trolled the corporations through interlocks. The Stanley committee reported:

Where two or more corporations are owned and operated by the same group of individuals, their interests will be identical, and in a great measure the strength of one is the combined strength of all. This is true to a degree where the directorates interlock. This record is replete with instances of the pernicious effect sometimes upon the steel corporation itself, and more often upon the public generally, of this interlocking of directorates.

The enormous sum paid for the properties of the Lake Superior Consolidated Iron Mines and the manifestly excessive sum for the Troy Steel Products Co., with rebates on purchases to the Standard Oil Co.; the purchase of supplies by the International Harvester Co. and the American Tin Can Co. at greatly reduced rates; the complicated web of agreements in restraint of competition, low costs in sliding-scale contracts, and the huge sums paid Mr. H. C. Frick and others in the absorption of the Union-Sharon Steel Co.; the inordinate sums paid to promotors and underwriters are concrete instances of abuses directly traceable to this community of interest between a few powerful individuals in control of a number of great corporations."

EFFECTS OF CORPORATE INTERLOCKS

Perhaps the most significant aspect of the common director problem is the concern that, by means of this device, inordinate control over the major part of U.S. commerce would be concentrated in the hands of so few individuals that the normal social and political forces relied upon to maintain a free economy would be ineffective to correct abuses. Ingrown relations, closely knit corporate identities, and the ability to wield economic power on a wide front, were feared because they could carry the seeds of a "business aristocracy" that would not be compatible with basic tenets of the political and economic democracy embodied in the antitrust laws. In the early days of the antitrust effort, this concern was reflected in the Pujo committee's and Mr. Brandeis' castigation of the "inner group." In more modern times the same concept is embodied in C. W. Mills' (1955) phrase "power elite," and currently popular allusions to a "business establishment." In 1935, the National Resources Committee considered the U.S. economic posture and was troubled by the existence of a "corporate community." The committee described this community as follows:

If each corporate management were quite independent of every other corporate management and subject only to market controls in its development of policy, the structure of nonmarket controls might be of only secondary importance. In fact, however, there is a great deal of interrelationship between corporate managements. Partly through interlocking directorates, partly through the activities of the major financial institutions, partly through particular interest groupings, partly through firms rendering legal, accounting, and similar services to the larger corporations, and partly through intercorporate stockholdings, the managements of most of the larger corporations are loosely brought together in what might be called the corporate community.10

It is clear that the total membership of the management officials of all U.S. corporations would comprise a body of individuals that could properly be called the establishment or the corporate community. Further, it is a truism that where interlocks exist and one individual serves more than one corporation, the total size of the membership of the corporate community is reduced. The problem, however, is to de

15 Id., pp. 209-210.

16 National Resources Committee, Structure of the American Economy (1939), p. 158; reprinted in part in hearings, Subcommittee on Study of Monopoly Power, Interlocking Directorates, serial No. 1, pt. 2, 82d Cong., 1st sess. (1951), p. 75.

termine how extensive such reduction has been, and whether one effect of the reduction has been to make the business community unresponsive to the social, economic, and political forces that are relied upon to achieve our antitrust policies. At the present time, there is a dearth of objective factual information on the size and composition of the "establishment."

Notwithstanding the numerous investigations and studies that have been conducted by both public and private bodies into the problems of interlocking corporate managements, there is virtually no reliable current information available that analyzes the effect of common management personnel participation in, or influence on particular business transactions. The Pujo, Brandeis, and Stanley investigations had information available that related corporate structural interlocks to corporate behavior in particular transactions. The only source of similar comprehensive information is the study of the Temporary National Economic Committee (TNEC) on the Concentration of Economic Power, which was commenced in 1938. The TNEC investigations that were particularly relevant to the problems of common corporate managements, were those that involved the life insurance industry 18 and investment banking.19 The advent of World War II and the consequent redirection of economic effort interfered with analysis and exposition of the materials gathered by TNEC. Examples of abuses flowing from particular interlocking relationships, except in Monograph 28,20 were not identified or documented as to particular

transactions.

17

Other investigations into interlocking directorates that have been undertaken from time to time have concentrated attention on the frequency and structure of interlocks, and not on the behavioral effects of such interlocks. Accordingly, as of this time, there are virtually no factual analyses of how interlocking business organizations deal with particular transactions and the social and economic impact of such transactions.

