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that corporations do exercise corporate social responsibility and that the corporate power is controlled. If we view these subjects in historical context over the past 75 years, we will recognize the distance that we have traveled.

Business corporations no longer operate in the manner that was suggested by Commodore Vanderbilt when he said, "The public be damned.” While advocates of rapid change will always suggest that we have not traveled far enough, fast enough, we are inclined to believe that the pace is about right.

Chartering deals only with the legal organization, form and structure, and stockholder relationships. The myriad other laws, State and Federal, impinge daily upon the corporation, as they do on any natural person in his or her life and business. Any suggestion that corporations are running rampant simply because they happen to be incorporated under State law is patently false.

The announcement states that corporations “were chartered by the governments of the States on the theory that they would better our economic life ***" I submit that a careful reading of history will not support such a generalization. If one looks at the problems facing America and England in the 18th century when the corporate form was developing, the problem for business was how to amass sufficient capital to carry out large-scale production which called for greater investment than the pocketbook of one, or a few individuals, operating as sole proprietors or partners, could afford. As individuals saw the need and opportunity for investing capital, they recognized that as an enterprise grew larger they would be removed from the day-today exercise of managerial judgment. The price they sought in return for investing was limited liability-no greater liability than the com. mitment of capital they were making in order that their other resources might not be destroyed if the particular investment failed. The novel solution was the creation of an artificial legal person, "the corporation," chartered by the State.

With these preliminary qualifications in mind, we would hope to be helpful to the committee by speaking directly to two basic issues: corporate social responsibility and the control of corporate power, often referred to as “governance"; and then comment on the utility of Federal chartering as a device for resolving such problems as exist.

It is our premise that corporations do exercise social responsibility and that corporate power is controlled. If we view these subjects in historical perspective over the past 75 years, we will recognize the distance traveled. Business corporations no longer operate in the manner suggested by Commodore Vanderbilt when he said "the public be damned.”

While advocates of rapid change will always suggest that we have not traveled far enough-fast enough—we, speaking for the chamber's 60,000 members, believe that the developments of the last three-quarters of a century demonstrate the evolving role of the corporation in our society, its responsiveness to the needs of society, and the adequacy of existing laws, State and Federal, to control the exercise of corporate power. The task of this committee is to take into account the demands of those who seek rapid and drastic change for their own reasons, those who want to return to the good old days, and those of us who believe that gradual change has brought about an equitable balance of power.

As evidence to support our view that the balance and the pace is right, we point to the economic preeminence of the United States in the world today and the remarkable adaptation of the modern corporation to the multitude of new economic and social demands placed on it.

The present “social responsibility” movement is not so radical a change as some observers have claimed. Although business corporations

have been classified as operating in the "private sector" of society, they have responded to the public's expectations for decades.

What the critics have been saying is that big business must take into greater account various effects of its operations that were previously not considered : pollution, congestion, employment and postemployment responsibilities, responsibilities to customers after sale, and repsonsibilities to stockholders. Like Government, business is confronted by the enormous challenge of trying to represent numerous conflicting interests while at the same time pursuing its main objective-responding successfully (meaning "profitably") to consumer choices.

Business is not unaware of greater social expectations. If I might be personal for a moment, I would like to comment on these from our corporate point of view.

From the time I joined Lipton in 1965 I have heard our chairman refer repeatedly to what he has chosen to call the “principle of the five-pointed star.” Attached to my testimony is a picture of that. It is from a document prepared for internal use at Lipton in our strategic planning and it appears at the beginning of the strategic planning document as a statement of Lipton's basic objectives.

You will note the heading says, “We will accomplish these objectives in a way that all who deal with Lipton will benefit." And around the five points of the star are listed "customers, community, suppliers, owners, and employees."

