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Each of these mechanisms for preventing the abuse of concentrated economic power is not a panacea, but only a limited tool. More importantly, these tools do not address the corporation, per se. It is the purpose of these hearings to explore the particular nature of the corporation and the need for legal changes dealing with its basic structure to insure that the corporation's economic activities are consonant with the public interest.
To answer this question, we are looking very carefully at the historical development of the corporation as the dominant economic entity in our society, and we are listening to various proposals for dealing with the corporation which in some respects offer an alternative approach to the three traditional remedies for dealing with concentrated economic power.
It is important to understand that the corporation is not merely a collection of individuals banding together for an economic purpose. It is a very specific economic entity, defined by State corporation law, which was established to define the legal rights of these economic organizations.
Originally, the great advantages incorporation conferred upon a firm were looked upon as highly dangerous to the social fabric, and corporate charters were granted only on a case-by-case basis, and only after careful weighing of the perspective costs and benefits to society and the economy at large.
As time passed, pressure to acquire the advantages of incorporation became so great in our rapidly growing economy that this view of corporate chiartering was diluted. A State corporation law evolved which on the one hand was intended to provide corporate management with maximum leeway in running the corporation and on the other was intended to define the interests of various parties with an economic interest in the corporation. All semblance of the corporate charter as a contract between society at large and the firm to accomplish a particular goal in the public interest has been lost.
What is the proper mechanism for controlling corporate power? Some advocate that the original critics of incorporation were right, that the corporation should not be established without specific public interest responsibilities. This view has been before this committee before, as long ago as 1913.
Now the question has once again come into the public limelight because of the intense public displeasure with corporate behavior during the last several years. One approach to the problem of controlling corporate economic power would be to revive the original concept of the corporate charter as a mechanism for assuring social responsibility in business behavior.
Advocates argue that dominant corporations are no longer the local, State, or regional entities they once were. Instead, they are national or international in scope and influence. The case is thus argued that the corporation should be chartered at the national level-or, perhaps someday, at the international level.
Others argue that Federal chartering, while an interesting mechanism for controlling the corporation, is not necessary to achieve changes in the structure of the corporation. They claim minimum Federal standards or special laws aimed at weaknesses in the corporate struc
ture would be just as adequate. We will be exploring these proposals in detail in the next few days.
We must also ask even more complex questions concerning the substance of corporate controls. The immense complexity of modern corporate activity raises questions of the public right to know the extent of that activity, the impact of activities upon workers, communities, and consumers, the interests that should be represented in the corporation's decisionmaking process, and how they should be represented.
The traditional notion that the investor and his managers alone should control a corporation will be pitted against proposals that others affected by corporate activity should have equal rights. In addition, the diffusion of responsibility throughout huge corporate bureaucracies and the ability of corporations to resist law enforcement through litigation, propaganda, and political pressure create difficult problems of how to effectively hold corporations accountable for their actions.
Perceptions of these problems and, indeed, whether there is a problem, and the means of dealing with them differ widely among the many students of this issue. We will hear from as many as possible over the next few days. I sincerely believe and confidently expect that these hearings will provide a thoughtful and solid basis on which to construct effective responses to this most difficult and important issue.
We have the distinguished Senator from Delaware, Senator Biden, who will introduce Mr. Crompton at this time.
STATEMENT OF HON. JOSEPH R. BIDEN, JR., U.S. SENATOR FROM
Senator BIDEN. Thank you very much for giving me the opportunity to introduce a friend of mine, an attorney in Delaware, Mr. Charles S. Crompton. Before I do, Mr. Chairman, I would like to compliment you on holding these extensive hearings. As you know, Mr. Chairman, during these hearings on Federal corporate chartering, Delaware has and will come under a little bit of criticism at least. For once again, we are recognized as the first State. There will be a great deal of scrutiny, and there has been on the State of Delaware and Delaware law.
I suspect it will continue to come under some attack. I am extremely pleased, Mr. Chairman, to present to the committee one of the outstanding members of the Delaware Bar and a close personal friend.