Without factual information concerning the actual operations of interlocks, "commonsense," presupposition, reliance on past proofs, and abstract reasoning have been predominant in the analyses of both the virtues and the evils attributed to corporate interlocks. Certain effects would seem to be self-evident from an analysis of merely the structure of the organizations that have common management members, particularly when viewed in the light of the Pujo, Stanley, and Brandeis disclosures. Nonetheless, it is clear that widespread interlocks long have been, and now are, a feature in American corporate operations. It is not necessarily true that present-day business conditions, with the changes that have accompanied Government growth and corporate sophistication, embody the same effects of common managements as the evils documented in the Pujo and Brandeis studies. A number of arguments are advanced as to the benefits provided to business by common management members. The quality of manage

17 TNEC, Investigation of Concentration of Economic Power, final report and recommendations. S. Doc. No. 35, 77th Cong., 1st sess., Mar. 31, 1941.

18 TNEC hearings, Investigation of Concentration of Economic Power, pt. 4, life insurance, 76th Cong., 1st sess.

19 Ibid., pts. 22, 23, and 24.

20 TNEC Monograph 28, Study of Legal Reserve Life Insurance Companies.

ment allegedly is raised by obtaining men of wider experience and more diversified background. Insofar as there is a scarcity of management talent, by making services of competent administrators available to more corporate organizations, this scarcity in part is overcome. A qualified man has the capacity to act effectively for several corporations, and the experience gained in handling the problems of one redounds to the advantage of others. By virtue of this a director may be more valuable to any particular company because of his experience in other companies. From a purely business standpoint, the presence of common directors may inure to the advantage of one or both companies by insuring business on profitable terms with a minimum of selling costs. Another area in which a common director may be beneficial to business, and at the same time not afford sufficient control to jeopardize independent operations, is where there is need to obtain information in order to protect an investment or other substantial financial commitment.

Objections to corporate management interlocks fall into three classes: (1) matters of antitrust significance; (2) conflicts of interest; (3) debasement of the quality of available business leadership.

In the antitrust field, an interlocking director is in a position to serve as a liaison officer between the two companies and to insure that the pursuit of the best interests of one is not seriously detrimental to the other. In addition, the liaison agent is in a position to bring about a measure of common action, and, if the proportion of interlocking directors is sufficient, competition between the two firms may be eliminated entirely. Interlocking relations between companies in closely related industries may tend to forestall the development of competition which otherwise would occur in the normal expansion and diversification of each of the respective companies. Common directors between companies that are in a supplier-purchaser position to each other may result in preferential treatment in periods of short supply to the impairment of competition generally throughout the affected industry. Similarly, preferential treatment may occur in access to market outlets. An interlock between a manufacturing corporation and banks and insurance companies or other sources of financial services may establish a community of interest that would tend to assure adequate credit to a favored company and a withholding of credit and capital from disfavored competitors.

There are two types of conflicts-of-interest problems. When a director serves on boards of different corporations, there is the narrow problem that the interests of stockholders may be subordinated to the opportunity for personal gain that is afforded the director because he has an opportunity for "inside dealing." The second problem extends beyond the effects of the director's divided loyalties for his own private gain. The structure of the interlock also divides his loyalties to the stockholders of each of the respective corporations. The incentive of the director to serve each is lessened in any course of dealing that involves both of the combined companies. Although in his official capacity a director is a fiduciary to his stockholders and is required to act in their interests, a director of two companies having business dealings with each other, or whose interests otherwise may conflict with each other, is placed in the anomalous position of being a fiduciary with respect to each.

In his examination of this aspect of interlocking directorates, Mr. Brandeis pointed out that the practice of having common directors in competing corporations was a departure from ancient norms established for fiduciary relationships. He stated:

Obviously, interlocking directorates, and all that term implies, must be effectually prohibited before the freedom of American business can be regained. The prohibition will not be an innovation. It will merely give full legal sanction to the fundamental law of morals and of human nature: that "No man can serve two masters." The surprising fact is that a principle of equity so firmly rooted should have been departed from at all in dealing with corporations. *** 21

The weakening of the fiduciary obligation also may occur in efforts of the common director to harmonize the conflicting interests, as far as possible, at the expense of both corporations. A director of two competing corporations, in good conscience, cannot recommend that either should undertake a type of competition that is likely to result in injury to the other. The inherent tendency of the situation where there is common management between companies that have dealings with each other as competitors or as buyers and sellers is to blunt the rivalry between the corporations, to compromise opposing interests and to develop alliances to preserve the interests of the combination if jeopardized by outsiders.

