CORPORATE DISCLOSURE MONDAY, MAY 20, 1974 U.S. SENATE, SUBCOMMITTEE ON BUDGETING, MANAGEMENT, ON INTERGOVERNMENTAL RELATIONS, The subcommittees met at 10 a.m., pursuant to recess, in room 3302, Dirksen Senate Office Building, Hon. Lee Metcalf (chairman of the Subcommittee on Budgeting, Management, and Expenditures) presiding. Present: Senator Metcalf. Also present: Vic Reinemer, staff director; E. Winslow Turner, chief counsel; Jeanne McNaughton, chief clerk; Alan Chvotkin, professional staff member; and Lyle Ryter, minority counsel, of the Subcommittee on Budgeting, Management and Expenditures; and Alvin From, staff director; Jane S. Fenderson, counsel; and Lucinda T. Dennis, chief clerk, of the Subcommittee on Intergovernmental Relations. Senator METCALF. The subcommittees will be in order. This is a continuation of oversight hearings by the Subcommittee on Budgeting, Management, and Expenditures and Subcommittee on Intergovernmental Relations on corporate disclosure. This morning we are privileged and honored to have before us the Chairman of the Federal Trade Commission, Hon. Lewis A. Engman. While that chair is vacant, I understood you were to be accompanied by Mr. James T. Halverson of the Bureau of Competition. Mr. ENGMAN. He is here and he is available to answer questions, Senator. Senator METCALF. Mr. Engman, it is a privilege to have you before the subcommittees. I know you have a prepared statement filed in accordance with the rules of the committee and, therefore, go ahead on your own. STATEMENT OF HON. LEWIS A. ENGMAN, CHAIRMAN, FEDERAL TRADE COMMISSION, ACCOMPANIED BY JAMES T. HALVERSON, DIRECTOR, BUREAU OF COMPETITION Mr. ENGMAN. Thank you very much, Mr. Chairman. I will not read the entire statement, although I will highlight certain aspects of it. It is a great pleasure for me to be here. Senator METCALF. I won't repeat it any more today. All of the material in your statement will be printed as if read and all of the material that you ask to be incorporated in the record will be so incorporated, without objection. Mr. ENGMAN. Thank you, Mr. Chairman. It is a pleasure for me to be here today to discuss the corporate disclosure requirements of the Federal Trade Commission and more particularly the ongoing activities with respect to direct and indirect interlocks among the corporations subject to the Commission's jurisdiction. In this regard your invitation of May 2 noted that the subject of these hearings is "Federal Agency Collection of Information From Regulated Corporations." As the subcommittees are aware, of course, the jurisdiction of the FTC extends principally over that segment of our economy which is not regulated by the Government. The FTC has long been concerned with the anticompetitive potential of direct and indirect interlocking relationships. In its 1950 Report on Interlocking Directorates the Commission concluded that the prohibitions contained in section 8 of the Clayton Act were far too narrow in scope to reach many significant corporate interlationships. Although these deficiencies of section 8 of the Clayton Act still remain the Commission believes that section 5 of the Federal Trade Commission Act in appropriate circumstances is applicable. At the present time the Commission's Bureau of Competition is undertaking a number of projects involving direct and indirect interlocking directorates as well as other interlocking relationships. For example, the Bureau's energy study group is examining the socalled institutional interlock, that is, the situation whereby financial institutions, particularly commercial banks, are interlocked through common personnel and business relationships with commercial corporations. As a vertical interlock between borrower and lender the institutional interlock, when multiplied, could lead to indirect horizontal interlocks between competitors. Although the institutional interlock pattern may very well be prevalent in all capital-intensive industries, the focus of our current study is on the effects of institutional interlocks on America's energy industries. It could be particularly important at a time when energy companies appear to be competing for expansion capital to examine the effects of these interlocking relationships among energy companies, commercial banks and other financial institutions. Mr. Chairman, in addition to its consideration of the relationships between financial institutions and energy companies the Commission's staff also intends to examine the extent of direct interlocks between companies producing the same fuels and interlocks between companies producing different but competing fuels. This investigation could also lead to enforcement activity under either section 8 of the Clayton Act and where applicable section 5 of the Federal Trade Commission Act. Mr. Chairman, as my written statement indicates, section 6 and section 9 of the Federal Trade Commission Act given us in our judgment sufficient authority to seek to obtain information from corporations. These provisions will be utilized as required in connection with our energy study, but in addition under section 6 (b) of the Federal Trade Commission Act the Commission currently requires corporations to file special reports under the premerger notification program and the quarterly financial statistics program. The premerger notification program initated by the Commission in April of 1972 requires both parties to large corporate mergers to notify and to file special reports to the Commission concerning the details of such mergers. The quarterly financial statistics program instituted by the Commission in March of 1954 requires certain manufacturing corporations to submit to the Commission quarterly financial reports containing profits, sales, and assets for manufacturing industries. Further, as you know, Mr. Chairman, the Commission presently is preparing to implement the long debated and long awaited line-ofbusiness reporting program. Under this program, as it is to commence, the Nation's 500 largest manufacturing firms will be required to submit financial data for individual product categories which should substantially improve the accuracy and the extent of product information currently published in the quarterly financial reports. Aggregate data on cost items such as advertising and research as well as information on sales, profits, and assets will be published on a line-of-business basis without disclosing individual company data. I would particularly at this point, Mr. Chairman, like to thank you personally for the great effort which you have expended in our behalf as we have so far overcome various hurdles along the way of making this program a reality. At this point and if there is no objection from the members I would like to have the record reflect the Bureau of Economic staff report