AN ANALYSH OF THE EXTENT OF CORPORATE OWNERSHIP AND CONTROL BY PRIVATE PENSION FUNDS The“: for “In Degree of pit. D. MICHIGAN STATE UNIVERSITY Dwayne Earf Wrightsman 1964- TH ESIS This is to certify that the thesis entitled An Analysis of the Extent of Corporate Ownership and Control by Private Pension Funds presented by Dwayne Earl Wrightsm an has been accepted towards fulfillment of the requirements for Ph D degree in Economics [W Major professor Date June , 19 64 0-169 LIBRARY Michigan State University LIBRARY Michigan State University ABSTRACT AN ANALYSIS OF THE EXTENT OF CORPORATE OWNERSHIP AND CONTROL BY PRIVATE PENSION FUNDS by Dwayne Earl Wrightsman Much has been said about the phenomenal rate at which pri- vate pension funds are buying common stock. This has led some to question whether the funds' trustees are acquiring voting control of the companies whose stocks are being purchased. Unfortunately, little has been done in the way of anatomizing the funds' holdings to deter— mine how much voting power the trustees actually have. The conten- tion of this thesis is that the degree of record ownership and voting control of individual corporations by individual pension funding media is sizable, i.e. , sufficient enough to warrant serious public and legislative concern. An effort is therefore made to quantify the extent of this ownership-control. Information was drawn from three primary sources. First, the literature was surveyed. Studies by Congressional and private bodies were found to contain much useful data suitable for synthesis. Second, the descriptions and financial reports of a sample of 232 randomly- selected pension plans were examined at the Department of Labor's Office of Welfare and Pension Plans. The sample was stratified to Dwayne Earl Wrightsman include larger proportions of larger plans. Thus it was possible to study more than 25 percent of the assets of all noninsured pension funds. Finally, a questionnaire on corporate-trusteed pension funds was sent to 68 banks believed to be the most prominent in the pen- sion trust business. Twenty-eight of the banks responded. Their replies were analyzed and incorporated into the thesis. The majority of pension fund trustees are found to have negligible voting control of portfolio companies. However, the lead- ing banks in the pension trust business are shown to have the poten- tial to influence or control some of this country's largest corporations. Moreover, it is found that the pension funds of individual companies are frequently invested in own—company stock, with the funds' company- appointed trustees acquiring substantial voting control in some instances. In addition, specific cases are presented in which company pension funds have been invested in controlling blocks of stock of competitor, supplier, and customer companies. The main conclusion of the thesis is that the extent of corporate ownership by pension funds and their trustees is sizable enough to constitute a possible control problem. The trustees are well on their way to becoming the principal voting stockholders of the large, listed corporations. As this ownership is highly concen- trated, a small minority of the trustees already have considerable management-determining potential. This potential could be used, more extensively than it has so far, to effect a greater concentration Dwayne Earl Wrightsman of operating control of industry. A strong policy to limit the trustees in their voting power over portfolio companies is, therefore, prescribed. In this connection, the need is stressed for (1) additional disclosure legislation, (2) some regulation of investment, and (3) more stringent application of the antitrust laws. AN ANALYSIS OF THE EXTENT OF CORPORATE OWNERSHIP AND CONTROL BY PRIVATE PENSION FUNDS BY Dwayne Earl Wrightsman A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Economics 1964 ACKNOWLEDGEMENTS I am deeply indebted to a number of persons and organi- zations for their generous assistance and helpful advice in the prep- aration of this thesis. Professor Walter Adams, under whose direction the thesis was written, was instrumental in securing resources-- financial and otherwise--without which the research and drafting of the thesis could not have been accomplished. Professors Ioel B. Dirlam and Jack R. Vernon were sympathetic to certain problems besetting me and kindly made suggestions in their behalf. Professor Robert F. Lanzillotti gave his support in securing financial assistance for research. The actual financing of the thesis program was provided by the Ford Foundation to which I am very grateful for a dissertation fellowship award. In conducting research, I am especially indebted to Messrs. Lewis Odom and Ben Gordon, staff members of the Select Committee on Small Business of the U.S. Senate, and to Messrs. Norris Sacharoff and John Hunter, Office of Welfare and Pension Plans of the U.S. Department of Labor, all of whom were uncommonly helpful in a variety of ways. I am also obliged to the many bankers who took time to answer the questionnaire sent to them. Finally, I am indebted to my wife, Susan, who gave me her unending moral ii support. Her encouragement and faith in my work more than once provided the push to carry on according to schedule. Of course, none of the above are responsible in any way for what is said in the text. For this I assume full responsibility. iii TABLE OF CONTENTS Page ACKNOWLEDGEMENTS.................. ii LISTOFTABLES.................... vi LIST OF ILLUSTRATIONS. . . . . . . . . . . . . . . . ix Chapter I.INTRODUCTION................. 1 II. THE AGGREGATE SIZE OF PRIVATE PENSION FUNDS . 17 A. Introduction B. Empirical Findings C. Projected Growth for 1970 and 1980 D. Conclusion 111. THE CONCENTRATION OF FINANCIAL CONTROL OF PRIVATE PENSION FUNDS. . . . . . . . . . . . . 46 A. Introduction 8. Concentration of Assets in Individual Pension Funds C Concentration of Financial Control by Corporate Trustees D. Concentration of Financial Control by Individual Trustees E. Concentration of Financial Control by Insurance Carriers F. Conclusion IV. ,CORPORATE TRUSTEES AND PORTFOLIO COMPANY CONTROL.................... 77 A. Introduction B. Corporate Trustee Holdings of Portfolio Company Stocks iv Chapter C. Behavior of Corporate Trustees as Stockholders D. Conclusion V. THE INVESTMENT OF PRIVATE PENSION FUNDS IN OWN-COMPANY SECURITIES . . . . . . A. Introduction B. Number of Pension Funds Invested in Own-Company Securities C. Nature of Own-Company Investments D. Income Performance of Pension Funds Invested in Own-Company Securities E. Pension Fund Investment in Own-Company Stock and Its Effect upon Corporate Control F. Conclusion VI. THE INVESTMENT OF PRIVATE PENSION FUNDS IN THE STOCKS OF COMPETITOR, SUPPLIER, AND CUSTOMER COMPANIES A. Introduction B Trustee Policies Regarding Investment in the Stocks of Related Companies C. Cases Involving the Use of a Pension Fund to Promote Corporate Integration D. Conclusion VII. PUBLIC CONTROL OF PRIVATE PENSION FUNDS. A. Introduction B Federal Regulation of Private Pension Funds C. State Regulation of Private Pension Funds D. Conclusion VIII. CONCLUSION . . . . . APPENDIX . BIBLIOGRAPHY.............. Page 98 121 136 157 169 190 Table LIST OF TABLES Stratification by Amount of Contributions in the Random Sample of 232 Pension Plans . . . Book Value of Assets of All Insured and Non- Insured Pension Funds in Billions of Dollars, 1945-1962 . . . . . . . . . Distribution of Assets, at Book Value, of All Noninsured Pension Funds in Billions of Dollars, 1957—1962 Savings in Private Pension Funds as a Share of the Financial Assets of Consumers, 1945-1960. Saving through Private Pension Funds as a Share of the Net Acquisition of Financial Assets by Consumers, 1946-1960 . Corporate Stockholdings of Corporate Nonin- sured Pension Funds as a Share of the Total Market Value of A11 Corporate Stock Outstand- ing, 1954-1960 Net Purchases of Common and Preferred Stock by Pension Funds Compared to Net Additions to Total Stock Outstanding, 1946-1962. Growth and Maturation of a Hypothetical Pension Fund . Estimated Book Values of Assets of Private Insured Pension Funds, Private Noninsured Pension Funds, and All Private Pension Funds, in Billions of Dollars, for the Years-Ending 1970 and 1980 . vi Page 15 20 22 24 26 28 29 33 35 Table Page 10. Estimated Distribution of Assets of All Private Noninsured Pension Funds for the Years-Ending 1970and1980.................. 39 11. Estimated Percentage Share of Total Corporate Stock Outstanding Held by Corporate Noninsured Pension Funds for the Years-Ending 1970 and 1980. . . . . . 41 12. Estimated Concentration of Assets in Individual Noninsured Pension Funds for the Year-Ending 1962 O O O O O O O O O I 0 O I O O O O 0 O O O O 48 13. Book Value of Assets of the 12 Largest Nonin- sured Pension Funds in the Writer's Stratified Random Sample of 232 Funds . . . . . . . . . . . 49 14. Banks Administering 100 or More Pension Funds in 1955. . . . . . . . . . . . . . . . . . . . . 52 15. Sample Distribution of Assets of 125 Randomly- Selected Pension Funds among Leading Banks for the Year-Ending 1962. . . . . . . . . . . . . 54 16. Number of Pension Trust Accounts, Average Rate of Return on Investments, and Typical Trustee Fee for Investment Service, for Each of Eighteen Banks Responding to the Questionnaire on Corporate-Trusteed Pension Funds. . . . . . . . . 57 17. Location of Corporate Trustee of Each of 125 Pension Funds in Reference to Location of Sponsoring Company. . . . . . . . . . . . . . . 58 18. Interlocking Directorates between 17 Large Banks and 125 Pension Fund Clients . . . . . . . 6O 19. Sample Distribution of Pension Fund Assets among the Individual Trustees of 49 Randomly-Selected Funds . . . . . . . . . . . . 67 20. Distribution of Pension Plan Premium Income among 33 Life Insurance Carriers in Con- nection with 76 Randomly-Selected Plans, 1962 70 vfi. Table 21. 22. 23. 24. Distribution of Group Annuity Premium Income among All United States Life Insurance Companies, 1960 . Cases in Which a Bank Held a Voting Stock in a Pension Trust and in Which the Amount Held, Together with the Amounts Held in Other Trusts of the Bank, Exceeded Five Percent of the Total Stock Outstanding, for the Year-Ending 1955 . Party-in-Interest Investments and Loans in 44 Pension Funds in the Stratified Random Sample of232Funds........... Approximate Amount of Own-Company Stock in Each of 30 Pension Funds in the Stratified Random Sample of 232 Funds, Expressed as a Percent of Total Shares Outstanding. viii Page 71 83 105 114 LIST OF ILLUSTRATIONS Figure Page ' 1. Graphical Projection of the Growth in Assets of Private Pension Funds, in Book Value, in Billions of Dollars, for the Period 1950-1980.................... 37 ix CHAPTER I INTRODUCTION Background. In the language of the Welfare and Pension Plans Disclosure Act of 1958, a pension plan is broadly defined as: . any plan, fund, or program which is communicated or its benefits described in writing to the employees, and which was heretofore or is hereafter established by an employer or by an employee organization, or by both, for the purpose of pro- viding for its participants or their beneficiaries, by the purchase of insurance or annuity contracts or otherwise, retirement benefits, and includes any profit-sharing plan which provides benefits at or after retirement. While a few pension plans are financed on a pay-as-you-go basis, the vast majority are funded: The conventional approach to the financing of pension benefits is for the employer (and employees, if the plan is contributory) , to set aside funds for the payment of such benefits with a trustee or insurance company in advance of the date on which the benefits become payable. Provisions for retirement benefits may vary considerably from plan to plan. They may be fixed at some pre-determined amount, with contributions to the fund determined actuari'a'lly, or they may lPublic Law 85-836, as amended by Public Law 87-420, sec. 3 (2). 2Dan M. McGill, Fulfilling Pension Expectations (Homewood, Illinois: Richard D. Irwin, 1962), p. 128. 1 depend, as in the case of profit-sharing pension funds, upon con- tributions based upon future earnings of the employer.3 Funds established and maintained in the private sector of the economy have come to be known as private pension funds, of which those established by corprorations and unions are the most common. Government pension funds, on the other hand, include railroad retirement, Civil Service, state and local, Federal Old Age Survivors Insurance, and federal disability insurance funds. Only private funds are considered in this study. No one know the precise number of private pension funds that currently exist in this country. Estimates range in the general vicinity of 60,000. The book value of the assets of the funds should reach $70 billion in 1964, exceeding in value the assets of all government pension funds combined.4 While the private pension system is already one of the largest financial institutions in America, it is destined to become much larger. The growth of the assets of the 3Most of the various funding arrangements are spelled out in simple terms in: Pensions and Profit Sharing (Washington: The Bureau of National Affairs, Inc. , 1956). 4According to statistics developed by the Securities and Exchange Commission, private pension funds are growing at a rate of 35-6 billion per annum while government funds are increading by only $2-3 billion. At the end of 1962, private pension funds had a value of $60.7 billion, compared to $61.3 billion for the government funds. U.S. , Securities and Exchange Commission, Corporate Pension Funds, 1962, Statistical Series Release No. 1902, May 24, 1963. 3 funds has been truly phenomenal, and there is no indication that it will taper off in the near future. Equally impressive is the amount of corporate stock being acquired by the funds as they grow. In 1962, their net purchases of common and preferred stock was equal in amount to 80 percent of 5 Stock investment is the total net additions to stocks outstanding. necessary for pension funds because of the nature of their commit- ments. Retirement benefits are usually set up to equal some fraction of the remuneration received by each employee just prior to his retirement. This means that retirement benefits are variable-dollar obligations. Indeed, given wage inflation, the benefits must be continuously increased. Consequently, the pension funds are obliged to hedge against this by investing in common stock. This is precisely what they are doing. To what extent have the pension funds come into ownership and voting control of the corporations whose stocks they have pur- chased? Because the funds have stepped-up their equity holdings at an extremely rapid pace, this question has assumed increasing significance in the eyes of many social scientists. Notably, Profes- sor Adolf A. Berle, Ir. , Columbia University Law School, has lectured and written about pension funds coming into greater corpor- ate ownership through their common stock investments, with more and Ibid . 4 more corporate voting power passing into the hands of the funds' trustees. In 1957, Professor Berle prepared for the Fund for the Republic's Center for the Study of Democratic Institutions a pamphlet in which he expounded his theory of the current metamorphosis of 6 power over property. Concerning the role of the pension funds, Profes sor Berle predicted: . if the pension trusts continue to take the good equities as they have been doing, they may well have the prevailing control-stockholding position and the capacity to make it absolute. They will have, say, 20 per cent to 30 per cent of the good equity stocks and the capacity to increase that to 40 per cent or 50 per cent (45 per cent for praciical purposes is a majority at any big stockholders' meeting). Unfortunately, only a handful of empirical studies have touched on the subject of pension funds and corporate voting control. These were turned out in the 1950's, when Congress and the legis- latures of a few states, most notably New York, began to investigate the realm of private pension funds. In 1955, the New York State Banking Department completed an empirical study on 1,024 pension 8 The study revealed (1) a high 9 funds trusteed by New York banks. concentration of assets in the largest pension funds, (2) a high 6Adolf A. Berle, Ir. , Economic Power and the Free Sociey (Santa Barbara, California: Center for the Study of Democratic Institutions, 1957). 7Ibid. , p. 12. Essentially the same contention is stated in his later book: Adolf A. Berle, Ir., Power Without Property (New York: Harcourt, Brace and Company, 1959), p. 54. 8George A. Mooney, Pension and Other Employee Welfare Plans, New York State Banking Department, 1955. 