The Pujo Committee, while failing to recommend that transactions in which a director has a private interest be prohibited, recognizes that a stockholder’s interest of more than a certain size may be as potent an instrument of influence as a direct personal interest; for it recommends that:
“Borrowings, directly or indirectly by ... any corporation of the stock of which he (a bank director) holds upwards of 10 per cent. from the bank of which he is such director, should only be permitted, on condition that notice shall have been given to his co-directors and that a full statement of the transaction shall be entered upon the minutes of the meeting at which such loan was authorized.”
As shown above, the particular provision for notice affords no protection to the public; but if it did, its application ought to be extended to lesser stockholdings. Indeed it is difficult to fix a limit so low that financial interest will not influence action. Certainly a stockholding interest of a single director, much smaller than 10 per cent., might be most effective in inducing favors. Mr. Morgan’s stockholdings in the American Bank Note Company was only three per cent. The $6,000,000 investment of J. P. Morgan & Co. in the National City Bank represented only 6 per cent. of the bank’s stock; and would undoubtedly have been effective, even if it had not been supplemented by the election of his son to the board of directors.
SPECIAL DISQUALIFICATIONS
The Stanley Committee, after investigation of the Steel Trust, concluded that the evils of interlocking directorates were so serious that representatives of certain industries which are largely dependent upon railroads should be absolutely prohibited from serving as railroad directors, officers or employees. It, therefore, proposed to disqualify as railroad director, officer or employee any person engaged in the business of manufacturing or selling railroad cars or locomotives, railroad rail or structural steel, or in mining and selling coal. The drastic Stanley bill, shows how great is the desire to do away with present abuses and to lessen the power of the Money Trust.
Directors, officers, and employees of banking institutions should, by a similar provision, be disqualified from acting as directors, officers or employees of life-insurance companies. The Armstrong investigation showed that life-insurance companies were in 1905 the most potent factor in financial concentration. Their power was exercised largely through the banks and trust companies which they controlled by stock ownership and their huge deposits. The Armstrong legislation directed life-insurance companies to sell their stocks. The Mutual Life and the Equitable did so in part. But the Morgan associates bought the stocks. And now, instead of the life-insurance companies controlling the banks and trust companies, the latter and the bankers control the life-insurance companies.
HOW THE PROHIBITION MAY BE LIMITED
The Money Trust cannot be destroyed unless all classes of corporations are included in the prohibition of interlocking directors and of transactions by corporations in which the management has a private interest. But it does not follow that the prohibition must apply to every corporation of each class. Certain exceptions are entirely consistent with merely protecting the public against the Money Trust; although protection of minority stockholders and business ethics demand that the rule prohibiting a corporation from making contracts in which a director has a private financial interest should be universal in its application. The number of corporations in the United States Dec. 31, 1912, was 305,336. Of these only 1610 have a capital of more than $5,000,000. Few corporations (other than banks) with a capital of less than $5,000,000 could appreciably affect general credit conditions either through their own operations or their affiliations. Corporations (other than banks) with capital resources of less than $5,000,000 might, therefore, be excluded from the scope of the statute for the present. The prohibition could also be limited so as not to apply to any industrial concern, regardless of the amount of capital and resources, doing only an intrastate business; as practically all large industrial corporations are engaged in interstate commerce. This would exclude some retail concerns and local jobbers and manufacturers not otherwise excluded from the operation of the act. Likewise banks and trust companies located in cities of less than 100,000 inhabitants might, if thought advisable, be excluded, for the present if their capital is less than $500,000, and their resources less than, say, $2,500,000. In larger cities even the smaller banking institutions should be subject to the law. Such exceptions should overcome any objection which might be raised that in some smaller cities, the prohibition of interlocking directorates would exclude from the bank directorates all the able business men of the community through fear of losing the opportunity of bank accommodations.
An exception should also be made, so as to permit interlocking directorates between a corporation and its proper subsidiaries. And the prohibition of transactions in which the management has a private interest should, of course, not apply to contracts, express or implied, for such services as are performed indiscriminately for the whole community by railroads and public service corporations, or for services, common to all customers, like the ordinary service of a bank for its depositors.