Economic literature contains a great deal of discussion about the separation of the control of industrial firms from the ownership of the stock in these firms. This paper deals with the recent growth of the institutional investors and how these investors, acting together, could by voting the stock they hold in their portfolios control the industrial firms. Control would be aided by the institutional officers who are directors of the industrial firms.

The institutional investors have cause to act together in that they are paid on the basis of funds managed, which is determined by portfolio performance. Each institution controls stock in several firms in the same industry. In many cases, financial institutions are the largest stockholders in other financial institutions. The financial institutions have director interlocks with other financial institutions and many industrial firms. It is expected that the financial controllers would desire the firms in an industry to perform similarly. The similar performance would serve to maintain or enhance the stock valuation of all firms in the financial controllers' portfolios.

Control would be effected by the directors of the firm acting on the officers of the firm. Information about other firms in the industry could be passed among firms by means of their interlocking directorates. The financial controllers should take action on the officers of the firm by removing them from office in the year of or the year following poor profit performance. The compensation of the officers of the firm will be dependent on firm performance for the bonuses and stock options that comprise the majority of their compensation. The variability and quantity of this compensation will depend on the level of financial control.

Regressions testing the effect of financial control on executive tenure and compensation were inconclusive. Compensation does vary with performance; officers do leave firms in years of poor profits. The financial control variables do not always aid in the explanation of this phenomenon.

Financial control should be good in that the desire of the financial controllers, increased stock values, is the same as the desire of the beneficial owners of the stock. Even though ownership and control are separated, the desire of the stockholder is met.