tries where one corporation provides a service to the other, as in the case of transportation services, and banking or other financial services; 3. Direct: Common director or directors serve on the board of each of the companies involved; 4. Indirect: (a) The linked enterprises, while having no directors in common, each may have one or more directors on the board of a third company. (b) A third company may have different representatives on the boards of two or more competing enterprises. (c) One company may have a director on the board of a second, for example, a bank, which has directors in common with a third company, for instance, a life insurance company, which in turn has directors on the board of a competitor of the first company. These types of indirect interlocks may be diagramed thus: The term "interlocking directorate" as used in this report, unless otherwise restricted, includes directors, officers, employees, and stockholders, to the extent that they actually participate in corporate management operations, and are not merely holding for investment. Jointly owned subsidiaries that do not have common management members, for example, even though coordinated control could be effected through such stockholdings, are not treated in this report. FEDERAL INTERLOCK LEGISLATION In the legislation enacted for the resolution of the problems of interlocks in corporate management, Congress has dealt with different classes of business operations in a variety of ways. The Clayton Act deals with three broad categories of business operations and two types of interlocking relationships. With respect to industrial and commercial corporations that are neither banks, banking associations, trust companies, nor common carriers, the Clayton Act seeks to bar horizontal interlocks between certain competitors through common directors; in banking operations in the Federal Reserve System, horizontal interlocks with any other bank, banking association, trust company, or savings bank, are prohibited unless specifically excepted or authorized by the Board of Governors, and officers and employees, as well as directors, are included in the prohibition; with respect to common carriers subject to the jurisdiction of the Interstate Commerce Commission, the Clayton Act does not deal with horizontal interlocks, but focuses on vertical interlocks between common carriers and other concerns with which it transacts business for construction and maintenance service, supplies, and financing. Authority to enforce Clayton Act interlock provisions is granted to six different agencies: the Department of Justice, has general authority to enforce all Clayton Act provisions; the Federal Trade Commission (FTC) has jurisdiction over industrial and commercial corporations; the Federal Reserve Board (FRB) has enforcement authority over banking operations; the Interstate Commerce Commission (ICC) deals with interlocks that involve common carriers under the Interstate Commerce Act; the Federal Communications Commission (FCC) supervises common carriers in wire or radio communications; and the Civil Aeronautics Board (CAB) deals with air carriers. In addition to the three categories of business operations included in the Clayton Act, Congress has from time to time enacted legislation that seeks to ban, and to establish standards for approval of, interlocks in various regulated industries. This legislation has been enacted on an ad hoc basis in an attempt to cope with particular problems that affected the designated industry at the time of the legislation, and in each instance, power is granted to authorize otherwise banned interlocking directorates in the industry on a showing of compliance with established criteria. Analysis of this ancillary legislation on interlocks in corporate managements discloses that there are differences as to the types of management officials affected by the prohibitions, differences in types of interlocks prohibited, and differences in the standards to be applied by the agencies in determining whether to approve or disapprove specific interlocks. The following list indicates the variety and scope of these ancillary legislative provisions: 1. Horizontal interlocks between railroads and competitive common carriers by water, operated through the Panama Canal or elsewhere, may be prohibited by the ICC; 25 2. ICC may prohibit or approve horizontal interlocks between common carriers it regulates; 26 3. Horizontal interlocks between telephone and telegraph common. carriers are unlawful unless approved by the Federal Communications Commission (FCC); 27 4. Vertical and horizontal interlocks between securities underwriters and national banks are subject to FRB regulation; 28 5. Horizontal interlocks between electrical utilities, and vertical interlocks between equipment suppliers to, or securities underwriters for, such utilities are within the jurisdiction of the Federal Power Commission (FPC); 29 6. The Securities and Exchange Commission (SEC) has cognizance over vertical interlocks between public utility holding companies and banks, trust companies, investment bankers, and banking associations; 30 7. The Secretary of the Treasury may approve vertical and horizontal interlocks between companies in the liquor industry; 31 8. Vertical and horizontal interlocks affecting common carriers or manufacturers engaged in any phase of aeronautics are subject to the jurisdiction of the Civil Aeronautics Board (CAB); 32 9. SEC has cognizance over certain horizontal interlocks between investment companies, and certain vertical links between investment companies and investment advisers, banks, and securities underwriters.33 25 Panama Canal Act, 37 Stat. 566 (1912), 49 U.S.C. 5(14) (1958). 20 Public Utilities Holding Company Act of 1935, 49 Stat. 830. 15 U.S.C. 79q (c) (1958). 31 Federal Alcohol Administration Act, 49 Stat. 986 (1935), 27 U.S.C. 208 (1958). 32 Civil Aeronautics Act of 1938, 52 Stat. 1001 (1938); replaced by the Federal Aviation Program, 72 Stat. 768 (1958), 49 U.S.C. 1379 (1958). 