The American Keiretsu and Universal Banks: Investing, Voting and Sitting on Nonnancials Corporate Boards

Joo A. C. Santos a Research Department Federal Reserve Bank of New York 33 Liberty St. New York, NY 10045 E-mail: joao.santos@ny.frb.org

Adrienne S. Rumble Research Department Federal Reserve Bank of New York 33 Liberty St. New York, NY 10045 E-mail: adrienne.rumble@ny.frb.org. July 21, 2004

JEL classication: G21, G32, L22 Keywords: Boards of directors, bank directors, trust business, voting rights, cash rights.

The authors thank Andy Winton, Michael Schussler, Charles Himmelberg and seminar participants at the

Carlson School of Management of the University of Minnesota for useful comments. The views stated herein are those of the authors and are not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System.

The American Keiretsu and Universal Banks: Investing, Voting and Sitting on Nonnancials Corporate Boards

Abstract There has been a great deal of interest among researchers on the voting rights of nonnancial rms stock controlled by Japanese and German banks. In the United States, little attention has been devoted to this issue because banks traditionally have been barred from making equity investments in nonnancial rms for their own account. Despite this prohibition, American banks control important stakes of the voting rights of nonnancial rms. The source of these voting rights is the trust business. This paper investigates the equity investments and voting rights that American banks control through their trust business. Following the evidence that German banks use the proxy voting rights they control to place their representatives on the rms board of directors, we also study whether the voting rights American banks control through their trust business help explain their presence on the boards of nonnancial rms. We nd that, on average, the largest 100 American banks control 10% of the voting rights of S&P 500 nonnancial rms. We also nd that there are several nonnancial rms in the S&P 500 index in which the top banks altogether control more than 20% of their voting rights and several nonnancial rms in the country in which they control more than 60% of the rms voting rights. Our investigation into the presence of American bankers on the boards of nonnancial corporations shows that, ceteris paribus, bankers are more likely to join the board of a rm in which their bank controls a large voting stake through its trust business.

Introduction

Lawmakers in the United States often evoke concerns with bank stability and concentration of power as reasons for prohibiting banks from investing in the stock of nonnancial rms. The regulations they have introduced, however, have not barred banks from voting the stock of these rms.1 The source of these voting rights is the trust business. To the extent that bank trust departments act as portfolio managers, putting only their clients money at risk, contagion to the bank looks less likely. Similarly, duciary duties put the emphasis on prots, not on control. Yet the trust business, by enabling banks to vote the stock of nonnancial rms, gives them an opportunity to exercise control over these rms. This paper documents the voting rights American banks control through their trust business and studies whether this voting power increases their likelihood of getting a seat on the rms board of directors. There has been a great deal of interest among researchers on bank equity investments in nonnancial rms. This has given rise to a large body of empirical research, almost entirely related to Japan and Germany.2 Researchers have investigated the impact of these investments on the agency costs of debt (Sheard (1989), Prowse (1990), Flath (1993) and Chirinko and Elston (1996)); the availability and cost of bank funding (Hoshi, Kashyap and Scharfstein (1991), Elston (1993) and Weinstein and Yafeh (1998)); the rms performance (Cable (1985), Wenger and Kaserer (1997) and Gorton and Schmid (1998)); the rms ability to recover from nancial distress (Hoshi, Kashyap and Scharfstein (1991)); and the banks ability to nominate its representatives to the rms board of directors (Kaplan and Minton (1994), Kang and Shivdasani (1995), Franks and Mayer (1994), Edwards and Fischer (1994), Gorton and Schmid (1998) and Morck and Nakamura (1999)).3 In the United States, because banks in general have been barred from making equity investments in nonnancial rms for their own account, little attention has been devoted to these issues. One exception is James (1995) study showing that nancially distressed rms in which banks take an equity stake in satisfaction of loans previously contracted perform better
1 2

See Haubrich and Santos (2003a) for the regulations on banking and commerce throughout American history. This has also given rise to a large theoretical literature, which includes Pozdena (1991), Kim (1992), Rajan

(1992), John, John and Saunders (1994), Puri (1996), Berlin, John, and Saunders (1996), Boyd, Chang and Smith (1997), Santos (1999), Arping (2000) and Haubrich and Santos (2003b).
3

See Santos (1998) for an extensive review of this literature.

afterwards. Despite the prohibition on banks equity investments for their own account, US law allows banks to oer trust business and to vote the stock of rms they hold in their trust departments. The trust business, like proxy voting in Germany, therefore unbundles the control rights from the residual cashow rights of nonnancial rms stock and places the former rights under bank control.4 This implication of the trust business is important because there is value in the votes that German banks control which do not have cashow rights attached.5 Gorton and Schmid (1998), for example, nd that German banks use this source of voting power to elect their representatives to the boards of rms.6 Despite American banks extensive control of rms voting rights through their trust business, to date little attention has been devoted to this issue. Berle (1959), for example, noted the importance of the separation of ownership and control introduced by duciaries, but he did not link the voting power of trust business to banks. Prowse (1990) acknowledged this link but argued that banks could not use voting rights of the shares they held as trustees to monitor rms because even when they [were] free to vote them, they [were] required by law to vote them in the interest of the benecial owners. Roe (1990) also noted that trust departments were banks remaining direct link to equity, but this was not an important source of power because banks could not have signicant equity stakes in rms through their trust departments.7 Soldofsky (1971), however, had a dierent view. He argued that the power of banks was augmented strongly by their trust business. He proposed to move the voting function from the bank to an independent organization like a Stockholders Voting Council
4

German banks, besides voting the stock they own, do proxy voting, that is, vote the stock that investors

deposit with them and give them voting authority over.

5

The trust business and proxy voting also introduce a deviation from the one-share-one-vote principle of

ecient corporate governance arrangements (Grossman and Hart 1988 and Harris and Raviv 1988). See Bebchuk, Kreekman and Triantis (1999) for a characterization of other arrangements, like dual voting classes and pyramids, that also introduce a similar deviation.
6

Cable (1985) shows that bank voting control and bank representation on a rms supervisory board are both

signicantly correlated with the rms performance, but he does not separate proxy voting from voting rights attached to the banks own equity shares.
7

The regulations that imposed the most restrictive limits on the equity stake a bank could have in a rm

through its trust department, however, were dropped in the 1990s.

when the bank had a stake in a corporation that exceeded a certain level. Banks that oer trust business do need to meet trust federal and state laws. Nonetheless, their ability to select the trust investments and to vote the stock they hold in trust creates an opportunity for them to exercise control over rms. An example of this control arose recently in Hewlett Packards acquisition of Compaq Computer. Walter Hewlett, a dissident director and shareholder of Hewlett Packard challenged the tally that approved the merger and alleged, among other things, that Deutsche Asset Management switched 17 million of its 25 million H-P shares in favor of the deal after being pressured by H-P management.8 Comprehensive data on American banks links with nonnancial rms through their trust business was rst made available in the 1968 study by the Subcommittee on Domestic Finance of the Committee on Banking and Currency. The Patman Report, as this study became known, found that 95% of the 3,125 banks that had trust departments managed trust assets worth more than $250 billion at 1967 yearend. Almost two thirds of these assets were invested in stock. This report also found, based on a sample 49 banks that held 54% of the industrys trust assets, that their trust departments had equity stakes equal or larger than 5% in 146 of the Fortune-500 largest industrial rms. On average these stakes represented 10% of the rms common stock and gave banks voting authority over about 7% of these rms voting rights, Haubrich and Santos (2003a). The extent of these bank-rm links led the Subcommittee to propose regulations to limit banks potential inuence through their trust departments.9 Most of its proposals, however, never became law and banks trust business continued to grow. As of 1999, the 2,300 nancial institutions engaged in trust activities had trust assets worth $23 trillion. These institutions had investment discretion over assets worth $4.4 trillion, of which they invested 59% in common and preferred stock, Trust Assets of Financial Institutions (1999). Our rst goal in this paper is to provide detailed evidence on the voting rights of nonnancial rms stock controlled by the top-100 American banks through their trust business
8 9

See Walter B. Hewlett v. Hewlett-Packard Company, Court of Chancery of Delaware, New Castle. This included the requirement that banks disclose both the composition of their portfolios and their proxy

voting, that they be prohibited from holding more than 10 percent of any class of stock of any corporation, and that any ocer or director of a bank be prohibited from serving on the board of any other nancial institution, insurance company, any corporation where that bank managed an employee benet fund for such a corporation or any corporation where that bank held more than 5 percent of any class of the corporations stock.

in 2000. We complement this evidence with a review of the regulatory framework banks need to meet when they oer trust business. We pay particular attention to the regulations on the selection of trust investments and on the voting of stock held in trust. Following the evidence on German banks use of proxy voting to place their representatives on corporate boards, our second goal is to investigate if American bankers are more likely to join the board of a nonnancial rm in which his bank controls a large voting stake through its trust business. The way German rms elect their directors is dierent from the way US rms elect theirs. In Germany the law specically grants shareholders the right to nominate half of the members of the supervisory board. By contrast, in the United States it is often argued that top management has the most say when it comes to choosing the board members (Mace (1971) and Vancil (1987)). Nonetheless, as argued by Roe (1993), one would still predict large shareholders to be more likely to have board seats and inuence in both countries.10 Does this prediction extend to banks that control large trust voting stakes? To answer this question, one needs to take into account the rm managements interests as well as the banks in this regard. Assuming that management controls the selection of board members, then the relevant question is whether it is in the managements self interest to have a banker on the board and, if so, whether it is in its interest to select a banker who controls a large voting stake of the rm. The analysis of Simon (1998) showing that J.P. Morgans decision to retire from the board of a large number of corporations had a negative impact on these rms values suggests that it is valuable to a rm to have a banker on its board.11 Following Fama and Jensen (1983), who argue that boards provide both service and governance functions, the value to have a banker on the board may derive from the bankers expertise in raising funding and his ability to better monitor the rms activities by accessing more information. From this perspective, one would expect the value of having a banker on the board to
10 11

See Roe (1993) for a comparison of the board powers in the United States, Japan and Germany. At the beginning of the twentieth century President Woodrow Wilson proclaimed that banking interests

were threatening to control the entire economy and called for federal law prohibiting interlocking directorates. In an attempt to substantiate President Wilsons claim, an investigation by Representative Ar`ne Pujo in 1912 e reported that 18 banks, including J.P. Morgan, had directors on the boards of 134 corporations. As Congress started to consider legislation, J.P. Morgan announced it would resign from the board of 30 corporations where it had directors. In 1914, Congress passed the Clayton Act where it prohibited interlocking directorships within the banking sector, but it did not ban banks from sitting on the boards of nonbank corporations.

increase if the banker also has control over a voting stake of the rm. The voting duties of a banker as a trustee will increase his incentives to invest human capital in the rm. This will promote a closer relationship with the rm and consequently improve the conditions under which the rm can access the banks services.12 In addition, the bankers voting stake will add credibility to his presence on the board, thereby improving the signal the rm sends to outsiders from having a banker on the board. These arguments suggest that, ceteris paribus, a rm manager is more likely to nominate to its board a banker who has control over a large voting stake of the rms stock. What about the banker? Does his control over the voting stake of a rm give him added incentive to join the rms board of directors? It is often argued that it is in a banks interest to be on the boards of its borrowing rms as this makes it easier to monitor the rms activities and facilitates the establishment of a relationship with the rm. If the bank, in addition, has an equity stake on the rm through its trust department, even though the corresponding cashow rights belong to its trust clients, the bank will have added incentive for the rm to perform well so that its trust business does well too. This will give the bank an additional incentive to join the rms board of directors. Kroszner and Strahan (1999), however, argue that US bankers may weigh the benets of a board membership against the potential cost of joining a corporate board due to the legal doctrines of equitable subordination and lender liability in eect in the country. According to these doctrines, a bank that is actively involved in the management of a client experiencing nancial distress could lose its senior status and become liable for losses to other claim holders. Our analysis of banks presence on the boards of nonnancial rms shows that, ceteris paribus, bankers are more likely to join the boards of rms in which they control large voting stakes. This result continues to hold when control for the voting rights associated with the bankers personal equity investments in these corporations. Finally, we do not nd evidence of reverse causality, that is, the correlation we nd between banks trust voting rights and their board memberships is driven by the voting rights and not the other way around. The remainder of the paper is organized as follows. The next section characterizes
12

The research which shows that Japanese and German rms that have close relationships with a bank have

lower agency costs of debt and are less nancially constrained is consistent with this idea. See Sheard (1989), Prowse (1990), Hoshi, Kashyap, and Scharfstein (1991), Flath (1993) and Elston (1993).

briey the Japanese keiretsu and the German universal banks. Section 3 reviews the regulations on the alternative channels American banks can use to gain control over the voting rights of nonnancial rms stock and reviews the voting policies of banks with trust business. Section 4 presents evidence on the investments and voting rights that American banks control through their trust business. Section 5 analyzes the presence of American bankers on the corporate boards of nonnancial corporations and section 6 investigates whether the voting power banks control through their trust business makes it more likely for them to get a seat on the rms board of directors. Section 7 concludes the paper.

