April 11, 1974
Page 10889
HEARINGS ON CORPORATE CLOSURE RESUME APRIL 23 AND APRIL 24
Mr. MUSKIE. Mr. President, the Government Operations Subcommittee on Budgeting, Management and Expenditures and Subcommittee on Intergovernmental Relations will conduct further joint oversight hearings on corporate disclosure on Tuesday, April 23, and Wednesday, April 24. Hearings both days will begin at 10 a.m. in 3302 Dirksen Senate Office Building.
The April 23 witnesses will be:
Rep. CHARLES A. VANIK of Ohio's 22d Congressional District, and Chairman George M. Stafford of the Interstate Commerce Commission.
The April 24 witnesses will be:
Chairman John Nassikas of the Federal Power Commission, and Assistant Comptroller General Phillip S. Hughes.
During the 3 days of hearings in March, the subcommittees heard the following witnesses:
Norton Simon, industrialist and financier; George M. Lingua, senior vice president, First National City Bank of New York; Professor David Ratner, Cornell Law School; Chairman Robert Timm, Civil Aeronautics Board, and Reuben Robertson and Mimi Cutler, aviation consumer action project.
The March hearings are at the Government Printing Office now, and will be available in a few weeks.
In these oversight hearings the subcommittees are studying and receiving testimony regarding Federal agency collection, tabulation, and publication of information and data from regulated firms. Persons who wish to submit statements, testify or obtain further information should get in touch with the subcommittee's staff. Senator METCALF'S and my opening remarks when the hearings commenced on March 21 provide additional information, and I ask unanimous consent that they be printed at this point in the RECORD.
There being no objection, the statements were ordered to be printed in the RECORD, as follows:
OPENING STATEMENT OF SENATOR EDMUND S. MUSKIE
We are here today to begin following up on a very significant report which has confirmed some of our greatest concerns about the extent of economic concentration in this country.
That report, "Disclosure of Corporate Ownership," has documented a situation which has been accelerating to an astonishing degree in recent years: that is, the fact that a few, very large banks, operating as institutional investors, are in a position to exercise control over the health and welfare of many of the Nation's largest corporations.
I want to emphasize that we are not here today to accuse anyone of an outright attempt to gain control of and manipulate the American corporate economy. The report itself makes no such accusation, though some may have misconstrued it that way.
What the report does say is that a variety of circumstances and investment practices have resulted in a system of corporate ownership which makes regulation difficult, which discourages or excludes relatively small investors and businesses from the benefits of the system, and which radiates at least the appearance of serious conflicts of interest that, if real, make a mockery of free enterprise.
The report focuses on the widespread use of nominee accounts by institutional investors in ownership reports to the Federal regulatory agencies. I do not argue that the use of nominees, by itself, is undesirable. What is undesirable from the viewpoint of enlightened public policy is the extent to which this practice has obscured the real concentration of stockholdings in the hands
of a few large institutional investors, primarily banks.
An enlightened public policy requires nothing less than full public disclosure of corporate ownership. This includes, not only a ready identification of the institutions behind the nominee names, but also the discretionary control, including voting rights, exercised by these institutions over their trustee accounts. I hope that these hearings will help to spur both the institutions and the Federal regulatory agencies to act on the report's basic recommendations in this regard.
However, I want to emphasize that the single most important aspect of the subcommittees' report is the picture it paints of an economy where billions of dollars in investment capital are under the control of a highly select "old boy" network virtually closed to the world around it. To recoin an old New England saying, the corporate presidents speak only to the bank directors, and the bank directors speak only to God.
"Disclosure of Corporate Ownership" has increased our understanding of some aspects of corporate control. More importantly, it demands that we pursue our investigations into the larger questions left unanswered:
What kinds of leverage do banks and other institutional investors really exercise over the corporations in which they control large blocks of stock? How do they influence management decisions?
Do banks maintain strict separation between their trust department activities and their commercial loan ventures? Are there potential conflicts of interest with which we must be concerned?
Finally, what are the implications of this degree of concentration on a free enterprise society?
We invited our distinguished witness today to lead off this aspect of our investigation and to help cast new light on these larger questions. He is in a unique position to do so, and we welcome the insights and observations his wide experience in corporate life has given him.
OPENING STATEMENT BY CHAIRMAN LEE METCALF
Today two Government Operations Subcommittees begin joint review of Federal agency collection of information from corporations.
We undertake this task at a time when concern over the reliability and adequacy of such information is increasing.
A number of committees have conducted hearings, and proposed legislation, regarding collection of information in the energy area.
Our own recent study, "Disclosure of Corporate Ownership"– Senate Document 93-62 – has shown the inaccurate and misleading nature of information in public files regarding ownership of many regulated companies. The real owners – the principal institutions or others empowered to buy, vote and sell stock – are often unidentified. Some of their holdings are listed in the names of nominees – "street names." And some of their holdings are not reported at all to the regulators, even though the institutional investor in some instances reports its aggregated holdings and voting rights to a commission in a distant state, or to the public.