91bid., p. 31. concentration of pension trusts in the largest bank and trust com- 10 panies, and (3) a high concentration of pension fund common-stock holdings in a small number of issues.11 While the study did not list individual-bank holdings of individual portfolio companies, the 12 data shown on combined holdings by banks suggested that individual banks had substantial holdings in large corporations in a number of instances. In 1956, the New York State Insurance Department completed a study of a cross—section of private employee benefit plans.13 One major problem raised in the study was that of self-dealing d.14‘ investment of a pension fun Looking into the assets of a large number of individual funds, the Department found numerous instances in which a fund was invested heavily in own-company common stock, remarking: Where a pension fund, managed by executives of a large corporation, holds a sizable block of the company's stock, it would be virtually impossible for outsiders carrying on a proxy fight to remove the inside group already in control. Such insiders, by loading the pension fund with the company's stock can, in effect, entrench the position of existing 101bid.. run. 1-2. 111bid., r). 4. lzlbid. 13Martin House, Private Employee Benefit Plans: A Public Trust, New York State Insurance Department, 1956. 14Ibid.. PP. 128-29, 326-339. 6 management beyond realistic possibility of attack, althopégh the management itself may own negligble amounts of stock. However, the study contained no evidence on the extent to which the trustees of the funds possessed or used this power. In the same year, the most important of all the government investigations was concluded, vis., the welfare and pension plans investigation of the U.S. Senate Committee on Labor and Public 16 the Committee summarized its find— Welfare. In its final report, ings of the abuses and problems in welfare and pension plans, including the problem of corporate control. With regard to the latter, the Committee reported these findings: (1) Sixty-six banks were known to have 5,269 pension and other employee trust accounts (predominantly profit-sharing plans with retirement features) with aggregate assets of $8,256 million, which, at that time, represented the bulk of the total assets of all corporate- trusteed pension funds.17 (2) Twenty-six of the 66 banks admitted a total of 100 instances in which they had portfolio company holdings of five per- cent or more of the company's outstanding common stock.18 15Ibid. , p. 329. 16 U.S. , Congress, Senate, Committee on Labor and Public Welfare, Welfare and Pension Plans Investifition, Final Report, 84th Cong., 2nd Sess., 1956. ”Ibid” p. 52. 18Ibid., p. 361. (3) Of the 3,191 noninsured pension plans trusteed by the 66 banks, 195 (six percent) held securities of the sponsoring company in the fund, and in 65 cases, these assets amounted to more than ten percent of the total assets of the fund.19 (4) Of the 1,538 profit—sharing plans with retirement features trusteed by the 66 banks, 195 held own—company securities in the fund, and in 112 cases, these assets came to more than ten percent of the total assets of the fund.20 Although the Committee did not report directly on whether the own-company stockholdings gave the funds voting control of their sponsoring companies, a disquietude about own-carpany dealings was expressed: It seems obvious to us that there are a number of instances. . in which the heavy investment in the assets of the employer may not be in the interests of the beneficiaries and in which the investment may have been motivated, at least in part, by ulterior considerations . Conjoining Professor Berle's foundations with the empirical data presented in the government studies, two important analyses of the relation between pension fund investment and corporate ownership and control appeared in 1959. In Pension Funds and Economic Power, Dr. Paul P. Harbrecht, SJ. , a former student of Professor Berle, 13113191.. pp. 52, 360, 362-63. 20 . Ibid” pp. 360-61, 363-65. 21 Ibid. , p. 52. 8 offered the most comprehensive analysis of the power aspects of 22 pension funds that has been written to date. However, Dr. Harbrecht's purpose in reporting the facts about the nature of pension funds and power over property was not so much to determine the extent of corporate voting control by pension fund trustees as it was to develop a theory of what he called the "paraproprietal" society.23 In sacrificing depth for breadth, Dr.) Harbrecht devoted only three pages specifically to the matter of potential control of corporations by pension trustees . 24 The other analysis to come out in 1959 was Robert Tilove's report to the Fund for the Republic, Pension Funds and Economic .25 Considering the question of "whether the common-stock Erection investments of pension funds will help to effect a concentration of corporate control," Mr. Tilove correctly diagnosed: This question involves inquiry into the past and future growth of pension funds, their acquisition of common stock, the management of their investments, their relation to other 22'Paul P. Harbrecht, 8.]. , Pension Funds and Economic Power (New York: The Twentieth Century Fund, 1959). 23This was defined by Father Harbrecht as a society in which "man's relationship to things-~materia1 wealth-—no longer deter— mines his place in society (as it did in a strong proprietary system) but his place in society now determines his relationship to things." Ibid., p. 287. 4 Ibidol EDP-248-250- 25Robert Tilove, Pension Funds and Economic Freedom (New York: The Fund for the Republic, 1959). 9 institutional investors, and the possibility that stock ownership by funds and other institutions will be translated into influence and control over the companies whose stock they own. In viewing the rapid growth of common-stock holdings by the funds in a limited number of issues, Mr. Tilove recognized a large potential 1.27 for corporate contro In this connection, he declared that: The question of potential control or influence over corporations through the use of the voting power can be considered in three fairly distinct categories: (1) Use of a company's pension fund to buy its own common stock, (2) Use of a company's pension fund to buy stock in a company in which it intends to exercise influence, and (3) The impact on corporate control and policy of aggregate institutional holdings. After examining a few cases in which a pension fund had acquired substantial voting control of its sponsor or other company, Mr. Tilove concluded that these cases were exceptional and probably 29 Furthermore, he claimed that the did not represent any trend. corporate trustees of pension funds, while they had a significant share of ownership of particular corporations, were definitely not anxious to use the potential for the purpose of control.30 Con- sequently, as he interpreted the evidence, there was no "threat for the near future" that the funds would effect a concentration of power. “£911., p. 30. 231911., p. 54. 2811311,, p. 56. 2531014., pp. 60, 85. 30 Ibid. , p. 85. 10 Nevertheless, he suggested in the final words of the report that: . reasonable steps might be taken to give the public the opportunity to appraise, from time to time, whether concen- tration of economic power or the use of pension funds to that end has or has not developed. The sensational advance of private pension funds has given a jolt to public interest that may ultimately help to develop an informed public better able to cope with our problems of economic freedom. Hypothesis and scope of analysis. This thesis attempts to determine how close private pension funds are to the "prevailing control-stockholding position" envisioned by Professor Berle. Pension fund stockholdings are disaggregated to show the extent of record ownership of individual portfolio companies by individual pension trustees. The holdings are anatomized to see how much corporate voting power pension trustees actually have. Only by examining the stockholdings of separate autonomous pension funding agencies can corporate ownership and voting control by the funds begin to have m eaning . 32 While the extent of such ownership has not previously been determined, it is known that (1) the pension funds have been buying Common stock at a much faster rate than the supply of new issues, ‘_ 31 Ibid. , p. 86 32H pension funds are taken in the aggregate, they already haVe considerable ownership of each of a number of large corporations. If Considered separately, it is unlikely that but a very few have vot— 1.119 control of even a single corporation. Neither of these approaches 13 altogether satisfactory, however, for the corporate ownership and Voting control associated with pension fund investment in common SPOCk is in the hands of trustees and insurers, each of which may handle as many as several hundred funds. 11 (2) there is a high concentration of assets in individual pension funds, (3) there is a high concentration of financial control of the funds by trustees and insurers, and (4) there is a high concentration of invest- ment of the funds in individual common stock issues. Taken together, these four factors suggest the possibility that some of the persons or firms in charge of pension fund investment may have substantial vot- ing power in some of the corporations whose stocks they have pur- chased. In this regard, it is hypothesized that the degree of owner- ship and voting control of individual corporations by individual pension funding agencies is sizable. It is proposed that the trustees of the largest funds already have substantial voting power in a con- siderable number of portfolio companies, not to the ultimate extent foreseen by Professor Berle, but sufficient enough to warrant serious public and legislative concern. Control is distinguished from ownership in this thesis primarily in the sense that the trustees, as record owners, are not always free to exercise voting discretion over their stockholdings. Thus the thesis deals primarily with voting control and only second- arily with operating control. Potential for control, not the exercise of Control, is the main concern. Moreover, the meaning of voting Control in the context of this analysis is confined more to absolute than to relative voting power. Little cognizance is taken of the fact that. for example, ten percent control in a widely—held corporation yields considerably more management-determining power than ten percent 12 control in a tightly—held company. Yet, the analysis treats such figures as if they were equivalent. Though unfortunate, this is nec- essary in order to avoid the formidable task of analyzing the matter of portfolio company control on a company by company basis. The analysis begins with an examination of the assets of private pension funds _i_n_ 3939; Here attention is focused upon the composition and growth of the assets. The dollar amount of the assets in corporate stock is compared to the value of total stock outstanding as a first indication of the extent of corporate control by the funds. Next the assets are segregated in accordance with their financial control by trustees and insurers. The fact that only a few banks, individuals, and insurers control the bulk of pension fund assets is empirically demonstrated. The factors leading to such concentration are briefly discussed. The analysis then shifts to the matter of corporate voting control by pension fund trustees. Given the various stock invest- ment policies followed by the trustees, the voting control question is analyzed from four points of view: (1) Whereas a bank trustee may handle many hundreds of pension, personal,:33 and other trust accounts, with total assets \ 3Actually, personal trusts are larger than private pension funds (though not much) and about two-thirds of their assets are in StOCk (compared to about two-fifths for the pension funds). However, the pension funds are much larger net purchasers of common stock than are‘the personal trusts. Also, the pension funds are much more 13 valued in the hundreds of millions of dollars, the trustee may come into considerable voting control of one or more of its portfolio com- panies in the normal course of building diversified stock-investment portfolios for each account. (2) Whereas bank trustees purchase stocks for the purpose of investment rather than control, their willingness to support corporate managements on issues brought to a vote before stock- holders may insulate the managements from effective stockholder challenge . (3) Whereas an individual-company board of trustees (usually management controlled) of a pension fund may choose to invest a large segment of the fund in the voting stock of the same company, the board may find itself with dominant voting control of the company . (4) And whereas an individual-company board of trustees of a fund may invest heavily in the stock of a competitor, supplier. or Customer company, the board may accumulate sufficient control to effect some kind of corporate integration. concentrated than the personal trusts in their placement. Finally, inCliVidual pension funds are larger than individual personal trusts, they are subject to fewer legal restrictions, and they give to the tTUStee considerably more discretion in their investment management. All of this makes the pension fund the greatest vehicle of voting I30Wer that the corporate trustee has. Nevertheless, personal trusts InLlst be considered along with the pension and other trusts in the Inpany securities than for funds that are not invested this way. Yet no significant difference was found between the mean rates of i I“‘Iestment return. Measuring the rate of return on investment in 111 each fund as income from dividends, interest, and rent divided by the average of total book value of assets at the beginning and end of year, less one-half investment income, simple frequency distributions of the rate of return were drawn from three sample sets: (1) the pen- sion funds having no party—in—interest investments and loans, (2) the pension funds having party—in-interest investments and loans amount- ing to less than ten percent of total assets, and (3) the pension funds having greater than ten percent of total assets in party-in— interest investments and loans. Subsequently, the mean and variance of each of the three sample sets were found: Set (1) Set (2) Set (3) Sample mean . . . . . . . 3.80% 3.80% 3.60% Sample variance. . . . . . .47% 1.01% 1.99% Number of funds observed 13. . . . . . 125.0 23.0 21.0 While the differences in the mean rates of return are in- Significant, this is not the case with the variances. The variation in the rate of return is greatest for the funds most deeply invested in own-company securities, while it is least for the funds having no in"estments of this type. This means, then, that own-company invest- Inel"its in pension funds involve an unnecessary amount of risk. H”hile they enhance the probability of obtaining greater investment \ 17 13The total number of funds observed was 169 rather than 13' 4 (the number of noninsured funds in the stratified random sample) sfcaUsr-zt invabtment incomewas not reported for five of the funds LlQlled. 112 gains, they also increase the chances of greater losses. Yet they do not earn, on the average, any higher rate of investment return. This is what would be expected intuitively knowing that many of the own-company arrangements are in violation of the financial principle of diversification of investment. However, since these arrangements are also in violation of the principle of investing only at arm's length, it would likewise be expected that pension funds invested in own-company securities would earn a lower mean rate of investment return than funds not so invested. Trustees who must simultaneously serve the employer and the employees may not always serve the latter by investing their funds in own-company securities. Even if their intentions are good, there is always the possibility that own-company investment decisions may be influenced by subjective attitudes, unconscious motivations, or ulterior considerations of a COgnizant nature.14 In any case, it would seem that any compro- mising behavior should have, on the average, a negative effect on the rate cfreturn on investment. Unfortunately, however, this did not show up in the above analysis. 14The contention, for example, that own-company invest- Ihents are sometimes made in order to obtain easy company finan- cling, to bolster the market position of a company's securities, or t0 secure some other financial advantage, has been promulgated through several sources: Harbrecht, op. cit.. P. 79; Martin Ouse, Private Employee Benefit Plans: A Public Trust, New York State Insurance Department, 1956, pp. 128-29; "The Startling Irhpact of Private Pension Funds," Business Week, January 31, 1959, D- 98; Tilove, op. cit., p. 59. 