exclusively over the counter. The study did not name the banks, insurance companies, investment houses, and other institutional investors. But it did name the companies in which these institutional investors had sole voting rights and partial voting rights to stated percentages of stock. And this study showed that various combinations of from one to three of the 230 institutional investors had sole voting rights to at least ten percent of the stock in more than one-fourth of 620 representative companies.
Some of the companies in which one, two, or three institutional investors vote at least ten percent of the stock include: Proctor & Gamble; Sears, Roebuck; Ford and Chrysler; two oil companies, Gulf and Standard Oil of Indiana; three drug companies, Upjohn, Parke-Davis, and A. H. Robbins; four insurance companies, Aetna Life & Casualty, Hartford Fire Insurance, Connecticut General Insurance, and Farmers New World Life; and six airlines, Eastern, TWA, United, National, Delta, and Northwest.
Chase Manhattan Bank is a major stockholder in most of the nation's biggest airlines. In 1972 annual reports filed by airlines with the Civil Aeronautics Board, Chase Manhattan was listed as holding 6.5 percent of the stock in TWA, 9 percent of Eastern Airlines stock, 8.4 percent of the stock in National, and 7.5 percent of American Airlines stock. Although the CAB reports did not divulge it, Chase Manhattan also held 6.86 percent of the stock in Northwest, 7.26 percent in Western Airlines, and 8.57 percent in United. The bank held the stock through nominees.
Time, Inc., the publishing giant, lists National Shawmut Bank of Boston, Mellon National Bank and Trust, the New York Stock Exchange, and Morgan Guaranty Trust among its stockholders. Time's ownership, however, does not appear in that form on its stockholder list. Instead, some ownership is identified in the Orwellian terms of nominees – Chetco, Pace & Co., Ferro, Cede & Co., Carson & Co., Powers & Co., and Tegge & Co. Although several banks hold blocks of stock in the magazine, Time did not disclose some of them in its 1971 ownership report.
In the electric utilities arena, fourteen banks are among the top ten stockholders of ten or more utilities: Chase Manhattan Bank, using four different names, appears among the top ten stockholders of forty-two utilities; Morgan Guaranty Trust, using thirteen different nominees, appears among the top ten of forty-one utilities; Manufacturers Hanover Trust, using five different nominees, appears among the top ten of thirty-one utilities; First National City Bank of New York, using eight different nominees, appears among the top ten of twenty-nine utilities; State Street Bank and Trust of Boston, using eight different nominees, appears among the top ten of twenty-one utilities; and Bankers Trust of New York, using eight nominees, is among the top ten stockholders of twenty utilities .
III. GOVERNMENT INSPECTION
The full extent of ownership concentration and the effects of that concentration are not known. Federal regulatory agencies have a spotted record at best in attempting to obtain ownership information, and many companies simply refuse to divulge such information on a voluntary basis.
Corporate documents have never been public records. Although corporations are often described as creatures of the state, they have never been treated as creatures of the people. Their transactions are essentially private, and the lid on that privacy is only pried off for special groups of people. The list of privileged people has not grown much since the common law, and statutory enactments of the inspection franchise have not added to the exclusive club. The privilege is still basically limited to agents of the government, stockholders of the corporation, and, of course, officers of the corporation.
Corporations are schizophrenic entities. They owe their existence to the laws of the state, but they are still formed by private individuals under private, voluntary agreements. The charter privilege provided by the state, however, makes the corporation more public than private as far as government inspection is concerned. In Wilson v. United States the United States Supreme Court held that a state, in granting a charter, reserved a "visitational power" to inspect corporate records and that a corporate custodian had, therefore, assumed the duty of producing these quasi-public records. Justice Brown, in an earlier decision, Hale v. Henkel, wrote for the Court that a "corporation is a creature of the State ... presumed to be incorporated for the benefit of the public" holding special privileges which are preserved only "so long as it obeys the laws" of the state and its charter.
The federal government's powers of corporate regulation can be found in the United States Constitution: the commerce power, the implied powers, its war powers, and its powers over post offices and the mail. Those powers lay largely unused until the New Deal era, although Congress had established regulatory agencies many years earlier. The 1930's saw new and vigorous attempts at business regulation, and the United States Supreme Court reacted protectively to the new usurpation of powers. It finally found solace in the commerce clause, and the federal government has been trying to regulate ever since.