which was just made available last week dealing with a line-of-business reporting program and with some of the important aspects of that program which bear upon the subject we have under discussion today. Senator METCALF. Yes; without objection, it will be incorporated in the record at the end of your statement. Mr. ENGMAN. None of these special report programs that I have just referred to, however, require the disclosure of ownership debt or management affiliations in such form or in such detail as to enable the Commission to monitor and evaluate the implications and legality of interlocking relationships. So the Commission's staff as a result is presently working on a proposal to the Commission to require annual interlock and ownership reports pursuant to section 6(b) of the Federal Trade Commission Act. Mr. Chairman, at this point although my prepared statement indicates that we would focus on the energy field with respect to these reports, in fact the staff is proposing to design reporting requirements which would apply to all industries, energy or nonenergy industries, which are subject to our jurisdiction. I would like to have the statement corrected in that respect. See p. 912. Hopefully, submission of these annual reports would alleviate the deficiencies and present investigatory procedures, would place the burden of monitoring interlocks on the corporations themselves at minimal cost to each of them and would, in general, provide us with an efficient detailed, one-step investigatory procedure. More importantly, such a requirement could provide a method of consistent and continuing interlock enforcement by the Federal Trade Commission. The data which would be required in such reports would include stockholding and debtholding information, parent and subsidiary information, management affiliations, and geographical areas of operation. I want to stress at this time that this proposal is still being formulated and has not yet been presented to the Commission for final or appropriate action. But nevertheless the Commission does appreciate this opportunity to outline its activities in this very important field and I would be happy to answer questions which you might have at this time. [The prepared statement of Chairman Engman follows:] PREPARED STATEMENT OF LEWIS A. ENGMAN, CHAIRMAN, FEDERAL TRADE COMMISSION It is a pleasure, Mr. Chairman, for me to appear here today to discuss the corporate disclosure requirements of the Federal Trade Commission and, more particularly, the ongoing activities of the Commission with respect to direct and indirect interlocks among corporations subject to its jurisdiction. In this regard, your invitation of May 2, 1974, noted that the subject of these hearings is "Federal agency collection of information from regulated corporations." As the subcommittees are aware, of course, the jurisdiction of the Federal Trade Commission extends principally over that segment of our economy that is not regulated by Government. INTERLOCKS The Federal Trade Commission has long been concerned with the anticompetitive potential of direct and indirect interlocking relationships. In its 1950 Report on Interlocking Directorates, the Commission concluded that the prohibitions contained in section 8 of the Clayton Act were far too narrow in scope to reach many significant corporate interrelations. While the intent of that act was the prohibition of intimate corporate relationships exhibiting a strong potential for anticompetitive conduct, the act, as applied to commercial corporations, prohibits only direct horizontal interlocking directorates, that is, common directors shared by competing corporations. Because the Commission believed, on the basis of its study, that many other corporate interrelations contained the same kind of anticompetitive potential as the prohibited common director relationship, it recommended in its 1951 annual report that the Clayton Act be amended to prohibit the following relationships: (1) director interlocks formed by officers, directors, employees, or substantial stockholders of one corporation serving as directors of competing corporations; (2) director interlocks between potential competitors, that is, those firms which might be competitors, were it not for the existence of the interlock; (3) vertical director interlocks between customers and suppliers, particularly borrowers and lenders; and (4) indirect horizontal director interlocks between competing corporations formed by directors serving simultaneously on the boards of third corporations. Although these deficiencies of section 8 of the Clayton Act still remain, the Commission believes that section 5 of the Federal Trade Commission Act, in appropriate circumstances, is applicable. At the present time, the Commission's Bureau of Competition is undertaking a number of projects involving direct and indirect interlocking directorates as well as other interlocking relationships. For example, the Bureau's energy study group is examining the so-called "institutional interlock," that is the situation whereby financial institutions, particularly commercial banks, are interlocked through common personnel and business relationships with commercial corporations. As a vertical interlock between borrower and lender, the institutional interlock, when multiplied, may lead to indirect horizontal interlocks between competitors. Although the institutional interlock pattern may very well be prevalent in all capital-intensive industries, the focus of our study is on the effects of institutional interlocks on America's energy industries. It could be particularly important at a time when energy companies appear to be competing for expansion capital to examine the effects of interlocking relationships among energy companies, commercial banks and other financial institutions. One of the questions the staff is addressing is whether these interlocking relationships are used to establish preferential access to credit that may result in harm to competitors. 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. Apparent instances of these indirect horizontal interlocks are being studied by the staff in preparation of a report to the Congress as a part of the energy study and for the purpose of examining the question whether enforcement action should be recommended to the Commission. 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. Hopefully, the Commission's undertaking will provide the Congress and the American public with an analysis of the actual, as distinguished from the potential, effects of direct and indirect interlocking relationships. In addition to its consideration of the relationships between financial institutions and energy companies, the Commission's staff also intends to examine the extent of direct interlocks between companies pro |