RECENT LEGISLATION
Two recent acts of Congress have a bearing on these hearings. One is the Federal Advisory Committee Act (Public Law 92-463). It was developed, on the Senate side, by Senator Muskie's Intergovernmental Relations Subcommittee, during the 91st and 92nd Congresses, from various bills which Senators Percy, Roth, Brock and I had introduced.
The original impetus for that legislation arose from problems relating to the clearance of Federal forms and questionnaires by the Office of Management and Budget, and its predecessor Bureau of the Budget.
The budget agencies received advice on agency questionnaires from industry advisory groups which all too often delayed, diluted or killed questions which Federal agencies properly asked, but which the industries did not wish to answer. This happened no matter which political party was in power.
The Federal Advisory Committee Act – on the books now for 14 months – has broadened out and opened up Federal advisory committees, and caused some of them to disband. There are still problems in the Act's administration, which are receiving our continuing attention.
The printed copies of the recent oversight hearings on this act will be available shortly.
The other recent Act of Congress – this one by the 93rd Congress – transferred from OMB to the General Accounting Office the responsibility for review and coordination of forms and questionnaires proposed by the independent Federal regulatory agencies. The pertinent legislation is Section 409 of the Alaska Pipeline Bill – P. L. 93-153.
Those independent agencies – which regulate utilities, airlines, railroads, trade, securities, broadcasting and product safety – are not part of the executive branch. Therefore, Congress concluded that review and coordination of their forms and questionnaires belongs more properly with GAO than an executive agency such as OMB. Furthermore, this act strengthens the commissions in that GAO will not be able to veto questionnaires, as OMB could under the previous procedure.
The vast majority of agency questionnaires are still subject to OMB clearance procedures. Persons or organizations – especially small businessmen – interested in participation in this form review process will find useful the full Committee hearings which Senator Nunn conducted last year, at Chairman Ervin's request, and my remarks in the eleven March, 1974 Congressional Record.
The importance of the seemingly bland and bureaucratic process of information gathering by Federal agencies cannot be overstated. In this capital city – as a witness in this room once testified – information is the currency of power. What good is a Freedom of Information Act, and access to government records, if the Federal files are devoid of timely, comprehensible and accurate data?
DELEGATION OF POWER
Congress has delegated to commissions and agencies much of the detail work regarding information collection. To use an example recently cited by Senator Roth, the U.S. Geological Survey has reported that there are almost one thousand shut-in gas wells in the Gulf of Mexico. But the Geological Survey does not have the information we all need stating detailed reasons for the shut-ins, and what is necessary to bring the gas on line.
The Geological Survey – whose questionnaires are subject to OMB rather than GAO clearance – apparently has not used its delegated authority to collect this vital information.
We at this time have no legislation regarding corporate disclosure, or agency collection of corporate data, before the Subcommittees. We will be looking at information disclosure and collection procedures in the light of laws that have been on the books for decades.
Congress long ago provided the independent regulatory commissions with broad authority to collect information. Congress also gave the commissions the power to impose sanctions, and issue subpoenas. And thirty-two years have elapsed since Congress directed that information collected from business firms shall be tabulated so as to "maximize the usefulness of the information to other Federal agencies and the public."
OWNERSHIP INFORMATION
Many large U.S. corporations substantially influence public policy. Often they affect public policy more than public officials do. Yet we know relatively little about important aspects of corporate government. If the American people are going to work within the system to provide more responsive government – private or public – a basic tool is the convenient availability of the names and addresses of institutions or individuals empowered to vote major blocks of stock in large, regulated corporations.
In these hearings we shall examine how the commissions have used their authority to collect and disseminate such information.
FOREIGN INFLUENCE
One aspect of undisclosed ownership is potential foreign influence within major U.S. corporations, including defense contractors.
This concern has already been expressed by the Senate in its adoption of the Huddleston amendment to S. 2776, the Federal Energy Emergency Administration Act now in conference.
The Huddleston amendment would require the FEEA Administrator to review and report, within six months, on foreign ownership, influence and control of domestic energy sources and supplies.
As "Disclosure of Corporate Ownership" showed, more than ten per cent of the stock in Litton Industries and Penn Central was held, as of 1972, by Swiss banks. Those companies were among eighty-nine – less than 30 per cent of those queried – which chose to cooperate voluntarily and fully with our Subcommittees.
Another Senate subcommittee has expressed its concern over recent acquisition of U.S. companies by foreign corporations based in Italy, France, Switzerland, Germany, the United Kingdom and Saudi Arabia.
CEDE & CO.
Another aspect of undisclosed ownership involves stock reported to government regulators in the name of Cede & Co. It is the nominee for Depository Trust, a wholly-owned subsidiary of the New York Stock Exchange. Stock held by the depository for various participants, such as brokerage houses and banks, is recorded in the name of Cede & Co. to simplify market transactions.
