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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 full

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

time job.

that have troubled all of us, I think there is an important role for audit committees, and I would be sympathetic to proposals that would suggest that audit committees should be composed entirely of outside directors.

Compensation committees, it seems to me, should be composed entirely of outside directors. I could see public policy committees that see whether corporations are living up to their legal and social responsibilities being made up entirely of outside directors.

I will leave to last perhaps the most controversial suggestion. I think I would be sympathetic to an appraisal of the whole process of nominating directors to our boards, because it is here where the selfperpetuating potential is perhaps largest. At the very least, I would be sympathetic to the idea that even the nominating committee should be composed of outside directors. But beyond this, Mr. Chairman, if sensible ideas can be presented that open up this process of nominating directors-not under the direction of the Federal Government approving or designating criteria, which I think is a step in a highly political and dangerous direction--but in the direction of a more open and democratic process, I would think that would be a good idea.

I would be sympathetic to the idea that the majority of directors should be nonmanagement, outside directors. I think reasonable men can argue as to how these outside director requirements should be set up, that is, whether by legislation or by direct action by the stock exchanges, for examples. I would prefer the latter if they would do it.

The basic thrust, I think, would be to put the ultimate over in the hands of the nonmanagement directors and ultimately the public stockholders. The ultimate remedy, Mr. Chairman, in our corporations is, to fire the bosses. Bosses are usually not fired by their subordinates, except in some totalitarian societies, and that is pretty hazardous business, as you know.

There has been great progress in recent years and recent months on the responsibilities of outside directors. I don't think you can appreciate, unless you are one, how much more aware the outside directors are aware of their responsibilities than they were a few years ago. I think we can go still further in that direction.

Our goal should be a responsive and responsible decentralization, not in the final analysis of what I believe these proposals are, which in effect is toward an unresponsive centralization of power.

Thank you, Mr. Chairman. Senator HARTKE. Thank you, Mr. Peterson. I think maybe you misinterpreted the purpose of these hearings slightly on two scores.

One of them is that we are in an exploratory process here. What probably is some relatively uncharted water, and we are not sure

Mr. PETERSON. Did you say "unchartered”?
Senator HARTKE. "Unchartered."

Secondarily, a lot of attention has been given to the fact that a very distinguished consumer advocate, Mr. Ralph Nader, has put forth a specific mechanism for dealing with corporations, the Federal corporate charter. That is not a position which is being advocated either by the chairman or by the committee.

What we are doing, is dealing with the question of substance and procedure and where the two seemingly have gotten together-where substance becomes procedure and procedure becomes substance. That is, how do we deal with a situation where the two merge?

No one denies that the role of the corporation is to make a profit. As you have said, if corporations don't make a profit, they go out of business.

On the other side of the coin, we do have certain social responsibilities that everyone, including corporations, must meet.

Now, the mechanism, once you have decided what the substance is, of how you are going to deal with that substance becomes an entirely different question.

Dealing first with substance, we can start out on a question which receives a lot of attention through the press, like bribery, or misuse of funds, or defrauding of investors--things of that sort.

Then you come up to another one. You come to the question of monopoly practice, whether or not that becomes a matter of concern.

You come to the question of pollution, and then down the line on social behavior.

I don't believe that anyone really contends that a corporation has to have, as its sole requirement, consciousness of the social needs, but at the present time I don't think there is any question that there has been a little bit too much corporate activity in the past which has been undesirable.

Even you recognized that in your final statement.

You come back, then, to the mechanisms. But, I think we can decide that mechanism at a later date, once we have decided where the problem is. There is no question that the SEC provides one form of mechanism. The reason for it is that, for some reason, the local regulations or the lack of local regulations, have failed to accomplish their purpose.

Mr. PETERSON. Mr. Chairman, I don't want to sound antediluvian because there is a slight possibility I am not.

I would suggest that there is a very important question about what the social aspects of business are, a very important question.

I would suggest in our system of special interests, countervailing power centers, whatever language you want to use, we have a very important mechanism for achieving that.

That is the Congress of the United States. You have demonstrated in the past, it seems to me, that where there are social costs that are not considered in the balance sheets and the profit and loss statements of American business, you have legislated a good deal of legislation in recent years with regard to environment, public safety, health, and so forth.

I am not objecting to the idea that that kind of legislation should be carefully considered. I think my comments have to do with, a great deal, the mechanism, as you suggest, Mr. Chairman.

The mechanism that I object to is the idea-not that we are going to have laws that business institutions must live up to, decided democratically, but the mechanism for assuring that American business "behaves responsibly," behaves in a balanced way, will be vested in a board of directors in which the board members are chosen to represent

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