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I believe that there is an additional area in which intervention is needed—and that is the question of corporate campaign financing.
The Congress in adopting the Federal Election Campaign Act of 1971, as amended in 1974 and 1976, has gone far to set standards of fairness, balance, and decency in the financing of elections to Federal office.
By comparison, the present practice with respect to financing corporate elections is neither fair, balanced, nor decent; election expenses of incumbents are paid out of the corporate treasury; election expenses of challengers must be advanced by the challengers themselves and may be recouped only if the challenge is successful.
Rather than take the committee's time to develop how this sorry state of affairs came about, I am submitting a legal memorandum, which is clipped to the back of my testimony, Mr. Chairman.
For the present, let me say that this unfair and undemocratic practice generally prevails throughout the United States.
The result has been that corporate democracy has entirely failed among the major corporations which dominate business life in this country.
The SEC reports that over the past 10 years 99 percent of all candidates for director of publicly owned companies have run unopposed.
Campaign expenses of the incumbents were paid by the corporate treasury. It was simply too expensive for other shareholders to challenge them even when the challengers owned more shares than the incumbents.
We are dealing here with large sums of money. A major corporation numbers its shareholders in the hundreds of thousands. With postage rates as high as they are, the legal, accounting, printing and mailing costs of a routine proxy solicitation may be several hundred thousand dollars.
If a contest develops, the cost of an entire campaign can run into millions.
To impose such costs on one slate of candidates and to subsidize the other is to make a mockery of the word "democracy".
I would like to propose a remedy for your consideration. I would give the shareholders of every public corporation an alternative: Either subsidize all candidates or subsidize none.
Such an approach, together with the SEC's disclosure requirements already in force, would return reality and meaning to corporate democracy.
Shareholders, in their corporate charter, could then require that all candidates for corporate directorships pay their own proxy solicitation expenses.
The result will be, I assure you, the directorships will tend to be held by people who have a sufficient economic stake to justify the expenditure of their own funds for election, that is, substantial shareholders and their representatives.
If, instead, the shareholders in their corporate charter, elect to subsidize all candidates, a question will arise as to how one weeds out the frivolous, opportunistic and mere publicity seekers.
Congress faced a similar question in the Federal Election Campaign Act when designing a system of matching funds for Presidential primary candidates.
You asked yourselves the question of how you could limit Federal subsidies to bona fide candidates, and you came up with a wise answer: In order to qualify for matching funds, the candidate, in the Presidential primary, must first demonstrate a minimum of support by producing $5,000 in small donations from each of 20 States.
I would urge you to consider a similar rule for corporate subsidy of election expenses : Limit the subsidy to candidates who have been nominated by a group which together owns a certain minimum number of shares.
The minimum which I would require for nomination would be the number of shares owned by the incumbent board of directors.
Let me apply this proposal to some well-known companies. Proxy statements filed with the SEC in connection with the 1976 annual meeting of Exxon Corp. reveal that 16 shareholders, owning 71,000 shares out of 223 million outstanding or .03 of 1 percent, have nominated themselves as candidates for the board of directors, and are running for office at the expense of the corporation.
It seems to me that any other group of shareholders owning .03 of 1 percent ought to be accorded the same privilege.
Proxy statements of other well-known companies reveal the relevant percentages as follows:
[The chart follows:]
These companies have been selected at random, but I believe they are representative of the Fortune 500, the largest industrial corporations with 1975 sales of $865 billion and assets of $668 billion.
The reality of American corporate life is that the vast majority of large American companies have been out of control for years out of control, that is, by their real owners.
Small corporations are actually controlled by their shareholders. Large corporations are controlled by self-perpetuating managements. This situation will continue as long as State law continues to subsidize incumbents but not challengers.
In recent months the press has been filled with stories of corporate misdeeds. The courts, the SEC and the committees of the Congress have all reported cases of bribery, kickbacks, and illegal corporate contributions by managements of large publicly owned corporations.
With very few exceptions the same boards of directors have been returned to office at the 1976 shareholders meetings. Why haven't the shareholders risen in their righteous wrath and thrown out the malefactors and the directors who continue to back them?
The answer is that under our present system of corporate elections the incumbents have close to absolute control and, in fact, are not responsible to shareholders.
This situation will continue as long as incumbents are permitted to use the corporate treasury to finance their own elections exclusively.
Senator HARTKE. Yesterday, I understand, Mr. Petrie, that several of the witnesses went to great length to say that the shareholders of large corporations could exercise adequate control over corporate performance by indicating their approval or disapproval of the management, by buying or selling stock.
Do they need more control than that?
It is a point of view which permits large aggregations of American wealth and centers of power to be left in the hands of whoever remains when the stock is sold.
Selling the stock does not change the nature of the control of the enterprise. These are a couple of answers to that.
I have served on the board of a university when there was a contested proxy fight. I, for the first time, asked at that trustees' meeting of the university, "Who votes our stock?”
It was the year Mr. Nader was running his campaign against General Motors.
I hadn't made up my mind whether we should vote for or against Mr. Nader's group. I thought the board should decide the question and not some clerks in the treasurer's office.
I asked who votes our stock and it turned out it was a clerk in the treasurer's office who voted the stock. I said that it seems to me there is a question of principle. A number of universities' boards passed on it, including, I think, the Harvard Overseers.
I found an almost universal attitude among the businessmen on our board, who said, "Don, if we are going to vote against management, we shouldn't own the stock.” That philosophy, Senator, is widespread.
There are some things that are wrong for it. One of them is it is bad for the country. It may be all right for the investor, but it is wrong for the country to have enterprises thus run.