Look, if you will, not particularly at the point of the star referring to customers, which is probably the most familiar to everyone, but to the point called community. The philosophy is stated to be a good corporate citizen. There follows the objectives and the strategies to be employed to accomplish those objectives. Note, if

you will, the philosophy respecting suppliers—particularly the second one, which has an appeal to me. “We will not take advantage of the misfortunes of our suppliers."

Sir, I submit this is simply good business judgment. You can ring and squeeze a supplier, but in a critical time when you need him, he may not be available to you. In effect, he must be entitled to a reasonable profit as well.

Perhaps the philosophy, objectives, and strategies respecting owners are not particularly unique, but they are succinctly stated, as are those respecting our employees.

What I am trying to suggest is that the management of Lipton stands at the center of the five-pointed star and we do our best to live by those precepts on a day-to-day basis. In so doing, we recognize that our basic responsibility is that of balancing the equities among the demands made by those five points.

At one time the emphasis may lie with the customer; at another, with the supplier; and another with the community. But it is a dynamic responsibility, something that cannot be treated in static terms.

While other corporations may articulate this point differently, it has been my observation that corporate management generally is preoccupied with similar considerations.

Turning to the subject of governance, I do, sir, take umbrage at the charge that corporate managers are beyond anybody's control and that top management is narrow and often dishonest.

In the years that I spent counseling corporations I also served on the boards of other corporations. Since joining Lipton, I have had the pleasure of visiting and knowing a large number of senior corporate officers. I found that very few of them are what I would call little venal men."

This is not to deny that there are some rotten apples in the barrel, but to put the matter in perspective, I submit that on a careful statistical analysis you will find no greater percentage of dishonest or amoral corporate directors than among a like sample of doctors, lawyers, Indian chiefs, or even Members of Congress.

Since the board of directors is legally responsible for the conduct of the corporation, there is no question but what board members should be the people of highest caliber. But I know of no way to legislate quality.

A board of directors has the responsibility for establishing the basic policies and the directions of the corporation, a responsibility for selecting the key officers, and establishment of performance standards, and it has the responsibility for monitoring management's performance.

It is just not feasible to expect more out of a board, no matter how it is composed. Individuals who can comprehend numerous aspects of running a corporation, such as finance, law, marketing, manufacturing, are needed and they must comprehend all of these areas. To delegate to one member responsibility for a single aspect of business just does not make sense.

The board is a collegial body, and it must act as one. To suggest that a board, particularly public members, can be responsible for the day-to-day management of business is to demonstrate one's total innocence of how business or any other large organization in our society operates.

If you are a member of a church board, do you expect to make all of the decisions respecting the church? Or in a school board? Or, I would even suggest, that you gentlemen as members of the Senate of the United States delegate a good deal of operational authority of this distinguished body to a select group of your peers and responsible subordinates.

If the board members live up to their responsibilities, all five points of the corporate responsibility star will be satisfied. If the board members are not of high quality, something will suffer.

I submit that an attempt to guarantee the quality of board performance by legislative activity is a little bit like trying to legislate morality.

I recognize that the suggestion is often made that the board members ought to be outsiders and there is a great deal of merit to that, because they bring a different experience to the board. But again to suggest that some rigid kind of formula ought to be applied to percentages of outside directors versus inside directors is to attempt to quantify that which is truly a qualitative judgment. I don't believe that will work.

May I suggest also that before legislating with respect to board responsibility you should give serious consideration to the sensitivity which has grown up over the last 15 years to board responsibility as a result of legislation and litigation.

The number of lawsuits filed against board members, many newly enacted laws-for example, the Employment Retirement Income Security Act provisions respecting fiduciary duty, the continuing expression of concern among board members respecting their responsibilities 1 all demonstrate the system of board responsibility is functioning.

Enactment of legislation which seeks to quantify board size, makeup and responsibility would be to engage in overkill, which would have damaging consequences. Directors bear a fiduciary responsibility to all shareholders; and they may be selected deliberately because they contribute a certain perspective. Their obligations, fixed by law, are to the shareholders as a whole, and direct representation of all affected interests on corporate boards would lead to an unmanageable dilution of responsibility.

