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Who is Really in Control.

Posted on Monday, 12th September 2011 @ 02:58 AM by Text Size A | A | A

In the first such analysis ever
conducted, Swiss economic researchers have conducted a global network
analysis of the most powerful transnational corporations (TNCs). Their
results have revealed a core of 787 firms with control of 80% of this
network, and a “super entity” comprised of 147 corporations that have a
controlling interest in 40% of the network’s TNCs.

global 
netweook analysis of corporate control, strongly connected coreStrongly
Connected Component (SCC); layout of the SCC (1318 nodes and 12,191
links). Node size scales logarithmically with operation revenue, node
color with network control (from yellow to red). Link color scales with
weight.

[Note to the reader: see the very end of this article for a ranking
of the top 50 ‘control holders’]

When we hear conspiracy theorist talk about this or that powerful
group (or alliance of said groups) “pulling strings” behind the scenes,
we tend to dismiss or minimize such claims, even though, deep down, we
may suspect that there’s some degree of truth to it, however distorted
by the theorists’ slightly paranoid perception of the world. But perhaps
our tendency to dismiss such claims as exaggerations (at best) comes
from our inability to get even a slight grip on the complexity of global
corporate ownership; it’s all too vast and complicated to get any clear
sense of the reality.

But now we have the results of a global network analysis (Vitali,
Glattfelder, Battiston) that, for the first time, lays bare the
“architecture” of the global ownership network. In the paper abstract,
the authors state:

“We present the ?rst investigation of the
architecture of the international ownership network, along with the
computation of the control held by each global player. We ?nd that
transnational corporations form a giant bow-tie structure* and that a
large portion of control ?ows to a small tightly-knit core of ?nancial
institutions
. This core can be seen as an economic “super-entity”
that raises new important issues both for researchers and policy
makers.” [emphasis added]

* This “bow tie” structure is similar to
the structure of the WWW (analyzing for most influential/most trafficked
websites); see diagram below.

bow tie 
structure of global corporate controlA bow-tie consists of in-section (IN),
out-section (OUT), strongly connected component or core (SCC), and tubes
and tendrils (T&T).

Data from previous studies neither fully supported nor completely
disproved the idea that a small handful of powerful corporations
dominate much or most of the world’s commerce. The researchers
acknowledge previous attempts to analyze such networks, but note that
these were limited in scope to national networks which “neglected the
structure of control at a global level.”

What was needed, assert the researchers, was a complex network
analysis.

“A quantitative
investigation is not a trivial task because ?rms may exert control over
other ?rms via a web of direct and indirect ownership relations which
extends over many countries. Therefore, a complex network analysis is
needed in order to uncover the structure of control and its
implications. “

To start their analysis, the researchers
began with a list of 43,060 TNCs which were taken from a sample of 30
million “economic actors” contained in the Orbis 2007 database [see end
note]. TNCs were identified according to the Organization of Economic
Co-operation and Development (OECD) definition of a transnational
corporation [see end note]. They next applied a recursive search
algorithm which singled out the “network of all the ownership pathways
originating from and pointing to these TNCs.”

The resulting TNC network includes 600,508
nodes and 1,006,987 ownership ties.

Bow-tie 
structure of the largest connected component (LCC)Bow-tie structure of the
largest connected component (LCC) and other connected components (OCC).
Each section volume scales logarithmically with the share of its TNCs
operating revenue. In parenthesis, percentage of operating revenue and
number of TNCs

In terms of the connectivity of the
network, the researchers found that it consists of many small connected
components, but the largest one (encompassing 3/4 of all nodes)
“contains all the top TNCs by economic value, accounting for 94.2% of
the total TNC operating revenue.”

Two generalized characteristics were
identified:

1] A strongly connected component
(SCC), that is, a set of ?rms in which every member owns directly and/or
indirectly shares in every other member. The emergence of such a
structure can be explained as a means of preventing take-overs, reducing
transaction costs, risk sharing and increasing trust between “groups of
interest.”

and

2] The largest connect[ed] component
contains only one dominant, strongly connected component
(comprised
of 1347 nodes). This network, like the WWW, has a bow tie
structure. What’s more, they found that this component, or core, is also
very densely connected; on average, members of this core have ties to
20 other members. “Top actors” occupy the center of the bow tie. In
fact, a randomly chosen TNC in the core has about 50% chance of also
being among the top holders
, as compared to, for example, 6% for
the in-section. [emphasis added]

“As a result, about 3/4
of the ownership of ?rms in the core remains in the hands of ?rms of
the core itself. In other words, this is a tightly-knit group of
corporations that cumulatively hold the majority share of each other.”

