amended to correct the citation to the rules and regulations of the FDIC, eff. July 24, 1963, HCAR 14916.

Amendment of paragraph (a) (4) (C) to permit a public utility subsidiary to have as a director or officer a person affiliated with a commercial bank whose principal office is located in the service area of an associate public-utility company, provided that the service areas of both such companies and contiguous and located entirely within the same State. Issued and effective June 7, 1966, HCAR 15495.

Mr. TURNER. Mr. Chairman, I would like to ask permission of the committee to have placed in the record my description of the Primary and Secondary Director Interlock chart which has been presented for this hearing this morning as well as the chart. I will have a couple of questions on it. But I would like my summary and description of the chart to be placed in the record as if read.

Senator METCALF. Yes. Without objection it will be so received. [The documents referred to follow:]

STATEMENT OF E. WINSLOW TURNER, CHIEF COUNSEL, SUBCOMMITTEE ON BUDGETING, MANAGEMENT AND EXPENDITURES, ON SUBMITTING THE CHART RE PRIMARY AND SECONDARY INTERLOCKS OF THE FIRST NATIONAL BOSTON CORPORATION AT THE SUBCOMMITTEES' HEARING, AUGUST 14, 1974

1

INTRODUCTION

The chart which is displayed at this hearing describes selected primary and secondary director interlocks with the First National Boston Corporation the largest bank holding company in New England and the 17th largest in the Nation. FNBC wholly owns the First National Bank of Boston, the largest bank in Boston and in New England.

The purpose of the chart is to show potential lines of control and influence over financial and corporate policies of major New England companies and financial institutions through a concentration of interlocking directorships on the board of the bank and on the boards of financial institutions and corporations with which the bank is interlocked.

This chart, entitled Primary and Secondary Interlocks, First National Boston Corporation, was prepared by the Subcommittee on Budgeting, Management, and Expenditures staff from material and information compiled by the Economics Division, Congressional Research Service of the Library of Congress, from public reports on file at the Federal Reserve Board, and from private sources, such as Standard and Poor's Directory and Who's Who in Finance and Industry. It is important to note here that the latest compiled public and private information was used for reference, but that changes constantly occur with respect to director interlocks. Thus without a system for updating existing directorships daily-a system which we do not believe exists-it would be impossible to obtain a completely accurate and up-to-date director interlock identification. However, we believe that this chart is more than substantially accurate.

1 See p. 174.

THE PRIMARY INTERLOCKS

At the center of the chart, we have the board of director table of the First National Boston Corporation (large type). Surrounding that table in medium-size type, we have the names of selected New England companies which are represented on the FNBC board. The numbers beside each company indicate the number of times that company is represented by a director. That is, eight board members of Liberty Mutual are on the board of FNBC; three board members of Boston. Edison are on it; three from John Hancock; et cetera. Stated another way, FNBC is represented eight times on Liberty Mutual's board through its directors; three times on Boston Edison; and three times on John Hancock.

Now each such representation involves a separate director. Many of FNBC's directors serve on several boards of the companies identified on the chart. For instance, Frank L. Farwell is president and director of Liberty Mutual and sits on the board of Boston Edison, Arkwright Boston, and United Shoe, as well as FNBC. Thus Mr. Farwell-as a director-represents four of the primary interlocked companies on the chart, and, as a director of FNBC represents that bank holding company on each of those four companies.

For further clarification of these primary or direct personal interlocks, I attach to my statement a copy of exhibit B of form Y-6, Federal Reserve Board, which is the annual report of FNBC,1 certified as of 1 April, 1974, containing the name of each director of FNBC; his position with the holding company; his position with the bank or other subsidiaries; his connections with other business organizations; and his principal occupation. The primary interlock information on this chart was developed principally from this Federal Reserve Board document.

THE SECONDARY INTERLOCKS

The same procedure of listing the names of companies and the number of times they were represented was followed with respect to the secondary or indirect interlocks.