The final type of problem, debasement of management, occurs from the fact that restriction in the number of opportunities for management experience by reason of interlocks may result in deterioration in the quality of service available for policymaking and decisionmaking functions. A director who undertakes to serve on the boards of too many corporations may be too busy to serve any of them effectively. The problem of the absentee director is common and long has been notorious. Interlocking directorates undoubtedly contribute as a cause of such absenteeism.22

Opportunities for younger executives to advance within the corporation may be foreclosed by the practice of using common directors. Reduction of the opportunity to be active in the top corporate management circles, tends to constrict the size of the management pool. This feature was of concern to President Wilson in his special message to Congress, urging enactment of the Clayton Act. With respect to the ban on interlocking directorates, he said:

Such a prohibition will work much more than a mere negative good by correcting the serious evils which have arisen, because, for example, the men who have been the directing spirits of the great investment banks have usurped the place which belongs to independent industrial management working in its own behoof. It will bring new men, new energies, a new spirit of initiative, new blood, into the management of our great business enterprises. It will open the field of industrial development and origination to scores of men who have been obliged to serve when their abilities entitled them to direct. It will

21 Supra, Harper's Weekly, Dec. 6, 1913, p. 14, Breaking the Money Trust.

22 TNEC Monograph No. 28, Study of Legal Reserve Life Insurance Companies (1940), pp. 39-45: This problem persists today. A special study commission to review the Maryland banking laws recently thought it necessary to recommend that "* ** a law be passed requiring a director of a banking institution to attend at least 50 percent of the regularly scheduled meetings of the board of a banking institution, and in the event he does not so attend, that he shall be automatically disqualified to serve as a member of the board ** *" (Final report of the Special Study Commission of the Law Relating to State Banks, Trust Companies. Mutual Institutions, Etc. (Md. 1963), p. 4). Such a law was enacted. Md. Laws of 1964, ch. 126.

immensely hearten the young men coming on and will greatly enrich the business activities of the whole country.23

PATTERNS OF INTERLOCKS

Interrelationships in the management of separate corporations may take a multitude of forms. Where the managements are bent upon coordinating the activities of their respective corporations so that the combination acts as a unit, devices available may vary from blatant conspiracies implemented by clandestine meetings in hotel rooms, and the use of secret codes; or, more subtly, the combination may be coordinated at social assemblages, on the golf course, or at any number of other opportunities that facilitate exchange of the necessary information among the various members. Such activities are not relevant to the subject matter of this report. The plaint that there "always will be an opportunity for persons so minded to conspire," while it involves corporate interrelationships, should not be permitted to confuse the analysis of interlocking corporate directorates. Deliberate conspiracy, no matter how difficult of proof, is separable, and, where it exists, is properly the subject of the positive prohibitions of the Sherman Act. The interlocks in corporate management of concern in this report are those relationships in an organizational structure that contain the seeds of competitive abuses. We are concerned with attempts to control the behavioral results of an organizational

structure.

"Interlocking directorate," as used by Mr. Brandeis, embraced a wide range of management interrelationships. His definition is as follows:

The term “interlocking directorates” is here used in a broad sense as including all intertwined conflicting interests, whatever the form, and by whatever device effected. The objection extends alike to contracts of a corporation whether with one of its directors individually, or with a firm of which he is a member; or with another corporation in which he is interested as an officer or director or stockholder. The objection extends likewise to men holding the inconsistent position of director in two potentially competing corporations, even if those corporations do not actually deal with each other."

As we shall see below, in dealing with interlocking directorates, Congress has not used so comprehensive a definition. The definitions used by Congress have varied in scope and content from industry to industry. In this report interlocks are defined as follows:

1. Horizontal: Common director or directors link two or more. companies that presently are, or potentially may be, competitors in the same industry, or, if in different industries, a vertical interlock is not involved:

2. Vertical: Common director or directors link two or more corporations which deal with each other but are at different levels in the same industry, as a manufacturer-supplier or a manufacturer-distributor. Vertical interlocks may also exist between different indus

23 51 Congressional Record 14222, Aug. 1914; H. Rept. 627, 63d Cong., 2d sess. (1914), p. 18. In his Apr. 29, 1938, message to Congress, recommending the study that led to TNEC. President Roosevelt expressed the concern that interlocking directorates deprived business of independent judgments. He said: "Interlocking financial controls have taken from American business much of its traditional virility, independence, adaptability, and daring— without compensating advantages. They have not given the stability they promised.

"Business enterprise needs new vitality and the flexibility that comes from the diversified efforts, independent judgments, and vibrant energies of thousands upon thousands of independent businessmen.' TNEC Final Report, S. Doc. 35, 77th Cong., 1st sess., p. 13. 24 Supra, Harper's Weekly, Dec. 6, 1913, p. 13.