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Max Weber
A recent study of concentration of corporate control says that 737 entities have accumulated 80% of the control of the 43,060 Transnational Corporations (TNCs) listed in the Orbis database. I describe the methodology of the authors here, and it appears to be a sensible contribution to the task of identifying control in the complex ownership structures that make up the economy. There are valid criticisms of the results, but I believe it provides evidence that we live in an Oligarchy.
A correspondent points out that the analysis gives credit for ownership, and thus control, to financial institutions that are not really in the ownership business. Mutual funds, and stock brokers holding stock for customers are two good examples. So are insurance companies, which invest in stocks as part of their business, and which may operate variable annuities, essentially mutual funds. These entities are not long-term holders, and have little interest in control of the companies whose stock they hold. Their most important vote is not with their proxies, but with their feet. It is easier and better to sell stocks than to try to control them. This is a serious problem for the paper. My correspondent is right that these kinds of companies are included in the database, and many of them rank in the top 50 holders. Even worse, The Depository Trust Company ranks 39th on the list. That is the company which keeps track of stocks held in street name. It has no voting rights, and thus no control over anything.
The authors of the control paper discuss this issue briefly:
In the literature on corporate control there is a debate on weather [sic] financial institutions really exert the control associated with their ownership shares. On the one hand, they are not supposed to seek an active involvement in the companies’ strategies. However, some works argue that institutional investors, including banks and mutual funds, do exert control to some extent.
Page 31 (cites omitted). That isn’t a satisfactory answer for stock held by mutual funds, let alone The Depository Trust Company and other brokerage account holdings, which only the shareholder can vote.
Stock ownership is far from the only indication of control of corporations. There are many other important factors, some of which are not open to study. These include friendship networks, interlocking membership on boards of directors, management independence from shareholders because of dispersed, disorganized and disenfranchised ownership, personal relationships among corporate managers, socialization of members of the economic elite and many others.
The authors of the control paper do not make the argument that they have proved anything about control in the sense of ability to vote their shares in corporate elections.
… [I]n this work, by control we mean how much economic value of companies a shareholder is able to influence. … [T]he shareholders with a high level of control are those potentially able to impose their decision on many high-value firms. The higher a shareholder’s control is, the higher its power to influence the final decision. In this sense, our notion of control can be related to Weber’s definition of “power”, i.e. the probability of an individual to be able to impose their will despite the opposition of the others.
Page 31 (cites omitted)*. It seems to me that this explanation is a somewhat better answer to the objection of my correspondent. Power in this sense is not just associated with ownership, but there is no doubt that ownership is a factor in determining power. Because ownership is not the only factor determining control, the paper does not correctly identify the entities and persons who have actual power. Furthermore, measuring control solely by ownership will give incorrect rankings of power.
That means that other entities should be substituted for those identified by the paper, or added to the list, and that the rankings are probably wrong. The actual number of entities with high levels of control could be larger or possibly smaller than the group identified in the paper. In either case, the number is miniscule. The authors say:
The interest of this ranking is not that it exposes unsuspected powerful players. Instead, it shows that many of the top actors belong to the core. This means that they do not carry out their business in isolation but, on the contrary, they are tied together in an extremely entangled web of control.
Page 32. This paper supports the proposition that the people who run a tiny number of entities control an immense amount of wealth, wealth in the form of TNCs, that can easily be used to influence political outcomes important to the concerns of the group. They are tied together through ownership, among other links. It is part of the answer to a question raised by another paper, how can there be an oligarchy inside a democracy?
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*Here is a discussion of Weber on power and dominance.
16 Comments
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Papers like these are great and all, vis-a-vis equity owners.
But how come these guys never talk about the bond holders? They are arguably even more important.
Just look at Greece and the Eurozone; the bond holders have more say over national government than their own citizens!
And post-2008, derivatives have even more say than bonds, with the AIG/Goldman fiasco being the poster child.
That is a good question. This paper could only be done because someone else collected the data on ownership of entities, which is used to calculate a control, and revenues, which are used to put a value entities and control. I am not aware of any similar database on bondholders, and certainly there is none on other interests in entities like swaps.
This is the first paper even to try to sort out control, and it has its problems. Still, I think it is a valuable first step.
I don’t know of any public database. But maybe Wikileaks has some of the info?
It wouldn’t need to be comprehensive. Although I think this study is v important, I’m *guessing* it’s incomplete as ownership in China (and elsewhere) is probably much murkier than the USA.
Actually… financial statements should be required to disclose bonds / derivative holdings… but then that wouldn’t necessarily provide a great deal of detail. And I doubt there’s an existing db that compiles the info.