Japanese keiretsu and German universal banks

A distinct feature of the Japanese and German banking systems is banks ability to invest and vote the stock of rms. Another distinct feature of the banking systems in both countries is the presence of bankers on the boards of rms, which researchers have found to be linked to the banks voting power.

2.1

Japanese keiretsu

The Japanese keiretsu are groups of rms from the nonnancial and nancial sectors connected by interlock shareholdings, with a common main bank, a certain degree of (reciprocal) business transactions, and at least for the core rms, common membership in a presidents club, Aoki, Patrick and Sheard (1993). The main bank, besides being usually the most important source of funding for the rms of the group, often holds a signicant equity stake in these rms and in many instances has a representative on their corporate board. Although Japanese law limits banks equity stakes to 5%, the interlock shareholdings among members of a keiretsu give the main bank in the group an opportunity to increase its voting rights signicantly above this limit, Sheard (1994).13 Table 1 presents some evidence on Japanese banks equity stakes in rms and shows that the top banks own large stakes in the largest corporations in the country. Sheard (1989), in addition, argues that bank equity holdings in rms are not limited to the largest corporations. According to him, the main bank,
13

Since 1948, the Antimonopoly Law has prohibited Japanese banks from holding more than 5% of the

outstanding stock of any rm. This ceiling was raised to 10% in 1953, but in 1977 it was again lowered to 5%. The new limit was phased in over the next ten years, Flath (1993).

dened as the bank with the largest loan share, was one of the top ve shareholders in 72% of the rms listed on the rst section of the Tokyo Stock Exchange in 1980.14 In addition to their equity links, banks in Japan are also known to sit on the boards of rms. Hoshi and Kashyap (2001), for instance, report that 52% of 761 rms listed in the rst section of the Tokyo Stock Exchange in 1992 had a banker on their board. Even though Japanese boards are typically made up of insiders, formally elected by stockholders but usually appointed by the CEO, researchers have found that bank membership in Japanese boards is linked to their voting rights. Hoshi, Kashyap and Scharfstein (1990), for example, report that out of 1,103 Japanese rms listed on the Tokyo Stock Exchange, 8% have at least one director from the rms main bank and 34% have a former main bank executive as a director.15

2.2

German universal banks

German banks, like their Japanese counterparts, are allowed to invest in the stock of rms for their own account. Pursuant to the German Banking Act, a banks investment in property, buildings, etc., together with its holdings (holdings are dened in the act as participations of more than 10%) in other banks and industrial companies may not exceed the banks own capital, Schneider-Lenn (1992). German banks, in addition, must meet the European Union Seconde Banking Directive that prohibits any single nonnancial equity participation from exceeding 15% of the banks equity capital and the sum of all participations from exceeding 60% of the banks capital. Another source of German banks voting power is proxy voting. Investors in Germany usually deposit their stock at a bank and give the bank permission to vote it. This permission lasts for fteen months, but it can be revoked. Prior to the shareholders annual meeting, the bank informs investors on how it intends to vote their stock. German law requires banks to exercise proxy votes in the interests of the shareholders they represent.16 The law, in addition, gives shareholders the right to instruct the bank to vote dierently should they disagree with
14

See Prowse (1990) and Morck, Nakamura and Shivdasani (2000) for further evidence on Japanese banks

equity stakes in rms.

15

Kaplan and Minton (1994), Kang and Shivdasani (1995) and Morck and Nakamura (1999) report that main

banks usually appoint their employees to the boards of rms when their nancial performance deteriorates.
16

Wenger and Kaserer (1997) argue that there are no ecient mechanisms in the country to enforce this law.

the banks voting proposal.17 A third source of German banks voting power is the investment companies they control. The Investment Company Act provides that fund managers shall vote the fund shares and it allows investment companies to coordinate voting with their parent bank, Baums (1992). Table 2 presents evidence on German banks control of nonnancial rms voting rights. The left-hand side panel shows that the bank-voting control is highly concentrated in the countrys three largest banks. The right-hand side panel, in turn, shows that proxy voting is by far the main source of banks voting power.18 German banks sit on the corporate boards of rms even more often than their Japanese counterparts. Edwards and Fischer (1994) report that 75% of the 100 largest publicly-traded rms in Germany had a banker on the board in 1974. A reason for the larger presence of German bankers on the boards of rms is the law in the country requiring rms with more than 2,000 employees to have a supervisory board with half of its members appointed by shareholders and the other half appointed by employees, Harm (1992). Moreover, researchers have found that banks use the voting power they control, including that derived from proxy voting, to elect their nominees to rms corporate boards (Franks and Mayer (1994) and Gorton and Schmid (1998)).

American bank control of rms voting rights

The most common way to gain control over a rms voting rights is to purchase its stock. However, as we just saw in Germany, the main source of banks voting rights, proxy voting, does not require them to make investments in equities. In this section, we show that the trust business gives American banks control over the voting rights of rms stock without them having to make the aforementioned investments. More importantly, when trust clients give banks voting authority, in contrast to proxy voting, banks are not required to inform them ahead of the shareholders meeting of their voting plans.
17

Rational apathy together with a belief that banks are better positioned to vote, however, lead most share-

holders to accept banks recommendations. According to Gorton and Schmid (1998), citing Krber (1989), only o about three percent of the shareholders who use bank proxy voting give instructions to their banks.
18

See Mlbert (1997) for more recent data on individual banks share of voting rights per company derived u

from banks own shares and proxy rights. The author, however, reports only the sum of these two components.

3.1

Controlling voting rights by investing in rm stock

American banks, in contrast with Japanese and German banks, are not allowed to invest in nonnancial rms stock for their own account. The 1864 National Banking Act allows national banks to exercise all such incidental powers as shall be necessary to carry on the business of banking by ... (what follows is a list of activities that does not include investing in the stock of rms). In 1933, the Glass-Steagall Act explicitly prohibited the purchase by the [national bank] for its own account of any shares of stock of any corporation, Fein (2001). The Federal Reserve Act and the Federal Deposit Insurance Corporation Improvement Act extended this prohibition to state-member banks and state-nonmember banks, respectively.19 In 1956, the Bank Holding Company Act allowed BHCs to acquire voting securities of a rm that represent ve percent or less of the rms outstanding voting shares.20 Federal and state laws provide for some exceptions to these prohibitions.21 Banks and BHCs, for example, can establish small business investment companies and through them make equity investments in small rms. Banks may also acquire shares in satisfaction of debt previously contracted. Finally, the 1999 Gramm-Leach-Bliley Act authorizes BHCs that become nancial holding companies to engage in merchant banking and through this activity to make equity investments in rms.
22

Based on this brief summary of the US regulation, it is apparent that there are some opportunities, albeit very limited, for banks to make investments in stock of rms for their own account and through them gain control over the voting rights of these rms stock. However, as we will see next, the trust business provides banks with a far more important opportunity to control the voting rights of corporate America.
19

Prior to 1991, state-nonmember banks investments were not restricted by federal law and some states

allowed their banks to invest in corporate stock.

20

The Board has ruled that this exemption applies only to passive investments. Equity holdings up to 25%

are possible provided the portion above the 5% threshold is made up of nonvoting shares, Pollard et al (1988).
21 22

See Haubrich and Santos (2003a) for a detailed discussion of these exceptions. There is no limit on the fraction of the rm that may be held, even if it constitutes a controlling interest.

The ownership must be for investment purposes only and not, for example, to routinely manage the rm. See Barth, Brumbaugh and Wilcox (2000) for further details of the law.

3.2

Controlling voting rights without investing in rm stock

In their capacity as duciaries, banks may engage in many more securities activities than they may otherwise do. The reason is that trust activities are recognized by regulators and the courts as traditional banking services and are generally immune from the Glass-Steagall Act and BHC Act restrictions. 3.2.1 Bank duciary activities

Banks may oer a variety of duciary services, including acting as trustees for trusts established by individuals and for employee benet plans. Bank trust activities, in turn, may range from simple services such as providing depository accounts, to complex services such as selecting trust investments and exercising the voting rights of the stock held in trust.23 National banks can oer trust services that are granted by state law to state banks where the national bank is located. In addition to state trust law, national banks also need to comply with Regulation 9 of the Comptroller and the federal trust law. Regulation 9 covers issues such as operational matters, compliance with other bodies of law and investment standards. As for federal law, it contains only a few general restrictions, including a requirement that funds held in trust not be used in the conduct of the banks business and a prohibition that banks lend trust funds to their employees. National banks that oer trust services to employee benet plans also need to comply with the 1974 Employee Retirement Income Security Act (ERISA), which regulates the terms and administration of these plans. With respect to state banks, they are not subject to Regulation 9, but they have to comply with similar standards issued by their supervisors and, as with national banks, they need to meet ERISA and the state trust law where they are located. Despite the importance of state trust law, there is no uniform general law of trust which is recognized by all states. As a result, banks trust powers vary with the state where they are located. State trust law, however, generally authorizes banks to act as guardian, receiver, and trustee with such duties and powers as may be conferred upon them by any person, corporation or court. It also authorizes banks to act as trustees for pension plans and to establish collective investment funds.24
23 24

See PricewaterhouseCoopers (1999) and Krikorian (1995) for reviews of the trust law. Banks use these funds to commingle the assets of trusts and invest them collectively. These funds may

10

3.2.2

Bank authority to select trust investments

Part of the importance of the trust business for banks derives from their discretion to invest the funds they hold in a duciary capacity. At the end of 1999, 19% of the $23 trillion of trust assets of US nancial institutions were discretionary trust assets, Trust Assets of Financial Institutions (1999). Even though banks have to select the trust investments within the connements of the federal and state laws and their supervisors regulations, as we will see below they can still have signicant discretion in the choice of securities. With the exception of ERISA, federal law defers to state trust law and does not substantively regulate bank trust investments. ERISA prohibits transactions between a plan and a party related to the plan and it imposes armative duties on duciaries (loyalty, prudence and diversication) for which no exemption can be made. These restrictions are relevant for banks because they are often designated as trustees of plans, or employed as an investment manager or adviser, and are therefore deemed duciaries under ERISA.25 As noted above, state trust law varies across states, but all states recognize the duty of loyalty. Therefore, as a trustee, the bank has the duty to act solely in the interest of account and plan beneciaries, unless it is authorized by the terms of the trust instrument, court order, or local law to do otherwise. As trustees, banks also need to observe the duty of care, for which no exemption can be made. This requires them to follow the prudent investor rule. According to this rule, no investments are imprudent per se but must be appropriate for the portfolio as a whole and as part of an overall investment strategy, which must pursue risk diversication. Banks also need to meet their supervisors regulations on trust investments. Regulation 9, for example, imposes on national banks the duty of loyalty through provisions on self-dealing and conicts of interest.26 As with national banks, state banks need to comply with ERISA and state trust law. They are not subject to Regulation 9, but they have to meet similar
receive money held by the bank as trustee, executor, administrator or guardian. They may also receive assets of retirement, pension, prot-sharing or other trusts that are exempt from federal income taxes.
25

ERISA requires collective funds made of pension plans to be diversied and it allows deviations from

diversication only if clearly prudent not to minimize the risk of large losses.
26

It is worth noting that as of 1996, the Comptrollers regulation on collective investment funds prohibiting

national banks from investing more than 10% of the funds market value in a single company no longer applies.

11

standards on their trust investments, which are set by their supervisory agency.27 Finally, in choosing trust investments banks need to account for the terms of the trust instrument. Some trust settlors or pension-plan sponsors choose to retain investment discretion for themselves. Others require the trustee choose these investments in consultation with another party. Others, however, give the trustee full investment discretion. 3.2.3 Bank authority to vote stock held in trust

Equally important is banks ability to vote the stock they hold in trust. A Greenwich Associates survey conducted in the mid-1980s found that two-thirds of 1,499 large U.S. corporations granted managers of their pension plans complete freedom in proxy voting on such issues as anti-takeover provisions and voting for directors, Krikorian (1995). Banks have full discretionary voting power over shares acquired for their collective investment funds. When they act as investment managers for assets not placed in these funds they are also often granted authority to vote the shares acquired with these assets. As with the investment discretion, banks need to exercise their voting authority within the connements of ERISA, federal and state trust laws, and the regulations of their supervisory agency.28 The power to vote shares in pension plans under ERISA lies with the named duciary or trustee(s). In 1988, the Department of Labor stated through the Avon letter that voting rights are plan assets and therefore must be exercised. The letter also noted that trustees have the exclusive authority to exercise these voting rights, unless the authority to manage the assets of the plan is delegated to an investment manager or the plan expressly permits a named duciary to direct the actions of the trustee. The sponsor can specify that investment responsibilities will be handled by the investment manager but voting will remain in the hands of the sponsor. When the sponsor delegates voting authority to trustees or an investment man27

Also as with national banks, state-member banks have to comply with Section 23B of the Federal Reserve

Act, which prohibits banks from purchasing in a duciary capacity any security if a principal underwriter of the security is an aliate of the bank during the existence of any underwriting or selling syndicate unless this purchase has been approved by a majority of the banks directors before the securities are initially oered for sale to the public.
28

When a bank acts as an agent, if the principal delegates stock voting rights to the agent, the bank has

no authority to delegate this function to another party, unless this has been previously agreed to. The same principle applies when a bank serves as custodian for mutual a pension funds.