33 Investment Companies Act, 54 Stat. 806 (1940), 15 U.S.C. 80(a)-10 (1958). In operation, this body of Federal legislation has not effectively prevented interlocks in corporate managements in the fields it covers. There is general agreement among commentators that the prohibitions of the Clayton Act against interlocks are too incomplete and restricted in scope to reach many significant corporate interrelations, and that the easy avoidance of section 8's express prohibitions has resulted in a failure of enforcement even as to those interlocks where there is a practical certainty that competition will be adversely affected. In the regulated industries, effectiveness of the prohibitions against interlocks has been dependent upon the policies of the particular commission concerned and has varied from agency to agency. In general, however, the various agencies have seen fit to approve far more interlocks than they have forbidden and which, but for agency absolution, would have been unlawful. Part of the reason for failure of the Federal legislation, to stop corporate management interlocks, may be due to a lack of clarity in the law. In its report on industrial and commercial interlocks, covered by the Clayton Act, the FTC pointed out that the legislation had been drafted in the absence of a background of experience and that its lack of consistency was evidence of its experimental nature. In this connection, the FTC said: When the Clayton Act was written the Congress had no experience with legislation about interlocking directorates. The provisions of the statute were apparently designed to cope with the problems that had become most conspicuous during the two previous decades. The lack of integration between the rules of law applicable to banks, common carriers, and industrial and commercial corporations is evidence of the tentative and experimental nature of the statute." A note, entitled "Interlocking Directorates: A Study in Desultory Regulation," in the Indiana Law Journal,35 concluded that the success of the Clayton Act provisions on interlocking directorates, in view of the widespread incidence of such relationships, had, at best, been nominal. Analysis of the Clayton Act revealed its inconsistencies but review of the status of the ancillary regulatory legislation was found to have resulted in chaos. The Note concluded that, as a result of incompleteness of each particular piece of legislation, application of the laws was unfair. The Note stated: As a result, businessmen sincerely attempting to comply with these laws often encounter unnecessary shackles, while others without such meritorious intentions utilize glaring omissions to gain unconscionable advantages. 30 A study made in 1950 by an official of the Antitrust Division of the Department of Justice, into efficacy of the Clayton Act in the prevention of industrial and commercial management interlocks, concluded that its failure was virtually complete. The study reasoned: It is not unfair to conclude that Section 8, at least as applied to manufacturing corporations, has accomplished none of the objectives sought by its sponsors. As we have seen, the Section has grave technical defects of which three seem most important. First, the section fails to prohibit a person who is an employee but not a director of a corporation from serving on the board of a competing corporation. Second, it places no limitation upon associates in a single banking house from serving as directors of competing corporations so long as each associate serves on the board of a different company. Third, the Act does not deal 34 Federal Trade Commission, Report on Interlocking Directorates (1951), p. 13. 35 29 Ind. L.J. 429 (1954). 30 Id. at p. 438. with directorships that interlock buyer with seller despite the fact that such directorships are used to eliminate competition." OBJECTIVES It is against the foregoing background that the staff has undertaken this study of interlocks in corporate management. One objective of the study is to assemble, analyze, and to examine operating experience under the Clayton Act and ancillary legislation as it affects corporate management interlocks. In the half century that has passed, since enactment of the Clayton Act, there have been numerous studies, some relatively recent, into the interlocks miasma that have demonstrated that inadequacies in the law existed at the inception and have persisted to the present. Another objective, then, is to collect and analyze the information, conclusions, and recommendations of these prior studies. A limited survey has been made of the current posture of management interlocks. The ultimate objective is to delineate the steps that need to be taken to reach an informed judgment on the desirability or necessity for amendments to existing legislation and, if so, the legislative policy and approach to such amendments. The survey of current information is based upon a sampling of interlocks in corporate management in three economic fields: (1) banks; (2) insurance companies; and (3) industrial and commercial companies. For convenience, unless otherwise noted, information has been compiled on the relationships that existed on December 31, 1962. The survey sample includes: 15 commercial banks; 10 mutual savings banks; 10 life insurance companies; 10 fire and casualty insurance companies; and 29 industrial concerns. For the most part, the information as to current interlocks has been assembled from publicly available sources, particularly information contained in Poor's Register of Corporations, Directors and Executives, 1963; Best's Life Insurance Reports, 1963; Best's Fire & Casualty Insurance Reports, 1963; Moody's 1963 Bank & Financial Manual, Public Utility Manual, Transportation Manual, and Industrial Manual; and from the annual reports of some of the corporations concerned. At the request of Chairman Celler, the FTC, by business machine tabulation, compiled certain information with respect to the thousand largest industrial firms listed in Fortune magazine's Plant and Product Directory, 1963-64. This information sets forth in alphabetical order the names of the officers and directors who interlock two or more of those corporations which make one or more products within the same 5-digit Census Bureau Standard Industrial Classification Code number according to the Fortune Plant and Product Directory. This information has been used as a source of information in a letter-questionnaire sent by Chairman Celler to selected companies that do business in the same or similar products or product lines. $7 V. H. Kramer, Interlocking Directorships and the Clayton Act After 35 Years, 59 Yale L.J. 1266 (1950), p. 1274. |