For instance, on the board of Liberty Mutual-which is directly. interlocked with FNBC eight times-we found the Shawmut Association (bank holding company) or the Shawmut Bank represented four times; Boston Edison represented five times; New England Telephone, three times. Two other large insurance companies-John Hancock and New England Mutual-were each represented twice. Such representation obviously involves some directors who also sit on the board of FNBC, but these are only a part of the total picture. Therefore, it was necessary to go to Standard and Poor's and other publications first to examine the latest list of officers and directors of the primary interlock-Liberty Mutual-and, second, to identify each business organization with which such officer or director was affiliated as a director. This identification was plotted on a huge working chart which is located in the subcommittee office. The names of each director interlocked with the primary (FNBC) interlocked company are on this chart and available for public inspection.

See Appendix G-15, p. 902.

37-733-74 pt. 3 12

The difficulty which staff had in developing the secondary interlocks may be of interest to the members of the subcommittees. We were unable to find a governmental source which required a full reporting of other business connections of directors on the public utilities, insurance companies, industrials or other companies which were represented on the FNBC board. We were assisted in part by the full disclosure required by the Federal Reserve Board with respect to a bank holding company. However, where a bank holding company is not involved, the only reliable way of tracing interlocking directorate information is manually through corporate reporting sources such as Standard and Poor's, Moody's, Who's Who, and corporate reports. This method is time consuming. Available data is incomplete and subject to error. The Securities and Exchange Commission has developed a computerized director identification system, but once the director's name gets into the system, it remains there even though he may have died or left the company.

Our laborious experience in identifying these secondary interlocks argues strongly for the development of a central reporting system, in which all officer and director affiliations with business organizations over a certain size are collected and kept up-to-date, available for instant analysis and public disclosure. In this way a more accurate picture of those who make corporate policy at local, State, regional, and national levels can be obtained.

EVALUATION OF CHART

Chairman Metcalf has asked me to evaluate the information contained on the chart with respect to potential areas of economic and financial concentration and possible lines of power and influence over certain corporate policies in the New England region. He has suggested that such evaluation be made in the light of the remarks of Chairman Engman of the Federal Trade Commission before the subcommittees on May 20, 1974, in which Mr. Engman expressed special concern over the so-called institutional interlock; that is, where financial institutions, particularly commercial banks, are interlocked through common personnel and business relationships with commercial corporations.

Mr. Engman testified:

The anticompetitive potential of institutional interlocks may be intensified to the extent that many of the interlocked financial institutions may have interlocking personnel relationships with several competing companies. *** There is concern that representation of competitors on the same bank boards, for example, may lead to exchanges of information between competitors, collusive activity, and possible communities of interest strong enough to provide a substantial handicap to nonrepresented companies dependent upon those banks for essential services. In addition, it is not inconceivable that links between competing corporations created by the institutional interlock could provide a stimulus and a source of available capital for anticompetitive mergers, acquisitions, joint ventures, and other transfers and combinations of corporate power.

The First National Boston Corporation is an $8 billion bank holding company providing a full line of domestic and international banking, investment, leasing and other financial services. Its nearest rival in Boston and in the New England area is the Shawmut Association. which is one-third its size. FNBC's wholly-owned subsidiary, the

First National Bank of Boston has traditionally been at the center of financial activity in the region since its origin in 1784.

There is little doubt that the current director representation on FNBC's board as indicated by the chart presents precisely the anticompetitive potential and concern for possible abuse expressed by Chairman Engman.

First, of the primary or direct interlocks, FNBC has on its board the chairman, president and six other directors of the Liberty Mutual Insurance Company, a billion dollar casualty and life insurance combine, one of the largest in the nation. It has the chairman and two other directors of the John Hancock Mutual Insurance Company, fifth largest in the nation with $11.4 billion in admitted assets.

It has the president of Massachusetts Mutual Life Insurance Company, the 10th largest in the country; and two directors of the New England Mutual Life Insurance Company, the 12th largest. In addition, FNBC has on its board the president of Commercial Union Insurance Company (the Employers company), another large insurance combine, and a director of Arkwright-Boston Manufacturers Mutual Insurance Company.