In examining the details of this core, the
analysis also showed that only 737 top holders accumulate 80% of the
control over the value of all TNCs (in the analyzed network). Further,

“despite its small
size, the core holds collectively a large fraction of the total network
control. In detail, nearly 4/10 of the control over the economic
value of TNCs in the world is held, via a complicated web of ownership
relations, by a group of 147 TNCs in the core, which has almost full
control over itself
. The top holders within the core can thus be
thought of as an economic “super-entity” in the global network of
corporations.” [emphasis added]

Concerning the implications of this super
entity, the researchers asked two fundamental questions: First, what are
the implications for market competition, and, second, what are
the implications for economic stability?

Regarding the first question, the authors
assert that no matter the origin of the SCC, due to its high degree of
TNC network control, “it weakens market competition”.

It is clear just from the history of
anti-trust laws in this country (the U.S.) that concentrated ownership
stifles free market competition and innovation, reduces over-all
employment, and leads to excessive pricing.

some major 
TNCs in the ?nancial sector.(source: Orbis 2007)Zoom on some major TNCs in
the ?nancial sector. Some cycles are highlighted. Note: data for this
analysis comes from the 2007 Orbis database — prior to the 2008
financial crisis, thus, firms such as Bear Stearns and Lehman Bros. are
included.

In regards to the second question, the
researchers note that “the existence of such a core in the global market
was never documented before and thus, so far, no scientific study
demonstrates or excludes that this international ‘super-entity’ has ever
acted as a bloc.

However, there is historical data — such as
within the airline, auto and steel industries — supporting this
possibility.

“…top holders are at
least in the position to exert considerable control, either formally
(e.g., voting in shareholder and board meetings) or via informal
negotiations.”

Additionally, recent studies (Stiglitz
J.E., 2010, Battiston S. et al, 2009) have shown that densely
connected ?nancial networks are highly susceptible to systemic risk.
Despite the fact that such networks may seem robust in good economic
times, in times of crisis however, member firms tend to enter ‘distress
mode’ simultaneously. This was seen recently in the 2008 (“near”)
financial collapse (note: 3/4 of the network core in this
analysis are ?nancial intermediaries).

Calling their findings “remarkable”, they
suggest that because “international data sets as well as methods to
handle large networks became available only very recently, [this] may
explain how this ?nding could go unnoticed for so long.”

While the researchers acknowledge that verifying whether the
implications of their findings “hold true for the global economy” is
beyond the scope of their current research, they assert that their
unprecedented attempt to uncover the structure of corporate control is
“a necessary precondition for future investigations.”

The paper, The network of
global corporate control
(Vitali, Glattfelder, Battiston) was
published July 26, 2011, on arXiv.org

End Notes:

The Orbis 2007 marketing
database
comprises about 37 million economic actors, both
physical persons and ?rms located in 194 countries, and roughly 13
million directed and weighted ownership links (equity relations).  This
data set is intended to track control relationships rather than
patrimonial relationships. Whenever available, the percentage of
ownership refers to shares associated with voting rights. Accordingly,
we select those companies which hold at least 10% of shares in companies
located in more than one country. Overall we obtain a list of 43,060
TNCs located in 116 different countries, with 5675 TNCs quoted in stock
markets.

The de?nition of TNCs given by the OECD states that they
“…comprise companies and other entities established in more than one
country and so linked that they may coordinate their operations in
various ways…”

Diagrams: (source) The
network of global corporate control
(Vitali, Glattfelder,
Battiston) 

= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =

Top 50 Control-Holders Ranking:

{source: the following is quoted directly
from the research paper]

This is the ?rst time a ranking of economic actors by global control
is presented. Notice that many actors belong to the ?nancial sector
(NACE codes starting with 65,66,67) and many of the names are well-known
global players.

The interest of this ranking is not that it exposes unsuspected
powerful players. Instead, it shows that many of the top actors belong
to the core. This means that they do not carry out their business in
isolation but, on the contrary, they are tied together in an extremely
entangled web of control. This ?nding is extremely important since there
was no prior economic theory or empirical evidence regarding whether
and how top players are connected.