113 E. PENSION FUND INVESTMENT IN OWN-COMPANY STOCK AND ITS EFFECT UPON CORPORATE CONTROL As stated in the introduction to this chapter, one possible consequence of investing a pension fund in own-company common stock is that the pension fund may end up in control of the company. Considering that the company has control of the pension fund to start with, heavy investment of the fund in own-company stock could lead to circular and self-contained control by a management oligarchy, whichmay own almost no stock of its own. The precise extent to which this is actually happening is unknown, although it is believed to be rate. Apparently, however, no one up to now has even begun to measure the amount of own-company voting power in individual pension funds . Voting power of pension funds invested in own-company Approximately one-sixth of all noninsured pension funds have At .8 tock . h01dings in the common stock of their sponsoring companies. least this is surmised judging from the own-company stock invest- Inerits in 30 of the 174 noninsured funds in the sample. This does not mean, however, that every sixth fund has a controlling block of its sponsor's stock. Indeed, as Table 23 shows, a number of the Own-company stockholdings constitute only a small fraction of invested assets and, consequently, can hardly be large enough to affect voting control. On the other hand, some of the holdings are more substantial 114 and appear to represent considerable voting power. The extent to which these 30 funds have come into own- company voting control is. more clearly indicated in Table 24, which shows the percentage amount of own-company stock outstanding that is held in each fund. Here it is found that 12 (40 percent) of the funds own less than one percent of the outstanding stock of their sponsoring companies, while 12 more (another 40 percent) own between one. and five percent. Five funds (16 2/3 percent) own between five and ten percent, leaving only one fund (3 '1/3 percent) with more than ten percent of its sponsoring company's stock. TABLE 24. -- Approximate amount of own-company stock in each of 30 pension funds in the stratified random sample of 232 funds, expressed as a percent of total shares outstanding ‘ ¥ 'A. Funds with 10% or more of sponsor's stock outstanding 1. Sears, Roebuck and Company Employees' Savings and Profit Sharing Pension Fund 3. Funds with 5-10% of sponsor's stock outstanding 1. Abbott Laboratories Stock Retirement Plan 2. Crown Cork and Seal Pension Plan 3. Rexall Drug Company Profit Sharing Retirement Trust 4. Signode Steel Strapping Company Employees' Savings and and Profit Sharing Trust Fund 5. Wooster Brush Company Retirement Plan - Funds with 1-5% of sponsor's stock outstanding 1. Armstrong Rubber Company Deferred Profit Sharing Plan 2. Bell and Howell Profit Sharing Retirement Trust _ 3. Fetzer Broadcasting Company Profit Sharing Plan First National Bank of Chicago Bank Pension Plan Jewel Tea Company Retirement Estates Kimber Farms Employees' Profit Sharing Plan . Mutual National Bank of Chicago Profit Sharing Plan Ohio (Marathon) Oil Company Thrift Plan CDVOfiO‘Ib 11. 12. 115 Pullman Trust and Savings Bank Retirement Plan Springs Cotton Mills Non-Salaried Employees' Profit Sharing Plan and Trust United Insurance Company Savings and Profit Sharing Pension Fund Whirlpool Corporation Savings and Profit Sharing Plan D. Funds with less that 1% of sponsor's stock outstanding 1. LOCDVCDCD 11. 12. Brewer-Titchener Corporation Employees' Saving and Profit-Sharing Retirement Plan Champion Paper and Fibre Company Retirement and Dis- ability Plan Chemical Bank New York Trust Company Deferred Compen- sation Plan Cincinnati Gas and Electric Company Retirement Income Plan General Electric Savings and Security Program General Motors Hourly-Rate Employees' Pension Plan General Motors Salaried Employees' Retirement Plan Northern Indiana Public Service Company Pension Plan Schering Corporation Employees' Profit—Sharing Incentive Plan United Parcel Services New York Retirement Plan Westinghouse Electric Corporation Pension Plan Wisconsin Public Service Corporation Employees' Retire- ment Plan Source: 1961 and 1962 D-2 statements filed at the Office Of Welfare and Pension Plans, corporation annual reports, corporation directories, stock reports, etc. Of course, it is difficult to say what effect these holdings have upon corporate control without knowing, also, who the other O"Vriers of the companies are and the size distributions of their hold- ings. It is probably true that the holdings of less than one percent of shares outstanding carry with them too little voting power to matter. The holdings of between one and five percent and between five and tgn percent are likely insufficient to control a company yet perhaps 116 large enough to wield some influence. It should be pointed out, how- ever, that these holdings are company-administered and, as such, are invariably voted in behalf of managements, who, under normal conditions, do not need to own the votes that are cast in their favor. With as much as ten, 20, or 30 percent ownership, a pension fund could conceivably control a company whose stock was otherwise widely held. Such control would especially be of value to the spon- soring company's management in the event of a proxy contest, or better yet, it would ensure against even the threat of any contest for control. The Sears, Roebuck and Company caps-lg: The best known case in which a pension fund has come into extensive control of its sponsoring company is that of Sears, Roebuck and Company. The facts surrounding this case were revealed in 1955 by General R. E. Wood (then chairman of the board of trustees of the Sears savings and profit sharing pension fund) in testimony before the Senate Commit- tee on Banking and Currency.15 In the course of General Wood's testimony, a number of pertinent facts were revealed: (1) The trustees of the fund were (and still are) appointed by the board of directors of the company.16 k. 15The full text is in: U.S., Congress, Senate, Committee on Banking and Currency, Stock Market Study, Hearings, 84th Cong. , 1st Sess., 1955. pp. 495-518. 16Ibid. , p. 496 . 117 (2) Three of the five members of the board of trustees of the fund were company directors.17 (Now it is four out of seven.) (3) The trustees could invest the fund at their discretion, although the rules of the fund provided for investment in Sears capital stock so that Sears' employees could share in the success. of the company.1 ('4) At the end of 1954, there were 6,331,814 shares of Sears stock in the fund, an amount of about 26 percent of the 24,845,000 shares outstanding.19 (At the end of. 1962, the fund owned 19,317,551 shares, which had a market value of $1,487,451,427 and represented 25.5 percent of total shares outstanding.) (5) Twenty-six percent ownership was admittedly sufficient to constitute control of a large company like Sears.20 (6) The stock was voted in accordance with the instructions Given by the trustees of the fund at their discretion.21 (7) Since the trustees of the fund were appointed by the directors of the company, and since three of the five trustees were 17ibid . 18Ibid , 19Ibid. . pp. 496-97. 20 Ibid. , p. 497 21Ibid. , p.503 118 directors themselves, their power to vote 26 percent of Sears stock was admittedly sufficient to ensure permanent entrenchment of manage- ment.22 While the Sears management probably did not need this power to ensure its continued existence, a situation had arisen wherein management was no longer bound to answer to the demands of the company's remaining stockholders. As Professor Adolf A. Berle, Jr., in 1957, expressed this development: . Sears Roebuck is socializing itself via its own pension trust fund, and is discovering that it is running into the same difficulty which a socialist or any other form of oligarchic government has—-that it has self-contained control, and manage- ment is thus responsible to itself. Thus, with the threat of any challenge for control removed, the management of Sears was theoretically subject to no mandate other than its own. Pass-through of voting rights. Obviously sensitive to public and stockholder opinion, Sears, Roebuck and Company amended the rules of the profit-sharing pension fund in 1958, permitting the stock Voting rights, previously exercised by the fund's trustees, to pass 1lhrough to the beneficial owners, the employees of the company. 1:‘Or the first time in Sears history, some 80,000 employees were eligible to vote their vested stock interests. In April, 1959, 84.7 x 22 Ibid. , p. 508. 23Adolf A. Berle, Jr. , Economic Power and the Free Socie_ty (Santa Barbara, California: Center for the Study of Democratic Institutions, 1957), p. 11. 119 percent of these employees sent their confidential voting instructions to Price Waterhouse in Chicago for tabulation, indicating a keen inter- est in their newly acquired right to vote. The pass-through of voting rights is by no means, however, standard procedure in pension funds invested in own-company stock. According to Lewis D. and John J. Gilbert, who keep a running account on companies that do and companies that do not receive voting instructions from the beneficial owners, most company officials have adopted the attitude that the pass-through procedure is inordi- nately expensive and to be avoided as long as public apathy permits.“ Thus, while a few companies have succumbed to the pass-through in the past few years, the majority continue to vote the stock without employee consultation . F . CONCLUSION Approximately one-fifth to one-fourth of all pension trusts are invested in the bonds, stocks, notes, etc. of their sponsoring Companies. In a third of these trusts the investments represent less than two percent of the assets of each fund. On the other hand, almost half of the trusts have in excess of ten percent of their astSets in own-company securities, usually common stock. Although the pension funds with own-company securities earn the same rate of investment return on the average as the funds that are not in- veSted this way, the variance of the rate earned is considerably \ 24Lewis D. and John J.Gi1bert, Twenty-Third Annual Report of ficfizkholder Activities at Corporation Meetings (New York: Lewis D. and John]. Gilbert, 1963), pp. 272-78. 120 greater for the former. This follows logically from the fact that the portfolios of these funds are not sufficiently diversified. Approximately one-sixth of all pension trusts have holdings in the common stock of their sponsoring companies. In about 40 percent of these trusts the holdings are small enough so as not to involve more than one percent of a company's total stock outstanding. In another 40 percent the holdings constitute from one to five per- cent control, while in practically all of the remaining cases there is less than ten percent ownership. This hardly seems like an excessive amount of voting power. But since these holdings are fated to grow, situations could result in which a management has the power to entrench itself through its pension fund. Because this happened to Sears, Roebuck and Company, it could happen to other companies, unless, like Sears, the trustees of the fundstake a Stand to provide for the pass-through of voting rights to the bene- ficial owners . CHAPTER VI THE INVESTMENT OF PRIVATE PENSION FUNDS IN THE STOCKS OF COMPETITOR, SUPPLIER, AND CUSTOMER COMPANIES A. INTRODUCTION Thus far the extent of corporate control by pension fund trustees has been analyzed from three perspectives: (1) individual- bank control of individual portfolio companies, (2) corporate influence by bank trustees .through their uniform voting behavior and their con- tacts with managements, and (3) trustee voting control of holdings of own-company stock. Now it is time to turn to the fourth type of control, namely, the investment of pension funds in the stocks of competitor, supplier, and customer companies. Just as the trustees Of a pension fund may decide to invest the fund in the stock of the employer company, so may they choose also to invest in the stock Of a related company. Whereas the investment may be a substantial One, there is the question of whether the trustees may end up with Control of the related company, thereby effecting some sort of corpo- rate integration . The extent to which corporate pension funds are invested in the stocks of other companies is a subject on which very 121 122 little has been written. Other than the four-page treatment, "Invest— ment in Other Companies for Control," in Robert Tilove's report,1 the subject has not been specifically examined in any of the litera- ture to date. This could be because there is no direct access to information showing pension fund holdings in other companies. The only holdings that must be reported under the Welfare and Pension Plans Disclosure Act are own-company holdings. Except for this, the pension funds are not legally required to reveal any of their hold— ings in specific companies under any Federal statute. The present chapter attempts to compensate for the absence of good data by examining the attitudes and policies of trustees toward acquiring related-company stock. In addition, a few cases are presented in which a company fund has been known to invest in another company's stock for the purpose of influence or control. Thus, from the prevailing trustee policies and the character of the Cases the problem of other-company control is approached. B. TRUSTEE POLICIES REGARDING INVESTMENT IN THE STOCKS OF RELATED COMPANIES Perhaps the best way to judge the extent of related-company stockholdings in pension funds is by examining the policies of the trustees responsible for the funds' investment. Although the trustees _k 1Robert Tilove, Pension Funds and Economic Freedom (New York: The Fund for the Republic, 1959), pp 66-69. 123 do not like to disclose their specific investment decisions, they are usually willing to divulge the general guidelines affecting actual decisions. In answering the questionnaire on corporate-trusteed pension funds, the bank trustees responded that they are opposed to making unduly large investments in the securities, obligations, or other property of the competitors, suppliers, or customers of the employers whom they serve in the trustee capacity. On the other hand, they indicated that they do not hesitate to make such investments if these investments are small and of high quality . The basic policy, they concurred, is to purchase securities on their investment merits and not on other considerations. Occasionally, the bank trustees are requested by clients to invest in stocks of other companies to an amount which the trustees deem excessive and improper. In these cases, the trustees attempt to resist their clients' requests. If the resistance is strong, the trust fund clients usually withdraw their requests. However, the Clients may threaten to take their business elsewhere, and in some instances they do. In his report, Robert Tilove describes this pattern of behavior: The major trust companies are opposed to investments of this sort, which are undertaken for the interest of the employer and not primarily for the benefit of the trust, just as they frown on "own-company" investments, except for the customary small participation in high-quality bonds or stocks. This attitude is more than simply an appropriate posture for the record. Several of the larger corporate trustees can quote cases when 124 they resisted pressure from employers to effect a transaction involving. . .investrnent in another company in which some influence was sought . They can cite specific instances in which important pension fund accounts have been withdrawn because of the trust company's refusal to agree to a transaction of this sort, accompanied perhaps by loss of the commercial account as well. Turning now to the individual-company boards of trustees of pension funds, it is much more difficult to judge the extent of related-company stockholdings on the basis of the broad investment policies followed by the trustees, for their numbers are larger and their policies are less well known. However, given the reluctance of the bank trustees to cater to self—dealing or self-serving requests from client-companies, these arrangements may be facilitated in funds trusteed directly by the employing companies. On this point, Mr. Tilove remarks that: Pension funds with portfolios directed by the company itself, or by an investment advisor or investment house, may of course be managed with as much integrity as any bank-managed trust fund. The only point is that their acts are freer: they are less liable to the checkrein of a corporate trustee, which is intensely concerned about its legal liability, its reputation in discharging fiduciary responsibilities, and, in the case of the large companies, its having at some point to stand up to public scrutiny. Although individual trustees may feel more free than corporate trListees to invest in related-company stock, it is noteworthy that Some trust agreements are set up to prohibit this kind of investment. \ 2Ibid., p. 67. 3Ibid. , p. 68. 125 This is usually done as a matter of good investment practice, but also as a measure to avoid any possible indictment of violating the antitrust laws: Some of the larger firms studied apparently have also deemed it necessary to insert prohibitions against the purchase of competitors' common stock and against excessive purchases of any company's securities in order to stay at peace with the Antitrust Divison of the U.S. Department of Justice. In the case of General Motors, for example, the governing trust agreements to the company's two main pension funds prohibit invest- ment in other companies to an amount where control could become an issue: . . In order to insure that the trustees and the corporation will avoid any possible charge that control or management responsibility is being acquired in any company through the pension funds, investments of each trustee in the voting stocks of any one company should not exceed three-fourths of 1 percent of any company's voting stock. A higher per- centage limitation of this type of investment may be estab- lished by any trustee or trustees, with the approval of the coordinator, to the extent that any other trustee or trustees do not wish to take full advantage of an investment, with their respective trust funds, of three-fourths of 1 percent in the voting stocks of any company and accept a lower per- centage limitation--provided that the investments of the com- bined trust funds in the voting stocks of any one company do not exceed 5 percent of such company's voting stock. Although a number of trust agreements contain restrictions to this effect, most are silent, permitting the trustees to invest in their \ 4James E. McNulty, Jr. , Decision and Influence Processes 1n\Private Pension Plans (Homewood, Illinois: Richard D. Irwin, 1961), p. 42. 