CORPORATE RIGHTS AND RESPONSIBILITIES

WEDNESDAY, JUNE 16, 1976

U.S. SENATE, COMMITTEE ON COMMERCE, Washington, D.C.

The committee met at 10:08 a.m., pursuant to recess, in room 2228, Dirksen Senate Office Building, Hon. Vance Hartke presiding.

OPENING STATEMENT BY SENATOR HARTKE

Senator HARTKE. This is the second day of Commerce hearings to explore the close relationship between the corporation and the Government, to ascertain the best means of assuring compliance by the corporation with our Nation's laws and social standards while promoting the greatest possible economic productivity.

To me this is one of the most important questions which faces this Nation today. The corporate giants dominate our marvelously productive economy. By virtue of that power they also dominate to a large degree our personal lives. I believe these hearings are important because we are looking at the basic structure of the corporation and asking how this tremendous force in this society can best be put to use for everyone's benefit.

In spite of the number of scheduling difficulties, I believe we are going to be able to hear all of those that have been interested in making a presentation before the committee.

I want to thank all of those who are here today in advance for coming forth to assist us in exploring this issue. I want to especially thank Senator Durkin for monitoring these hearings yesterday in my absence.

Our first witness is the distinguished Ambassador, Peter Peterson. STATEMENT OF PETER PETERSON, CHAIRMAN OF THE BOARD, LEHMAN BROS.

Mr. PETERSON. Thank you, Mr. Chairman.

I apologize for not having a written statement. I have been traveling around the world a bit. But just so you understand my position from the outset, perhaps I thought that I had better make an honest dollar before you pass this legislation.

I have great difficulties with the proposal of Federal chartering of corporations on many grounds, philosophic and practical. On philosophic grounds, having really nothing to do with business as such, but having a lot to do with our political system, I find myself quite troubled by the idea that we are going to be managed in our society by

what you might call constituency directors. It rather suggests a government and a set of institutions of special interests rather than a government of the people.

I suppose what it suggests is every time there is a new special interest or constituency, we would modify our institutions so that they can be represented.

I further suggest that if what we are saying by this kind of legislation is that every institution within itself must be diverse, must represent all the special interest groups, I suggest to you, Mr. Chairman, that what we will probably end up doing is destroying diversity, promoting uniformity, and more or less homogenizing society.

I believe our society is one of countervailing power centers in which various groups do their own thing and in the course of doing their own thing, there is a very important marketplace of ideas, one of whose focuses is here in the Congress, of course.

What I think is being suggested is probably not really democracy, but something you might call corporativism or corporatism.

It suggests that going back to the early days of the Catholic Church and to the time of Mussolini in Italy there was this notion of what he called "national syndicalism" in which various corporations would be represented by an amalgamation of various special interest groups.

I suggest, however, that this idea of constituency directors is a manifestation of not just a business concept, but a much larger concept. If we say that institutions can't somehow represent their own interests, but every one of them must be "balanced," I suppose we had better test this idea by extending it to its outer perimeters.

Are we suggesting, for example, that we should take most major institutions, labor unions, for example, and put environmental groups, consumer groups and, of course, business groups so that their judg ments are balanced? Should we do the same thing with various consumer groups in our society?

I suggest to you that this is a thoroughly bad idea, because what would happen is we would introduce highly adversary proceedings in the workings of all of our institutions. They would probably become highly politicized and if everybody were represented on everything, I submit to you they probably would end up doing very close to nothing. But now in terms of business institutions, I suggest to you that we should, first, start with what the purpose or the essential function of a business institution is-if you are going to praise the validity of this concept of constituency directors.

First and foremost, I would say a business, a corporation, functions effectively if it is essentially as an economic institution; not a social institution, not a political institution. Just as we have discovered in our society of checks and balances that the separation of economic and political power is a good ideal, and as we have discovered-I think-in our society and in others around the world that economic freedom and political freedom is really indivisible, I suggest that trying to mix the essential functions of our institutions is not a valid concept.

I think every institution needs to have what I would call an essence. If we try to do everything, we usually end up doing nothing.

One of the old cliches-and I guess we need a new cliche-is that the business of business is business. I guess what we mean by that is busi

nesses are responsible for providing goods and services, for the economic benefit of our society.

Now, I know there are some very sincere advocates who suggest that we provide these goods and services for the social benefit of our society, but the trouble, Mr. Chairman, I have with these formulations is that when we start injecting words like social benefit into the criteria by which we measure business institutions, we usually find that what this means is that somebody else is going to make some kind of a value judgment as to whether, for example, your wife or mine should be spending all this money on cosmetics or should be looking at television commercials, or whatever it might be.

With that comes a very important loss of freedom.

Now, another purpose of the corporation, it seems to me, is to provide a mechanism through which capital savings can be utilized to achieve that end. I think this injects into your concept of what a corporation is about that it ought to be managed for the benefit of the public stockholders, and a little later on I will have some specific suggestions in that regard, because it is they that provide the capital.

So this gives the essential mission of a corporation a certain simplicity. I am sure the critics would say I am being simplistic but, a company that doesn't make a profit and can't attract capital is a failure; and it means that quite literally-that it fails. In other words, it could be the most pollution-free, the most community-minded, the most employee welfare-oriented, and still be a total failure if it lost money.

So profits are a necessary condition, not sufficient but a necessary condition of a corporation. Obviously it must also observe basic laws and have some larger, longer term concepts of profits which suggests that you continue to have a viable, decent society and market.

I suggest to you, first of all, that if we try to say that a business institution should try to do everything, it will probably end up being nothing, because the decisions will not then be business decisions. They will be social, political decisions.