This is important no doubt but I wonder how this correlates with Bill Black’s theory of “control fraud”? I have been reading “The Best Way to Rob a bank is to Own One” where Black has made a compelling case in my opinion for individuals like Charles Keating and others who bought S & L’s (with OPM of course) and used their ownership of the S & L’s to loot them and bribe politicians and regulators. Control frauds certainly explain the S & L collapse and it also seems to apply to the 2008 financial crisis. It seems to explain a lot about the lamprey-type hold the big financial institutions have on the government as they loot their victims.
Control of wealth is used to buy influence to create more power. In the 60′s corporate buyout facilities started competing to conglomerate corporate power by targeting weaker corporation. GE’s Immelt talks of this a corporate policy. Sell off the weaker arms and target sectors growing the glom.. Note 1,000 regional banks are being swallowed by larger institutions. K street was formed to make a revolving door elected official go to corporations after service in congress.
Medical industry is glommed. Just look at the financial sectors and Wall Street.
The march to corporate takeover of public policy has been on steroids as we were globalized into the New World Order. This was a plan by think tanks. Find those mission statements and you have the blueprint of the Oligarchy. No accident that homeland security was put in place to step on any OWS type push back. The corporate culture has no rules.
There must be a million illegal scam techniques to watch for. “Making a market” is the “house” advantage in addition to the fees. A tax on all trades would make deficit reduction through austerity unecessary.
I’ve been following your work on this, great stuff. It would be great to know just how much inbreeding(?) there is on these TNC boards.
If there isn’t a law that requires companies to report their bond purchases, that means there’s yet another failure of Dodd-Frank. Disclosure of bond holdings should be in the statements, but derivatives, no.
Bubba Clinton & Larry Summers did away with regulation of derivatives with the CFMA act. Even so, there is so much lying and fraud with financial statements, they are all worthless to look at anyway.
Most banks will report the gross notional value of things like swaps on their balance sheet, but it’s very murky, opaque, and generic.
The Fed & BIS keep some data on this as well; I’d imagine OCC does too. But again, it’s pretty crappy, non-specific data.
It seems like they intentionally keep that data opaque and hard to access, no?
I’m surprised some of this stuff can’t be pulled up on a Bloomberg terminal in a few minutes.
Standard & Poor’s breaks the market into 11 sectors. Two of these sectors, utilities and consumer staples, are said to be defensive sectors, while the rest tend to be more cyclical in nature. The other nine sectors are: transportation, technology, health care, financial, energy, consumer cyclicals, basic materials, capital goods, and communications services.
The vertical trust are being rebuilt look at communications, TV, Radio, Search engines all gloomed with pressure on regulatory and congress. The system works to stack the deck. In competition all that is needed is an edge to win. World bank and IMF and other organization implement Disaster Capitalism to take public assests. The tentacles of the Oligarchy are protected by US MIC empire building.
Opaque reporting is what I assume exists. But as you point out, it’s useless anyway.
Mark-to-market is imperfect. But with Obama (actually, I think it was the FASB??) rolling over and allowing his cronies to mark-to-The-Land-of-Make-Believe… I agree. Many financials are materially bogus.
You don’t need voting rights to have influence. The peons know who are the investors and how to not anger them.
I would be curious to see the study expanded from the 737 companies to the members of the board of directors/(board of directors employers). I think having employees of GS on say 158 of the 737 companies would be interesting.
I also think that Depository Trust Company may be an example of “soft” power, i.e. they don’t have any actual power, just perceived power.
After re-reading the post, I’m reminded of my study of the Public Utility Holding Company Act of 1935, which I did as a regulatory attorney for a public utilities commission a number of years ago. The Holding Company Act was repealed in 2005 after the SEC stopped enforcing it probably in 1952. But it included some interesting provisions about “control.” For example, the law defined “affiliated interest” as a 5% or more owner of shares or any “person”, broadly defined, that the SEC found, exercised an influence over the policies, management and financing of a public utility or holding company that reflected a lack of “arms length bargaining”. This was aimed at “investment bankers” which the Act was directed at indirectly and specifically the practice of enabling the over-issue of bonds that overleveraged the capital structures of utility systems.
The Holding Company Act was a product of Brandeis’s thinking on interlocking directors, which he discussed in his “Other People’s Money” about the Money Trust. Some of Brandeis’s ideas were incorporated into the Clayton Antitrust Act and some other laws. But these laws did not adopt Brandeis’s suggestion that the prohibition apply to any corporation with which a bank did business, in other words, establish that bankers of all kinds were fiduciaries and should be subject to a general law prohibiting conflicts of interest, these laws have never been effective.
It might surprise people to know that the bank where you have your checking and savings accounts, does not owe you any fiduciary duty about how they handle your money. It’s a purely contractual relationship.
Good point.
The study utilizes three methods of calculating control. One of them is the Relative Method, in which a block less than 50% is counted as controlling if the block is substantially larger than other blocks of stock. It gives similar results to the threshold model used for the calculations leading to the graphs in my prior post. In the threshold model, control is assigned to the 50% holder.