5U.S., Congress, Senate, Committee on Labor and Public Welfare, Welfare and Pension Plans Investigation; Hearings, 84th Coho, lst Sess., 1955, p. 1137. 126 Idiscretion. In this. regard, the vast majority of trustees probably invest conscientiously for the exclusive benefit of the participants. However, there are a few known cases in which a pension fund, has been invested in the stock ,of a related company for the purpose of control. Unfortunately, the degree to which these cases are atypical is a question that cannot be answered given the. limited available data . C. CASES INVOLVING THE USE OF A PENSION FUND TO PROMOTE CORPORATE INTEGRATION Known instances in which a pension fundhas purchased stock in another company for control are few. Those which are known, however, embrace a considerable variety of forms by which pension fund investment may implement attempts to integrate corporate control. The cases discussed below entail many of these forms. The United Mine Workersfca§_e_._ The case of Pennington v. \United Mine Workergpf America6 is significant for it involves a Charge of conspiracy to monopolize the soft coal industry on the part of the UMW and the Trustees of the UMW Welfare and Retirement 1:"~lrid. Moreover, it involves the use of the Fund's money to finance a number of stock acquisitions in large coal mines, rail and. shipping c'3<>ricerns (coal carriers), electric power companies (coal consumers), \ 6Pennington v. United Mipe Workepr; of Amerigg, Trade Reg. Rep. (1963 Trade Cas.) 70972, at 78850,(CA-6 Dec; 18, 1963). 127 etc. , thereby effecting both horizontal and vertical concentration of c ontrol in the industry. The original action in the case was by John L. Lewis and the other Trustees of the Fund against James M. Pennington, et. a1. , owners of Phillips Brothers Coal Company, for nonpayment into the Fund of 40 cents per ton of coal produced. In retort to the complaint, Phillips Brothers filed a cross claim against the UMW, charging that the union and certain large coal producers had conspired in violation of Sections 1 and 2 of the Sherman Act to drive Phillips Brothers and other small producers out of business by means of the profit squeeze. Here it was contended that the union had used its Welfare and Retire- ment Fund, along with other union monies, to buy working control in the West Kentucky Coal Company and its subsidiary, Nashville Coal Company, and that coal from these producers had been dumped on the Spot coal market of TVA at constantly reduced prices without regard to profit, forcing Phillips Brothers out of this market and subsequently Out of business. The case was tried in the U.S. District Court for the Eastern District of Tennessee, Northern Division. On May 17, 1961, the quy found the union guilty as charged. The case was then appealed to the U.S. Court of Appeals for the Sixth Circuit. On December 18, 1963, the previous judgment was affirmed. According to Circuit Iuclge Miller, the jury's conclusion was not unreasonable in light of the union's financial dealings: 128 There was evidence showing that UMW acquired outright 85,400 shares, out of 857,264 shares outstanding, of the common stock, and the entire 50,000 shares of the preferred stock of West Kentucky Coal Company, one of the major coal companies, of which Nashville Coal Company was a subsidiary. The common stock was acquired at a price of about $25.00 per share. Later, the stock market quotation rose to about $40.00 a share and thereafter declined to about $11.00 per share. The preferred stock was acquired at about $50.00 per share. The preferred stock became voting stock when dividends were in arrears. Arrearage dates back to April 1, 1958. On June 30, 1960, it was $309,375.00. In addition to the stock owned outright, UMW held substantial blocks of the stock of the two companies as collateral on loans. Under the provisions of many of these notes, which the collateral secured, the borrower was relieved from personal liability upon surrender of the collateral. The notes were renewed annually. If the interest was not paid, usually because dividends were not paid‘on the stock held as collateral, it was added to the principal of the renewal note. If the stock held as collateral declined in value, there was no demand for additional collateral. One of these loans in the amount of $2,513,895.18, secured by 90,600 shares of common stock of West Kentucky Coal Company, was to Cyrus S. Eaton, Chairman of the Board of West Kentucky Coal Company and Nashville Coal Company. . . . This direct and indirect interest in the two coal companies totaled over $25,000,000.00. The shares of common stock of West Kentucky Coal Company owned outright and held as collateral totaled more than one-half of the outstanding common stock. It was not unreasonable for the jury to conclude from these facts that it was the purpose of the UMW to have a very material voice, if not the dominant one, in determining the policies and operations of these two major coal companies, which, as is hereinafter pointed out are charged with playing an important role in the alleged conspiracy. Not only did the evidence establish UMW control of the West Kentucky Coal Company and the Nashville Coal Company, but, aS Judge Miller pointed out, the facts confirmed price-cutting tactics on the part of these two large producers: 71bid., p. 78859. 129 Contracts for less than $10,000.00 were not subject to the wage determination of the Walsh-Healey Act. Phillips sold coal on the TVA spot market under contracts for less than $10,000.00, thus avoiding the wage determination of the Walsh-Healey Act. About the end of 1956 the price of coal on the spot market began to decline, which continued through 1957 and 1958. During 1956, 1957 and 1958 Pittsburg-Midway Coal Co., Peabody Coal Co., West Kentucky Coal Co. and Nashville Coal Co. , four of the large coal producing companies, made large offerings of tonnage on the TVA spot market at generally declining prices, with a number of such bids being successful. There was evidence that West Kentucky coal was sold extensively in the middle western market, most of it up and down the Mississippi Valley, that the middle western utility market had held up well, but that the distress coal which was for sale by West Kentucky Coal Co. and Nashville Coal Co. was for the most part thrown into the TVA market rather than the other market. There was also evidence that West Kentucky Coal Co. , Nashville Coal Co. and Peabody Coal Co. did not make an analysis of the profit on the coal sold to TVA, the President of Peabody Coal Co. stating that he was "afraid to look at some of them." There was also evidence that the heavy offerings of West Kentucky coal on the TVA spot mar- ket would have the effect of bearing down on the price heavily.8 Considering all of the evidence, Judge Miller upheld the jury's verdict of exclusion of Phillips Brothers Coal Company by the large producers in conspiracy with the UMW: We believe it was a reasonable deduction which the jury could make that the wage determination for the coal industry under the Walsh-Healey Act and the dumping of West Kentucky coal on the TVA spot market materially and adversely affected the operations of Phillips in the important TVA market, thus contributing to the elimination of the company as a competitor to the large coal pro- ducing companies operating in that area, including the West Kentucky Coal Company, in which the UMW had such a dominant interest.9 In addition to the holdings in the two coal-producing com- panies. the union was found to have purchased through its Retirement x 81bid., p. 78860. 9Ibid_, 130 and Welfare Fund and other monies the stocks of coal-carrying and coal-buying companies. As reported by Nathan G. Caldwell and Gene S. Graham, both of the Nashville Tennessean, the UMW purchased $16 million worth of the stock of one of the major coal-hauling rail- roads--the Chesapeake and Ohio.10 It invested $3.4 million in the stock of one of the major coal-hauling steamship lines-~American Coal Shipping Company-- for a 33 percent interest in it.11 And it advanced loans, mostly to Cyrus Eaton, secured by collateral stocks in Cleveland Electric Illuminating Company, Tampa Electric Company, Union Electric Company of Missouri, Illinois Central Railroad, and Tri-Continental Corporation (Eaton Investment Company).12 Finally, the UMW obtained working control of the National Bank of Washington, Washington, D.C.13 Through the bank, the union loaned money to large coal companies to mechanize their plants and equipment. The Sears, Roebuck and Compgricase. Chapter V stated that the Board of Trustees of the Sears, Roebuck and Company Employees Savings and Profit Sharing Pension Fund had for many Years followed the policy of buying large amounts of Sears common “ 0 Nathan G. Caldwell and Gene S. Graham, "The Strange Romance Between John L. Lewis and Cyrus Eaton," Harper's Magazine, December, 1961, p. 31. “Ibid. lzIbid. A recent study shows that the union owns 39 percent of the bank's outstanding shares. U.S. ,Congress, House, Select Commit- tee on Small Business, Chain Bankirgl Stockholder and jlgan Links of L00 Largest Member Banks, 87th Cong., Jan.3, 1963, p. 179. 131 stock for the Fund. On March 11, 1955, General R. E. Wood, then Chairman of the Fund's Board of Trustees, testified before the Senate Committee on Banking and Currency that this policy had had the effect of reducing the floating supply of Sears stock and of raising its price, and that, consequently, the Trustees had turned to buying the common stocks of some of Sears' supplier companies.14 It was learned that the Fund had purchased 30 percent of the outstanding shares of Whirlpool Corporation, supplier of Sears' washing machines.15 It was also learned that the Fund had a large holding in Sears' supplier of refrigerators—- Seeger Corporation.16 Finally, it was admitted that Sears had holdings, tho’ugh small, in other supplier companies, including Birtman Electric, American Rockwool Company, Graybar Company, and General Lane Products Company.17 However, accord- ing to General Wood, none of these holdings were sufficient to give Sears practical control over any of the companies in question.18 In July, 1955, a proposed merger to include Whirlpool, Seeger, and RCA's stove and air-conditioning division (Hamilton, Ohio) was ~__ 14U.S., Congress, Senate, Committee on Banking and Cur- rency, Stock Market Study, Hearings, 84th Cong., lst Sess., 1955 , p. 512. . 15Ibid. 161bid. 171b1d. * l 8 Ibid . 132 confirmed by Elisha Gray 11, President of Whirlpool. The merger, it was recognized, could place considerable voting control in the hands of Sears and RCA. However, under the merger plan, Sears and RCA agreed not to extend their combined interest in the new company beyond 50 percent, nor to vote more than 20 percent of the stock held, the rest to be voted by Gray.19 In September, 1955, Whirlpool-Seeger Corporation was born. Later the name was changed to Whirlpool Corporation. On December 31, 1962, the Sears group (including Sears, Roebuck and Company; Allstate Insurance Company; Allstate Fire Insurance Company; Sears, Roebuck and Company Employees Savings and Profit Sharing Pension Fund; Sears, Roebuck Foundation; and All— state Foundation) owned 25.9 percent of Whirlpool preferred and 18.9 percent. of Whirlpool common.20 These facts suggest that Sears made a conscientious effort not to get majority control of Whirlpool. On the other hand, the per— centage holdings mentioned are too large not to imply some degree of influence or control. As Sears owned large blocks of stock of both Whirlpool and Seeger, it is hardly unreasonable to infer that these hOldings may have played a key role in effecting the Whirlpool-Seeger merger. And with the present ownership, Sears undoubtedly has the \ ssh/Aid A0 WRQLLBMCt W'q C~{§CM\S 1.9.__Btusiness WeekJ July 23, 1955, p. 52. 20Moody's Industrial Manual, 1963 (New York: MoodY'S Investors Service, Inc., .1963), p. 85. 133 potential to influence Whirlpool's affairs. The steel companies case. In the Douglas Committee hear— ings in 1955, several references were made to a case in which a steel company, through investment of its pension fund, had acquired indirect voting control over a large block of stock of another steel company, with which the first company was seeking to merge.21 Though the names of the companies involved were not mentioned, the deduction from the references made is that the case concerned Bethle- hem Steel and Youngstown Sheet and Tube.22 The issue in the case was whether the pension fund in question and others like it could be used to promote mergers and other forms of horizontal integration. In this regard, several witnesses testified that tactics of this sort were possible. _Two caseiinvolvinlcgrlglomerate control. Thus far the discussion has dealt only with instances of pension fund investment in the stocks of suppliers, customers, and competitors, effecting Various forms of horizontal and vertical control. Pension funds have also been know, however, to acquire large blocks of stock in unre- lated companies, with conglomerate control resulting. One such case 21 U.S. , Congress, Senate, Committee on Labor and Public Welfare, Welfare and Pension Plans Investigationi Hearing , 84th Cong., lst Sess., 1955, pp. 894, 1051-52, 1135—36, 1167. 22 This deduction was confirmed by Paul J. Cotter, Chief Counsel for the Douglas Committee, in a verbal statement to the Writer in July, 1962. 134 was tha: of the Springfield Republican-Daily News Employees Benefi- cial Fund and the Springfield Union Employees Beneficial Fund. As reported in 1959, these two funds owned 79 percent of the stock in Atlas Tack Corporation, a manufacturer of tacks (and hardware; 70 per— cent of the stock in Exchange Buffet Corporation, a cafeteria chain (now bankrupt); and 87 percent of Longchamps, Inc. , a restaurant chain.23 Another case was that of General Tire and Rubber. In this instance the company purchased with its pension fund the Dan Lee Mutual Broadcasting System of California.24 Though in both cases the companies owned by the pension funds were small, this kind of control on a larger scale is possible. D. CONCLUSION The extent to which corporate pension funds are invested in other companies for control is a subject on which there is little in- formation. It is known, however, that bank trustees are against such maneuvers in the funds they manage. It is also known that some sponsoring companies prohibit the practice by inserting appropriate investment restrictions in the governing trust agreements. Never- theless, some cases of pension fund investment for control in _¥ 23"l‘he Startling Impact of Private Pension Funds," Business 34842.8, January 31, 1959, p. 99. 24Robert M. Ball for the Joint Committee on the Economic Report, Pensions in the United States (Washington: U.S. Govern- ment Printing Office. 1952), P- 50- 136 other companies, related or not, have been reported. In these cases the investments have led to various forms of corporate integration and to possible lessening of competition. In light of this, it would seem desirable to have some new means of information by which the actual extent of other-company control by pension funds might be determined. CHAPTER VII PUBLIC CONTROL OF PRIVATE PENSION FUNDS A. INTRODUCTION Thus far in the analysis it has been shown that the bank trustees of private pension funds are on the threshold of becoming the principal stockholders of corporations, with the potential voting power to determine their managements. It has also been shown that the pension funds of individual companies are frequently invested in own-company stock, where dominant voting control of the company by the fund is the occasional result. Furthermore, it has been demon- strated that corporate integration can be achieved by investing a company pension fund in a controlling block of the stock of a com- petitor, supplier, or customer company. However, little has been indicated with regard to the framework of law and public regulation by which the funds, in their accumulation of voting power, are affected. No attempt has been made to bring in governmental regulation as a mOderating force in the expansion of corporate voting control by pri- Vate pension funds. This chapter uncovers those Federal and state regulations that bear directly upon the operations of private pension funds. It 136 137 demonstrates that the funds are subject to statutory provisions rang- ing from simple disclosure of information to prohibition of certain practices. 