Second, there are many people who are simply not free to sell their stock. There are people whose stock is held in trust where they really don't have actual control.
As Ambassador Peterson mentioned a few moments ago, we are tending toward the time when 50 percent of the equity in our major companies will be owned by pension funds.
We will be there, if we are not there already.
The individual beneficiaries of those pension plans are not in a position to make a decision as to whether to keep or to sell.
I would like to stay with the free enterprise system, where the shareholders control, rather than flee, it seems to me, to a second and rather bad choice.
Senator HARTKE. You suggested, regarding the funding of directors' candidacies, that corporations either fund all candidates or none.
Mr. PETRIE. That the corporation be given the option.
Senator HARTKE. In other words, you don't prefer either one. You sav give them the alternative.
Mr. PETRIE. In their corporate charter let the shareholders decide that we fund everybody or nobody, but we don't exclusively fund in. cumbents, which is the present system.
A system which only funds incumbents, and doesn't fund challengers, cannot be described as a democratic system.
I think that what will happen is that in the very large corporations it may be difficult to have the directors fund themselves in the very, very large ones.
We called a few companies, called Exxon, for example, and asked them what it cost simply to mail out their proxy.
This is just the mailing, printing, just the bare out-of-pocket costs. It costs them about $.70 a shareholder. An average shareholder has between 200 and 300 shares. It costs about $.70 just to make the mailing.
I believe if you included the legal and accounting and other costs that are there, but not included in these figures, it probably costs about a dollar apiece. As soon as you get into a contest, Senator, these costs multiply ten
a fold. A contested election will cost $10 a shareholder.
When Robert Young did his famous fight for the New York Central, which is one of the few pieces of information available—nobody ever reports it; the only time you get this information is when there has been a lawsuit-when Robert Young had his fight for the New York Central in 1954, he spent $1,300,000 to pursue 41,000 shareholders. It cost $31 a shareholder.
That was in 1954. Today, that contest would have cost $3 million.
Now, with very large companies the alternative of saying everybody pays for himself may not be practical, just as Congress found in Federal elections that funding the Presidential campaign was something that the Treasury better do.
What you didn't do was what corporations do. You didn't say, “Well, in the Presidential election campaign, we are going to give the money only to Jerry Ford. We are not going to fund the challengers.” The corporate system only funds the incumbent.
I would think that the smaller companies may well say, "Fund it yourself," but not the larger ones. The numbers are so big. I think it costs about $1 a shareholder just to get a letter out to them.
If you have 700,000 shareholders, that is three-quarters of a million dollars.
Senator HARTKE. That is an expensive election.
What do you suggest in regard to incentives within the corporate structure to deal with people who have been directors, who have actually violated the law?
In other words, could they be prohibited from serving?
Mr. PETRIE. I read Mr. Nader's book with interest. I listened to Ambassador Peterson with interest. I agree with you. It is a subject which needs a lot of study; and there are obviously important points on both sides.
I heard Pete Peterson at the end of his testimony being positive and saying it is terribly important that nonmanagement directors dominate certain functions.
I have never been willing to serve on a corporate board which had insiders on the audit committee.
I just wouldn't serve. I insisted on a completely independent audit committee.
I think it should be a universal rule. I think the same thing is true of compensation committees.
I noticed in the Nader book a suggestion that there be a disqualifying period of 5 years where corporate criines have occurred. If we are
going to continue to treat white-collar crime with a touch of a feather in terms of punishment, it may be an important disincentive for people.
Senator HARTKE. There have been some changes that have been made, of course, by the New York Stock Exchange, by the SEC, and the question of being more demanding especially of the large publicly owned and publicly held corporations.
Do you see any really significant action being taken by the States to modify, change, or update their corporate laws?
Mr. PETRIE. I haven't practiced this kind of law for a number of years, Senator. My recollection is that I used to spend a lot of Monday mornings in Wilmington, Del., because that is where all my Chicago clients had their annual meetings. As long as you have a competition of easy virtue, I don't believe that the matter will be corrected by the States.
I think you must set standards-as you did in the 1934 act. One of the reasons I mentioned that is because there was a hue and cry that the 1934 act interferred with State chartering rights.
None today would suggest repeal of section 14 and say the shareholders can vote as they used to in the bad old days with no information at all.
Senator HARTKE. The fact of the matter is that people look at is as an advantage not only to the public but to the corporation as well; do they not?
Mr. PETRIE. Sure.
Senator HARTKE. Let me ask you this: Is there not an area of distinction between, as you indicated, corporations which are owned by pension funds-large corporations, publicly owned for all intents and purposes and the small closely knit corporations.
Originally, the laws were designed really for the smaller corporations, the closely held corporations. Do you make a distinction how you would approach those ?
Mr. PETRIE. Yes. One of the criticisms I have of Mr. Nader's book is that I thought the cutoff point for Federal standards was much too low. I thought $250 million was simply too small. I thought they should cut off at $1 billion.
If you run through Fortune 500, the companies which are the major factors in this country are at the billion-dollar level in sales.
Surely small corporations, closely held companies don't require this sort of treatment, because in point of fact the shareholders do control them.
Everyone knows who the controlling shareholders of a close corporation are, or their representatives. It is interesting that in the turmoil over some of recent corporate misconduct, people have been wondering why boards of directors were retained and why chief executives were returned to office.
I can think of only two chief executives that lost their jobs in this connection. One is the case in which a single family, the Mellon family in Pittsburgh, owned enough of Gulf so that they were an important shareholder.
It seemed to me that exactly the principle vou talked about—although Gulf is an enormous corporation, the Mellons are sufficiently wealthy—that according to the press reports, the Mellon family and their interests actually exercised shareholder control in that situation.