Moreover, it would involve a repudiation of the entire premise of the competitive marketing economic system. That system is based on the principle, borne out in practice, that the interaction of various individuals or bodies pursuing their undiluted self-interest will normally lead to optimal social results. It is just as dependent upon shareholders behaving in accordance with their self-interests as it is on employees or consumers behaving in accordance with theirs.

The real reason why managers should be permitted to manage it is not that it is nicer to be able to act that way, but that the welfare of all will ultimately be impaired if they are not.

That takes me back again to my observation with respect to the management finding itself in the center of the five-pointed star, confronted with the hauling and pulling of these various forces, and the responsibility for trying to move the enterprise and all those that it serves forward at what they consider to be the optimum result.

If, for example, a business is not permitted to locate its plant in the area where its costs are lowest because employees can veto a transfer, the benefit of those particular employees is more than offset by the loss to society as a whole. Capital is being forcefully employed in less than optimal use because of the pressure of special vested interests. The accumulation of essentially political interferences with economic decisions leads ultimately to catastrophic market failures and depressed standards of living which are characteristic of planned economies.

It is easy to be destructively critical of the existing system, but very difficult to be constructively critical. In the final analysis, when you are looking at the operations of corporate boards and management, you are studying the dynamics of decisionmaking in a rapidly evolving society. May I, therefore, suggest that before you place additional restraints on the operation of corporations, you remember that business faces two threshold questions at every instance of decisionmaking:

1 See "The Hazards of Being a Director," Forbes, May 15, 1976, p. 125.

Can the corporation identify what society wants from it; and can it provide, within a profit-oriented framework, what society wants ?

а The first is identification of the problem. The second is the scope of the demand.

Some will say business profits are too high and increased costs should be absorbed by the producing firms. Profits are, in fact, quite modest, only 12.4 percent on stockholder equity in all manufacturing in the third quarter of 1975, down from 13 percent in 1965. Here is something that Congress and the public must understand: The return to shareholders must exceed by at least a reasonable amount the return on nonspeculative securities, such as Government bonds. Otherwise the capital to provide goods and services of any kind will not be available.

You are now confronted with the question of whether Federal chartering is a device to be used to control corporate enterprise in America. We submit that the advocates of Federal chartering want to use the device to advance their own social and economic policies which by and large they have not been able to sell thus far. In short, their prescription is sold wine in new bottles.”

At the turn of the century, the muckrakers lambasted the corporate trusts for their arrogance and operations—and rightly so. The Great Depression of the 1930's was another era in which the role of the corporation was under attack. In fact, both the corporation and the enterprise economy were questioned when the country faced a sustained period of economic uncertainty. Senator Joseph O Mahoney and the Temporary National Economic Committee which he chaired examined the idea of Federal charters for corporations. Now, however, the situation is quite different as the advocates of corporate chartering would turn over the control of our economy almost completely to Washington at a time when public opinion polls clearly reveal a general disenchantment with Washington's mishandling of the economy in the last decade.

The Federal chartering proposal really is an attack on all the legislation that this Congress has enacted in various fields affecting business. The Federal or State charter is not what matters. The crux of these proposals is to exert more controls and more regulations over corporations through chartering. For example, much of the rhetoric in support of Federal chartering criticizes some aspect of existing Federal control, such as occupational health and safety, environmental protection, consumer product safety, and employment discrimination.

All of these areas are subjects of relatively new Federal legislation, with no indication of enforcement failures because corporations are chartered by the States. If, in fact, there are enforcement failures, the logical solution would be specific legislation addressed to the identified failures. That way, political judgments would be made in the political arena. To assign these judgments to corporate board rooms would leave the principal function of the corporation-producing goods and services—unattended.

: Economic Report of the President, January, 1976, p. 261. The report further shows a return on sales of only 4.9 percent, down from 5.6 percent in 1965.

76-083–76-11

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