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CORPORATE RIGHTS AND RESPONSIBILITIES

THURSDAY, JUNE 17, 1976

U.S. SENATE,
COMMITTEE ON COMMERCE,

Washington, D.C. The subcommittee met, pursuant to notice, at 10:15 a.m., in room 5110, Dirksen Senate Office Building, Hon. Vance Hartke presiding.

OPENING STATEMENT BY SENATOR HARTKE Senator HARTKE. The hearing will come to order. These are hearings on corporate rights and responsibilities. This is the third day of hearings to investigate one of the most important issues of this decade. What legal controls should be placed upon the establishment of and the exercise of power by the giant corporations which have come to dominate our economy.

The question of what, if anything, should be done about this power has been brought to the forefront of public concern by the disclosure of a long list of abuses, yet even if these abuses had never come to light or never been committed—the very existence of such massively concentrated power would be an issue that should seriously concern us as a democracy and as a society whose oldest and deepest traditions include a healthy distrust of concentrated power in any form, public or private.

Certainly, no one can deny the power of our largest corporations. The simple fact is that a vast number of economic decisions affecting the quality of American life are made or controlled by a small number of men at the center of a few hundred corporate empires. And this concentrated economic power is steadily increasing:

In 1955, the top 500 manufacturing corporations controlled 58 percent of the U.S. total manufacturing sales. In 1975, they controlled 81.1 percent.

Over 78 percent of all the people who work in manufacturing industries work for one of the 500 largest manufacturing corporations. The top 500 firms earn 53 percent of all U.S. business profits after taxes and have 82 percent of all corporate assets.

As a result, to a large extent those who control these corporations control decisionmaking as to who will have jobs, where those jobs will be, how long they will last, whether new facilities will be built in a community or existing ones will be shut down (and perhaps moved abroad), working conditions, the kind and quality of the goods available for purchases at what price, the type and quality of energy supplies that will be made available and at what price.

They decide whether products and production techniques will be chosen that pollute the air and water and cause occupational and consumer health problems, or whether alternatives will be sought, and, if alternatives are sought, how vigorously they will be sought and what resources will be dedicated to the search.

While the giant modern corporation has tremendous influence over the quality of American life, Americans are not reciprocally represented in the corporate decisionmaking process. Internally, it is a bureaucratic hierarchy. Externally, what remains of stock control is focused upon the stockholder's immediate economic interests. The direct control through stockholder votes, generally controlled by institutional investors, holding companies, conglomerates, the exercise of pension fund proxies by major banks, et cetera, is exercised by a tiny fraction of the population. Stockholder votes through the purchase and sale of stock in the stock market, may act as an effective influence upon economic performance, but this influence is diffuse and generalized.

Similarly, consumer influence through the market, while not as limited as stockholder control, is also inadequate. The increased sophistication and extent of modern advertising, restrictions upon the range of alternatives from which consumers must choose together with the increasing concentration of corporate control, tend to tip the balance in the marketplace more and more against the consumer.

As a result, large modern corporate managements are becoming in many respects, private governments, exercising enormous control over our lives and subject to very little democratic

constraint. This would be a matter of grave concern even if all the decisions made by the corporations were right and good.

But many are not. And in a few cases, not merely poor judgment, but rank cupidity, corruption and callous disregard for human lives have been implicit in the corporate decision making process.

On the other hand, it would be ridiculous to assume that all or even most decisions made by the dominant corporations are against the public interest. On the contrary, no serious, objective observer can fail to be impressed with the vitality, the productivity, and the innovation of modern corporations or with the immense positive contributions which they have made to modern life.

And because we are aware and grateful for the enormous economic benefits conferred by corporate activity, we are also aware of the difficulty of better defining corporate rights and responsibilities in the second half of the 20th century.

Defining the role of the corporation is an extremely complicated task. If the record of corporate activities were merely a simple one of unrelieved abuse of social responsibilities, the many purveyors of simple anticorporate panaceas could be given more credence. On the other hand, if the record were overwhelmingly one of positive contributions to the Nation's welfare, peppered only by occasional accidental and minor misdemeanors, then the pollyannas who uncritically defend the status quo sound less like characters from Alice in Wonderland.

We think serious reforms of some sort are clearly called for, that the centralization of private power has simply gone too far and that abuses of that power have become too widespread and systematic to be ignored any longer.

But we do not have any immediate anwers to the problem of improving the economic productivity of the corporation or reducing corporate activities which threaten the quality of American life. That is why we are asking the question: "Should corporations continue to be governed and regulated as in the past, or is there a better way to define the rights and responsibilities of the corporation ?"

The basic problem of the abuse of concentrated economic power is, of course, not new. It has been addressed many times before and we are all aware of the primary approaches to promoting the public interest in the use of economic power, the various forms of nationalization, public regulation, and deconcentration of antitrust.

In many other countries, nationalization has often been the course chosen. The experiences of these countries have demonstrated that nationalization is not a panacea for the basic problem of concentrated economic power. It has often been observed that the behavior of the large oligopolistic or monopolistic corporations in both the private and public sphere is frequently quite similar.

Another common approach is public regulation, both direct economic regulation, such as that exercised by the ICC and FPC, and the more direct prohibitions against specific antisocial activities, such as the air and water pollution control laws.

Regulation has made great contributions, and, carefully reformed and adapted to changing conditions, can continue to play an important role. But no one would claim that regulation in its various forms provides a simple answer to the whole problem. The inherent difficulties of regulation are too well known-the tendency of regulatory agencies to be dominated by the industries they are supposed to regulate, the rigidity and inability to respond to changes which regulation imposes upon a market, the endless redtape stifling efficiency, and, as in the case of the environmental protection laws, the inadequacy of enforcement activities in areas where violations are in the economic interest of the corporation.

Concentration of economic power in corporate hands is constantly increasing. I cannot advocate that direct Government intervention in the day-to-day economic decisionmaking of the corporation should also increase at the same rate.

Finally, the traditional American answer to concentrated economic power has been trustbusting. Our experiment with deconcentration efforts is the oldest and by far the toughest, most extensive effort of its type in the world. And its reform and expansion must play an important part in our attempt to deal with economic concentration.

Yet antitrust is clearly insufficient by itself. Concentration of economic power has preceded steadily and without interruption throughout the entire history of antitrust.

The present degree of concentration in the United States is not significantly less than it is in other major industrial countries withont our history of antitrust society. Some attribute this situation to weak enforcement and interpretation of the antitrust laws.

I do not agree. The forces of work in favor of economic concentration in many cases appear to be forces which cannot simply be stopped by "breaking up" a large corporation. For the foreseeable future, it appears that large organizations are here to stay.

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 chartering 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 structure 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

DELAWARE

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 Mr. Crompton.

Thank you.

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