12

ager, it cannot take back the right to vote on issues that are of particular concern. Investment managers on the other hand may not, as general policy, decline to vote proxies or vote only non-controversial proxies.29 With respect to federal trust law, the only specic reference to voting appears in provisions that prevent a national bank as a trustee from voting its own stock, but only when the issue at stake is the election of bank directors. Regarding state law, as expected it varies across states, but in general it empowers banks holding shares as duciaries to vote these shares without mandating them to do so. Examples of states with these state laws are Massachusetts, Delaware and New York. Finally, with respect to the trust instrument, it usually confers the power to vote shares through standardized boiler plate language. The voting clause in trust agreements and other pension plan or agency documents often reads as follows: The Trustee shall have power in its discretion to exercise all voting rights with respect to any investment held in Trust Fund or The Trustee shall have the following powers, rights, and duties in addition to those vested in it elsewhere in the plan or by law ... to vote on any corporate stock ... for any purpose; ... to consent to, take any action in merger, readjustment of the nancial structure, sale, lease or other disposition of the assets of the corporation ...30 In summary, the business of trust gives American banks a unique opportunity to vote the stock of nonnancial corporations even though the law does not allow them to invest in the stock of these rms for their own account. The federal and state trust law, together with banking regulation, impose limits on how banks can exercise this voting power and banks need to account for their duciary responsibility. However, this regulatory framework still leaves banks plenty of discretion to decide on how to exercise these voting rights when their trust clients confer on them the voting power associated with their trust equity investments.
29

The handling of voting rights of employee plans that invest in the employers stock is important for banks

because they are often trustees for these plans with voting and investment discretion. As noted in the advisory opinion issued by the Department of Labor in connection with Bank of Americas attempt to pass a decision on a tender oer through to plan participants, the so-called Monks letter, banks may run into problems if they seek guidance from plan participants in the case of non-ESOP plans for which pass through voting is not mandated.
30

See Krikorian (1995) for further examples.

13

3.2.4

How do banks vote trust stock?

The responsibility for the exercise of duciary powers is specically vested in the board of directors of a national bank by Regulation 9. The board may assign the administration of these powers to director(s), ocer(s), employee(s), or committee(s) as it may designate. The Comptrollers Handbook for National Trust Examiners notes, however, that in this case directors remain responsible for directing and reviewing the actions of all individuals or committees to whom they delegated their duciary powers. The Fed and the FDIC have dened similar patterns of director responsibility. When a bank has voting authority, its own portfolio or fund managers usually provide the rst level of decision making on proxy matters. Controversial proxy proposals are frequently reviewed by the head of the investment research department, a committee of senior bank ocers and, sometimes, a committee of the board of directors.31 How do banks vote trust stock? It is often claimed that duciaries follow the Wall Street Rule of voting with management or selling the stock. The adoption of this rule, particularly by large duciaries, however, may be problematic. A large selling program, even if spread out over time, will gradually depress the price of the stock, placing the manager in the troublesome position of beneting the accounts whose shares it sells rst to the detriment of the accounts whose shares go on the market later. The Department of Labor, in addition, has advised duciaries for ERISA plans not to follow blindly the Wall Street Rule and to vote instead plan proxies in the best interests of plan beneciaries. There is limited information on banks voting policies as duciaries because they usually do not disclose these policies. However, the voting policies of investment managers which have been made public question the claim that duciaries follow always the Wall Street Rule. For example, the Statement of Policy and Procedures for Voting Proxies on Behalf of Client Discretionary Accounts of Alliance Capital Management Corporation summarized in Table 3 shows that at least with respect to anti-takeover proposals, Alliance would not necessarily vote with management. Also, the investment policy of a large investment manager described by Useem (1993), which we summarize in Table 3, shows that on many non-routine issues, including restructurings, acquisitions and divestitures, the managers policy is to vote on a case-by-case basis and thus not necessarily to vote with management.
31

For shares held in a custodial capacity, the bank may be instructed to vote with management on routine

matters and send the proxies signed in blank to the investment manager for action in all other cases.

14

4
4.1

Evidence on American banks control of rm voting rights

Data and sample
Data

4.1.1

Following the recommendations of the Subcommittee on Domestic Finance that studied the trust business of banks in 1968, US Congress passed in 1975 Section 13(f) of the Securities Exchange Act of 1934 requiring all institutional investment managers exercising investment discretion over $100 million or more invested in 13f Securities to le form 13f with the SEC.32 These forms are our main data source on the voting rights of nonnancial rms stock controlled by banks. They contain detailed information on investment managers portfolio of 13f securities that the manager has investment discretion over.33 In the case of stocks, managers report for each company where they have investments their discretion over the investment and their voting authority. The distinctions in the investment discretion and voting authority included in the 13f form are very important, because the stock of a single corporation may be in several trust accounts, each with dierent allocations of investment discretion or voting powers. Regarding the investment discretion, the manager reports the number of shares over which he has sole, shared-dened or shared-other discretion. A manager has sole discretion when the trust instrument gives him full authority to determine which securities to buy and sell for the trust account. He has shared-dened discretion when he shares this discretion with controlling or controlled companies (such as BHCs or their subsidiaries) or with investment advisers. He has shared-other discretion when he shares discretion in a manner other than that described above. For the purpose of this paper, we dene investments with discretion to be the sum of sole plus shared-dened investments. Regarding voting authority, the manager reports the number of shares over which he has sole, shared or no voting authority. According to the 13f form instructions, a manager exercising sole voting authority over specied routine matters and no authority over non32

Section 13(f) securities include exchange-traded or NASDAQ-quoted stocks, equity options and warrants,

shares of closed-end investment companies, and certain convertible debt securities. Shares of open-end investment companies, i.e., mutual funds, are not included, and, therefore, are not reported in the 13f form.
33

Investments in which the manager has no investment discretion are not reported in the 13f form. In addition,

managers may omit holdings otherwise reportable if they hold fewer than 10,000 shares and less than $200,000 aggregate fair market value.

15

routine matters has no voting authority.34 For the purpose of this paper, we dene investments with voting authority to be the sum of sole plus shared voting authority. 4.1.2 Sample

Our sample of banks comprises the top-100 BHCs (by assets) operating in the United States as of the end of 2000.35 Only 72 of these BHCs led a 13f form with the SEC at the end of 2000. Out of these, we had to exclude 1 BHC because of various problems with its 13f form. Thus we were left with 71 BHCs, which accounted for 83% of banking industry assets in 2000.36 Filers of 13f forms le either a 13F HOLDINGS REPORT when they include in the report all of the securities with respect to which they have investment discretion or a 13F COMBINATION REPORT when part of the securities with respect to which they have investment discretion is reported by other managers. In this case, they include a listing of these managers. We use this information to aggregate the holdings for all the managers in the BHC in order to have consistent data for all banking organizations. We consider only common stock holdings. Because we wanted to focus on US rms, we exclude security holdings which our banks identify as Global or American depository receipts. We also exclude companies that were involved in mergers at the end of 2000 because this makes it dicult to compute the shares of outstanding stock and voting rights. We further limit the common stock holdings to rms in Compustat, our data source for the rms number of shares outstanding. After we account for these criteria, we nd that our 71 BHCs have trust investments in the common stock of 5,513 corporations, of which 4,641 are nonnancial rms. Of the latter, 403 corporations are nonnancial rms in the S&P 500 index.37 Finally, given that some of the corporations in the country have dual classes of voting
34

If voting authority is shared in a manner similar to a sharing of investment discretion which would call for

a response in the investment category of shared-dened, then a manager should report voting authority as sole authority.
35

Note that this list does not coincide with the top trust institutions because some of the latter are trust

companies. See Trust Assets of Financial Institutions (1999) for the top 100 trust institutions.
36

Unless otherwise noted, in the rest of the paper, even though we use interchangeably the words banks and

BHCs, our data refers to BHCs because we aggregated the trust business of all subsidiaries in each BHC.
37

The number of US nonnancial corporations in the S&P 500 at 2000 yearend was 407. We excluded 4

nonnancial rms that were in the S&P 500 because they were going through mergers at 2000 yearend.

16

(common) stock outstanding, we searched the proxies of the nonnancial companies in our sample to identify those with dual classes and the number of votes associated with each class.38 This information is important not only to compute the total number of outstanding voting rights for these companies, but also because banks may hold and vote both classes of these companies stock. We nd that 384 of the 4,641 US nonnancial corporations in our sample have dual classes of common stock outstanding. The number of votes per share of the dual class of common stock that our 71 BHCs hold in these corporations varies from 0 to 25. Table 4 presents some statistics for the trust business of our 71 BHCs. A brief analysis of this table reveals that these banks manage (with some investment discretion) trust assets worth on average about one third of their assets.39 On average banks have invest 86% of trust assets in common stock. Still according to Table 4, the portfolios of banks trust investments in common stock generally include a large number of rms, 1,016 on average, with 873 being nonnancial corporations. Lastly, banks have voting power averaging over 86% of the stock of nonnancials acquired with trust funds and sole voting authority over 79% of this stock. Because in the latter part of this paper we study whether banks voting rights in connection with their trust business help explain their presence on corporate boards of nonnancials in the S&P 500, the bottom panel of Table 4 summarizes banks trust investments in these corporations. These statistics account for the fact that 32 S&P 500 corporations had dual classes of voting (common) stock outstanding in 2000, with the number of votes per share in the dual class varying from 0 to 16.58. Our sample of banks have trust investments in the capital of all 403 nonnancial rms that were in the S&P 500 at 2000 yearend. The number of votes per share of their holdings varies from 0 to 11. Comparing the two bottom panels of Table 4, we nd that the patterns of investment discretion and voting authority associated with their holdings of nonnancial rms are similar to those associated with their holdings of nonnancials in S&P 500 index. It is worth noting, though, that while the number of S&P nonnancials represent 30% of the number of nonnancial rms in the banks portfolios, the value of the banks investments in the former account for 88% of their investment in the stock
38

This exercise is important because for these companies the number of outstanding votes diers from the

number of outstanding shares. Moreover, banks do not report in the 13f form the number of votes they control, but instead the number of shares of a particular security for which they have voting power.
39

Recall that our data does not include trust assets, such as custodian assets, for which the bank does not

have any investment powers.

17

of corporations. Thus, the bulk of bank trust investments in common stock of nonnancial rms is indeed in S&P 500 rms.

