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No recommendation

VII Interlocking of Directors-Railroads and Bankers Being divided in opinion concerning regulatory prohibitions affecting railroads and financial institutions, the members of the committee have united in no recommendation on the subject but suggest that members of the Chamber be asked to vote upon the following questions:

Questions for vote

(A) SHOULD INTERLOCKING OF OFFICERS AND DIRECTORS BETWEEN RAILROADS AND BANKERS WITH WHOM THEY HAVE FINANCIAL TRANSACTIONS BE ENTIRELY PROHIBITED? OR

(B) SHOULD THERE BE LEGISLATIVE PROHIBITION OF SUCH INTERLOCKING WITH A PROVISION THAT A FINDING OF THE INTERSTATE COMMERCE COMMISSION TO THE EFFECT THAT IN A PARTICULAR INSTANCE THERE WAS NO DETRIMENT TO THE PUBLIC INTEREST WOULD PREVENT ILLEGALITY IN THAT INSTANCE? OR

(C) SHOULD THERE BE LEGISLATION IN A FORM WHICH WOULD NOT PRONOUNCE ILLEGAL EXISTING SITUATIONS BUT WOULD AUTHORIZE THE INTERSTATE COMMERCE COMMISSION UPON FINDING A DETRIMENT TO THE PUBLIC INTEREST IN ANY INTERLOCKING TO ORDER THAT IT BE TERMINATED?

Opposing arguments

Against a prohibition

Upon the questions involved members of the committee representing different points of view regarding the advisability of a legislative prohibition affecting the relations in question have prepared statements.

In opposition to a prohibition it is said the dealings which bankers have with railroads usually take the form of purchase of securities, and in fact it is this particular form of transaction which is sought to be reached in the prohibition of bankers being directors of railroads. Dealings of railroads in the capacity of buyer or seller in practically every instance except the sale of securities are private transactions and are not necessarily known beyond the board of directors itself. But when a railroad sells its corporate securities, it is now required by most states to obtain the approval of a board of commissioners which investigates the purposes for which securities are to be issued, and in this way the matter becomes of public record. Furthermore, in some states the comniission goes so far as to fix a minimum price at which securities can be sold. A custom has thus been inaugurated and is rapidly spreading that dealings between a banker and a railroad in the purchase of securities have the supervision of public authorities. Indeed, the proposition contained in the bill for federal supervision and approval of the issuance of railroad securities looks to so complete a control over these transactions as to remove any dangers of "collusive" trading between a banker director and the rest of the board of a railroad, if such dangers exist at all.

Therefore, it is not antagonistic to the public interest that bankers should be permitted to have representation on the directorates of railroads. On the contrary, it is distinctly in the interest of railroads and vitally necessary to their welfare that bankers should not only be permitted but should be encouraged to take the responsibility of participating in the administration of properties the securities of which have been widely distributed among their clients. Notwithstanding a popular notion to the contrary, a banker's clientage has faith in his honesty and ability; otherwise, he has no clientage. A banker's clientage has been built up by ability, experience, and painstaking care and is just as definite an asset to him as is the good-will and reputation of any other business. A banker's clientage, generally speaking, buys what he recommends and to a large extent because he recommends it. Therefore,

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it is of value that the railroads should have access to such a clientage and if the volume of business in hand warrants it a railroad may have a duty to invite its banker to sit upon its board of directors, and there may be no less a duty on the part of the banker to accept; for railroad financing in these days has got away from the idea that stockholders of a company being short of money wish to borrow some for a while. A railroad today is "financed” by stock and bonds. The bonds in practice are never paid. Therefore, there is every reason in good business ethics that the people who have financed part of a given railroad by putting their money into bonds should not be excluded from representation upon its board in favor of those who have simply invested their money in another form of security. Efforts to exclude them are misguided and permit of dangerous manipulation in those cases where the controlling stockholders hold title only by the thinnest kind of an equity.

The exclusion of bankers from railroad directorates would tend to narrow the market for railroad securities. There never has been a time when railroads needed their markets for securities enlarged, strengthened, and encouraged more than at present. When one contemplates the great number of restrictions, prohibitions and burdens that have been heaped upon railroads he cannot help feeling that by banishing bankers from a position to give the utmost support they are able almost everything will have been done to prevent railroads from living under private ownership and it must follow that the Government will have to assume the burden.