Regulation led to investigations, reports, staff appraisals, agency intervention into corporate conduct, and agency access to corporate books and records. The Government needed information to carry out its responsibilities. Some agencies have attempted to compile stock ownership information on the corporations they regulate. That information is seldom broken down into a convenient form, however, and often has to be culled from other reporting requirements imposed on the corporations.
IV. SHAREHOLDER INSPECTION
The common law has long recognized a shareholder's right to inspect company books. The privilege is a property right which grows out of the stockholder's investment in the company and his right to protect that investment.
The common-law privileges of inspection are not absolute, however, and must be tied to some "proper purpose," a vexatious and troublesome term that defies description. Generally, courts have agreed that a proper purpose is one that is germane to his interests as a stockholder, and that means his economic interests.
Statutory authorization for shareholder inspection has diluted the privilege even more. While a few states decree that the statutory privilege is an expansion of common-law rights, most states still retain the old common-law "proper purpose" requirement. In interpreting state inspection statutes, courts have ruled that they were meant only as a reaffirmation of the common law's "proper purpose" doctrine. Even the absolutists find a way out of their purity. Since inspection is enforced by a mandamus action, a remedy invoked at the discretion of the court, the court can properly inquire into the purpose of the remedy.
Fletcher has summarized the kinds of proper purposes as follows: (1) to ascertain the condition of corporate affairs, (2) to determine the propriety of dividends, (3) to obtain a mailing list of stockholders to solicit proxies, (4) to ascertain the value of stock, (5) to prepare for a law suit unless the suit is inspired by ulterior motives, and (6) to defeat a merger. On the other side of the coin, improper inspection purposes include blackmail of the corporation, idle curiosity, speculation and "window-shopping," annoyance and harassment, promotion of personal business interests, and aiding a competitor or divulging business secrets.
Proper purpose is not the only stumbling block a shareholder must leap on his way to the corporate records. He has to get there at the right time. He has to be at the right place. And he has to schedule his trip for the right time of year, since the books might be preempted for corporate use. He should buy his stock some months, or years, in advance of inspection; and he better save his money, so he can buy a substantial quantity of stock.
State inspection statutes limit perusal to shareholders of record for some period of time, usually six months. Other states require a minimum percentage of ownership, usually one to five percent. Some states combine the two requirements. Almost all states limit shareholder access to certain hours of the day and a particular inspection site.
The Indiana inspection statute is one of the least complicated of the state statutory regulations. It requires each corporation to keep a shareholders list, and requires that–
"[a]ll such books, records and lists of a corporation shall be open to inspection and examination during the usual business hours for all proper purposes by every shareholder of the corporation, or his duly authorized agent or attorney."
Only the proper purpose doctrine and the business hours requirement dilute an otherwise absolute privilege.
Florida and New York have tied up the privilege with practically every limitation known to the inspection statutes. Both states limit inspection to shareholders of record for at least six months. Florida also requires ownership of at least one percent of the outstanding stock. Both states permit stockholders to combine their stock ownership to obtain inspection, and New York incorporates the "business purpose" doctrine into the inspection requirements.
The recitation of provisions from New York and Florida inspection laws is not meant to demean the attitude toward stockholders in those states. Other states have provisions that are just as confusing and that further tie up the principles of common-law inspection.
V. SOME RECENT DEVELOPMENTS
Economic interests are not the only reason shareholders may desire inspection. Ralph Nader and the Project for Corporate Responsibility typify the approach to social attitudes which many stockholders desire. Two recent court cases illustrate this collision of emerging social attitudes and the traditional test of corporate inspection.
The most celebrated case appears, to be State ex rel. Pillsbury v. Honeywell, Inc., a 1971 Minnesota decision, The shareholder, an heir to the flour millions, was also born with a social conscience. He was particularly concerned with the production of munitions by Honeywell, so he purchased stock in that company to conduct a proxy campaign and perhaps change the policies of the company. He was very frank in his motives, openly admitting the purpose of his stock purchase and his membership in the "Honeywell Project," a group of people also opposed to the production of munitions.
That honestly led to Pillsbury's demise. The Supreme Court of Minnesota upheld Honeywell's refusal to permit inspection and refused to issue a writ of mandamus to allow such inspection.