4.2

Bank control of rm voting rights through trust business

The evidence presented in the previous subsection shows that banks use their investment discretion over trust assets they manage to invest predominantly in the stock of nonnancial rms. It also shows these investments give banks control over a vast number of voting rights. This evidence, however, is mute about the size of the banks equity and voting stakes in each rm. Table 5 addresses this issue by presenting information on the equity and voting stakes held by the top-71 BHCs. The top-71 BHCs have a total of 62,010 equity stakes in nonnancial companies and have investment discretion over 55,378 of these stakes. More meaningful, however, is the fact that 465 of the former and 357 of the latter are equity stakes larger than 5%. As a result of these investments, and after we account for their trust clients choice of who should vote these investments, we nd that our banks have control over 372 voting stakes larger than 5% and 106 stakes larger than 10%. When we consider only voting stakes where banks have sole voting authority, we still nd that banks control stakes larger than 5% and 10% in 290 and 70 instances, respectively. The bottom part of Table 5 contains similar statistics, but for the 403 nonnancial rms in the S&P 500. As expected the numbers become smaller. Nonetheless, there are still 44 instances where the top-71 banks have some control over more than 5% of the rms outstanding voting rights and 13 instances where they have sole voting authority over a voting stake larger than 5%. The statistics in Table 5 show that trust business is an important link between banking and commerce in the United States, but they do not capture two important facts of the banknonnancial rms equity and voting ties. First, how much of these rms equity and voting rights are controlled by the largest banks in the country? Second, how do these equity and voting stakes vary across banks? We address these issues in Table 6. As the top panel of Table 6 indicates, on average the largest banks in the country own 5% of US nonnancial rms and control 4% of the voting rights of these rms. Note that these percentages increase substantially with the size of the corporation. For example,

18

these banks own on average 12% of the 185 nonnancial rms with assets worth more than $10 billion and control 10% of the voting rights of these rms. Still regarding the top panel of this table, it is worth highlighting the existence of several nonnancial rms in the country where the largest banks together have sole voting authority over more than 50% of the rms voting rights. Even though our sample of banks was drawn from the top-100 BHCs, the trust holdings vary signicantly across banks as evidenced in the second panel of Table 6. Despite that, on average each bank has 7 equity stakes and 5 voting stakes larger than 5%. Moreover, note that there is in the sample a bank that has some control over 62 voting stakes that are between 5% and 10% and a bank that controls 19 voting stakes that are between 10% and 20%. With respect to the S&P 500 rms, as the bottom panels of Table 6 show, on average the trust departments of the large banks own 12% of these rms capital and control 10% of their voting rights. Note though that, and in contrast with the universe of all nonnancial rms, within the S&P 500 sample these percentages do not vary substantially with the rm size. Finally, note that the vast majority of the trust investments in S&P 500 rms originates an equity stake smaller than 2.5%, but there is a bank in the sample that controls 17 voting stakes between 5% and 10% and a bank that controls 9 voting stakes between 10% and 20%. In sum, comparing the equity and voting holdings of US bank trust departments in nonnancial rms we presented in this section with those of Japanese and German banks we presented in Section 2, it is apparent that banking is not as mixed with commerce in the United States as it is in these countries.40 Note, however, that once US banks receive voting authority from their trust clients, they are not required to inform them in advance on how they plan to vote. This contrasts with German banks main source of voting power, proxy voting, where banks are required to inform their clients on the way they plan to cast their votes and accept the instructions of the latter in case they wish their stock to be voted dierently. Despite the prohibition that US banks invest in stock of nonnancial rms for their
40

It is worth noting that the statistics we have presented for the three countries are not fully comparable. For

example, we do not account for any equity holdings, and the corresponding voting rights, US BHCs may have in nonnancial rms either through merchant banking, small business investment companies or under the 5% limit they are allowed by law. In addition, the voting shares controlled by German banks that we reported were computed as a function of the shares present at the shareholders meetings and not, as in the case of US banks voting stakes, as a function of the total outstanding voting rights.

19

own account, our evidence still shows that American banks make sizable equity investments in nonnancial rms through their trust departments and hold investment discretion over most of these investments. Furthermore, as a result of these investments we nd that American banks control stakes of these rms voting rights in number and size that one would not expect to encounter in light of the often claimed separation between banking and commerce in the United States. More importantly, this evidence seems to be at odds with one of the reasons most often evoked in the United States to justify the regulations that prohibit banks from making equity investments in nonnancial rms for their own account concerns regarding the concentration of power in the banking industry. It remains to be seen, however, if these bank-rm equity and voting ties have any of the implications that researchers have unveiled in connection with German and Japanese banks equity ties to nonnancial rms. We investigate one of these implications next, namely if American banks control of voting rights help them get elected to the rms board of directors.

American bankers on corporate boards

As we noted in Section 2, it is quite common for bankers in Japan and Germany to be on the boards of nonnancial rms.41 Furthermore, there is evidence that banks in these countries use the voting power they control to elect their representatives to the board of these rms.42 The literature that has investigated the presence of bankers on the boards of rms in the United States nds that this presence is important, though not as prevalent as in these countries. Booth and Deli (1999) report that 23% of the nonnancial rms in the S&P 500 in 1990 had a banker on their board, and Kroszner and Strahan (1999) report that 31% of nonnancial rms in the Forbes 500 in 1992 had a banker on their board. This literature, however, does not consider the potential importance of banks voting power to explain their presence on the boards of rms. Booth and Deli (1999) nd that rms that have a banker on their board who also has
41

Hoshi and Kashyap (2001) report that 52% of the 761 rms listed in the rst section of the Tokyo Stock

Exchange in 1992 had a banker on their board, and Edwards and Fischer (1994) report that 75% of the 100 largest German publicly-traded rms in 1974 had a banker on their supervisory board.
42

See, for example, Kaplan and Minton (1994), Kang and Shivdasani (1995) and Morck and Nakamura (1999)

for evidence on Japan, and Franks and Mayer (1994) and Gorton and Schmid (1998) for evidence on Germany.

20

a business relationship with the rm do not use relatively more bank debt. In contrast, rms that have a banker on their board who does not have a business relationship with the rm operate with more bank debt. They argue these results are consistent with the theory that bankers supply bank debt expertise but not with the theory that they sit on boards to monitor lending relationships. Kroszner and Strahan (1999), in turn, investigate whether the doctrines of equitable subordination and lender liability aect bankers choices of board memberships.43 They argue that these doctrines play an important role in American bankers board choices because bankers tend to join the boards of large stable rms with a high proportion of tangible (collateralizable) assets. It is unclear why this literature did not account for the voting power of American banks. A possible explanation is that because of the regulations prohibiting American banks to invest in the stock of nonnancial rms for their own account, this literature assumed that banks could not control the voting rights of these rms stock. However, as we showed in Section 3, banks control through their trust business large voting stakes in many nonnancial rms. Moreover, Gorton and Schmids (1998) nding that the voting rights German banks control through proxy voting help explain their presence on rm boards further suggests that it is important to account for the voting power American banks control through their trust business in an analysis of their board memberships. Another possible explanation is that US rms elect their corporate boards in such a way that the voting rights of potential candidates do not play a role in the selection process. Eectively, the way US rms elect their board of directors is dierent from the way German rms elect theirs. For example, and in contrast to Germany, the law in the United States does not specically grant shareholders of large rms the right to nominate half of the members of the rm board. Nonetheless, as we argued in the introduction to this paper, one would still expect that, ceteris paribus, shareholders or other entities with control over large voting stakes are more likely to join the board of a rm. In order to investigate the importance of US banks trust voting stakes on their board memberships, we complemented our trust data on banks voting stakes in S&P 500 rms at 2000 yearend with data from the Corporate Library on these rms directors at that time.
43

Under these doctrines, a bank that becomes actively involved in the management of a rm that gets in

nancial distress may lose the seniority of its claims on the rms assets.

21

This data source includes, for each director of every rm, information on whether he is an insider, the number of shares of the rm he owns, his tenure, and his biography. We use the directors biography to determine the identity of the other rms where he is also a director, and in the case of outside directors, whether he is employed and the identity of his employer. The total number of directorships in our 403 S&P 500 nonnancials is 4,258. These directorships are held by a total of 3,227 directors. As reported in the top-panel of Table 7, a median S&P 500 nonnancial rm has 10 board members, 8 of which are outsiders, but none is a banker. However, we nd that 25% of the 403 nonnancial rms have a banker on their board, and 20% of these rms have one or more bankers on their board who were employed at one of the top-71 BHCs.
44

We report in the bottom panel of Table 7 the voting rights controlled by inside directors and outside directors, distinguishing nonbank directors from bank directors. For the latter group we further distinguish the voting power associated with the bankers own equity stake from the voting power associated with the trust business of his bank. We also investigated if the BHCs in our sample held equity investments in any of the S&P 500 nonnancial corporations for their own account and found no instances where this happened.45 Our statistics indicate that on average inside directors have larger equity stakes than outside directors. They also indicate that there is an important dierence between the equity stakes and voting stakes of inside directors. This is due to the presence of 32 rms with dual voting classes of common stock in our sample of S&P 500 nonnancials. Our statistics further show that when we do not account for trust voting, there does not exist a major dierence between the voting stakes of outside nonbank directors and bank directors. This is not the case, however, when we account for the voting rights that bank directors control through their trust business. In an attempt to understand the presence of American banks on the boards of nonnancial rms, we started by comparing rms with bankers on the board and rms without bankers on the board. To this end we collected balance sheet data from Compustat on the variables that Booth and Deli (1999) and Kroszner and Strahan (1999) have found to help explain the
44

These statistics are comparable to the Booth and Deli (1999) nding that 23% of the nonnancial rms in

the S&P 500 in 1990 had a banker on their board. This is slightly lower than the 31% found by Kroszner and Strahan (1999), but as we noted above the latter is based on nonnancial rms in the Forbes 500 in 1992.
45

Recall that BHCs are allowed to acquire up to 5% of the voting securities of any rm.

22

presence of bankers on corporate boards. We complemented this data with information from SDCs Domestic New Bond Issuances database on these rms bond issuance activity. Table 8 compares the two subsets of rms.46 According to the statistics presented in the top panel of this table, bankers are more likely to join the board of larger rms and rms with larger boards as well as rms with boards having a larger number of outside directors. They also show that bankers are more likely to join rms that have public debt outstanding with a higher credit rating. Finally, this panel shows that rms with bankers on their board operate with more long-term debt relative to their assets and more short-term debt relative to their liquidity. Overall, these results are consistent with the ndings of the previous literature on the presence of US bankers on the board of nonnancial rms. In order to investigate the potential role of banks voting power on their board memberships, we computed the voting stake of each BHC on nonnancial rms in the S&P 500 index. According to the evidence presented in the second panel of Table 8, this variable seems to be important to explain the presence of bankers on the boards of rms. Bankers do appear to be more likely to join the board of a rm where their BHC controls a larger percentage of the rms voting rights. Before we investigate the robustness of this nding, we next compare our subsets of S&P 500 nonnancial rms with respect to two other potential reasons that have been put forward for a bank to join the board of a rm: the rms ownership of an equity stake in the bank, and the existence of a lending relationship with the rm. To account for the role that rms equity stakes in banks may play on bank board memberships, we investigated whether rms owned an equity stake in the banks in our sample. We found no example of a qualied investment by these rms in any of the banks. For this reason, we considered instead the equity stakes in the banks held by bank directors that were employees of the S&P 500 rms. The third panel of Table 8 presents evidence on these equity stakes. According to this evidence, rms with a banker on the board are more likely to have an employee who sits on the board of a bank than rms with no banker on the board, but on average the equity stake in the bank held by the former directors is not statistically dierent
46

Given that in the next section we exclude 22 corporations from our sample of 403 S&P 500 nonnancial

rms because they have a banker on the board who is not employed at one of the banks in our sample of top-71 BHCs, we chose to report the results in Table 8 for our nal sample of 381 rms.

23

from the equity stake of the latter directors. These results cast some doubt on the idea that cross ownership structures ` la Keiretsu play a role on the presence on banks on corporate a boards in America. Finally, to account for the role of lending relationships, we collected information from the Loan Pricing Corporation syndicated-loans database on the identity of the banks that lent to rms in our sample. We measure the intensity of a rms lending relationships with dierent banks by the amount it borrowed from each bank over the 1995-99 time period. We consider two alternative denitions of lending relationships. Under the rst denition, we limit the rms relationships with banks that act as lead underwriters for the syndicates that extended loans to the rm. Under the second denition, we consider the rms relationships with all of the banks that participated as lenders in the syndicates that lent to the rm. We think it is important to investigate these alternative denitions because banks perform dierent roles when they participate in a loan syndicate. Some banks, for example, are not capable of acting as lead underwriters. Others, instead, have specialized in this role and gained a signicant market share of this business. Note, for example, that 75% of the 1,837 syndicates that lent to our rms over the 1995-99 time period have a single lead underwriter and that three banks alone, JPM Chase, Bank of America and Citigroup, appear as lead underwriters in 25%, 15% and 14%, respectively, of those 1,837 syndicates. Under these conditions, limiting the denition of relationship lenders to lead underwriters poses the risk that we may not identify for some rms their true relationship lenders. Expanding this denition to include all of the lending banks in loan syndicates that lent to the rm reduces the likelihood of this happening, but it comes at the cost of using a more noisy measure of a rms lending relationships. A reason is that some of the banks that participate in loan syndicates do so because they have relationships with lead underwriters for these syndicates and not with the borrowers. The fourth panel of Table 8 presents some statistics on the bank-lending relationships of our rms. These statistics show that rms with a banker on the board borrow on average from more banks than rms that do not have a banker on the board, but the dierence is not statistically signicant when we consider rms relationships with lead underwriters alone. They also show that the former rms have a more concentrated structure of bank-lending

24

relationships than the latter rms, irrespective of the way we dene lending relationships.47 According to these results, it is possible, therefore, that lending relationships are related to the presence of banks on the boards of rms in the United States. In order to evaluate the importance of these rationales for US bank-board memberships more thoroughly, and in particular, investigate if the voting power banks get through their trust business help explain their presence on corporate boards, we turn next to a multivariate analysis.