Charles Crompton is the chairman of the General Corporation Law Committee, Delaware Bar Association and is extremely competent to present the case of the State of Delaware, although he is not speaking for the State of Delaware here this morning. I hope that those who are not here will take the time before they make final decisions on the outcome of these hearings to review Mr. Crompton's testimony. Again, I would like to thank the Chair for granting me the privilege of introducing Mr. Crompton.
Senator HARTKE. Thank you, Senator Biden. I might say, Senator Biden has made an outstanding record in his first term here. We are delighted to have his competence in the Senate. We will try to treat Delaware fairly.
Senator BIDEN. Mr. Chairman, I must go to the Intelligence Oversight Committee hearings this morning. I am not abandoning Mír. Crompton.
STATEMENT OF CHARLES CROMPTON, JR., PARTNER, POTTER,
ANDERSON & CORROON, WILMINGTON, DEL. Mr. CROMPTON. Thank you very much, Senator Biden. We, in Delaware, too, recognize our Senator's competence and contribution to our State and to the Congress.
Senator HARTKE. Let me explain. Unfortunately the Communications Subcommittee, which is under this full committee, has failed to put in proper communications equipment in this room. You will have to pull up that microphone to get people in the back to hear you.
Mr. CROMPTON. In examining the rights and responsibilities of the corporation in the United States today, one suggestion advanced by several commentators is that a Federal incorporation law is needed to curb corporate abuses.
The premise underlying these proposals is that the State chartering system has collapsed, and that Delaware in particular has led a "race to the bottom” among the States in a greedy competition to attract the most business by awarding the broadest license to corporate management.
Some of the less gracious proponents of a Federal preemption of this field have referred to Delaware as a “pygmy State” which is totally incapable of regulating the corporate giants which are creatures of its law. Thus, it is argued, the modern, multinational corporation has been permitted to run loose in what is alleged to be an unprecedented crime wave, and a comprehensive Federal program is said to be the only way to stem this tide.
I submit that the issue of a Federal incorporation law is purely a red herring, for the central goal of these proposals is not really to amend or improve the substantive law of incorporation, or to propose standards for the organic act governing corporate activities. The true aim is to establish new Federal controls to remedy various social ills as perceived by these proponents by assuming the ultimate power to revoke the charter of a corporation. To justify the need for a Federal law governing the creation of cor
a porations, the Nader-sponsored Corporate Accountability Research Group, for example, in its study “Constitutionalizing the Corporation”, cites abuses involving discriminatory employment practices, industrial pollution of the environment, illegal advertising, product safety standards, illegal foreign sales commissions, and the like.
Not one of these issues has ever been the subject of Delaware's incorporation law, nor probably of any State's chartering system. It is thus difficult to see how the State statutes can be blamed for such ills. In fact, virtually every one of the abuses cited is already the subject of a Federal law or regulation of some sort. It is ironic that this failure of Federal regulation can be used to justify its extension to a totally new area.
Let us remember that there is a very substantial body of Federal corporation law-both statutory and judge made. What is proposed now is Federai preemption of a totally new area, and the application of Federal standards not to be tested in the crucible of congressional debate, but by a system of “politicizing” the corporation's basic structure.
In any event, no one denies that these substantive issues—the economic and other abuses alleged to be a product of the current sys
tem-are properly the subject of Federal action. However, they are not properly within the province of a chartering statute—whether it be State or Federal.
The proposals made by the Nader group have been very carefully packaged in a shiny wrapping of popular or at least newsworthy causes. This technique is subject to the same charge of false and deceptive advertising which the study castigates corporations for striving to sell a product not by stating facts such as price and quality, but by "associating their products with alluring superstars or beckoning moods”, such as using a French filmstar to advertise perfume or a rugged cowboy to peddle cigarettes.
The substance of the Nader proposals behind this glittering facade is to "decentralize” the corporation and subject it to“a major redesign." Again, it is ironic that total central, Federal control is recommended to accomplish this "decentralization."