Pillsbury had run aground on the "business purpose" requirement, which mandated an economic, and not a social awareness. The Minnesota court noted that Pillsbury "had utterly no interest in the affairs of Honeywell" until he learned of the corporation's production of fragmentation bombs and that after obtaining this knowledge Pillsbury purchased stock for the "sole purpose of asserting ownership privileges in an effort to force Honeywell to cease such production." The court condemned the holding of stock for such a purpose and suggested that "but for his opposition to Honeywell's policy, petitioner probably would not have bought Honeywell stock, would not be interested in Honeywell's profits and would not desire to communicate with Honeywell's shareholders." The court in Pillsbury noted that the shareholder's avowed purpose in buying the Honeywell stock was to place himself in a position to try to "impress his opinions favoring a reordering of priorities upon Honeywell management and its other shareholders." Such a motivation, the court emphasized, could hardly be deemed a "proper purpose germane to his economic interest as a shareholder."
For future Minnesota crusaders, the teaching of Pillsbury is clear: Eschew any reference to "political" or "social" concerns. Instead, the corporate crusaders should focus on claims of mismanagement of corporate funds or indicate a desire to communicate with shareholders about the "economic future" of the corporation. Courts in at least one state have already adopted that approach. They have pointedly said that a secondary improper purpose will not defeat a primary proper purpose.
The social stockholder may fare a little better under federal inspection statutes – at least that is the conclusion of some writers. But their opinion is based on a case that only partially approaches the problem. The case, Medical Committee for Human Rights v. SEC, arose under Securities and Exchange Commission rule 14a-8. That section establishes provisions which require management to include stockholder proposals in proxy statements of the corporation, unless the proposals come within one of several enumerated exceptions.
The Committee, a group of doctors and psychiatrists across the United States, was opposed to the use of napalm it the Vietnam war. It became a stockholder in the Dow Chemical Company to stop the production of napalm by that company. The Committee submitted an amendment to Dow's Articles of incorporation which called for a prohibition of napalm production by the company. Dow refused to submit the proposal with its proxy statement, and the Securities and Exchange Commission upheld that refusal. Dow and the SEC probably based their refusal on the exceptions to rule 14a-3, as set out in subsection (c) of that rule. The proposal was doubtlessly either not considered a "proper subject for action by security holders" or was considered as being submitted to promote "general economic, political, racial, religious, social or similar causes ... "
The Court of Appeals for the District of Columbia overruled the Exchange Commission on a technicality and remanded the order to the Commission for reconsideration . But in the process of reaching that decision, the Medical Committee court made some interesting observations about stockholder inspection. The court strongly implied that management should not be allowed to automatically block shareholder inquiry into company policies which might be “economically profitable but, perhaps, socially irresponsible." While the court conceded that the propriety of corporate political decisions was irrelevant to the controversy at hand, it stressed that of "immediate concern was the question of whether corporate proxy rules can be employed as a shield to isolate such managerial decisions from shareholder control." Although the language may appear as a little venting-of-the-spleen on the part of the judges, the court's language still points away from the "business as usual" requirements of the Minnesota court.
When Medical Committee was appealed, the United States Supreme Court avoided a direct ruling on the propriety of the stockholder activity. Instead, the Court ruled that the refusal by Dow was moot and held that it was "purely a matter of conjecture" as to whether the Committee would resubmit the proposal in 1974 and, if it did, whether Dow would accept it. Political and social causes are still in limbo, a least as far as the provisions of section 14(a) of the Securities and Exchange Act are concerned.
Admittedly, the inspection right asserted by the stockholders in the Pillsbury case and the proxy right asserted by the stockholders in the Medical Committee case are different. But both cases deal with the broader question of stockholder access to corporate records and the corporate decision-making processes. The Medical Committee case is a much easier case to live with for the corporate reformer.
VI. PUBLIC ACCESS
The discussion so far has primarily been concerned with the inspection rights of shareholders and the Government. Inspection beyond that, in both state statutes and court cases, is limited to agents of the shareholder, officers and managers of the corporation, and judgment creditors.
The record for public access is not without precedent, however. Some stockholder information has been available at many federal agencies for years. However, these lists are limited to the very few major holders who often hide their identity and the quantity of their holdings through use of nominees.
The consequences of our present legal and corporate attitude toward ownership disclosure are predictable. The corporate election process in America today is as rigged as elections are in the Soviet Union. The outcome is as predictable. The accompanying propaganda is as self-serving.