These are substantial insurance companies handling a variety of lines. For instance, John Hancock, New England Mutual, Massachusetts Mutual, and to a much lesser extent, Liberty Mutual all provide ordinary, participating and group life insurance and health annuity programs. Liberty Mutual, Commercial Union, and Arkwright Boston are heavily involved in casualty, fire, marine, accident, and high risk lines. Liberty Mutual is making an increasing entry into life insurance. The companies are potential, if not direct competitors in the insurance business. They are also substantial customers of banks as depositors and investors. Not only do the insurance companies sit together on the FNBC board, but two FNBC directors (Roger C. Damon and Thomas J. Galligan, Jr.) each sit on the boards of Liberty Mutual and New England Mutual-direct competitors. The chairman of FNBC (Hill) sits on John Hancock and Liberty Mutual; and another FNBC director (Farwell) is on the boards of Arkwright Boston and Liberty Mutual, apparent direct competitors.

Some of these insurance companies may be extensively involved in pension and health plans for many commercial companies and other organizations in New England. FNBC is also involved in this highly competitive and profitable area of both service and investment. These insurance companies are lenders, handling corporate bonds, mortgage loans (personal and corporate) and policy loans. So is FNBC involved in personal and corporate lending. And both FNBC and the insurance companies are involved in residential and industrial development in New England.

Thus, the opportunity-the location-for dissemination by competitors and others of inside information relating to investments, financial conditions of companies and placement of loans is ever present on the FNBC board.

Second, there are direct interlocks between the bank holding company and major utilities in the New Enland region. The President of Boston Edison and two other Boston Edison directors are represented on the FNBC board. The second largest private electric utility in New England is also on the bank board: New England Electric System

(Robert Krause). Along with these energy companies is New England Telephone & Telegraph-the primary telephone supplier to the region-with two directors on the FNBC board.

These utilities are major customers of banks and other financial institutions in the region and perhaps nationally. The utilities not only obtain extensive loans both short term and long term, but they make substantial bank deposits. They use bank and other institutional services for the collection of revenues, the payments to suppliers, employees and shareholders, the management of pension funds, the maintenance of health programs, the purchase of insurance, the issuing of securities, and other financial and corporate needs. Such services should be obtained on a competitive basis in order to keep down costs and, in turn, utility rates to the consumer.

The fact that representatives of these major utilities sit at the board table of the region's largest bank corporation together with a heavy representation of directors from major insurance companies may provide an opportunity whereby these financial institutions can learn the particular financial needs of such utilities and obtain a favored position in meeting those needs to the detriment of other competitive financial institutions. We do not claim that such practice is in effect, merely that the potential for preferential access to credit and other anticompetitive activities is apparent from the representation on FNBC's board. Our inquiry discloses that all of the financial institutions represented on FNBC's board are in the corporate loan market. The extent to which they are involved in loans and other financial services to these major utilities would be a matter for further investigation.

Other companies represented on FNBC's board may be actual or potential suppliers and customers of the utilities.

Their close relationship could also provide special anticompetitive conditions with respect to similar companies not on the FNBC board. Raytheon, for instance, is a major supplier of electronic equipment. It owns a subsidiary which designs, engineers, and constructs both conventional and nuclear power facilities. Raytheon is also a substantial customer of the utilities. So are United Shoe, Gillette, Cabot Corp. and other companies directly interlocked on the FNBC board. Cabot Corp. is, among other things, an energy company. It is involved in the exploration, development, and production of natural gas, condensate, and crude oil, and in the selling of liquified natural gas in the Northeast. Cabot has two of its directors on the FNCB board.

Third, the chart indicates certain secondary or indirect interlocks with the FNBC which may also fall within the area of concern expressed by the Chairman of the Federal Trade Commission.

As previously mentioned, eight members of FNBC's board sit on the board of Liberty Mutual on which also sit four board members of the Shawmut Association (or its bank)-FNBC's leading bank competitor. Over on the John Hancock board three directors of FNBC sit down with three directors of Shawmut. On Boston Edison's board three FNBC directors sit with three Shawmut directors. In fact Shawmut appears to be secondarily interlocked with FNBC some 15 times with respect to the selected primary interlocking companies on the chart. Further study of the primary interlocks may disclose additional secondary interlocks.