6
6.1

Do trust voting rights give bankers board seats?

Banks voting rights and their board memberships

To nd out if a banks trust voting rights help explain its board memberships, we started by estimating the probit model specied below where the dependent variable takes the value 1 if the rm has a banker on the board and zero otherwise. The explanatory variable in this model that is of key interest to us is the share of the rms voting rights controlled by each bank in the sample (BHC-votes). For reasons we will explain below, the banks voting stake in each rm in our probit model is the sum of the banks trust voting stake and the bankers own voting stake in case the bank has an employee who sits on the board of the rm.
k

banker = c + outsiders + i-votes + nonbk-o-votes + BHC-votes + i

i=1

Xi + .

(1)

We estimate the impact of a banks voting power on its board memberships controlling for the number of outside directors on the rm board of directors (outsiders), the percentage of the rms voting rights controlled by its inside directors (i-votes), and the percentage of the rms voting rights controlled by its nonbank outside directors, (nonbk-o-votes). We further control for a set of explanatory variables (X) which previous research has shown to help explain the presence of bankers on the board of nonnancial rms. This set includes the size of the rm, its protability, its growth opportunities, its overall indebtedness, its short-term debt, and the rms sector of activity. We also control if the rm has already issued public debt and if so the credit rating of its most recent issue.
47

We measure the concentration of a rms bank-lending relationships by the Herndahl-Hirschman index.

To compute this index, we started by determining the percentage of the amount the rm borrowed from each bank over the 1995-99 time period. The rms index was then computed as the sum of the square of these percentages.

25

Following the idea that bank-board memberships may result from cross-ownership structures similar to those of the Japanese keiretsu, we account for the percentage of the banks voting rights controlled by employees of the rms in our sample.48 Following the idea that bank-board memberships may result from lending relationships, we control for the rms lending relationships with banks in our sample. We investigate separately the rms lending relationships with lead underwriters for the syndicates that lent to them and their relationships with lending banks that participated as lenders in these syndicates. The results of our probit model are presented in Table 9. All models were estimated with robust standard errors clustered by rm. Model 1 of Table 9 is the closest model to the literature that has investigated the presence of banks on the boards of nonnancial rms and produces results similar to those unveiled in this literature. It shows that bankers are more likely to join the boards of large rms and better performing rms. They are also more likely to join the boards of rms with more outside directors and rms with more long-term debt. This model, however, does not account for any information on directors voting rights and banks trust voting. Models 2 and 3 consider the importance of insiders voting control as well as that of outsiders. These models distinguish, among outside directors, bankers from nonbankers. In the case of bank directors, these models consider the voting rights of the trust business of their BHC together with the bankers own voting rights. These models show that, ceteris paribus, bankers are more likely to be present on the boards of rms in which they control a large voting stake. Note that this result holds both when we consider only the trust voting rights that their BHC has sole voting authority over (model 2), and the trust voting rights that their BHC has either sole or shared voting authority over (model 3). These models show that bankers voting power helps explain their presence on the boards of nonnancial rms in the United States without controlling for two other potentially important rationales for bankers to join the boards of rms, respectively, to strengthen a relationship they may have with the rm by virtue of an equity stake the rm has in the bank or to monitor a lending relationship that they have with the rm. To test the robustness
48

Recall that we use information of rm-employees equity stakes in the banks rather than on the equity

stakes held by the rms themselves because we did not nd any example of an S&P 500 nonnancial rm with a qualied equity stake in our banks.

26

of our key nding to the cross-ownership motive for bankers to join the boards of rms, we added to our model 3 a variable which measures the rms equity stakes in each of the banks in our sample. The new results are reported in model 4 of Table 9.49 The new variable is not statistically signicant. Importantly, though, we continue to nd that the voting power of bankers helps explain their presence on the boards of rms. To test the robustness of this link to the lending-relationship rationale for banks to join the boards of rms, we extended model 3 to include a variable which measures rms bank-lending relationships. As we discussed above, we consider two alternative denitions for this variable. Under the rst denition, we measure the rms bank-lending relationships by the amount it borrowed from each of the lead underwriters for the syndicates that lent to the rm over the 1995-99 time period. Under the second denition, we measure the rms lending relationships by the amount it borrowed from any bank that participated in a lending capacity in these syndicates.50 Models 5 and 6 of Table 9 report the results of these two tests. Interestingly, the denition of bank-lending relationships appears to matter. Note that under the rst denition the relationship-lending variable is not statistically signicant but the bankers voting power variable continues to be signicant. In contrast, under the second denition of bank-lending relationships the opposite holds. In an attempt to clarify these results, we expanded models 5 and 6 to include a new variable: the interaction of the bankers voting power variable with the lending-relationship variable.51 Models 7 and 8 of Table 9 report the results of this test. Note that now we get the same results regardless of the way we measure rms bank-lending relationships. While bankers
49

In the interest of space we report only the results of this test (as well as those of the test where we account

for the potential impact of bank-lending relationships) when we measure the voting power of banks as the sum of the bankers own voting rights plus the voting rights the BHC has sole or shared voting authority as a result of its trust business. We get similar results when we measure the voting power of banks as the sum of the bankers own voting rights plus the voting rights the BHC has only sole voting authority as a result of its trust business. These results are available from the authors upon request.
50

We have also considered the number of times the rm borrowed from each bank and dummy variables that

take the value 1 for the bank that lent the most and for the bank that lent most often. In addition, we have considered both longer and shorter time spans to dene these relationships. In general, our ndings on the link between banks voting power and their board memberships do not change with these alternative denitions of lending relationships.
51

We are thankful to the referee for suggesting this test to us.

27

voting power and lending-relationship variables are not statistically signicant, the interaction of these variables is highly signicant. Altogether, these results are somewhat ambiguous as to whether the voting power banks control and their lending relationships, separately, help explain their presence on the boards of rms. However, they seem to indicate that, together, these variables play a role on bank-board memberships, that is, banks appear to be more likely to join the boards of rms in which they have both control over a voting stake and a lending relationship. These results are novel for the United States and suggest that attempts to explain the presence of bankers on US corporate boards should control for the voting power of banks. Note, however, that our results are mute as to whether the voting power banks accumulate through their trust business helps explain their presence on corporate boards. The reason is that we our analysis did not distinguish among the sources of banks voting power. We investigate this issue next.

6.2

Banks trust voting rights and their board memberships

The models in Table 9 have two potentially important limitations. First, they do not distinguish between the bankers own voting stake and the voting stake his BHC holds in connection with its trust business. The reason we did not consider these two stakes separately is as follows. Our data includes information on the voting stakes of each of the top-71 BHCs in all S&P 500 nonnancials, regardless of whether the BHC has board representation. However, we do not have the same detailed information on the bankers own voting stakes. We have information on a bankers voting stake in the rm(s) where he is a board member but we do not have the same detailed information on the voting stakes he may have in the other rms in the sample. This is because US law requires investors to make public only their qualied equity stakes, that is, stakes larger than 5 percent. We investigated if any of the 87 bankers in our sample with board seats in the S&P 500 nonnancials had qualied equity stakes of their own in the rms where they were not board members and found no example of such holdings. For this reason, in order to study the trust votes separately from the bankers own votes, in the rest of the paper we assume that bankers do not have an equity stake of their own in the nonnancial rms where they do not have a board seat. Furthermore, given that our probit models cannot be estimated once we include

28

the bankers own equity stake as an independent variable, we estimate our models with the OLS method instead.52 A second limitation of the models in Table 9 is that they include information on the voting stakes as of 2000 yearend, but they do not control for the date when the directors, including bankers, joined the rms board nor their voting stakes at that time. To the extent that dierent director groups (insiders, outsiders-nonbankers, outsiders-bankers) have systematically dierent tenures or accumulate stock of the rm at dierent rates over time, this may introduce problems for those models. For example, given that the compensation packages of rm directors often include stock options, one would expect the voting stake of inside directors to grow with their tenure in the corporation. This time eect is also likely to be present in the outside-directors voting stakes, but it is less likely to be present in banks trust voting stakes. This, of course, would not be the case if a bank were to increase its trust investments in rms after it became a member of their board (more on this in the next subsection). To evaluate the potential importance of tenure on the voting stakes of rm directors, we started by comparing in the top panel of Table 10 the average tenure of rms directors. Our statistics show that inside directors tend to stay longer with the rm than outsider directors, and among the latter non-bank directors tend to stay slightly longer than bank directors. To further evaluate the potential importance of tenure on the voting power of rm directors we present in the bottom panel of Table 10 the voting stakes as of 2000 yearend of the classes of directors that joined the rms boards in 2000 and 1999, respectively. As expected, directors who have served the rm in this capacity for a longer time period tend to have larger voting stakes. The accumulation of voting power is particularly evident among inside directors. These results, therefore, suggest that to evaluate the potential role of trust voting on bank-board memberships, it is important to control for the voting stakes of directors at the time they joined the rm board. Given that we do not have a panel on both directors voting stakes and the BHCs trust voting stakes, but only a cross section of these stakes at the end of 2000, our data seems more appropriate to evaluate the role of trust voting rights on the bank directors who joined the boards of rms more recently.
52

The reason the probit models cannot be estimated is that the bankers own voting stake variable predicts

perfectly the dependent variable in one case: whenever that variable is zero there is no banker on the board of the rm.

29

In order to evaluate the potential impact of the two limitations of our data on the results we derived with the probit model, we altered our econometric model rst, to control for the bankers own voting stakes separately from his BHCs trust voting stakes, and second, to control for the date the banker joined the board of the rm. To this end we investigated the 26 bankers who joined the boards of rms in 1999 and 2000. We consider these two classes together as opposed to the bankers who joined the boards in 2000 because only 10 bankers joined the boards of rms in this year. Table 11 presents the results of our new econometric model on bank-boards memberships.53 All models were estimated with robust standard errors clustered on the rm. Model 1 of this table accounts for the bankers own voting rights separately from those of the trust business of his BHC in order to address the rst limitation we discussed above. According to it, only the former variable helps explain banks board memberships. This model, however, does not address the second limitation we discussed above because it does not account for the banks voting power at the time they joined the boards of rms. To address this issue, we added to model 1 two variables: the (personal) voting stakes controlled by those bankers who joined the boards of rms during the 1999-2000 time period and the trust voting stakes controlled by the BHCs of these bankers. Model 2 reports the results of this test and shows that the trust voting power of BHCs at the time their bankers join the boards of rms helps explain these bankers board memberships. Note that the trust voting rights controlled by the BHCs of those bankers who joined the boards of rms in 1999 or 2000 help explain these bankers board memberships even after we account for these bankers own voting stakes in rms. As we did above, we tested the robustness of this nding to the cross-ownership and lending relationships rationales for bankers to join the boards of rms (models 3-5 of Table 11). After we add the variables to control for these rationales, we continue to nd that bankers are more likely to join the boards of rms in which their BHC controls a voting stake through its trust business. The variable which measures the trust voting stake of the BHCs of those bankers who joined the boards of rms over the 1999-2000 time period continues to be highly signicant. Note also that, as with our probit analysis, the rms equity stakes in banks
53

In the interest of space, and because the ndings are similar, we present only the results when we measure

banks trust voting power as the sum of the voting stakes they have sole voting authority over and those stakes they have shared voting authority over. The results that we get when we measure the banks trust voting power by the stakes they have sole voting authority over are available from the authors upon request.

30

and their lending relationships with lead underwriters of syndicates that lent to them are not statistically signicant, but their lending relationships with banks that participate in these syndicates as lenders help explain bank-board memberships. Finally, as a further robustness check to our key nding, and also as we did above, we interacted our lending relationship variables with the trust voting rights of the BHCs of those bankers who joined the boards of rms over the 1999-2000 time period. The results of this test, which are presented as models 6 and 7 of Table 11, continue to show that on average bankers are more likely to join the boards of rms in which their BHC has a trust voting stake, and the likelihood of this happening is higher when their BHC also has a lending relationship with these rms.

6.3

Causality

The correlation we have unveiled between BHCs trust voting stakes in rms and the presence of their bankers on the corporate board of these rms is mute about the causality of this link. A possibility is that the voting power a BHC controls through its trust business gets it elected to the board of the rm. Alternatively, once a banker gets elected to the board of a rm its BHCs trust department starts to invest in this rm and consequently gain control over an important voting stake in it.54 Although there are many ways in which reverse causality can be controlled for, we followed one of the most common tests in the literature, which consists in lagging the relevant independent variable, in our case the trust voting stake of BHCs, one period. Based on this test we found that the signs of the variables that measure the BHCs trust voting power remain unchanged, and the size and level of signicance of these variables remained unchanged or went up. These results, therefore, appear to be inconsistent with the existence of reverse causality in the link we have identied between banks trust voting rights and their presence in the boards of nonnancial rms, but consistent with the idea that trust voting rights increase a banks likelihood of getting elected to the board of the rm in which it has a voting stake.
54

Another possibility is that once a banker gets elected to the board of a rm, this rm chooses the bankers

BHC to manage its pension plan. Given that rms often invest their pensions plans funds in their own stock this will give the BHC control over an important voting stake of the rm.