Shareholders are ranked by network control (according to the
threshold model, TM). Columns indicate country, NACE industrial sector
code, actor’s position in the bow-tie sections, cumulative network
control. Notice that NACE codes starting with 65,66, or 67 belong to the
?nancial sector.

Rank , Economic actor name, Country, NACE code, Network Cumul.
Network position, control (TM, %)

1 BARCLAYS PLC  GB 6512  SCC 4.05

2 CAPITAL GROUP COMPANIES INC, THE  US  6713  IN  6.66

3 FMR CORP  US  6713  IN  8.94

4 AXA  FR  6712  SCC  11.21

5 STATE STREET CORPORATION US 6713 SCC 13.02

6 JP MORGAN CHASE & CO. US 6512 SCC 14.55

7 LEGAL & GENERAL GROUP PLC GB 6603  SCC 16.02

8 VANGUARD GROUP, INC., THE  US 7415 IN 17.25

9 UBS AG  CH 6512  SCC 18.46

10 MERRILL LYNCH & CO., INC. US 6712  SCC 19.45

11 WELLINGTON MANAGEMENT CO. L.L.P. US 6713  IN 20.33

12 DEUTSCHE BANK AG DE 6512  SCC 21.17

13 FRANKLIN RESOURCES, INC. US 6512  SCC 21.99

14 CREDIT SUISSE GROUP  CH 6512 SCC 22.81

15 WALTON ENTERPRISES LLC US 2923 T&T 23.56

16 BANK OF NEWYORKMELLON CORP. US 6512 IN 24.28

17 NATIXIS   FR 6512 SCC 24.98

18  GOLDMAN SACHS GROUP, INC., THE US 6712 SCC 25.64

19 T. ROWEPRICE GROUP, INC. US 6713 SCC 26.29

20 LEGG MASON, INC. US 6712 SCC 26.92

21 MORGAN STANLEY US 6712 SCC 27.56

22 MITSUBISHI UFJ FINANCIAL GROUP, INC. JP 6512 SCC 28.16

23 NORTHERN TRUST CORPORATION US 6512 SCC 28.72

24 SOCIÉTÉ GÉNÉRALE FR 6512 SCC 29.26

25 BANK OF AMERICA CORPORATION US 6512 SCC 29.79

26 LLOYDS TSB GROUPPLCGB 6512 SCC 30.30

27 INVESCOPLCGB 6523 SCC 30.82

28 ALLIANZSE DE 7415 SCC 31.32

29 TIAA US 6601 IN 32.24

30 OLD MUTUAL PUBLIC LIMITED COMPANY GB 6601 SCC 32.69

31 AVIVAPLC GB 6601 SCC 33.14

32 SCHRODERSPLC GB 6712 SCC 33.57

33 DODGE & COX US 7415 IN 34.00

34 LEHMAN BROTHERS HOLDINGS, INC. US 6712 SCC 34.43

35 SUN LIFE FINANCIAL, INC. CA 6601 SCC 34.82

36 STANDARDLIFEPLCGB 6601 SCC 35.2

37 CNCE FR 6512 SCC 35.57

38 NOMURA HOLDINGS, INC. JP 6512 SCC 35.92

39 THE DEPOSITORY TRUST COMPANY US 6512 IN 36.28

40 MASSACHUSETTS MUTUAL LIFE INSUR. US 6601 IN 36.63

41 INGGROEP N.V.  NL 6603  SCC 36.96

42 BRANDES INVESTMENT PARTNERS, L.P. US 6713 IN 37.29

43 UNICREDITO ITALIANO SPA IT 6512 SCC 37.61

44 DEPOSIT INSURANCE CORPORATION OF JP JP 6511 IN 37.93

45 VERENIGING AEGON  NL 6512 IN 38.25

46 BNPPARIBAS  FR 6512 SCC 38.56

47 AFFILIATED MANAGERS GROUP, INC. US 6713  SCC 38.88

48 RESONA HOLDINGS, INC.  JP 6512  SCC 39.18

49 CAPITAL GROUP INTERNATIONAL, INC.  US 7414 IN 39.48

50 CHINA PETROCHEMICAL GROUP CO.  CN 6511 T&T 39.78

 

Source:
Planetsave (http://s.tt/138oe)

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