I said earlier the plan is to politicize the corporation, because the end result of the Nader plan is to replace the shareholder as the ultimate arbiter of corporate activity, with the "citizen” or “the consumer" or the "public." These goals would be accomplished by such means as forbidding the conglomerate pursuit of multiple business; establishing an outside limit on the market share of the business of any company; forbidding any employee or agent of a corporation from serving as a director of his company; and requiring the entire board of directors to be "professional" full-time directors with qualifications and salaries to be controlled by a Federal law or administrative policy. (It is astounding on this last point, that the Nader study concludes that because the power over a director's "subsistence” includes power over his "will,” it is wrong for Delaware and other States to leave it to management to fix director's pay, without recognizing that the same power over his will would appear to follow the Federal control of a director's salary under the Nader proposal.)
Whatever view one has on the merits of these proposals, they are certainly proper topics for Federal debate, if they are candidly presented for what they are-amendments to the antitrust laws or other basic economic regulatory provisions involving a fundamental change in national economic and social policies.
Such controls are not the proper subject for the enabling acts by which corporations are created and under which they operate. Neither should they be left to the regulatory power of some new super-SEC or other new Federal agency as suggested by the Nader group.
Delaware has never attempted to reach such questions under its corporation law, and it is admitted that such vital questions should not be left to any one or more of the States, whether pygmy or giant. But, the State chartering systems cannot be accused of "collapse" in connection with issues which have always been left for Federal action.
In short, the Nader proposals do not justify abandoning a system of chartering which has operated in a fair and flexible manner for 200 years, enabling our corporate managers to adapt to changing economic demands in a startlingly successful manner. One prominent scholar has recently recognized the benefits of the State system. I am guoting from an article by Prof. Ernest Folk cited in my statement.
The scope, form and direction of corporate operations are determined by business needs, by competition, by tax considerations, by the panoply of regulation (Federal, State and local), and by the desires, hopes and fears of men. A statute which enables a great variety of enterprises, from smallest to largest, to accommodate themselves to these complexities performs a significant function. Indeed, this is the ultimate warrant for the kind of statute current today; it provides a suitable framework for an infinite variety of corporate activities.
Hence, a statute may rightly be concerned primarily with structure, form and procedures. None of these is a trivial matter. Moreover, in my view, nothing is gained by an added dimension of regulation through the corporation statute. The line of movement in corporation statutes—towards simplicity, openness and flexibility-has been prudent and wise. More than enough regulation will come when needed, but it will be more effective if it is functional, directed at identified abuses, and not miswoven into a statute properly concerned, as I have suggested, with structure, form and procedures.
It is clear that Congress is the appropriate Federal forum to consider if a new or strengthened statute governing corporate political contributions is needed; or a more stringent antitrust law as currently before you; or a new corporate tax structure. But, these reforms and changes must be functional and substantive rules pointed to specific and identified abuses, and adopted after full political debate.
Federal action may well be called for upon each of the social and economic ills diagnosed by the Nader group, but each must be submitted on its merits to open political debate and not be slipped past the Congress under the guise of a Federal corporate chartering statute.
In contrast to the Nader group's packaging technique, some other proponents of Federal chartering do attempt to justify the proposal with arguments which are relevant and do attempt to establish the superiority of a Federal law of incorporation. Even these arguments however, do not withstand analysis. It is claimed that a national uniformity of fundamental corporate
a rights and duties would result from a Federal chartering act. Stockholders, management and all persons dealing with federally chartered corporations would know that in certain areas cach national corporation would be identical to each other national corporation.
First, it is far from likely that a Federal chartering statute would provide such uniformity. With hundreds of Federal courts interpreting a new statute unguided by any precedents, inconsistent and conflicting interpretations of rights and duties under the statute are certain to result. Many such conflicting interpretations of such "uniform" acts as the Internal Revenue Code and the Securities and Exchange Act of 1934 remain unresolved today after decades of litigation under these statutes.
No nationally uniform standards are any more likely to result under the Nader proposal. In fact, the long-established Delaware corporation law with its large and cohesive body of interpretation developed over the last 90 years is far more likely to provide a uniform national rule as long as a large number of the large corporations are chartered here. It is not my purpose here to respond to the attacks on the substance of Delaware's law advanced by some.
I have neither the objective detachment nor the time to present a comprehensive response to these attacks. I have attached as an exhibit to this paper, however, a study prepared by the Delaware Corporation Law Committee to refute these attacks and to demonstrate the fairness, wisdom, and equity established under the Delaware statute as applied and interpreted in its courts.