8. FEDERAL REGULATION OF PRIVATE PENSION FUNDS The Welfare and Pension Plans Disclosure Act. The Welfare and Pension Plans Disclosure Act of 1958, as amended in 1962, pro- vides for the registration, reporting, and disclosure of employee wel- fare and pension plans.1 The Act applies to all private pension plans that cover more than 25 employees, except those administered by nonprofit organizations exempt from taxation under the provisions of section 501 (a) of the Internal Revenue Code of 1954.2 Each plan administrator who is covered is required to publish and submit to the Secretary‘of Labor two copies of a description of the plan and, if the plan covers 100 or more participants, two copies of an annual report of financial operations.3 The descriptions and annual reports are then made public information.4 The description of the plan is supposed to include: (1) the names and addresses of the person or persons acting as the admin- istrator. of the. plan, their official positions relating to the «plan, ‘ 1Public Law 85-836, as amended by Public Law 87-420. 21bid., sec. 4. 3"— 1bid,, sec. 8. 4 Ibid. , sec. 10. 138 their relations to the employer or to any union, and all offices, posi— tions, or employment held by them; (2) the name and address of the plan; (3) the type of administration of the plan; (4) the schedule of benefits under the plan; (5) the names, titles, and addresses of any trustees of the plan; (6) whether or not the plan is mentioned in a collective bargaining agreement; (7) copies of the plan, bargaining agreement, trust agreement, and other instruments under which the plan is operated; (8) the source of the financing of the plan and the names of all organizations that provide benefits; and (9) the procedures used in presenting benefit claims and the remedies available for any redress of claims.5 Required information in the annual report varies and depends upon whether the plan is funded or unfunded and, if funded, whether the plan is insured or noninsured. The annual report for a noninsured plan requires the following: (1) the amount of. employer and employee contributions to the fund; (2) the amount of benefits paid; (3) the number of employees covered; (4) a statement of assets and liabilities, Specifying the amounts of cash, Government bonds, non-Government bonds and debentures, common stocks, preferred stocks, common trust funds, real-estate loans and mortgages, operated real estate, other real estate, and other assets; (5) a statement of receipts and dis- bursements: (6) a statement of salaries, fees, and commissions \ 51pm, , sec. 5 139 charged to the plan and the purposes, amounts, and recipients of these money transactions; (7) the type and basis of funding, the actuarial assumptions used, and the amount of current and past serv- ice liabilities; (8) a list of all investments in the securities and properties of any party-in—interest of the plan, including the cost and present value of each party-in-interest investment; and (9) a list of all loans made to any party-in-interest of the plan, including the terms of each loan and the names and addresses of the borrowers.6 Each pension plan administrator who must submit a plan description has to maintain detailed records on all matters of which disclosure is required and to keep such records available for exam- 7 ination by the Secretary of Labor. In addition, each administrator, officer, or employee who handles pension plan monies must be bonded for an amount of‘ not less than ten percent of the funds handled, provided the bond shall amount to not less than $1,000 nor more 8 than $500,000. If there is cause to believe that investigation may disclose violations of the Act, the Secretary of Labor is empowered to make such investigations as he deems necessary.9 He may, in his dis- cretion, bring actions in the Federal courts to enjoin practices 6Ibid. , sec. 7 . 71bid., sec. 11. 81b1d., sec. 13. 91bid., sec. 9 (d). 140 which he considers unlawful under the Act.10 In turn, the Federal courts have jurisdiction, for cause shown, to restrain violations of the Act.11 Any person who is found to have willfully violated any pro- vision of the Act may be fined as much as $1,000, imprisoned up to six months, or both.12 The 1962 amendments to the United States Code make it a Federal offense for anyone to steal or embezzle from an employee benefit plan; to make false statements or to conceal facts in relation to any document required under the Act; or to offer, accept, or solicit any thing of value to influence the operations of an employee benefit plan.1?3 Any person found guilty of committing any of these crimes may be fined up to $10,000, imprisoned up to five years, or both.14 The Internal Revenue Code. Substantial tax advantages are available to pension funds that qualify in accordance with certain provisions of the Internal Revenue Code of 1954. First, employer contributions to qualified funds are deductible as an ordinary and 1012144, sec. 9 (f). 11 Ibid., sec. 9 (9). 12Ibid., sec. 9 (a). 13Added to Title 18, United States Code, by section 17 of the Welfare and Pension Plans Disclosure Act Amendments of 1962. 14Maximum imprisonment in the case of offer, acceptance, or solicitation to influence employee benefit plan operations is three rather than five years. 141 necessary business expense during the taxable year in which paid.15 Second, employer contributions are not taxable as employee income in the taxable year when paid but are taxable later when received by employees in the form of retirement benefits.16 Finally, the income of qualified pension trusts is exempt from income taxation in the year when earned and is taxable later when received by employees in the form of retirement benefits. 17 In other words, preferential tax treat— ment is given to income saved indirectly through pension funds over income saved directly from take-home wages and salaries. Conse- quently, participation in a qualified pension fund enables an employee to increase his life-time income after taxes at no extra cost to the employer. The Internal Revenue Service regulates pension fund operations only in the sense that the funds must qualify under sections 401 (a) and 503 of the Internal Revenue Code of 1954 to take advantage of the tax-exempt provisions listed above. The main requirements of these sections are: (1) The fund must be for the exclusive benefit of the employees or their beneficiaries.18 The cost of securities in the fund must not 15Internal Revenue Code of 1954, sec. 404 (a). 161bid,, secs. 402 and 403. 17 Ibid“ sec. 501 (a). 18Ibid., sec. 401 (a) (l). 142 exceed their fair market value at the time of purchase. The fund must provide a fair return on investment. It must be kept liquid enough to provide benefit payments in accordance with the terms of the plan. It must have a diversified portfolio. Own-company in- vestments must not be made unless their purpose is for the benefit of the employees or their beneficiaries. (2) The fund must be established on the basis of a defi- nite written plan.19 The written plan must contain all the provi- sions necessary for qualification under the Code. Noninsured funds must exist under valid trust agreements. Contracts for insured funds must be executed and issued. (3) The plan must be communicated to the employees either by furnishing each employee with a copy of the plan or by informing the employees that a copy of the plan is available for their inspection.20 (4) The plan must be a permanent and continuing program.21 A plan that is established during years of high tax rates and is aban- doned a few years later when profits fall does not qualify. Contri- butions must be substantial and recurring. (5) Diversion of any part of the principal or income of the fund, other than for the exclusive benefit of employees or their 191bid . ZOIbid . 21Ibid . 143 beneficiaries, must be impossible under the trust agreement.22 No part of the trust fund may revert to the employer, unless, after all employee claims have been paid, a surplus remains because of over- funding. (6) The plan must benefit employees in general and cover a 23 Excluding, seasonal, temporary, and sufficient proportion of them. part-time employees, the plan must cover 70 per cent or more of all employees, or at least 80 percent of all eligible employees (provided that 70 percent or more of all employees are eligible to benefit under the plan). In lieu of meeting these requirements, the plan must bene- fit a classification of employees, where such classification does not discriminate in favor of officers, stockholders, supervisors, or highly- compensated employees. (7) The plan must not discriminate in favor of officers, stockholders, supervisors, or highly-compensated employees with respect to contributions to the fund or benefits paid from it.24 (8) Finally, the fund must not be used for making: personal loans that are not adequately secured or are made at unrea- sonable rates of interest; payments of fees and commissions that ex- ceed the value of funding services rendered; or purchases or sales of securities at dollar values that represent more or less than adequate 22Ibid., sec. 401 (a) (2)- 231bid., sec. 401 (a) (3). 24Ib1d., sec. 401 (a) (4). 144 consideration . 2 5 In order to demonstrate compliance to the requirements listed above, a pension fund must file an annual information return with the Internal Revenue Service. The Service may examine and audit the in- formation return for accuracy. However, failure to qualify or to demonstrate compliance carries no penalty other than the loss of the tax privileges. The Labor Management Relations Act, Section 302 of the Labor Management Relations Act of 1947, as amended by the Labor Management Reporting and Disclosure Act of 1959, is designed to pre- vent labor unions and their officers from diverting to other uses funds established for the exclusive benefit of employees. Covering only union and jointly administered funds, the Act brings approximately 20 percent of all private pension plans under its purview.26 Except under certain conditions, the Act prohibits payments, loans, or deliveries of any thing of value to employees or employee organizations from employers or employer associations.27 Excepted, however, are employer payments into trust funds established for the exclusive benefit of employees and their beneficiaries, provided: (1) payments are held in trust for the purpose of paying welfare and 251bid,, sec. 503. 26Of the 28,100 pension plans that were registered with the Secretary of Labor on July 1, 1961, 5,470 were jointly administered and 230 were wholly union administered plans. 27Labor Management Relations Act of 1947, sec. 302. 145 pension benefits, (2) payments are made in accordance with specified and written agreements, (3) trust funds are administered by an equal representation of employee and employer personnel, (4) trust funds are audited annually, and (5) pension contributions are made to distinct pension trusts invested for no purpose other than providing benefits for retirement.28 Penal in nature, the Act provides that any person who will- fully violates any provision of section 302 is guilty of a misdemeanor and subject to a maximum fine of $10,000, a maximum imprisonment of one year, or both.29 The Act also provides that violations of section 302 are to be restrained under the jurisdiction of the District Courts of the United States.30 Federal supervision of corporate trustees, Practically all corporate trustees of private pension funds are subject to supervision by one or more of three agencies at the Federal level. The Comp- troller of the Currency is responsible for supervising the fiduciary activities of all national banks; the Federal Reserve Banks are em- powered to look after the trust affairs of their state member banks; and the Federal Deposit Insurance Corporation has the authority to 28Ibid., sec. 302 (c) (5). ”Ibid., sec. 302 (d). 30Ibid., sec. 302 (e). 146 examine any insured member bank. Only those corporate trustees that are neither national banks, members of the Federal Reserve system, nor belong to the Federal Deposit Insurance Corporation are free from Federal supervision. Fiduciaries in this category, if any, are never- theless regulated under the banking laws of the various states. The key regulatory tool of each of these Federal agencies is the bank examination, usually conducted on an annual basis and without advance notice. The examination is essential for checking up on corporate trustees, determining whether their operations conform to the provisions of ruling trust agreements, and verifying that they have not misused the statutory power given them. In examining the corporate trust departments of national banks, the Comptroller of the Currency checks to see that there have been no transgressions of the authorized fiduciary powers of national banks.31 Important mandates that the national banks are required to follow include: (1) All personnel engaged in trust activity must be adequately bonded.32 (2) Fiduciary records must be kept separate from other bank service records, and records of full information on each trust account These powers are subject to the provisions of Regulation 9 of the Comptroller of the Currency. 32Regulation 9 of the Comptroller of the Currency, sec. 9.7 (b) . 147 must be retained by the bank for examination.33 (3) Audits of the trust department must be made at least once a year and must ascertain whether the trust department has been ad- ministered in accordance with the law.34 (4) Fiduciaries must invest funds in accordance with the trust agreements creating the fiduciary relationships, or, in the absence of any written specifications, with local law.35 (5) Funds must not be invested in the securities of the fidu— ciary unless lawfully authorized.36 (6) Investments of each account must be kept separate from the assets of the fiduciary and the investments of all other accounts unless the investments are part of a lawful collective investment fund.37 (7) Funds may be invested collectively in a fund consisting entirely of assets of retirement benefit trusts, provided that each trust is exempt from taxation under the Internal Revenue Code.38 (8) No more than ten percent of the market value of a col- lective investment fund may be invested in the securities of any one firm or corporation unless the collective fund consists entirely of assets of retirement benefit trusts.39 h 331bid., sec. 9.8 (a). 341bid., sec. 9.9. 3SIbid., sec. 9.11 (a). 36 Ibid., sec. 9.12 (a). 371bid., sec. 9.13. 38Ibid., sec. 9.18 (a) (2). 39 Ibid., sec. 9.18 (b) (9) (ii). 148 The Federal Reserve Banks and the Federal Deposit Insurance Corporation in their examinations look for similar things. The former examine the trust operations of their state member banks, while the latter looks into the trust affairs of banks that are not members of the Federal Reserve System. C. STATE REGULATION OF PRIVATE PENSION FUNDS Every state has written into law some kind of regulation or supervision of the banks and life insurance companies located or doing business within its borders. As part of this business is the funding of pension plans, there may be considerable supervision of pension fund operations at the state level. Although the statutes on bank and life insurance company supervision are not uniform, i.e., some states are more stringent than others in this matter, there are certain broad phases of supervision that are common to all. These have been summarized by Edwin W. Patterson, Cardoza Professor Emeritus of Jurisprudence, Columbia University.40 Drawing completely from Professor Patterson's account, this section indicates the essential features of state regulation of private pension funds. 40Edwin W. Patterson, Legal Protection of Private Pension Expectations (Homewood, Illinois: Richard D. Irwin, 1960), pp. 114—215. 149 State regulation of comorate trustees. The more important aspects of state control of corporate trustees concern organizational requirements, investment requirements, auditing requirements, and administrative supervision by means of the bank examination. Of these, the latter three may directly affect the pension trust operations of banks. With regard to investment requirements, some states use "prudent man" rules. Other states have laws that specify the kinds of securities in which fiduciaries can invest. These securities are normally of top investment grade and are known as "legals." In New York and other important pension fund states prescribing "legal lists," a trustee is relieved from investment in "legals" if greater latitude is permitted in the ruling trust agreement. In this connection, most pension trust agreements provide that investment shall not be restricted to securities authorized for investment by trustees under state law. Corporate trustees nevertheless bear the "legals" in mind when they go to purchase securities since they may be held liable in case of investment loss due to negligence. The board of directors of a trust company is required in many states to conduct an annual audit of the assets and records of private trusts. This audit affects pension trust operations as it includes "the handling, counting, and checking of the securities in the pension funds and reconciliation with the records of receipts, disbursements, 150 41 By scrutinizing the activities of persons in and transactions." positions of trust, the internal audit helps to protect the safety of trust funds. Of course, the internal audit does not obviate the need for periodic examination by state officials. Trust company examinations by state officials, required in every state but Iowa, are normally con- ducted on an annual basis and without advance notice. In these examinations the assets of pension trusts are typically checked on a sampling basis. Here the physical presence of securites shown on the books are checked in order to determine whether a trust has been breached. However, state examination of trusts is not comprehensive in coverage. In 24 states, examination is not required of trusts that are already scrutinized by a Federal Reserve Bank or by the Federal Deposit Insurance Corporation. Since most state banks with trust departments are members of the Federal Reserve System, the F.D.I.C. , or both, the. number of trust companies subject to required state examination in the 24 states is quite small. In the remaining 26 states, official supervisors use the reports of Federal examiners and the internal audits by bank directors to supplement their own investi— gations . State regulation of life insurance carriers. The McCarran Act of 1945 leaves the task of regulating insurance carriers up to the “Ibid. , p. 181 . 