In the proposal of constituency directors you will know there is a proposal for nine directors, as I understand it, representing various special interest groups. The proposal-excuse me.

Senator HARTKE. There is a 5-minute warning for my vote. I have to go vote.

We will recess. [Recess.]

Senator HARTKE. Thank you.

Mr. PETERSON. Mr. Chairman, as I was saying, under the proposal, as I understand it, for constituency directorships I can find one thing that is slightly reassuring, that of the nine directors, the proposal is disingenuous enough to suggest that at least one of them should be directly concerned with profits and financial integrity.

I would ask you, sir, that if you saw a corporation where one director said he represented the environment, another the consumer, another labor, and so forth, would this not become a highly adversary process? And I would say a politicized process, because in the final analysis these constituency directors would probably have to be approved by somebody, governmental or otherwise. It would be hard for me to see how that process wouldn't get quite political.

Do we believe that such an organization would likely produce profits; and if we do believe that, how could this be, because many of the special interests that would be represented either think that profits are pretty bad as an idea; and those who don't often say that whatever their particular special interest is, that it is a good deal more important.

I would suggest that we might see an institution of various of us riding our respective hobbyhorses. The difficulty of that, of course, to carry that matter further is that hobbyhorses have a tendency to move up and down and make little progress in a forward direction.

I think an analogy to most great business organizations I know is closer to a cavalry where there is a sense of mission, a sense of dedication and perhaps even a sense of risk. You look at the great companies of this country, the Polaroids, the Xeroxes, the Texas Instruments, you will find most are characterized by decisiveness, for example, and risk-taking. Does anyone know of a "balanced" group of constituencies that is decisive, innovative, and risk-taking?

If so, I would like to know which ones meet those requirements. I find it distinctly ironic that those who are most critical really of the political processes in this country-may I say, Mr. Chairman, the congressional process, the constant mediation, debate and logrolling, and so forth-are making a proposal that I suspect would have many of the same characteristics.

I would also ask whether such a corporation could compete in world markets. You might say "so what?" Suppose it does make a lot less money or loses money.

Well, this gets us back to the public stockholders. If a business doesn't attract capital, then it won't build plants, it won't create jobs and products because it is under these circumstances that people decide to save money rather than spend it.

I would also suggest, Mr. Chairman, that you look at the pension plan ownership of stocks in American life, which is becoming extraordinarily important, as you know. Remember that when you are tampering with rates of return, or the perception of lower rates of return and higher risks, you are also tampering in a very significant way with the values of the pensions of American workers.

Very briefly, I will move into one other area. I would have thought that you as an eminent legislator might raise questions as to the implications of this approach in terms of its effect on the legislative processes. I have seen Christmas tree proposals in my day. This one strikes me as quite an omnibus, and perhaps a record setter.

We have here proposals dealing with areas of the FTC with regard to product advertising that will have to be substantiated by scientific research, an emloyer bill of rights, a mechanistic formula that has eluded the students of antitrust for years that would simply say, "If four corporations accounted for 50 percent of the market for any 2 consecutive years, this would be presumed illegal."

What I am suggesting is that I think there are major implications here about how we legislate in this country and which congressional committees have which responsibilities.

I would also suggest, Mr. Chairman, that you explore how this concept would be implemented, how would it be carried out?

One of the fears I would have is that it would suggest still a new regulatory body of some sort, a supergroup, because someone would have to see that the corporations lived up to these new charters.

In sum, Mr. Chairman, I think we have here what the doctors call the iatrogenic disease. This is the disease that you probably know of where the treatment ends up being or creating a new disease.

What we see here is a lot of exploratory, experimental surgery of vital parts of our body economic, and therefore our body politic, without seriously exploring what the symptoms are, how serious they are and whether there are alternative methods of dealing with them.

I doubt that you in your role lack legislative authority for interpreting, for example, interstate commerce clauses. You have done it with regard to environment, public health, safety, and so forth. This kind of omnibus approach is most troublesome from that standpoint. I would also suggest, Mr. Chairman, that it is singularly untimely. I read in today's papers that the likely Presidential candidate for your party had characterized Washington as a "huge, wasteful, unmanageable, insensitive, bloated bureaucratic mess." He must be doing something right, or saying something right in the eyes of the voters. So I would ask whether this kind of a proposal is going to make Washington less large, less wasteful, less unmanageable, less insensitive, less bloated, less bureaucratic, and less a mess. I rather doubt it.

Let me close with something more constructive. I think there are some problems with boards of directors in this country, but I think if we are going to identify these problems, we had better decide what the purpose of a board of directors is. It is not, as this proposal seems to suggest, to manage corporations. That is, in my judgment, a fulltime job.

I see boards of directors designed to monitor, to audit, to assess performance against goals, indeed to help define the goals, to provide for management quality and continuity.

I think that perhaps their unique contribution, however, is to represent the public stockholders. Now if we get into proposals in which the boards are actively involved in managing the business, I think we will have something almost as bad as everybody doing everyone's job, which is to have two people do the same job.

But businessmen such as myself have some bad habits. Among them is being very vocal and verbose about what is wrong with somebody else's programs or ideas and silent on what is right about their criticism.

I think the constructive area that I would like to talk about is this: Having said that boards represent public stockholders, I think it is probably necessary to go further and be sure they represent the public stockholders and not the management.

I think an intellectually responsible critic could make a responsible argument if he were to say that there is at least potential danger, I emphasize "potential," that boards of directors can be seen as instruments for the self-perpetuation, for self-serving, even the self-dealing of the managements at the expense of the public stockholders.

I would be sympathetic to proposals that would specify certain functions be carried out by nonmanagement or outside directors in this crucial monitoring role. For example, in lieu of recent disclosures