31

Final remarks

There has been a great deal of attention among researchers on bank equity and voting stakes in nonnancial rms in Japan and Germany. In the United States, because banks in general have been barred from making equity investments in nonnancial rms for their own account, little attention has been devoted to these issues. Yet, as we have shown in this paper, American banks do control important voting stakes of nonnancial rms as a result of the equity investments they make through their trust business. A distinct feature of these equity investments is that they separate the cash rights of the stock from its voting rights. Researchers who have investigated this separation have focused on the potential conicts it introduces between the beneciaries and the duciaries of a stock, and have not considered the implications of a large portion of these voting rights being controlled by banks.55 Our paper, however, shows that bankers are more likely to join the corporate board of a nonnancial rm in which his BHC controls a large voting stake. This result is novel for the United States. It is also novel in that it shows a new source of value of voting rights that do not have cash rights attached, in general, and of trust votes, in particular. In this regard, our results have some similarities with Gorton and Schmids (1998) nding that German banks use the proxy voting they control to place their representatives on the rms supervisory board. Finally, our ndings raise questions on the often adopted assumption that banking is separated from commerce in the United States, particularly in research where the bank-rm equity ties have proven important in Japan and Germany. This suggests that a fruitful area for future research is to investigate if control of trust equity investments and voting stakes in nonnancial rms have some of the other implications researchers have found in connection with Japanese and German banks equity stakes and proxy voting, namely on the rms ability to access bank funding and on the bank lending terms as well as the investment banking services provided by the bank.

55

See Jarrow and Leach (1991), Payne, Millar and Glezen (1996) and Brickley, Lease and Smith (1988).

32

Table 1 Equity Ownership by the largest ve Japanese nancial institutions Ranka Corporation Equity stake 1 Toyota 21.5 2 Tokyo Elc. 15.7 3 Hitachi 13.6 4 Matsushi 17.3 5 Nippon Stl. 15.6 6 Kansai Elc. 15.3 7 Mitsubishi Elc. 18.0 8 Toshiba 15.8 9 N.E.C. 24.1 10 Nissan 21.9 Average 17.9
a

Corporations ranked as of 1992.

Source: Roe (1993) citing Japan Company Handbook (Tokyo Keizai Inc., 1977-92).

33

Table 2 Voting rights exercised by German banks in meetings of the largest widely held stock corporationsa Corporations Voting rights by banks in 1986b Three big banks Deutche Dresdner Commerz- All 3 bank bank bank banks 17.8 2.9 15.0 28.1 30.8 9.2 20.0 20.5 7.0 11.2 16.2 10.7 3.7 16.9 17.4 16.9 11.5 23.1 20.3 9.5 5.6 13.6 4.1 1.3 31.6 6.2 6.8 11.9 5.9 9.7 13.7 2.6 9.4 32.5 8.0 63.5 51.7 54.5 32.6 47.9 50.5 30.2 19.3 39.1 All banks Source of voting rights in 1992 All banks Own Invest. Proxy Total shares subsidiary votes shares 9.9 85.6 95.5 8.9 35.2 44.1 10.7 87.7 98.5 0.1 13.6 81.0 94.0 11.2 80.1 91.3 6.8 3.6 35.0 45.4 12.6 78.2 90.9 7.8 90.4 98.1 8.7 12.7 26.8 48.2 40.7 4.5 54.3 99.5 5.6 9.6 65.4 80.5

Siemens Volkswagen Hoechst BASF Bayer Thyssen VEBA Mannesmann MAN Preussag Average
a b

79.8 19.5 98.3 96.6 95.8 53.1 98.2 95.4 52.9 99.7 78.9

Corporations ranked as of 1992. Percentages are of all shares represented at the meeting. The numbers for Siemens and VEBA refer to the 1987 meeting. Sources: Left-hand panel, Baums (1995); right-hand panel, Baums (1992).

34

Table 3 Voting policies of two investment managers Voting policy of Alliance Capital Management Corporation 1. 2. Vote with management on routine matters (e.g. election of directors, ratication of selection of accountants) Oppose any antitakeover proposals (regardless of whether they are advanced by management or shareholders) except where special circumstances may dictate otherwise On matters relating to social and political responsibility issues, either abstain or vote in the manner indicated by a given client account Voting policy of an anonymous large investment manager Issues General policy Routine issues Social and political issues Governance issues Voting policy Proxies must be voted in the best interests of the shareholders. We will vote with management. Routine issues include election of directors, approval of stock options plans, and ratication of auditors. Unless instructed by a client, we will usually vote with management. We will usually vote against proposals that limit shareholder sovereignty. Such proposals include elimination of cumulative voting and approval of poison pills. We will vote on a case-by-case basis. These matters include restructurings, acquisitions, and divestitures.

3.

Non-Routine Business Issues

Sources: Top panel, Statement of Policy and Procedures for Voting Proxies on Behalf of Client Discretionary Accounts of Alliance Capital Management Corporation cited in Krikorian (1995). Bottom panel, Useem (1993) cited in Krikorian (1995).

35

Table 4 Trust business of large BHCs at 2000 yearenda Variables Mean Median Min BHC Assets 76,667 26,078 4,905 13f securities (value) 26,430 3,294 148 % of 13f sec. with inv. discretion 76.95 80.47 0.00 % of 13f sec. invested in c. stock 86.44 89.26 42.66 Investments in common stock number of rms 1016 437 66 Amount invested 23,402 2,713 131 % of c. stock with inv. discretion 76.40 79.47 0.00 % of c. stock with v. power 85.31 91.16 30.11 % of c. stock with sole v. power 78.08 82.82 0.00 Common stock of nonnancial companies number of rms 873 379 54 Amount invested 19,303 2,165 105 % of c. stock with inv. discretion 76.49 81.44 0.00 % of c. stock with v. power 86.45 91.16 23.05 % of c. stock with sole v. power 79.18 84.58 0.00 Common stock of nonnancial companies in S&P 500b number of rms 263 246 43 Amount invested 16,952 2,032 85 % of c. stock with inv. discretion 75.65 81.05 0.00 % of c. stock with v. power 86.71 91.61 29.19 % of c. stock with sole v. power 80.30 84.93 0.00

Max 902,210 308,666 100.00 97.40 4,330 291,449 100.00 99.60 98.51 3,790 241,309 100.00 99.74 98.58 403 222,740 100.00 99.68 98.50

a Data covers only trust assets with investment discretion. It covers only 71 of the top-100 BHCs by assets because 28 companies of the top-100 BHCs did not submit a 13f form for December of 2000 and 1 BHC submission could not be used. BHCs assets and amounts invested are in millions of dollars. All percentages are computed based on values. b The total number of US nonnancial companies in the S&P 500 is 407. We excluded 4 companies from the sample that went through mergers at 2000 yearend. Source: Authors computations.

36

Table 5 Number of equity and voting stakes held by large BHCs by size of the equity stake at 2000a Equity stakes Voting stakes Stakes All equity Equity stakes All voting Voting stakes stakes with inv. stakesc with sole discretionb authority All nonnancial rms >0 62,010 55,378 59,211 57,792 ]0, 2.5%] 60,692 54,327 58,180 56,902 ]2.5%, 5%] 853 694 659 600 ]5%, 10%] 334 258 266 220 ]10%, 20%] 95 72 79 50 > 20% 36 27 27 20 Nonnancial rms in S&P 500d >0 18,662 17,158 18,438 17,985 ]0, 2.5%] 18,481 17,047 18,331 17,932 ]2.5%, 5%] 115 89 63 43 ]5%, 10%] 48 19 32 13 ]10%, 20%] 15 3 11 0 > 20% 3 0 1 0
a Statistics report only to trust holdings in US nonnancial rms by 71 of the top-100 BHCs by assets because 28 companies of the top-100 BHCs did not submit a 13f form for December of 2000 and 1 BHC submission could not be used. b Includes all equity stakes that the BHC has either sole or share-dened investment discretion. A manager has shared-dened discretion when he shares this discretion with controlling or controlled companies (such as bank holding companies or their subsidiaries) or with investment advisers. c Excludes voting stakes that the BHC has no voting authority over. d The total number of US nonnancial companies in the S&P 500 is 407. We excluded 4 companies from the sample that went through mergers at 2000 yearend. Source: Authors computations.

37

Table 6 Equity stakes in nonnancial rms by BHCa Equity stakes All Equity stakes Mean Median 4.88 1.91 4.64 7.65 11.82 873 855 12 5 1 1 12.10 10.81 11.99 13.29 12.22 263 260 2 1 0 0 379 379 1 0 0 0 54 54 0 0 0 0 2.95 0.64 3.09 6.89 11.46 0.00 0.00 0.00 0.01 0.56 Min

Firm sized Number All rms 4641 < $100M 1607 $100M - $500M 1457 $500M - $10B 1392 > $10B 185 Equity stakes >0 ]0, 2.5%] ]2.5%, 5%] ]5%, 10%] ]10%, 20%] > 20%

Voting stakes Equity stakes with All voting stakesc Voting stakes with sole investment discretionb voting authority Max Mean Median Min Max Mean Median Min Max Mean Median Min Max Percentage of rms capital and voting rights held by top-71 BHCs, by rm size 60.62 3.32 2.08 0.00 59.73 4.12 2.28 0.00 67.86 3.78 2.18 0.00 61.28 60.62 1.43 0.44 0.00 53.60 1.66 0.51 0.00 60.62 1.56 0.48 0.00 60.37 59.73 3.45 2.23 0.00 59.73 3.98 2.44 0.00 59.72 3.74 2.30 0.00 59.72 50.80 5.02 4.43 0.00 47.45 6.36 5.64 0.00 67.86 5.79 5.28 0.00 61.28 42.79 5.74 5.70 0.49 26.23 9.77 9.33 0.16 22.94 8.17 8.29 0.12 16.48 Number of equity stakes and voting stakes in nonnancials per BHC, by stake size 3790 780 311 0 3788 834 370 53 3763 814 319 0 3760 3778 765 310 0 3780 819 370 53 3752 801 319 0 3751 148 10 0 0 146 9 1 0 123 9 0 0 120 78 4 0 0 73 4 0 0 62 3 0 0 59 20 1 0 0 19 1 0 0 19 1 0 0 18 9 0 0 0 9 0 0 0 5 0 0 0 5 0.00 0.00 1.26 0.34 0.80 0 0 0 0 0 0 16.48 15.37 14.17 16.48 12.90 402 402 13 4 0 0

38

Firm sized Number All rms 403 <$3B 114 $3B - $10B 135 $10B - $50B 134 >$50B 20 Equity stakes >0 ]0, 2.5%] ]2.5%, 5%] ]5%, 10%] ]10%, 20%] > 20%

Percentage of S&P 500 nonnancials capital and voting rights held by top-71 BHCs, by rm sizee 11.09 4.69 47.16 6.06 5.71 2.05 26.23 9.89 9.33 0.00 25.78 8.64 8.46 10.00 5.47 40.48 5.84 5.47 2.64 13.01 8.57 8.30 0.00 17.29 7.98 7.81 10.76 5.69 47.16 6.09 5.68 2.56 17.06 9.89 9.25 1.29 25.78 8.63 8.36 12.57 4.69 42.79 6.28 5.91 2.05 26.23 10.96 10.31 0.37 22.94 9.26 8.94 11.40 6.70 19.53 5.56 5.77 2.66 8.02 10.34 9.80 0.84 18.00 8.38 8.71 Number of equity stakes and voting stakes in S&P 500 nonnancials per BHC, by stake sizee 246 43 403 242 218 0 403 260 237 42 402 253 231 246 43 403 240 218 0 403 258 237 42 402 253 231 0 0 34 1 0 0 34 1 0 0 15 1 0 0 0 18 0 0 0 7 1 0 0 17 0 0 0 0 10 0 0 0 1 0 0 0 9 0 0 0 0 1 0 0 0 0 0 0 0 1 0 0

a Statistics report only to trust holdings in US nonnancial rms by 71 of the top-100 BHCs by assets because 28 companies of the top-100 BHCs did not submit a 13f form for December of 2000 and 1 BHC submission could not be used. The reason why the Max of voting rights is larger than the Max of equity stakes for rms with assets between $500M and $10B is due to one rm that has two classes of common stock outstanding, one of which is entitled to one vote per share and the other is 0 votes. b Includes all equity stakes that the BHC has either sole or share-dened investment discretion over. A manager has shared-dened discretion when he shares this discretion with controlling or controlled companies (such as bank holding companies or their subsidiaries) or with investment advisers. c Excludes voting stakes that the BHC has no voting authority over. d Firm size measured in assets. e The total number of US nonnancial companies in the S&P 500 is 407. We excluded 4 companies from the sample that went through mergers at 2000 yearend. Source: Authors computations.