151 several states.42 The several states, in turn, have produced a myriad of regulations affecting every phase of the insurance business. In this section attention is focused upon the gmeral powers of the states to regulate investments by life insurance companies in the pension business. .Each of the fifty states has laws which restrict the invest— ments of life insurance companies located or doing business within its borders. These laws are designed to provide investment security by specifying the classes of securities in which the insurers are per- mitted or forbidden to invest. Securities in the permissible invest- ment classes are known as "legals" for life insurance companies, and from these the companies' investmentportfolios are determined. Fixed-obligation securities are recognized as permissible in- vestments in every state. Public bonds may normally be purchased in unrestricted amounts. Corporate bonds and debentures may be freely purchased, provided these instruments qualify in accordance with such quality tests as the "not-in-default" test, the "ratio-of—debt- to-security" test, or the "earnings" test. Real-estate mortgages are permissible investments, although some upper limit of the "ratio-of- debt—to—security" test is almost always prescribed. Investments in commercial paper, receivers' and trustees' certificates, etc., subject 2Although Congress has consented to regulation of inter- state insurance by the several states, the commerce clause of the Constitution gives Congress the potential authority to regulate this business. 152 to certain quality tests, are also recognized as legitimate and author-— ized investments for life insurance companies. Equity securities, on the other hand, can not be purchased so freely. Preferred stocks and the capital stocks of financial insti- tutions are typically authorized investments only when the "no-default," "earnings," and other quality tests are met. Common stocks are sub- jected to quantity as well as quality tests. The most common quan— tity test places an upper limit on the total amount of common stock that an insurer can hold in his investment portfolio.43 This ranges from two percent of the insurer's assets in Utah to 25 percent in Nevada, with five percent typical in many states. A number of states also limit the amount an insurer may hold of the common stock of any single corporation, with one percent of the insurer's assets typifying the maximum. Quality tests vary from state to state, but generally include: (1) registration on a national stock exchange, (2) eligibility of all other securities of the issuing corporation for investment, and (3) an "earnings" test. Like the quantity tests, the quality test provisions are designed to prevent excessive risk-bearing. The power of the states to stipulate the legal investments of life insurance companies is reinforced by the power of the respective 43However, more states are liberalizing their insurance laws on common stock investments, especially with regard to the funding of pension plans. In 1962, for example, New York Insurance Law was amended to permit life insurance companies to establish and maintain separate accounts, with broad power to invest in common stocks, for funds received under group annuity contracts for qualified retirement plans. . 153 ~state supervisory officials. to examine the companies' affairs. The better- staffed insurance departments do. a thorough. job of scrutinizing insurers and their investment behavior. .Qtate disclosure lags, Disclosure of individual pension fund affairs to official state supervisors“ is required in Washington, New York, Wisconsin, California, Connecticut, and Massachusetts. The Washington disclosure law covers all pension funds except those trusteed by banks, provided that the banks are examined either by the state banking commissioner or a federal examiner; the New York law, only jointly administered funds: the Wisconsin law, all funds that receive $2,000 or more in annual contributions from Wisconsin employers or that pay benefits to 25 or more Wisconsin employees; the California and. Come cticut laws, only those jointly administered funds not trusteed by banks. subject to state or. Federal examination: and the Massachusetts law, all plans which claim membership of 25 or more employees of the state. The administrators of these covered pension plans are required, in each of the six states except Washington, to submit sworn regis- tration statements and essential plan documents to the official state 44In California, Connecticut, Washington, and Wisconsin, . the disclosure law is administered and enforced by each state's commissioner of insurance. In Massachusetts, the statute is admin— istered by the Commisioners of Banks, of Insurance, and of Labor and Industry. , In New York, the Superintendent of Banks has juris- diction over corporate—trusteed funds, while all other funds are subject to the supervision of the Superintendent of Insurance. 154 supervisors in charge of the disclosure laws. They also must file annual statements, disclosing information called for in the twenty- page uniform blank drafted by the Committee on Blanks of the National Association of Insurance Commissioners. While these annual state- ments are much more detailed and comprehensive than the annual finan- cial reports (D-2 statements) required under the Welfare and Pension Plans Disclosure Act, the scope of their coverage in terms of numbers of funds reporting is not nearly as great. In addition to the information received in accordance with the registration and reporting requirements, the official supervisor in each of the six states is empowered to examine the records of any fund covered under the law. In California, New York, Washington, and Wisconsin, each trust fund must be examined periodically;45 in Massachusetts, a court order is required to examine a fund;46 while in Connecticut, an examination may take place only if requested by a specified number of persons involved in the plan.47 45At least once in every three years in California; at least once in every five years in New York, Washington, and Wisconsin. 46The supervisory commissioners must apply to a judge of a probate court for an order to examine a fund. If good cause is shown, the judge may approve of the examination. 7Either 30 percent of the contributing employers, 30 per- cent of the participating unions, ten percent of the covered employees, 100 covered employees, a majority of employee trustees, or a ma- jority of employer trustees. 155 As far as substantive regulations are concerned, all six states except Washington expressly prohibit pension fund transactions that involve rebating, diversion of funds, or conflicts of interest. With the exceptions of Connecticut and Massachusetts, the disclosure statutes require that the records of each covered pension fund must be maintained in accordance with prescribed methods of accounting. Moreover, the laws in Massachusetts, California, and New York pro- vide that employer contributions to pension funds must be paid in accordance with the terms established under written agreements. Finally, in Massachusetts, New York, and Wisconsin, individual trustees as well as corporate trustees are responsible for pension funds in a fiduciary capacity. Enforcement provisions of the state disclosure laws are both civil and-penal in scope. The Connecticut,;New York, Massachusetts, Wisconsin, and California statutes provide for action to obtain redress for breaches of trust. In addition, the official supervisors of these states, with the exception of Massachusetts, are empowered to sue to obtain an injunction against any person who violates the law. With regard to penal enforcement, the California and Connecticut laws have no special provisions. In New York, any person who willfully violates any provision of the law is guilty of a misdemeanor. In Massachusetts, a maximum penalty of a $10,000 fine and imprisonment for five years may apply to any person who takes insurance rebates, swears falsely, keeps false records, embezzles, or diverts funds. Any person who 156 fails to comply with the disclosure law in Washington faces a maxi- mum fine of $10,000 and imprisonment up to one year. Finally, the maximum penalty for willful violation of the Wisconsin law is a fine of $5,000 and imprisonment for five years. D. CONCLUSION Private pension funds are by no means free from public con- trol. They are subject to various kinds of governmental regulations at both the state and Federal levels. The Welfare and Pension Plans Disclosure Act of 1958, along with the pension plan disclosure laws of six states, serve to keep the public informed of the administrative and financial operations of individual pension funds. There is also a great deal of governmental supervision of the corporate trustees and the insurers of the funds. Finally, the way in which the Federal income tax laws are set up has a limited influence on how the funds are managed. It has not been established, however, whether public regu- lation, as it stands today, is sufficient to keep pension fund voting power in line with the public interest. Given the findings of the previous chapters, one may wonder if there are truly adequate safe- guards to prevent the funds from using this power to stifle competition. This issue, which can no longer be avoided, is the, focus of atten— tion in the subsequent and final chapter. CHAPTER VIII CONCLUSION In a book review of Professor E. B. Cox's Trends in the Distribution of Stock Ownership, Dr. Simeon Hutner expressed well the lack of information on the holdings of private pension funds: What is not to be found in the material which Cox reviews is a thorough analysis of the trends in stock ownership as between individuals and institutions and the trends among the institutions themselves. (The Stock Exchange specifically excludes from its surveys the holdings of all nonindividual stockholders.) Those who work closely with securities are acutely aware of the encrmous impact on common stocks from the phenomenal growth of pension funds and their tendency to put increasing portions of their assets into stocks during the 1950's. Information on the holdings of pension funds, mutual funds, insurance companies and other institutional investors should be more valuable than data showing that individuals who own stock have better than average incomes, education, and liquid assets: that they tend to be older persons, and that they come from the professional, managerial, or entrepreneurial occu- pations.1 This thesis has attempted to answer the need for such information. Aggregate stockholdings of the funds have been anatomized to show the degree of corporate ownership and voting control by individual 1Simeon Hutner, Review of Trends in the Distribution of Stock Ownership, by E. B. Cox, American Economic Review, Vol. 54, March, 1964, p. 205. 157 158 pension fund trustees over individual portfolio companies. An effort has been made to see how close the trustees have come to the "pre- vailing control-stockholding position" foreseen in the 1950's by Professor Adolf A. Berle, Jr.2 Attention has been focused on testing the hypothesis that pension fund trustees do indeed possess sub- stantial voting power in many portfolio company cases and that the potential for control is sufficient to warrant serious public and legis- lative concern. Findings. The evidence is scanty, but what there is of it supports the contention that the extent of corporate ownership by private pension funds is sizable enough to constitute a potential con— trol problem. Specifically, the more important findings are these: (1) Unfortunately, information on current portfolio company holdings of bank trustees is unavailable. However, in 1955, 26 of the 65 largest bank and trust companies had through their pension and other trust accounts as much as five percent or more record ownership in one or more corporations. In 30 of the 99 cases in all, the hold- ings amounted to more than ten percent voting control. Since many of the holdings were in large, listed, and widely-held companies, the bank trustees had with as little as five or ten percent ownership considerable potential for control. Today, the potential is undoubtedly 2Adolf A. Berle, Jr., Economic Power and the Free Society (Santa Barbara, California: Center for the Study of Democratic Institutions, 1957), p. 12. 159 greater, though by how much it is hard to say. (2) Approximately one-sixth of all pension and deferred profit-sharing trusts have holdings in the common stock of their spon- soring companies. In about 40 percent of these trusts the holdings are small enough so as not to involve more than one percent of a company's total stock outstanding. In another 40 percent the hold- ings constitute from one to five percent control, while in most of the remaining cases there is less than ten percent ownership. Cases in which a pension fund owns a greater than 25 percent share of the employer's stock (e.g. , Seard are rare. Nevertheless, one out of every ten pension trusts holds at least one percent of its sponsor's stock. This much stock is sufficient in most cases to give to its holder some influence in corporate affairs. (3) The over-all extent to which pension funds are invested in the stocks of competitor, supplier, and customer companies for the purpose of control cannot be determined on the basis of available sources of information. Several instances have been uncovered, how— ever, in which a company or union has invested its pension trust in the stock of a related company to an extent sufficient to give the original party voting control of the company held. In some of these cases the voting control apparently led to corporate integration and a lessening of competition. (4) The degree of corporate ownership and voting control by pension funds and their trustees, though sizable, has not yet reached 160 its zenith. The funds' stockholdings are slated to grow. The trend is toward increased corporate ownership. In the past three years, the funds have purchased, net, more stock than all other investors combined. Moreover, the growth rate of demand for stock by the funds vastly exceeds the growth rate of supply of new stock issues. Thus, pension fund trustees are now only on the threshold of real- izing their full voting control potential. Megning and conseguencegof control, What does this voting control mean? What are its possible consequences? Will the pen- sion trustees, as record owners of corporations, exercise their legal prerogative to gain operating control of business enterprise? Unfor- tunately, these questions have no easy answers. This. thesis has dealt with voting control, not operating control. Yet the possible channelling of the former into the latter must be taken into consider- ation. The concentration of voting power in the hands of pension trustees could generate into a similar concentration of management power, a situation detrimental to the public welfare. The use of voting power for corporate influence on the trustees' part is tempered by (1) the distribution of ownership and voting control of individual stock issues, and (2) the behavior of the trustees in exercising voting rights. Suppose a trustee has the power to vote ten percent of a corporate stock issue. His ability to real- ize operating control would then depend upon who has voting power of the remaining shares. If this 90 percent is distributed minutely 161 among a large number of investors, the trustee is left with the poten— tial to determine management. If, on the other hand, the 90 percent is controlled by one party, the trustee is left (in the absence of cumulative voting) with no management-determining power. In this country, a wide distribution of stock ownership prevails, and, in a great many instances, a pension trustee would not need anything approaching majority ownership to determine management. Individual situations, however, vary considerably. Given sufficient voting power to determine one or more management positions, the pension fund trustee may or may not use that power to achieve operating control. Most pension trustees behave passively in exercising voting rights. They conduct them- selves as institutional investors, and they are aware of their fidu- ciary responsibility to beneficial owners. When they come into vot- ing control of a portfolio company, it is unintentional. Control is not sought; it is incidental. As