For a prohibition

In advocacy of a prohibition affecting railroads and bankers with whom they deal it is said that every reason against permitting a banker who purchases or underwrites securities of a corporation to act as a director of that corporation applies as well in the case of railroads as in the case of private industrial corporations. The fundamental law that no man can serve two masters knows no exceptions. When a banker becomes director of a railroad corporation, it is just as true as when he becomes director of an industrial corporation that he occupies a position which prevents the transaction by which he acquires its corporate securities from being properly called a bargain. In neither case can there be real bargaining where the same man is on both sides of the trade. In either case there is the same strain on loyalty and the exercise of impartial judgment when the interests of the corporation on whose board the banker sits come in conflict with his private interests or with the interests of other corporations with which he has simllar relations.

In addition there are two special objections which have greater force in the case of railroads than in the case of private industrial corporations : (a) A railroad is a public service corporation. If a banker who sits on a railroad board abuses his trust either by using his position directly for his personal profit or by favoring some other railroad or industrial company which he also finances, the public pays the penalty in higher rates or in poor service. (b) Vast sums of money are involved in the issue of railroad securities. A very potent factor in creating the concentrated control of credit which exists has been the control exercised by bankers over railroads. One of the things which must be done in order to prevent the concentration of financial power in a few hands is the elimination of bankers from railroad directorates.

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It is argued that the presence of a banker on a railroad board is desirable in order that the railroad may have sound financial advice and that investors may be protected. The answer is that a banker can and will perform every legitimate service without being a director. Bankers who purchase issues of railroad securities will always require and receive the fullest information and assurances as to the financial condition of the railroad, and as to the purposes, character, and capacity of its management. Their advice as financial experts will be sought just as the advice of engineers is sought in regard to construction problems. The added influence which comes from a place on the board of directors is undesirable, among other reasons, because it is dangerously strong. The banker who holds the purse is apt to become the dominant influence. The recent experiences of the New Haven and Frisco railroads show that investors cannot safely rely on banker management for protection.

VIII

Interlocking of Directors-- Banks The Senate bill expressly exempts banks from the operation of its provisions Senate bill regarding interlocking of directors.

See page 28

House bill Concerning banks the House bill, however, has extended provisions, ex

See page 20 pressed with two limitations, one referring to amount of resources regardless of the location of the banks in question and the other affecting banks located in the same place. Under any circumstances, no banking institution operating under national laws may have as director, officer or employee a person who occupies such a position in any other banking institution operating under the same laws if either institution has deposits, capital, surplus, and undivided profits exceeding $2,500,000, nor have as director any person who is a director in any banking institution operating under State laws if the State institution has resources ex

Banks in same city ceeding $2,500,000. In cities of more than 100,000 inhabitants no bank operating under national laws may have as director, officer, or employee a person who holds such a position in any other banking institution located in the same place, whether it operates under national or State laws.

None of the provisions of the House bill, however, is to apply to niutual Mutual savings banks savings banks not having capital stock represented by shares, and there is an ex

Subsidiary State banks press provision that a bank operating under national laws may have the same directors, etc., as one institution which is organized under State laws and the entire capital stock of which is owned by stockholders in the parent bank.

There is also a proviso that those directors of Federal Reserve Banks who are Federal Reserve Banks elective by the member banks may be directors or officers in one member bank.

Upon the subject of interlocking of directors among banks the committee No recommendation of com. makes no recommendation, but upon the larger question which is involved it states the following questions on which to ask the members of the Chamber to vote:

A) SHOULD THE PROBLEMS INVOLVED IN PREVENTING CONCENTRATION Further investigation OF CREDIT BE REFERRED FOR INVESTIGATION AND RECOMMENDATION TO THE FEDERAL RESERVE BOARD OR SOME OTHER COMPETENT BODY? OR

B) SHOULD THESE PROBLEMS BE THE SUBJECT OF IMMEDIATE LEGISLA- Immediate legislation TION, FOR EXAMPLE, IN THE FORM OF A PROHIBITION OF INTERLOCKING OF OFFICERS OR DIRECTORS AMONG BANKS IF ANY BANK IN QUESTION IS OF A CERTAIN SIZE?

On the one hand it is of great importance to the business community that the control of credit should not be so concentrated that considerations extraneous to the elements which in normal course govern the granting or refusing of credit

mittee

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