Table 7 The presence of bankers in the S&P 500 nonnancials boards and their voting powera Variables Mean Median Min Max Number of directors per rm All directors 10.6 10 4 21 Inside directors 2.5 2 1 9 Outside directors Nonbank directors 7.8 8 1 20 Bank directorsb 0.2 0 0 2 Equity and voting stakes of rm directors Inside directors Equity stake per director 1.095 0.084 0.000 33.101 Voting stake per director 1.434 0.081 0.000 100.00c Outside directors Nonbank directors Equity stake per director 0.135 0.003 0.000 32.594 Voting stake per director 0.136 0.003 0.000 32.594 Bank directorsd Directors own equity stake 0.156 0.003 0.000 7.492 Directors own voting stake 0.156 0.003 0.000 7.492 Directors own & sole trust voting stake 0.743 0.335 0.001 8.902 Directors own & sole & shared trust voting stake 0.905 0.367 0.001 10.322
a Statistics computed for our sample of 403 US nonnancial rms that were in the S&P 500 index. The total number of US nonnancial companies in the S&P 500 is 407. We excluded 4 companies from the sample that went through mergers at 2000 yearend. b A bank director is dened as an employee of a bank who sits on the board of one of our 403 US nonnancial rms that were part of S&P 500 index. c This reports to a rm that has dual classes of stock, but only one of which (class B) has voting rights. An insider is the single holder of the rms class B shares. d The statistics reported here relate only to the 87 bank directors who are employees of the top-71 BHCs. For comparability reasons, we dropped the other 22 bank directors who were employed at other banks because we did not have the trust investments of these banks. Source: Authors computations.

39

Table 8 Nonnancial rms with a banker on the board vs nonnancials with no banker on the boarda Variables F. with F. without Dierence P value bankers on bankers on their board their board Number of rms 81 301 -220 % of rms that existed prior to 1990 93.83 81.40 -12.43 0.007 Average board size 11.79 10.18 1.61 0.000 Average number of (all) outside directors 9.19 7.65 1.54 0.000 Total assets 28,120 12,858 15,262 0.001 1998-2000 average ROA 0.07 0.07 0.00 0.790 Debt maturing within one year / Debt 0.06 0.07 -0.011 0.930 Debt maturing within one year / Liquidityb 3.93 1.05 2.88 0.008 Notes payable / Debt 0.19 0.16 0.03 0.265 Long-term debt / Assets 0.24 0.19 0.05 0.008 % of rms with outstanding public debt as of 2000 81.48 76.41 5.07 0.333 % of rms that issued public debt since 1982 83.95 78.41 5.55 0.273 % of rms with a S&P credit rating as of 2000 91.36 83.72 7.64 0.085 S&P credit ratingc 6.92 7.61 -0.69 0.041 Tobins Qd 2.70 3.92 -1.22 0.114 % of rms v. rights owned by inside directors 2.709 3.950 -1.241 0.349 % of rms v. rights owned by nonbank out. directors 1.15 0.88 0.27 0.577 % of the rms capital owned by top-71 BHCse 12.92 11.90 1.01 0.110 % of rm v. rights top-71 BHCs have v. powerf 10.78 9.65 1.13 0.015 % of rm v. rights top-71 BHCs have sole v. powerf 9.07 8.52 0.56 0.090 Firms with employees that are bank shareholdersg 32 46 -14 Firm-employees average bank equity stakeh 0.13 0.16 -0.03 0.878 Lending relationships with lead loan-syndicate underwritersi Average number of banks the rm borrowed fromj 1.54 1.52 0.02 0.314 Average HHI for the rms bank lendersk 0.90 0.87 0.03 0.000 Lending relationships with loan-syndicate underwritersl Average number of banks the rm borrowed fromj 9.35 8.88 0.47 0.000 Average HHI for the rms bank lendersk 0.24 0.19 0.05 0.000 Shares of rms by sector of activitym Agriculture 0.00 4.65 -4.65 Manufacturing 51.85 56.81 -4.96 Communications 23.46 12.96 10.50 Trade 17.28 11.63 5.66 Services 7.41 13.95 -6.55 a Statistics computed for 381 of the 407 US nonnancial rms that were in the S&P 500 index. We excluded 4 companies from the sample that went through mergers at yearend 2000 and 22 companies that had a banker on their board who was not an employee of the top-71 BHCs. b Liquidity is dened as the sum of cash and cash equivalents. c The scale conversion used is as follows: AAA=1, AA+=2, AA=3, AA-=4 CCC and lower than CCC=17. d Tobins Q is computed as the sum of market value of equity, book value of preferred stock, and total liabilities divided by total assets. e Includes investments where the BHC has sole, shared-dened or shared-other discretion. f Includes the bank employees own voting stake. g We consider the bank equity holdings of rms employees because we found that no S&P 500 nonnancial rm had a qualied equity holding in the sample banks. h Averages computed for the rms with employees who had an equity stake in one of the top-71 BHCs. i Lending relationship with lead underwriters is measured as the amount the rm borrowed from lead underwriters for the syndicates that lent to the rm over the 1995-99 time period scaled by the rms 1999 assets. j Averages computed among those rms that borrowed from one of the 71 banks in the sample at least once over the 1995-99 time period. k To compute the Herndahl-Hirschman index for each rm we started by determining the percentage of the amount the rm borrowed from each of the sample banks over the 1995-99 time period. The rms index was then computed as the sum of the square of these percentages. l Lending relationship with syndicate lenders is measured as the amount the rm borrowed from banks in the syndicates that lent to the rm over the 1995-99 time period scaled by the rms 1999 assets. m There are no rms in our sample in the real estate sector. Source: Authors computations.

40

Table 9 Probits: Dependent variable equals 1 when rm has a banker on the boarda

Variables Constant

Num. out. directors

Firm assetsb

LT Debt / Assets

1998-00 average ROA

Debt due in 1 yr / Cash and equivalents

Debt due in 1 yr / Total Debt

Firm issued public debt

1 -2.073 -5.54 0.105 3.05 0.004 2.01 0.972 1.67 2.470 1.93 0.021 1.66 -0.023 -0.04 0.022 0.14

BHC assetsc

Insiders v. stake

41
2.253 1.69 -12,738.1 9.0 -12,712.9 9.2 -12,713.1 9.2

Nonbank outsider directors v. stake

3 -2.081 -5.44 0.103 2.99 0.004 2.04 0.978 1.67 2.480 1.93 0.020 1.67 -0.015 -0.02 0.021 0.13 -0.002 -1.66 -0.205 -0.30 1.561 0.90

4 -2.081 -5.44 0.103 2.99 0.004 2.04 0.978 1.67 2.480 1.93 0.020 1.67 -0.014 -0.02 0.021 0.13 -0.002 -1.63 -0.205 -0.30 1.561 0.90

5 -2.081 -5.44 0.103 2.99 0.004 2.04 0.976 1.67 2.480 1.93 0.020 1.66 -0.016 -0.03 0.021 0.13 -0.003 -2.02 -0.206 -0.30 1.558 0.90

6 -2.079 -5.43 0.103 2.99 0.004 2.05 0.959 1.64 2.475 1.95 0.020 1.66 -0.026 -0.04 0.022 0.14 -0.009 -2.39 -0.217 -0.32 1.557 0.90

7 -2.080 -5.44 0.103 2.99 0.004 2.05 0.977 1.67 2.477 1.93 0.020 1.67 -0.016 -0.03 0.022 0.13 -0.003 -2.00 -0.207 -0.30 1.565 0.90

8 -2.076 -5.43 0.102 2.99 0.004 2.05 0.960 1.64 2.474 1.93 0.020 1.66 -0.025 -0.04 0.023 0.14 -0.009 -2.27 -0.216 -0.32 1.549 0.89

Bankers + BHC sole v. stakes

2 -2.082 -5.45 0.103 2.99 0.004 2.04 0.978 1.67 4.478 1.93 0.020 1.67 -0.014 -0.02 0.021 0.13 -0.003 -1.67 -0.205 -0.30 1.566 0.90 3.725 1.71 2.213 1.66 1.994 1.48 1.412 1.12

Bankers + BHC sole & shared v. stakes

0.366 0.24

Firm-employees equity stake in banksd

2.217 1.66 8.635 0.52

Lending rel. with lead loan-syndicate underwriterse

3.355 1.21 6.549 2.13

-4.342 -1.18 3.955 1.24 1.181 3.21

Lending rel. with loan-syndicate lendersf

(Bankers + BHC sole & s v. st.) x Rel w lead underwitersg

(Bankers + BHC sole & s v. st.) x Rel w synd lendersg -12,713.1 9.2 -12,712.5 9.2 -12,703.6 9.2 -12,707.5 9.2

Loglikelihood Pseudo R squared

0.520 3.22 -12,699.8 9.3

Variables measured as of 2000 yearend. Models estimated with robust standard errors and clustered on rms. All models control for the rms sector of activity as dened by SIC one-digit code. There is no dummy for real estate because there are no rms in this sector of activity in our sample. Z-statistics are beneath coecients. ***,**,* indicates statistical signicance at the 99%, 95%, and 90% level, respectively. Number of observations equal to 27,051.

Coecients scaled by an adjustment factor equal to 1,000.

Coecients scaled by an adjustment factor equal to 100,000.

We use the rm-employees equity stakes in banks because we found that no S&P 500 nonnancial rm had a qualied equity stake in the sample banks.

Lending relationships with lead underwriters are measured as the amount the rm borrowed from banks that acted as lead underwriters for the syndicates

that lent to the rm over the 1995-99 time period scaled by the rms 1999 assets.

Lending relationships with syndicate lenders are measured as the amount the rm borrowed from banks that participated as lenders in the syndicates that

lent to the rm over the 1995-99 time period scaled by the rms 1999 assets.

Coecients scaled by an adjustment factor equal to 1/1,000.

Source: Authors computations.

42

Table 10 Directors voting stake at 2000 yearend by tenure of the directora Variables Number Mean Median Min Max Average tenure of rm directors as of 2000 yearend (years)b Inside directors 10.48 7.00 0.00 61.00 Outside directors Nonbank directors 7.77 6.00 0.00 57.00 Bank directors 7.62 5.00 1.00 28.00 Voting stakes of rm directors by tenure of directors Inside directors 2000 starters 97 0.124 0.022 0.000 4.503 1999 starters 86 0.191 0.049 0.000 6.146 Outside directors Nonbank directors 2000 starters 292 0.010 0.000 0.000 0.992 1999 starters 302 0.192 0.002 0.000 32.594 Bank directors 2000 starters 10 0.019 0.000 0.000 0.172 1999 starters 16 0.016 0.002 0.000 0.202
a The statistics reported in this table relate only to the 87 bank directors who are employees of the top-71 BHCs. For comparability reasons, we dropped the other 22 bank directors who were employed at other banks because we did not have the trust investments of these banks. A bank director is dened as an employee of a bank who sits on the board of one of our 403 US nonnancial rms that were part of S&P 500 index. b The min tenure of insiders and outsiders (nonbank directors) is zero because we included in our sample directors who joined the rm at 2000 yearend (we excluded directors who left the rm during 2000). When we exclude these newcomers from the sample the mean tenure of these two groups increases to 10.79 and 8.01 respectively, and the median increases to 1 in both cases. The statistics for outside bank directors remain unchanged. Source: Authors computations.