passive owners, the trustees are apt to go along with management on matters put to a vote before stock- holders. Not all trustee-stockholders behave passively. A few enjoy control and actively pursue it. Those who do not, may in the future. Control may be sought through various means for various reasons. One, previously discussed, is the purchasing of own-company stock to ensure management entrenchment. Another, also discussed, is the purchasing of other-company stock to promote vertical, horizontal, 162 or conglomerate integration. There are still others. A bank trustee may influence a portfolio company to do business with the bank. Deposit accounts, loans, and other financial arrangements may result from the bank trustee—portfolio company relationship. Also, a trustee may succeed in naming a director to the board of a portfolio company in which some influence is sought. A portfolio company interlock may prove useful for a variety of purposes. In addition, a trustee may effect a change in a portfolio company's financial policy. Dividends may be altered to benefit the controlling trustee, or the trustee may profit by realigning the capital structure of the portfolio company. Still another advantage of portfolio company control is the possible use of voting power to arrange and profit from a merger, consolidation, or other combination of the companies held. These devices represent the use of power for profit at the public's expense. So far, only a few of the trustees with this power have exercised it for this purpose. As to the future, one can only speculate. Apparently, corporate voting control will become increas- ingly concentrated in the pension trusts. Hence, the trustees' potential to effect a concentration of operating control will probably increase. Polichrescriptions. Given that this country is committed to a policy of maintaining a competitive rather than a concentrated economic climate, the question is whether existing policy tools are adequate to prevent the possible stifling of competition through the 163 pension funding medium. This study (supports the belief that the law falls short .of providing full public protection and that some new policy prescriptions are in order. . The growth of the funds and their rapid accumulation of common stocks are inevitable. But an unhealthy concentration of economic power does not have to follow. Steps can be taken now to ensure against this potential danger. The first thing that needs to be done is to provide for a more comprehensive disclosure of information regarding the stock- holdings of pension fund trustees. If any one thing was clearly evident in the course of the analysis, it was that there is. an almost total lack of access to this kind of information. The trustees are extremely reluctant to divulge any of their holdings and regard such information as confidential. Moreover, with the exception of the "party-in-interest investments and loans" section of the Welfare and Pension Plans Disclosure Act, there is no federal law requiring dis- closure of pension fund holdings in portfolio companies. Without full and recurrent knowledge of the stockholdings of pension trustees, there: is no good way of gauging the potential problem of concentration of corporate voting control. Unlike the mutual funds and the life insurance companies, the pension trusts are not impelled to diversify their stock investments, making dis- closure all the more necessary. 3 Of course, this by itself will not 3The Investment Company Act of 1940 limits open-end investment company (mutual fund) holdings in any one portfolio 164 directly prevent any trustee who seeks control from concentrating his stock purchases in a single issue, but it will nevertheless go a long way, especially in conjunction with a more positive antitrust program. As stated by Mr. Justice Louis D. Brandeis more than 50 years ago: Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of dis- infectants; electric light the most efficient policeman.4 Specifically, it is recommended that all pension fund trustees, banks and individuals alike, be required to divulge to a federal agency, like the Securities and Exchange Commission, every holding in a portfolio company which exceeds a prescribed percentage of the company's outstanding voting shares. Three percent would probably suffice. In the case of bank holdings, the bank would be required to include all holdings of all pension and nonpension trust accounts that are registered in its own name and in the names of its nominees. In the case of individual boards of trustees of individual pension company to five percent of the total assets of the investment company and to ten percent of the outstanding voting shares of the portfolio company, for atleast 75 percent of the total assets of the investment company. For life insurance companies, diversification requirements are even more restrictive under the statutes of several states. How- ever, only a small minority of pension trust agreements mention any restrictions of this sort. Most of the agreements empower the trustee to invest in accordance with his full and unimpaired discretion. 4From Louis D. Brandeis's series of articles, "Other People's Money" (1913), cited by Paul L. Howell before the Subcommittee on Labor of the House Committee on Education and Labor, quoted in U.S., Congress, Senate, Committee on Labor and Public Welfare, To Amend the Welfare and Pension Plans Disclosure Act, 87th Cong. , lst Sess., 1961, p. 184. 165 funds, the trustee board would be required to include all holdings of which any member has full or partial voting control. The three per- cent level would be low enough to catch all important holdings and high enough so as not to be unduly burdensome and costly. Since the mutual funds and the life insurance companies are limited by law in the amount of voting shares they can accumulate in any one company, there seems to be no good reason to exclude the pension trusts from similar legislation. After all, the pension trusts purchase, net, more stock than all the mutual funds and in- surance companies combined. The philosophy of the Hughes legis- lation in New York State in the 1900's was to prevent life insurance companies from effecting through their purchases of common stock a concentration of corporate control. This was also the case in the Investment Companies Act of 1940 with regard to mutual funds. Today the pension trusts are even more advanced in the size of their stock- holdings than the insurance companies were in 1905 or the mutual funds in 1939. Yet there are no federal or state laws to prevent a pension trust from buying up voting control of a portfolio company. It is recommended that a three percent ceiling be set on the amount of stock that a pension trust can hold in any one portfolio company. This policy would safeguard the public against a concen- tration of voting power without unduly jeopardizing the pension trustee's freedom to invest. Three percent voting control of most corporations represents an ownership value far in excess of the total 166 value of assets of most pension trusts. Consequently, the policy would not represent compulsory diversification for the smaller trusts. The only funds that would be directly affected are a few deferred profit-sharing funds with large blocks of own-company stock and the funds that overtly seek control through self-dealing and self-serving measures. It is, of course, in these funds where the potential danger of a misuse of power lurks. It should be recognized that the policy would not obviate the disclosure recommendation prescribed above. The three percent owner- ship ceiling would apply to pension trusts while the three percent disclosure level would apply to pension trustees, and herein lies the difference. If anything, the two policy prescriptions are complementary and together should go a long way toward insuring a wide distribution of power. Ideally, the ultimate protective measure against excessive concentration of power should come from a rigorous application of the antitrust laws. The use of pension monies by pension trustees to effect corporate integration of the vertical, horizontal, and conglom- erate varieties should in all cases be construed as unnatural monop- olistic thrusts in violation of the law of antitrust, and the trustees who are responsible for such deeds should be held strictly, account- able under the law. So far, the Antitrust DiviSion of the Department of Justice has not taken any direct action against any pension fund trustee. While this is partially indicative of a general absence of 167 anticompetitive behavior on the trustees' part, there have been a few instances in which pension money has been ’used as leverage to prompt concentration of economic activity. Thus it is recommended that the Justice Department make itself aware of the problem and remain alert to violations. Finally, a strong anti-bank-merger policy is advocated. When two or more corporate trustees combine, there is a simultaneous combining of portfolio company voting power. Many large banks have merged in recent years and this undoubtedly has had a profound in- fluence in bringing about the high concentration of corporate voting 5 Unfortunately, this phenomenon. has not control by bank trustees. had a bearing in the Justice Department's decisions on merger pro- posals. It is felt that this is a mistake, and it is recommended that the Department consider trustee voting power in future bank merger decisions. A policy such as the one outlined above would prevent an excessive concentration of corporate voting power by pension fund trustees. A "do nothing" or a "wait and see" policy could possibly lead to the undoing of "competitive capitalism." The findings of this thesis indicate a sizable and growing concentration of corporate ownership and voting control by the funds and their trustees. Unless 5The seven largest New York City banks, for example, hold over half of the common stocks in all corporate-trusteed pension funds. In 1951, the seven banks were 14 in number. Merging with each other, only one of the original 14 banks managed to escape the merger movement. 168 it can be firmly demonstrated that this will not lead to a greater con- centration of control over all economic activity, preventive legislation should be enacted in the public interest. APPENDIX A DATA COMPILED ON EACH PLAN IN THE STRATIFIED RANDOM SAMPLE D-l (1) 1. Name of plan and address of its principal office 4. Group(s) of employees covered by the plan 5. Industry in which most of the participants are employed 6. Is the plan mentioned in a collective-bargaining agreement? 7. Party(ies) making contributions to the plan 8. A. Official name (or title) and address of plan administrator B. Is plan employer, joint employer-union, or wholly union administered ? C. Individual names and addresses of persons constituting the administrator; official position with respect to the plan; relationship to employer(s) or to union(s): and any other offices, position, or employment held 169 12. 170 D-l (2) A. Party maintaining records of plan participants B. Party determining eligibility of individual claimants for receipt of benefits C. Party processing claims for benefits under the plan D. Party making determination on appeals E. Party authorizing payment of benefits F. Party making payments to beneficiaries G. Party authorizing incurrence of expenses H. Party selecting carrier or service organization 1. Party selecting corporate trustee J. Party determining investment policy A. Summary of investment provisions as stated in the plan or bargaining agreement, trust agreement, contract, or other instrument under which the plan is operated 171 D-2 (3) Year ending Name of plan and address of its principal office Official name (or title) and address of plan administrator A. 1. Amount contributed to the plan during the period by employers 2. Amount contributed to the plan during the period by employees 3. Amount contributed to the plan during the period by other (specify) B. Number of employees covered by the plan during the year Amount of benefits paid or otherwise furnished by the plan either directly or through insurance during the year If plan is completely unfunded, total benefits paid under plan, average number of employees eligible for participation, and total benefits paid to retired employees for this and pre- ceding four years 172 D—2 (4) Exhibit A-l (Welfare and Pension Insurance Data) A. 1. Name of carrier or service or other organization 3. Data for period 4. Class of benefits provided and approximate number of persons Covered by each class of benefits 5. Total premium received 6. Total claims paid 7. Dividends or retroactive rate refunds paid 8 . Commissions paid 9. Administrative service or other fees paid B. Name and address of each recipient of commissions or fees; amount of commissions paid each recipient; amoung of fees paid each recipient; and purpose for which paid 173 D-Z Exhibit B-l (Summary Statement of Assets and Liabilities) 1. 2. 10. ll. 12. 13. 14. 15. 16. 17. 18. Cash a. Government obligations b . Nongovernment bonds c. Total bonds and debentures a . Preferred stocks b. Common stocks Common trusts Real estate loans and mortgages Operated real estate Other investment assets Accrued income receivable on investments Prepaid expenses Other assets Total assets Insurance and annuity premiums payable Reserve for unpaid claims (not covered by insurance) Accounts payable Accrued payrolls, taxes and other expenses Total liabilities a. Reserve for future benefits and expenses b. Total funds and reserves Total liabilities and funds (5) 174 D-2 (6) Exhibit B-2 (Summary Statement of Receipts and Disbursements) l. 10. 11. 12. 13. 14. 15. 16. a. Employer contributions b. Employees contributions c. Other (specify) contributions Interest, dividends, and other investment net income Gain (or loss) from disposal of assets, net Dividends and experience rating refunds from insurance companies Other receipts Total receipts Insurance and annuity premiums paid to insurance companies for participants benefits Benefits provided other than through insurance carriers or other service organizations a. Salaries b. Fees and commissions c. Interest d. Taxes e. Rent f. Other administrative expenses Other disbursements Total disbursements Excess (deficiency) of receipts over disbursements Fund balance at beginning of year Excess (deficiency) of receipts over disbursements Other increases or decreases in funds Fund balance end of year 175 D-2 (7) Schedule 1 (Salaries Paid and Charged to Plan) To whom paid Purpose for which paid Amount of Salary (1) (2) (3) Schedule 2 (Fees and Commission Paid and Charge to the Plan) To whom paid Purpose Commissions Fees (1) (2) (3) (4) 176 D-2 (8) Exhibit C (Party-In-Interest Investments and Loans) Tables A, Table C . Table D . B. All investments in securities and property of parties in interest, including identity of each security, mortgage, loan, or property; name of party in interest and relation- ship; cost of each investment; present value of each investment; and percentage of the total fund represented by each investment Fees and commissions incidental to the purchase or sale of all investments in securities or properties of party in interest, including name and address of recipient; purpose for which paid; and amount Loans made or outstanding to party in interest, showing name and address of debtor, party in interest relation- ship to fund, dates loans made and when due, interest rate, and any other terms and conditions of such loans; also face amount of each loan; amount outstanding at end of year; and nature of collateral held APPENDIX B PENSION PLANS IN THE STRATIPIED RANDOM SAMPLE Name of Plan 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. Abbott Laboratories Stock Retirement Plan Ace Glass Pension Plan Acme Tag Company Group Annuity Contract Plan Aetna Insurance Company Retirement Income Program Alabama By-Products Corporation Pension Fund Alabama Power Company Pension Plan Allegheny Ludlum Steel Corporation Group Annuity Plan Allis—Chalmers Retirement and Pension Plan Allis-Chalmers Salaried Employees' Retirement Plan Amalgamated Association of Street, Electric Railway and Motor Coach Employees Old Age and Disability Benefits Plan Amalgamated Lithographers of America Local 1 Pension Fund Amchem Products Profit Sharing Retirement Plan Amerace Corporation Pension and Severance Award Plan Amerada Petroleum Corporation Employees' Retirement Income Plan American Can Company Marathon Division Salaried Employees Retirement Plan American Sanitary Manufacturing Company Pension Trust American Viscose Corporation Retirement Plan Ames Trust and Savings Bank Retirement Plan Anchor Hocking Service Retirement Plan Archer-Daniels-Midland District No. 50 UMW Pension Plan Armstrong Rubber Company Deferred Profit Sharing Plan Automotive Supply Company Employees' Profit Sharing Plan Bakery and Confectionery Union and Industry National Pension Fund Bakery and Confectionery Workers Local No. 3 Pension Fund Bank of America Annuity Plan Barber-Colman Employees' Trust Barber Oil Corporation Retirement Income Plan Beaver-Gear Profit Sharing and Retirement Fund Beaverite Products Employees' Savings and Profit Sharing Retirement Plan 177 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 178 Beckett Paper Company Pension Trust