Consider the procedures for an annual stockholders' meeting. The agenda and the candidates are determined well in advance by the corporate management. It polices the election. It chooses the auditors. Great effort and considerable expense, months prior to the meeting, are required to obtain consideration of the most modest proposals that have been offered by management. If the attempt to get a candidate or an issue on the ballot is successful, identification of the voting stockholders and timely communication with them is difficult or impossible. The proxies of a few key institutional investors decide the election, which is then publicly construed by the corporation publicists as a ringing endorsement of its past activities and a mandate to continue doing whatever it decides to do.
The flaw is secercy; the remedy disclosure. Last year the writer introduced legislation, S. 3923, which would require corporations that gross more than $10 million a year to disclose quarterly, to the Library of Congress, the names and addresses of each person or institution empowered to vote one percent or more of the voting securities of the corporation. This Corporate Ownership Reporting Act (CORA) further provided for publication of these ownership reports by the Library of Congress and sale of the ownership document by the Superintendent of Documents.
Studies now in progress indicate that large banks may have voting rights to more stock in individual companies than statutes and regulations permit. A Library of Congress analysis of material supplied, at the writer's request, by the Federal Communications Commission, shows that the largest stockholder in Columbia Broadcasting System, with sole or partial voting rights to more than fourteen percent of the stock, is Chase Manhattan Bank. It has similiar voting rights to 4.5 percent of the stock in RCA Corporaion, parent of the National Broadcasting Company. Bankers Trust has voting rights to more than ten percent of the stock in the American Broadcasting Company and 9.8 percent of the stock in Metromedia. The banks mentioned above, and a few others, also have substantial holdings in other broadcast companies.
Under FCC rules, one owner-individual or institutional investor may control seven AM, seven FM, and seven TV stations (no more than five of the latter can be VHF stations). Ownership is also conditioned by the "duopoly rule," which prohibits ownership of two TV, FM, or AM radio stations which serve the same area. Beyond those liberal ownership provisions, no individual or bank, until last year, could own more than one percent of the stock of other broadcast companies that have fifty or more stockholders. Since 1968, mutual funds have been permitted to own three percent. Under more lenient regulations adopted last year, banks are permitted to control five percent of the stock of other broadcast companies. The three percent limit for mutual funds, and the one percent limit for individuals, was not changed.
Unfortunately, the FCC was unaware of information in its own files which shows the concentration of stock which its own staff and the Library of Congress subsequently verified. The problem, as Commissioner Nicholas Johnson stated later last year, "is that the Commission's ownership reports for a variety of reasons, are not providing the relevant information on institutional holdings of broadcast stock." A major reason, evident from examination of the files, is use of numerous nominees, rather than the single proprietary owner, in reports filed with the Commission. The FCC is certainly not the only governmental agency which lacks information.
As Ralph Nader has recently stated, "[n]either the SEC, the Civil Aeronautics Board nor the Federal Power Commission penetrates the veil of so-called nominee shareholders to determine who the actual owners are – corporate or individual – of the industries they purport to regulate."
VII. CONCLUSION
The banks that vote huge blocks of other persons’ stock constitute the legislative branch of corporate government. Power of the institutional investors is further increased through two other methods, control of credit and interlocking directorates. The CORA bill the writer is now drafting, for introduction and consideration in the Ninety-third Congress, will provide for disclosure in those two areas as well as stock voting rights.
The equipment and procedures now designed to service assets can and should be altered to provide ready access to the names and addresses of the individuals empowered to vote the principal blocks of stock in major corporations, principal creditors and the amount of indebtedness, and the affiliations of principal officials with officers of other companies. That information should be compiled, kept up-to-date, and broadly available.
If the Government Printing Office prints a corporate ownership report, it will become one of the best sellers the GPO ever issued. The report will be of inestimable value to regulatory commissions and the Justice Department in enforcing regulations and antitrust law. It is a necessary tool for persons who want to work within the system.
Ownership and control of many of our principal corporations have slipped into the hands of very few people. Corporate secrecy disguises, perpetuates, and accelerates their control. They must be identified, and raised from low profile to sharp silhouette, so that they can be held accountable to the customers and stockholders, and to the laws enacted by those of us elected under the principle of "one man, one vote."