Mechanisms of Control
It has often been pointed out that the contribution of a subsidiary to the parent is evaluated with respect to its effect on the profit rate of the corporation as a global financial unit. The subsidiary is an instrument to be used within the context of the total operation. Conflicts of interest would be inevitable if the subsidiary were an independent financial unit.
The role of the subsidiary has been well explained by the Director and Vice-President of the Dupont Company or Canada:
“Clearly any subsidiary is always the chosen instrument of its parent company. Its very reason for existence is to carry out the function of the parent in its designed sphere of activity, and it must recognise this relationship in all its actions . . . often it h impractical to sell equity shares at anything like the per unit value to the parent company because of an initial loss periods or because the chief impact of the subsidiary is on the incremental earnings of the parent, rather than any direct profit in the subsidiary.”
This explains the reluctance of parent companies to permit direct shareholding in subsidiaries, and their many statements that subsidiaries are frequently not operating at a profit.
A three year campaign by the Montreal Stock Exchange to encourage American companies to sell a part of the equity of their subsidiaries to the Canadian public met with a resounding negative response. Ninety-four of the largest fully owned subsidiaries were approached by Montreal Stock Exchange in the early 1960’s. Sixty-four replied, only one of which said it planned to issue minority shares. ·
Furthermore, Canadian experience seems to be the rule. The United States Census of 1957 revealed that in 75% of cases of direct American investment abroad, the parent company holds 95% or more of equity stock in subsidiaries.
From the scores of replies received by the President of Montreal Stock exchange we select three:
“We have been represented in Canada for many years by wholly owned subsidiaries. As a matter of fact we do business through wholly-owned subsidiaries in some 22 countries throughout the world. A change to public ownership of anyone of these companies would represent a substantial departure from the platform in which we are geared to do business and at the moment we do not feel we are prepared to undertake a change of this kind.”
“All operations outside the United States are handled by wholly-owned subsidiaries. The Canadian company represents one of foreign subsidiaries all of which are wholly-owned. To date we have found this method of operations have been very beneficial to our customers and employees as well as to our stockholders, throughout the world.”
“At the present time we have no plans for outside financing at all so wo do not contemplate any sale of any stock at present the stock of . . . . , listed on the New York Stock Exchange and is available to investors, and an investor has the opportunity for investment in the entire scope of operations. We consider this preferable from an investor’s point of view, since the broader scope of the investment should make for an increased stability of the investment.”
Some of the replies were more explicit in explaining why the parent corporations did not wish to have stockholders in subsidiaries.