Plan Bell and Howell Profit Sharing Retirement Trust Bendix Hourly Employees Pension Plan Boston Five Cents Saving Bank Pension Benefit Plan Braniff Airways Pilots' Retirement Plan Brewer-Titchener Corporation Employees'Saving and Profit- Sharing Retirement Plan Bucyrus-Erie Pension Plan Budd Company Executive and Administrative Employees' Retirement Plan Building Service Employees' Pension Trust Building Trades Milwaukee and Vicinity United Pension Trust Fund Butler Manufacturing Company Hourly Paid Factory Employees' Retirement Benefit Plan California Butchers' Pension Trust Fund California Packing Retirement Plan California Texas Oil Company Annuity Plan California-Western States Life Insurance Company Employee Retirement Program Calumet and Hecla Employees' Pension Trust Carlyle Johnson Machine Company Employees' Pension Trust Carolina Narrow Fabric Company Profit-Sharing Retirement Plan Carpenters of Western Washington Retirement Trust Carter Publications Supplemental Retirement Plan Champion Paper and Fibre Company Retirement and Dis- ability Plan Champion Spark Plug Company Salaried Pension Plan Champion Spark Plug Company Toledo Hourly Pension Plan Chemical Bank New York Trust Company Deferred Compen— sation Plan Cincinnati Gas and Electric Company Retirement Income Plan Clark Equipment Company Salaried Employees' Retirement Plan Clorox Company Salaried Employees' Profit Sharing Plan Clow, J. B., and Sons Salaried Employees' Retirement Income Plan Coca Cola Bottling Company of Ohio Employees' Retirement Plan Colorado Fuel and Iron Corporation Pension Plan Columbia Gas System Companies Retirement Income Plan Commodore Hotel Salaried Employees' Retirement Insurance Plan and Trust Continental Can Company Hourly Pension Plan Cooperative Grange League Federation Exchange Employees Retirement Plan 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 179 Corn Products Company Welfare Benefits Policy Craddock-Terry Company Quarter Century Club Crown Cork and Seal Company Pension Plan Crown Zellerbach Retirement Plan Curtiss-Wright Contributory Retirement Plan Curtiss-Wright Pension Plan Cutler-Hammer Employees'Pension Trust Dairy Craftsmen's Retirement Plan Dallas Federal Savings and Loan Profit Sharing Plan Daystrom Salaried Employees' Retirement Plan Detroit Stamping Company Hourly Employees Retirement Income Plan Distillers Company and Gordon's Dry Gin Company Salaried Employees' Funded Pension Plan Donnelley, R. H., Corporation Employees Retirement Plan Dorn's Transportation Employees' Profit Sharing and Retire- ment Fund Dravo Corporation Retirement Plan Dress Industry of New York Retirement Fund Dun and Bradstreet Employee Retirement Plan duPont de Nemours, E. I, , Pension and Retirement Plan Durham Manufacturing Company Profit Sharing Plan and Trust Eagle-Picher Company Chicago Vitreous Division Profit Sharing and Retirement Plan Eastern Airlines Retirement Income Plan Eastern Steel Barrel Corporation Employee Profit Sharing Plan Edie Profit Sharing Plan and Trust Electrical Industry Annuity Plan Elgin Corrugated Box Company Employees' Profit Sharing Trust Fairchild Stratos Corporation Retirement Benefit Plan Farmers Union Central Exchange Savings-Sharing Plan Farmers Union Grain Terminal Association Employees' Insurance and Retirement Plan Fetzer Broadcasting Company Profit Sharing Plan Fire Insurance Rating Organization of New Jersey Retirement Plan First National Bank of Chicago Bank Pension Fund Ford Motor Company General Retirement Plan Ford Motor Company UAW Retirement Plan Foy-Johnson Group Annuity Retirement Contract Garlock Profit Sharing Plan General Electric Pension Plan General Electric Savings and Security Program General Metal Products Company Pension Plan General Motors Hourly-Rate Employees Pension Plan 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134 135_ 135, 180 General Motors Salaried Employees' Retirement Program GT&E Service Corporation Employees' Pension Plan Geuder, Paeschke, and Frey Company Pension Plan Gottlieb and Associates Profit Sharing Trust Guarantee Reserve Life Insurance Company Deposit Admin- istration Group Plan Hammond, C. S. , and Company Profit Sharing and Retirement Trust Hartford Electric Light Company Retirement Plan Hood, H. P., and Sons Profit Sharing Trust Hotel and Industry Local 150 Pension Fund Illinois Power Company Retirement Income Plan Imperial Refineries Corporation Employees Profit Sharing Trust Independent Salt Company Pension Trust International Brotherhood of Teamsters, Chauffeurs, Warehouse- men and Helpers of America Central States, Southeast and Southwest Areas Pension Plan International Harvester CompanyPension Plan International Typographical Union Old Age Pension Plan Jewel Tea Company Retirement Estates Kansas City Power and Light Company Hourly-Rate Employees' Retirement Annuity Plan Kelco Company Employees' Benefit Plan and Trust Kimber Farms Employees' Profit Sharing Plan Kirk and Blum Manufacturing Company Office Employees Retirement Plan Krause Stamping and Manufacturing Company Profit Sharing Plan ' LaClede Steel Company Hourly Employees Pension Plan Lancaster County National Bank Pension Plan Lever Brothers Company Retirement Plan Libbey-Owens-Ford Glass Company Gas Department Salaried Employees Retirement Plan Liberty National Bank and Trust Company Retirement Plan Mandeville and King Company Profit Sharing Retirement Plan McLouth Steel Corporation Salaried Employees General Retirement Plan Mellon National Bank and Trust Company Employees' Retire- ment Plan . Merck and Company Salaried Employees' Retirement Plan Midland-Ross Corporation Salaried Employees' Pension Plan Milk Wagon Drivers' Union and Milk Dealers' Severance Retirement Fund Mississippi Valley Structural Steel Profit Sharing Plan Moody's Investors Service Employees Participation Trust Plan 181 137. Morrison-Quirk Grain Corporation Profit Sharing Plan 138. Mutual National Bank of Chicago Profit Sharing Plan 139. Myers, F. E. , and Brothers Company Supplemental Salaried Employees' Retirement Plan 140. National Bank of Detroit Employees' Retirement Plan 141. National Biscuit Company Pension Plan 142. National Distillers and Chemical Corporation Pension Plan 143. National Zinc Company Employees' Benefit Fund 144. Nebraska Farmer Company Salaried Employees Pension Trust 145. New York Telephone Company Pension, Disability Benefit and Death Benefit Plan 146. Norca Corporation Employees' Profit Sharing Trust 147. Norfolk County Trust Company Retirement Plan 148. Northern Indiana Public Service Company Pension Plan 149. Northern Trust Company of Chicago Officers' and Employees' Pension Trust 150. Ohio Oil Company Thrift Plan 151. Outboard Marine Corporation Employees' Retirement Plan 152. Owens-Corning Fiberglas Corporation Retirement Plan 153. P.H.S. Tobacco Company Employees'Retirement Plan 154. Peavey, F. H. , Salaried Employees' Group Retirement Plan 155. Pennsylvania Wholesale Drug Company Profit Sharing Plan 156. Phelps Dodge Day's-Pay Employees' Pension Plan 157. Philadelphia Ladies' Garment Industry Retirement Fund 158. Pillsbury's Retirement Annuity Plan 159. Pittsburgh Plate Glass Company Glass Division—-CIO Pension Plan 160. Plymouth Citrus Growers Association Pension Plan 161. Polaroid Corporation Profit-Sharing Retirement Plan 162. Producers Cotton Oil Company Pension Plan 163. Prudential Insurance Company Service Retirement Plan 164. Pullman Managerial Employees' Retirement Objective Policy 165. Pullman Trust and Savings Bank Retirement Plan 166. Rea and Derick Employees' Benefit Trust 167. Remington Rand Retirement Plan 168. Republic Aviation Corporation Pension Plan 169. Republic Steel Corporation Pension Plan 170. Revere Copper and Brass New Bedford Division Hourly Employees' Pension Plan 171. Rexall Drug Company Profit Sharing Retirement Trust 172. Ridgewood News and Associated Companies Pension Plan 173. Rulon, R. V., Salaried Employees' Retirement Plan 174. St. Clair Rubber Company and H. Scherer and Company Salaried Employees Retirement Plan 175. San Fernando Valley Federal Savings and Loan Profit Sharing and Retirement Plan 176. 177. 178. 179. 180. 181. 1820 183. 1840 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201. 202. 203. 204. 205. 206. 207. 208. 209. 182 Sandia Corporation Group Annuity Retirement Plan Schatz Manufacturing Company Employees' Trust Schering Corporation Employees' Profit-Sharing Incentive Plan Schnadig Corporation Profit Sharing Plan Sears, Roebuck and Company Employees' Savings and Profit Sharing Pension Fund Servicised Products Corporation Employees' Profit Sharing Trust Shamrock Oil and Gas Corporation Employees' Pension Trust and Death Benefit Plan Sheffield Corporation Exempt Employees Pension Plan Signode Steel Strapping Company Employees' Savings and Profit Sharing Trust Fund Simmons Company Retirement Plan Snap-Tite Production and Maintenance Employee Pension Plan Southern California Retail Clerk Unions and Food Employers Joint Pension Trust Fund. Southern New England Telephone Company Employees' Pension, Disability Benefit and Death Benefit Plan Southern Pacific Contributory Retirement Plan Southland Life Insurance Company Retirement Plan Southwestern Life Insurance Company Employees' Retirement Annuity Plan Sparks, J. W., and Company Profit Sharing Plan Sperry Rand Retirement Pension Plan Springs Cotton Mills Non-Salaried Employees' Profit Sharing Plan and Trust Standard Oil of California Annuity Plan Standard Oil of Indiana Retirement Plan Standard Oil of New Jersey Retirement Annuity Plan Stapleton Service Laundry Corporation Employee Retirement Plan Stokely-Van Camp Salaried Employees' Past Service Retirement Plan Studebaker Corporation UAW-AFL-CIO Pension Plan Teamsters Joint Council No. 43 and Affiliated Local Unions Retirement Plan Texaco Group Life Insurance and Pension Plan Texas Life Insurance Company Employees Retirement Plan Thompson Ramo Wooldridge Bankers Plan Thompson Ramo Wooldridge Supplementary Retirement Income Plan Trans World Airlines Retirement Plan Trucking Employees of North Jersey Welfare Fund Pension Account Union Furniture Company Profit Sharing and Retirement Plan United Air Lines Non-Union Employees' Fixed Benefit Retirement Income Plan 210. 211. 212. 213. 214. 215. 216. 217. 218. 219. 220. 221. 222. 223. 224. 225. 226. 227. 228. 229. 230. 231. 232. 183 United Aircraft Corporation Retirement-Income Plan United Biscuit Company Salaried and Certain Hourly-Paid Employees Retirement Plan United Brotherhood of Carpenters and Joiners General Office Employees'Retirement and Pension Plan United Insurance Company Savings and Profit Sharing Pension Fund United Life and Accident Insurance Company Employees' Retirement Plan United Parcel Services New York Retirement Plan United States Steel Employee Pension Benefit Plan Universal Leaf Tobacco Company Employee Pension Plan Utility Metal Products Retirement Plan Varian Associates Retirement Plan Warner-Lambert Pharmaceutical Company Retirement Plan Washington Gas Light Company Employees' Retirement Plan Westchester Teamsters Pension Fund Western Electric Company Employees' Pension, Disability Benefit and Death Benefit Plan Westinghouse Electric Corporation Pension Plan Wheeling Steel Corporation Pension Plan Whirlpool Corporation Savings and Profit Sharing Plan Wisconsin Electric Power Company Administrative Employees Retirement Plan Wisconsin Public Service Corporation Employees' Retirement Plan Wood, G. R., Pension Benefit Plan Wooster Brush Company Retirement Plan Yonkers Transit Corporation Pension Plan Zenith Radio Corporation Profit-Sharing Retirement Plan APPENDIX C QUESTIONNAIRE ON CORPORATE-TRUSTEED PENSION FUNDS Dear Trust Officer: This questionnaire is one part of a current research project on the organization of the private pension system in the United States. The project is designed to fulfill the requirements for a doctorate in economics at Michigan State University. The questions call only for numerical answers, opinions, and statements of general policy. Approximations can be entered where exact answers cannot be given. In order to maintain this written interview on a confidential basis, names of persons, companies, and banks (including your own) are not requested. Enclosed is a self-addressed, stamped envelope for your con- venience in returning the questionnaire. Your response will be greatly appreciated. Very truly yours, Dwayne Wrightsman Department of Economics Michigan State University 184 185 How many individual pension funds do you hold in trust? What is the total book value of the assets of all pension funds held by you as corporate trustee? $ What is the total book value of the assets of the five largest pension funds held by you as corporate trustee? $ 3 What is the total book value of the assets of all pension funds of which you, as corporate trustee, have full and complete investment discretion? 3 What is the total book value of the assets of all pension funds of which you, as corporate trustee, share investment discretion with employers or other pension plan administrators? $ What is the total book value of the assets of all pension funds of which investment decisions are, for practical purposes, directed by employers or other pension plan administrators? $ What proportion of pension trust agreements, between employers and yourself, direct, permit, or do not prohibit investments in the secur- ities, obligations, or other property of the employer, its subsidiaries, or affiliates? % What proportion of pension'funds, which you hold in trust, actually have investments in the securities, obligations, or other property of the employer, its subsidiaries, or affiliates? 9, O 10. 11. 12. 13. 14. 186 What general policy do you follow in making investments in the secur- ities, obligations, or other property of competitors, suppliers, or customers of employers of whom you serve as corporate trustee? What is your typical fee for rendering ordinary pension trust service? What is the average rate of investment return on the total book value of the assets of all pension funds held in trust by you? % What proportion of the total book value of the assets of all pension funds held in trust by you is represented by: (a) cash? % (b) U.S. Government obligations? % (c) corporate bonds? % (d) preferred stock? 1 % (e) common stock? % (f) real estate loans and mortgages? % (g) other assets? % Given the combined holdings of individual issues of common stock in your pension trust portfolios, how many instances are there where you hold more than five per cent of any one outstanding issue of common stock of a "listed" corporation? What proportion of pension trust agreements, between pension plan administrators and yourself, give common stock voting rights to the corporate trustee? % 187 15. What is your general policy on exercising voting rights of common stock held in trust in the event of a proxy contest? 16. It has been said that, some time in the future, corporate trustees of pension funds will face the uncomfortable choice of (l) accu- mulating legal control over much of American industry, or (2) los- ing out on profitable investments. What is your feeling on this matter? 17. What, if any, are your general comments concerning the subject of this questionnaire? CORPORATE TRUSTEES TO WHOM THE QUESTIONNAIRE WAS SENT APPENDIX D Name of Trustee Bank of America, San Francisco Bank of California, San Francisco Bank of New York Bankers Trust, New York Camden Trust Central National Bank of Cleveland Central Trust, Cincinnati Chase Manhattan Bank, New York Chemical Bank New York Trust . .. Citizens Fidelity Bank and Trust, Louisville Citizens National Bank, Los Angeles Cleveland Trust Connecticut Bank and Trust, Hartford Continental Illinois National Bank and Trust, Chicago Crocker-Anglo National Bank, San Francisco Detroit Bank and Trust Fidelity-Philadelphia Trust, Philadelphia Fidelity Union Trust, Newark First City National Bank of Houston First National Bank of Boston First National Bank of Chicago First National Bank in Dallas First National Bank of Oregon, Portland First National Bank in St. Louis First National City Bank, New York First Pennsylvania Banking and Trust, Philadelphia First Trust Company of St. Paul First Wisconsin National Bank of Milwaukee Franklin National Bank of Long Island, Mineola, N. Y. Girard Trust Corn Exchange Bank, Philadelphia Harris Trust and Savings Bank, Chicago Hartford National Bank and Trust Irving Trust, New York . . Lincoln-Rochester Trust, Rochester Manufacturers Hanover Trust, New York 188 36. 37. 38. 39. 40. 41. 42. 43. 44.,, 45. 46. 47. 48. 49.. 50. 51. 52. 53. 54. 55. 56. 57. 58., 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 189 Manufacturers National Bank of Detroit Marine Midland Trust of New York Marine Trust of Western New York, Buffalo Meadow Brook National Bank, West Hempstead, N. Mellon National Bank and Trust, Pittsburgh Mercantile-Safe Deposit and Trust, Baltimore Mercantile Trust, St. Louis Morgan Guaranty Trust, New York National Bank of Commerce, Seattle National Bank of Detroit National City Bank of Cleveland Northern Trust, Chicago Northwestern National Bank of Minneapolis Old Colony Trust, Boston Philadelphia National Bank Pittsburgh National Bank Provident Tradesmens Bank and Trust, Philadelphia Republic National Bank of Dallas Rhode Island Hospital Trust, Providence . 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