Depository Trust sends monthly reports to each issuing company for whom it holds stock. These reports identify the depository participants and number of shares held for each of them, by Depository Trust, in the issuing companies.
Many banks and brokerage houses hold stock in a company in their firm name or in the name of nominees, and also manage stock in the same company which is held by Depository Trust in the name of Cede & Co. The reporting problem has arisen from the fact that many issuing companies, in their annual reports to Federal commissions, do not use the information which Depository Trust has provided them. Instead they report a block of stock in the name of Cede & Co. rather than aggregating appropriate portions of it with the other holdings of investors.
Board Chairman W. T. Dentzer, Jr. of Depository Trust and his associates have been most cooperative with us in developing a suggested procedure for proper attribution of stock held in the name of Cede & Co. It would simply have the commissions require that reporting companies use the information provided them by Depository Trust. For verification purposes, Depository Trust could provide the appropriate regulatory commissions and GAO the same information on participants' holdings which it already provides each issuing company.
SUGGESTED PROCEDURE
I hope that we can work out a similar procedure for banks and other institutional investors whose holdings are not now aggregated by many regulated companies for reporting purposes. I am suggesting that the major institutional investors could provide each regulated company in which they hold a significant amount of stock a quarterly or annual report, similar to the one which Depository Trust already provides issuing companies on a monthly basis. That report could show the total number of shares of the company's stock to which the large investor has sole or partial voting rights and the number of shares held in which the investor does not have voting rights. In those instances where the institutional investor does not have voting rights the identity of the party empowered to vote the stock would be provided by the investor to the issuing company. Copies of those reports by the large institutional investors would be available to the appropriate regulatory commission and the GAO.
We will welcome comments on this proposal as these hearings progress. I would add here that one of our witnesses next week will be a senior vice president of First National City Bank of New York, which for years has issued a public report regarding its voting rights in its trust department's one hundred major stock investment accounts.
PERSONNEL AND BUSINESS RELATIONSHIPS
A third aspect of undisclosed ownership involves other levers of corporate control beyond the voting of stock. The Securities and Exchange Commission, in its Institutional Investor Study report, concluded that some institutions – particularly banks – have personnel and business relationships with portfolio companies which may tend to reinforce any power conferred as a result of stock holdings, may create potential conflicts of interest and may lead to misuse of inside information. The SEC found a strong statistical correlation between bank stock-holdings and personnel and business relationships.
As we review reporting requirements of various Federal agencies we will look at the questions which the agencies ask – or do not ask – and the answers they receive regarding direct and indirect interlocks, and financial dealings between regulated companies and the institutions with which they have a stock or interlock relationship.
One of our witnesses next week will be the chairman of the Civil Aeronautics Board, which recently recognized the need for gathering more information regarding these several interrelated control mechanisms, and instituted an appropriate investigation.
CONCENTRATION OF ECONOMIC POWER
A fourth area of undisclosed ownership on which we seek additional illumination is the national extent of concentration of economic power.
In setting the rules for limiting control of a company by a large investor, Congress and the commissions usually look at a single investor's potential influence within one company, or one industry. The data contained in "Disclosure of Corporate Ownership" shows – on the basis of partial, voluntary disclosure and sample studies by the SEC, FCC and Congressional Research Service – a degree of over-all concentration beyond that which has been heretofore available to the Congress. The study shows that the same few banks are dominant within a number of competing companies – airlines, broadcasting, pharmaceuticals, electrical equipment, conglomerates, and petroleum.
This partial data, for the years 1969 and 1972, suggests a need for comprehensive and timely collection of information regarding all aspects of corporate concentration so that its ramifications can be considered by Congress on a factual basis.
CORPORATE ANNUAL ELECTIONS
I would note that we begin these hearings in an election season. Many corporate annual elections and meetings of stockholders will be held in the next few weeks.
They do not of course receive the kind of surveillance attending the elections to which Members of this Committee are accustomed. This may be because of the difficulty in creating an aura of suspense regarding an election in which a single slate of officers, selected by insiders, is offered, an election in which no provision is made for casting "nay" votes against the single slate, and the outcome of which is decided before the annual meeting begins, by the proxies of a few large institutional investors.
But I think it is appropriate to note here that interest in corporate government has now extended beyond the participation by a few individuals or a project GM.
More than sixty major corporations will consider, this spring, shareholder resolutions from church, labor, environmental, foundation and public interest groups and individuals. In a number of these challenges, the issue is corporate disclosure. The concept of the Sunshine Law, of which Florida Senators on this committee often speak, is spreading to corporate government.
SHARED OVERSIGHT
I would hope that these hearings will encourage more persons outside and inside of government – Federal, State and corporate – to participate in the important business of information collection by the Federal government. Congress has improved the procedures for public participation. The vital oversight function can be broadly shared.