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company." He then states that "budgetary and capital allocation decisions were

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made at the corporate level and that process continues. The distinction that should be emphasized is that prior to the formation of the holding company, the ICC had regulatory control over the process, while now the holding company is beyond the control of the ICC. I believe this is one reason for the formation of the holding company and it is one of the reasons for concern about the longterm viability of the railroad.

3. Frequency of audits and variables considered:

The spokesmen for the General Accounting Office and the Interstate Commerce Commission seemed to agree that a closer monitoring of the railroad holding companies was appropriate. The remaining question is the frequency

of the analysis. The ICC is apparently changing from a complete audit every two or three years to an audit of one subsidiary every year.

Recognizing the staff limitations, I would favor a selective auditing of specific railroad holding companies every year while others could be audited every three years. Those holding companies that have railroad subsidiaries that are financially weak are the most likely candidates to diversify heavily and eventually injure the railroad subsidiary. I would therefore suggest complete annual audits of those holding companies with the weakest railroads and a complete audit of the other railroads every three years.

Mr. Taylor listed some of the variables that the ICC would investigate on page 6 of his follow-up material. I am confident the ICC is aware of the potential problems of railroad holding companies and, using their 1977 study as a guide, can choose the appropriate variables to monitor the performance of the railroad and the holding company.

FOOTNOTES

1Reese H. Taylor, Jr., Statement of Reese H. Taylor, Jr., Chairman, Interstate Commerce Commission Before the Senate Committee on the Judiciary on Rail Merger Policy, p. 12.

2 Reese H. Taylor, Jr., p. 11.

3Edward L. Sattler, Statement by Edward L. Sattler to the Senate Committee in the Judiciary Hearing in Rail Mergers and the Burlington Northern Holding Company, p. 5.

4Reese H. Taylor, Jr., P. 12.

5Richard M. Bressler, Statement of Richard M. Bressler, Chairman and Chief Executive Officer, Burlington Northern, Inc., Before the Agency Administration Subcommittee of the Senate Judiciary Committee, p. 7.

an appellate court, stand ready to defer to the Commission on findings of fact and, to a more limited extent, on conclusions of law. Here, however, the Commission made no specific factual findings or conclusions of law on this issue. We are unwilling to speculate as to the Commission's intentions, and therefore remand for further findings.

As

We intimate no opinion as to the extent or nature of the future proceedings necessary to resolve this issue. respondents have suggested, the Commission only recently concluded an extensive, two-year study of BN and its subsidiaries in the Frisco merger case. The Commission may be able to take administrative notice that BN's interests in the terminal companies do not constitute control so as to confer jurisdiction under $11343(a) (4). We in no way intend for the Commission to ignore what it already knows. We insist only that the Commission tell us what it knows, so that we can then, if another petition is filed by any party, decide whether the Commission's conclusion is a permissible

one.

In sum,

we hold that the Commission was within its rights in holding that the formation of the holding company did not violate the Frisco Merger Order, and that the union petitioners have no standing to assert a violation of BN's bond indentures. We also sustain, in general, the Commission's use of the single-system doctrine to define its authority under 49 U.S.C. §11343(a) (4). The order denying the unions' petition for investigation will be vacated, however, and the cause remanded to the Commission, for such further proceedings as may be necessary to determine whether BN's interests in terminal and switching companies take this case out of the single-system doctrine and give the Commission jurisdiction over the formation of the holding company.

It is so ordered.

A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.

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Rail-Based Holding Companies: A View of Some Indicators of Strategy, Management Change, and Financial Performance

INTRODUCTION

The formation of rail-based holding companies was a distinctive business phenomenon of the 1960s and early 1970s. By 1972, the population of such entities stood at sixteen, and encompassed a significant portion of the nation's Class I railroad mileage.1 This article focuses on a study of selected Cindicators of economic performance, management change, and corporate strategy in rail-based holding companies.' The study specifically sought to:

1. Identify the relationship between rates
of return on railroad assets and the de-
cision to diversify.

2. Examine the degree to which holding
companies headed by rail-oriented
presidents have engaged in non-rail di-
versification.

3. Examine rail-based holding company
performance subsequent to non-rail
diversification.

HOLDING COMPANY
DIVERSIFICATION PATTERNS
The degree of diversification into non-rail

Mr. Graham is Assistant Director of Executive Pro-
grams, College of Business Administration, The
Pennsylvania State University, University Park,
Pennsylvania 16802.

lines of business varies markedly among rail-based holding companies. Of the holding companies considered here, four have pursued diversification to the point where railway operating revenues represent 40 percent or less of total corporate (i.e., holding company) revenue. These firms, together with one which derives less than two-thirds of its revenue from rail operations, are classified in Table I as diversified firms. In contrast, rail revenues have continued to dominate the total revenues of other rail-based holding companies, i.e., those categorized as non-diversified in Table I. Let us now look at some possible causes of these differing patterns of diversification.

POOR INITIAL RAIL RETURNS Rumelt, a researcher in the field of management strategy, suggests that diversification reflects an effort to “escape" from inadequate earnings. Data presented in Table II show that, during the initial period of time focused upon in this study (19571960), inadequate returns were a reality for the five railroads which diversified (as categorized in Table 1). The five firms that remained non-diversified (as categorized in Table I) throughout the period of the study

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TRANSPORTATION JOURNAL

earned average returns on total assets which exceeded the returns on a "riskless" investment alternative. Indeed, as shown in Table II, the diversified firms, prior to their diversification, earned rates of return which were less than two-thirds of that which could have been earned from an alternative riskless investment (i.e., a 30-year U.S. Treasury bond).

CHANGES IN MANAGEMENT, PERSONNEL, AND CORPORATE STRATEGY

In a recent book on railroad management, D. Daryl Wyckoff suggests that railroad chief executive officers are rail-operations oriented, and are imbued with a perspective limited to the railroad industry, its customers, and it regulators.3 Raymond E. Miles and Charles C. Snow, researchers in the field of management strategy, contend that firms with strong industry orientations, such as railroads, have managements that are resisting changes in the competitive economic environment and defending their industry by attempting to maintain the status-quo. Such firms are dominated by an orientation which encourages striving for production efficiency and cost control at the expense of marketing, technological innovation, and scanning or monitoring of

4

Sumn..

the corporation's external environment for strategic opportunities. Wyckoff cites promotion from within, promotion on the basis of seniority, the dominance of the rail-operations-oriented career ladder, and the resulting long career tenure within rail operations as the backgrounds of typical rail chief executives. He suggests that the limited abilities of these executives in marketing, technological innovation, and environmental scanning result in part from such a career track.

If Wyckoff is correct, how were five of the railroads studied able to make such radical strategic changes? This study examined changes in the composition of the boards of directors for each holding company as compared to the composition of the board of directors for the corresponding railroad subsidiary. Dominance of holding-company boards and hence strategy by railroad operations-oriented executives was expected to be associated with little non-rail diversification. Where holding company boards include fewer common members with rail operations-oriented backgrounds, a more active strategy of non-rail diversification was expected. These expectations were confirmed by an examination of the degree of commonality of membership

Table I

Rail Revenue as a Percentage of Total Revenue by Holding Company
Average for 1973-76

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*Reduced its rail revenue contribution to zero through divestiture of its rail subsidiary, the Chicago & North Western Railway.

"Divested its railroad subsidiary after the completion of most work on this study.

"Significant at the .05 level.

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