43

Table 11 OLS estimates: Dependent variable equals 1 the rm has a banker on the boarda

Variables Constant

Num. out. directors

Firm assetsb

Long-term debt / Assets

98-00 average ROA

Debt due in 1 yr / Cash and equivalents

BHC assetsc

Insider directors voting stake

Nonbank outsider directors v. stake

Bank-directors own voting stake

44
0.369 0.89 9.60 9.68

1 -0.120 -1.27 0.027 2.98 0.001 2.30 0.245 1.57 0.652 1.97 0.005 3.67 -0.004 -1.24 -0.018 -0.13 0.473 0.86 14.384 6.02

99-00 Bk-director appointees own v. staked

BHC sole & shared v. stake

99-00 Bk-appointees BHC sole & shared v. stakee

2 -0.120 -1.26 0.027 2.98 0.001 2.30 0.245 1.57 0.651 1.97 0.005 3.67 -0.004 -0.99 -0.019 -0.14 0.471 0.85 14.059 6.51 0.336 3.75 0.079 0.20 13.369 2.14

4 -0.120 -1.26 0.027 2.98 0.001 2.30 0.244 1.57 0.651 1.97 0.005 3.67 -0.006 -1.28 -0.19 -0.14 0.471 0.85 13.804 6.17 0.335 3.73 0.079 0.20 13.319 2.15

5 -0.119 -1.26 0.027 2.98 0.001 2.31 0.240 1.55 0.651 1.98 0.005 3.65 -0.022 -2.11 -0.021 -0.15 0.471 0.86 13.450 5.62 0.330 3.60 0.028 0.07 13.275 2.18

6 -0.119 -1.26 0.027 2.98 0.001 2.30 0.245 1.57 0.651 1.97 0.005 3.67 -0.006 -1.45 -0.019 -0.14 0.472 0.85 13.286 5.49 0.317 3.41 -0.025 -0.06 12.966 2.24

7 -0.118 -1.25 0.027 2.98 0.001 2.31 0.240 1.55 0.650 1.97 0.005 3.65 -0.020 -2.02 -0.021 -0.15 0.468 0.85 13.286 5.17 0.312 3.25 -0.400 -0.93 13.382 2.30

Firm-employees equity stake in banksf

3 -0.120 -1.26 0.027 2.98 0.001 2.30 0.245 1.57 0.651 1.97 0.005 3.67 -0.004 -0.97 -0.019 -0.14 0.471 0.85 14.049 6.53 0.336 3.75 0.069 0.17 13.378 2.14 2.801 0.45 0.634 0.76 1.858 1.92 0.313 3.14 -0.974 -1.23

Lending rel. with lead loan-syndicate underwritersg

Lending rel. with loan-syndicate lendersh

1.086 1.13

(99-00 Bk-appointees BHC s. & sd. v. st.) x Rel w lead underwitersk

(99-00 Bk-appointees BHC s. & sd. v. st.) x Rel w synd lendersk 9.69 9.69 9.75 9.71

R squared

0.161 2.87 9.77

Variables measured as of 2000 yearend. Models estimated with robust standard errors and clustered on rms. All models control for the rms sector of activity as dened by SIC one-digit code. There is no dummy for real estate because there are no rms in this sector of activity in our sample. T-statistics are reported beneath coecients. ***,**,* indicate statistical signicance at the 99%, 95%, and 90% level, respectively. Number of observations equal to 27,051.

Coecients scaled by an adjustment factor equal to 1,000.

Coecients scaled by an adjustment factor equal to 1,000,000.

Measures the personal voting stake of the bank directors that joined the boards of rms over the 1999-00 time period. Coecients scaled by an adjustment

factor equal to 1/1,000.

Measures the voting stake of the BHCs of those bank directors that joined the boards of rms over the 1999-00 time period. It includes the voting stakes

that BHCs have sole and shared voting authority.

We use the rm-employees equity stakes in banks because we found that no S&P 500 nonnancial rm had a qualied equity stake in the sample banks.

Lending relationship with lead underwriters is measured as the amount the rm borrowed from banks that acted as lead underwriters for the syndicates

that lent to the rm over the 1995-99 time period scaled by the rms 1999 assets.

Lending relationship with syndicate lenders is measured as the amount the rm borrowed from banks that participated as lenders in the syndicates that

lent to the rm over the 1995-99 time period scaled by the rms 1999 assets.

Coecients scaled by an adjustment factor equal to 1/1,000.

Source: Authors computations.

45

References
Aoki, M., H. Patrick and P. Sheard (1993) The Japanese Main Bank System: An Introductory Overview, CEPR Working Paper 353. Arping, S. (2000) Banking, Commerce and Antitrust, mimeo University of Amsterdam. Barth, J.R., R. Dan Brumbaugh and J.A. Wilcox (2000) The Repeal of Glass-Steagall and the Advent of Broad Banking, Journal of Economic Perspectives 14(2), 191-204. Baums, T. (1995) Universal Banks and Investment Companies in Germany, mimeo Universitt Osnabr ck. a u Baums, T. (1992) Corporate Governance in Germany: The Role of the Banks, CEPR Working Paper 311. Bebchuk, L., R. Kreekman and G. Triantis (1999) Stock Pyramids, Cross-Ownership, and Dual Class equity: The Creation and Agency Costs of Separating Control from Cash Flow Rights, NBER Working Paper 6951. Berle, A. (1959) Power Without Property, New York, Harcourt, Brace and Company. Berlin, M., K. John and A. Saunders (1996) Bank Equity Stakes in Borrowing Firms and Financial Distress, Review of Financial Studies 9, 889-919. Booth, J.R. and D.N. Deli (1999) On Executives of Financial Institutions as Outside Directors, Journal of Corporate Finance 5, 227-250. Boyd, J.H., C. Chang and B. D. Smith (1997) Moral Hazard Under Commercial and Universal Banking, Journal of Money Credit and Banking 30, 426-468. Brickley, J., Lease, R. and Smith, C. (1988) Ownership Structure and Voting on Antitakeover Amendments, Journal of Financial Economics 20, 267-291. Cable, J. (1985) Capital Market Information and Industrial Performance: The Role of West German Banks, Economic Journal 95, 118-132. Chirinko, R.S. and J. A. Elston (1996) Banking Relationships in Germany: Empirical Results and Policy Implications, Federal Reserve Bank of Kansas City Working Paper 96-05. Edwards, J. and K. Fischer (1994) Banks, Finance and Investment in Germany, Cambridge University Press, Cambridge. Elston, J.A. (1993) Firm Ownership Structure and Investment: Theory and Evidence from German Panel Data, Wissenschaftszentrum, Berlin. Fama, E. F. and M. C. Jensen (1983) Separation of Ownership and Control, Journal of Law and Economics 27, 301-325. Flath, D. (1993) Shareholding in the Keiretsu, Japans Financial Groups, Review of Economics and Statistics 25, 249-257. 46

Franks, J. and C. Mayer (1997) Ownership, Control and the Performance of German Corporations, mimeo London Business School. Gorton, G. and F. Schmid (1998) Universal Banking and the Performance of German Firms, Journal of Financial Economics 58, 29-80. Grossman, S. and O. Hart (1988) One Share-One Vote and the Market for Corporate Control, Journal of Financial Economics 20, 175-202. Harm, C. (1992) The Relationship between German Banks and Large German Firms, World Bank Working Paper 900. Harris, M. and A. Raviv (1988) Corporate Governance: Voting Rights and Majority Rules, Journal of Financial Economics 20, 203-235. Haubrich, J.G. and J.A.C. Santos (2003a) Alternative Forms of Mixing Banking with Commerce: Evidence from American History, Financial Markets, Institutions and Instruments, 12(2), 121-164. Haubrich, J.G. and J.A.C. Santos (2003b) Banking and Commerce: A Liquidity Approach, mimeo Federal Reserve Bank of New York. Hoshi, T. and A. Kashyap (2001) Corporate Financing and Governance in Japan: The Road to the Future, MIT Press, Cambridge, Massachusetts. Hoshi, T., A. Kashyap and D. Scharfstein (1991) Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups, Quarterly Journal of Economics, 33-60. Hoshi, T., A. Kashyap and D. Scharfstein (1990) The Role of Banks in Reducing the Costs of Financial Distress in Japan, Journal of Financial Economics 27, 67-88. James, C. (1995) When Do Banks Take Equity in Debt Restructurings? Review of Financial Studies 8, 1209-1234. Jarrow, J. and R. Leach(1991) The Relevance of Fiduciary Conict-of-Interests in Control versus Issue Proxy Contests, Journal of Financial and Quantitative Analysis 26(4), 53347. John, K., T. A. John and A. Saunders (1994) Universal Banking and Firm Risk Taking, Journal of Banking and Finance 18, 307-323. Kang, J. and A. Shivdasani (1995) Firm Performance, Corporate Governance, and Top Executive Turnover in Japan, Journal of Financial Economics 38, 29-58. Kaplan, S.N. and B.A. Minton (1994) Appointments of Outsiders to Japanese Boards: Determinants and Implications for Managers, Journal of Financial Economics 36, 225-258. Kim, S. (1992) Corporate Financing Through a Shareholder Bank: Lessons from Japan, Federal Reserve Bank of San Francisco Working Paper 92-03. 47

Krber, U. (1989) Die Stimmrechtsvertretung durch Kreditinstitute, Duncker & Humblot, o Berlin. Krikorian, B.L. (1995) Fiduciary Standards in Pension and Trust Fund Management. 2nd edition. Stoneham, MA: Butterworth Legal Publishers. Kroszner, R.S. and P.E. Strahan (1999) Bankers on Boards: Monitoring, Financing, and Lender Liability, Forthcoming in the Journal of Financial Economics. Mace, M. (1971) Directors: Myth and Reality, Boston, Harvard Business School Press. Morck, R. and M. Nakamura (1999) Banks and Corporate Control in Japan, Journal of Finance 54, 319-339. Morck, R., M. Nakamura and A. Shivdasani (2000) Banks, Ownership Structure, and Firm Value in Japan, Journal of Business 73(4), 539-567. M lbert, P.O. (1997) Bank Equity Holdings in Nonnancial Firms and Corporate Governance: u The Case of German Universal Banks, mimeo, Universitt Trier. a Payne, T., Millar, J. and G. Glezen (1996) Fiduciary Responsibility and Bank-rm Relationships: An Analysis of Shareholder Voting by Banks, Journal of Corporate Finance 3, 75-87. Pollard, A.M., J.G. Passaic, K.H. Ellis, and J.P. Daly (1988) Banking Law in the United States Boston, Butterworth Legal Publishers. Pozdena, R.J. (1991) Why Banks Need Commerce Powers, Federal Reserve Bank of San Francisco Economic Review 18-30. PricewaterhouseCoopers (1999) The Trust Regulatory Handbook, PricewaterhouseCoopers Regulatory Handbook Series. Armonk, NY: Sharpe Professional. Prowse, S. D. (1990) Institutional Investment Patterns and Corporate Financial Behavior in the United States and Japan, Journal of Financial Economics 27, 43-66. Puri, M. (1996) Conicts of Interest, Intermediation, and the Pricing of Underwritten Securities, mimeo, Graduate School of Business, Stanford University. Rajan, R. (1992) Conict of Interest and the Separation of Commercial and Investment Banking, mimeo, Graduate School of Business, University of Chicago. Roe, M.J. (1993) Some Dierences in Corporate Governance in Germany, Japan and the United States, Yale Law Journal 102, 1927-2003. Roe, M. J. (1990) Political and Legal Restraints on Ownership and Control of Public Companies, Journal of Financial Economics 27, 7-41. Santos, J.A.C. (1999) Bank Capital and Equity Investment Regulations, Journal of Banking and Finance 23(7) 1095-1120.

48

Santos, J.A.C. (1998) Banking and Commerce: How Does the United States Compare to Other Countries? Federal Reserve Bank of Cleveland Economic Review 34(4), 14-26. Sheard, P. (1994) Reciprocal Delegated Monitoring in the Japanese Main Bank System, Journal of the Japanese and International Economies 8, 1-21. Sheard, P. (1989) The Main Bank System and Corporate Monitoring and control in Japan, Journal of Economic Behavior and Organization 11, 399-422. Schneider-Lenn, E.R. (1992) Corporate Control in Germany, Oxford Review of Economic e Policy 8(3), 11-23. Simon, M.C. (1998) The Rise and Fall of Bank Control in the United States: 1890-1939, American Economic Review 88(3), 1077-1093. Soldofsky, R.M. (1971) Institutional Holdings of Common Stock, 1900-2000: History, Projection, and Interpretation, Bureau of Business Research, Graduate School of Business Administration of the University of Michigan. Trust Assets of Financial Institutions (1999) Trust Assets of Financial Institutions, Federal Financial Institutions Examination Council, Washington D.C. U.S. House Committee on Banking and Currency. Subcommittee on Domestic Finance. Bank Stock Ownership and Control. 89th Cong., 2d sess., 1966. Committee Print. Useem, M. (1993) Building an Organizational Foundation for Relational Investing, paper presented at the conference Relational Investing, sponsored by the Institutional Investor Project of the Center for Law and Economic Studies, Columbia University School of Law. Vancil, R. (1987) Passing the Baton: Managing the Process of CEO Succession, Boston: Harvard Business School Press. Weinstein, D.E. and Y. Yafeh (1998) On the Costs of a Bank-Centered Financial System: Evidence from the Changing Main Bank Relations in Japan, Journal of Finance 53, 635-672. Wenger, E. and C. Kaserer (1997) The German System of Corporate Governance: A Model that should not be Imitated, in Competition and Convergence in Financial Markets S.W. Black and M. Moersch (Eds), Elsevier, Amsterdam, 41-78.

49