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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 approring 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.

a 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



these various special interests, and I submit, Mr. Chairman, that that process—and I know you aren't necessarily advocating that-will tend to rigidify, to paralyze the businessmaking function of a corporation.

Senator HARTKE. But there are certain violations of law which are occurring now by corporations. There is no disincentive inside corporate structure at the present time.

There is no disincentive for the individuals that are running them, for the people

Mr. PETERSON. Mr. Chairman, I think I would argue that the chief executives who no longer have their jobs might argue with that.

There has been a partial cleansing process taking place.
Senator HARTKE. I don't think you can successfully argue that.

I don't want to get too specific. I think if you will examine that situation you will find out that it does not always rule.

In fact, I would imagine in some cases you can see where there has actually been a reward to an individual who has been successful in really taking a corporation to a position in which they have been able to avoid legalities.

Mr. PETERSON. Couldn't I argue, Mr. Chairman, that if that is what we are all concerned about—and I am desperately concerned about illegal behavior—why don't we specify what that behavior is and then have penalties for companies that don't live up to the law, and let the existing regulatory agencies specify the mechanisms by which it is done.

I still don't see, frankly, why the concept of a board of directors made up of special-interest constituencies is required to achieve that goal.

Senator HARTKE. Let me give you a specific.

Let's say you have a corporation located in a community, and the board of directors has a difficult time with some of the working force.

They say, "Well, to penalize this community and show you what we can do, we will up and close here and move out.” That may be fine. Maybe that is their right to do so.

I am not saying it is or isn't. I am questioning what the social responsibility of that organization is. In other words, can they just flaunt the whole community and ruin the lives of individuals and their families and maybe destroy the whole reputation of a community without any form of concern whatsoever for what they have done to the people?

In many cases, people throughout the Nation on these industrial development committees, give of their time, give of their service, working hard, whether right or wrong, whether that is a proper procedure or not.

They at least feel they are providing a community service in trying to bring an industry to a community. Then, all of a sudden, there is no responsibility to any of these people in return from that corporation.

For example, in labor disputes in Europe, there are labor representatives. Generally speaking, contrary to what might be expected in an American community, in the business community in Europe there does not seem to be, as you well know, that antagonism.

In fact, this community representation has alleviated some of the problems in many of the disputes.

Well, I think Ỉ hear you, and I hope you will follow these hearings. I think you, yourself, have recognized a part of the problem that we are dealing with.

Knowing your versatility, I am sure that you will help us come up with the proper solution.

Mr. PETERSON. You know, Mr. Chairman, that versatility sounds like a euphemism that the eminent Mr. Dirksen once used with me. When I was a citizen of Illinois, there was a particular matter I was discussing with him. It seemed to me that he had changed his position rather profoundly between one visit and the other; and the great Senator looked at me one day and said, “Pete, you are probably wondering whether I am a man of principle or not," and I said, "Senator, since you have raised that question, I have to admit that that thought has crossed my mind.”

He said, "Actually I am a man of great principle, and my first principle is flexibility.”

I suggest your use of the word "versatility” has certain pejorative connotations that I will think of going back to New York.

Senator HARTKE. Thank you for coming.

Our next witness this morning is Mr. Donald Petrie, from Washington, D.C.

STATEMENT OF DONALD PETRIE, WASHINGTON, D.C. Mr. PETRIE. My name is Donald A. Petrie. I am a resident of Washington, D.C. I am a member of the bar of the States of Illinois and New York and of the District of Columbia.

During a 30-year career, I have served as an officer or director of a number of corporations and for some years I was a partner in a Wall Street investment firm.

In connection with your study of corporate rights and responsibilities, I would like to talk about matters of corporate control.

Under our corporate system the owners of the corporation-the shareholders-elect the board of directors which, in turn, makes policy and selects, retains, or removes the chief executive.

By analogy to our Federal Government, one would say that the board of directors embraces both the legislative and the executive power-or at least the power to select and remove the chief executive.

The system of selection of the all-powerful board of directors is therefore of paramount importance to the shareholders.

At the present time, with some important exceptions, the election rules are controlled by the laws of the State of incorporation with respect to such parliamentary matters as cumulative voting, quorum requirements, notice of meetings, and voting lists.

Since State laws vary in these matters, clever lawyers for larger, publicly owned corporations have tended to prefer those States whose laws most favor incumbent managements and least favor the rights of individual shareholders.

In two important respects State laws have been so badly drawn and so foolishly administered that other agencies have intervened to raise the minimum standards.


The first of these, Mr. Chairman, is something you mentioned a few minutes ago.

The Congress intervened by the adoption of section 14 of the Securities Exchange Act of 1934,

The Congress found that the standards of State corporate law were unacceptably low with respect to the information supplied to shareholders at election time.

The Congress, therefore, required that corporations listed on stock exchanges, and others having substantial numbers of shareholders, be subject to minimum disclosure requirements before proxy votes could be solicited for an election.

Before they are asked to vote by proxy, shareholders must now be supplied with:

1. An annual report showing financial results for the prior year.

2. Compensation paid by the corporation to its principal officers and directors.

3. Insider transactions involving financial relationships between the corporation and its directors or members of their families.

4. Important biographical information about candidates, particularly first time candidates, and their backers.

When this legislation was adopted in 1934, Mr. Chairman, it was regarded by some as an unwarranted interference with State chartering laws.

I know of no one in the business community today who holds that point of view.

On the contrary, the intervention of the Congress in raising State chartering standards with respect to disclosure

of vital information is now perceived as an important contribution to investors and the public,

The New York Stock Exchange has also been dissatisfied with the low standards set by State incorporation laws.

For example, prior to 1964, neither the Securities Exchange Act of 1934 nor most State incorporation laws imposed any real penalty on corporations which simply failed to hold elections or, when holding such elections, refused to solicit proxies, and thereby avoided disclosing the information required by the SEC.

The New York Stock Exchange stepped into this gap and, through its listing agreements, positively required the hundreds of major companies listed on the exchange to hold such meetings annually and to disclose such information.

The exchange has gone further. Through a series of well-thought-out rules, set forth in section A-8 of the New York Stock Exchange Company Manual, it has required that the beneficial owners of shares held by brokerage firms, the real owners of such shares, be given the right to vote at corporate elections.

Information supplied under the SEC rules must be passed on to them so they can vote intelligently; and, in contested elections, the brokerage firm may no longer vote shares it holds without consulting the real owners.

Both the Congress and the New York Stock Exchange have made real contributions to corporate democracy by thus raising the low standards of State incorporation laws.

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