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Senator HARTKE. Why?

Mr. CROMPTON. Because that would permit it to be imposed at the will of whoever is going to manage that regulation without any debate on that very important policy in the Congress. Now if the Congress wants to enact an amendment to the antitrust law that says that no corporation shall engage in more than one line of business, that is certainly a proper topic for Federal action and not a proper subject for the State chartering system.

Senator HARTKE. Why? Why is it not a proper subject of debate? In other words, you make the assumption-and this is what I call decisionmaking by assumption-you just assume that this is rightand then you expect all of us to go ahead and say simply because you assume it is right, therefore it is right.

Mr. CROMPTON. No. I did not mean that as an assumption.

Senator HARTKE. Let me be specific with you. I happen to be in a position here where I have listened to some of these same arguments made very specifically in the Penn Central case, when I had hearings in March. I listened carefully at that time to some of the fears that were being expressed; that they were headed into ultimate bankruptcy. We listened in the public arena. Yet all the law was out there; and they assured me, the president of all these people, the representatives came in here, sat at this very table, and assured the public that everything was all right.

The University of Pennsylvania then proceeded to buy about $7 million worth of bonds which were at that time-if the truth were known-absolutely worthless.

Let me ask you; where are they incorporated? Where is the Penn Central incorporated ?

Mr. CROMPTON. I think I am right that that is a strange creature because it is incorporated in a number of States.

Senator HARTKE. All right. So the Federal Government ultimately came in and rescued the transportation industry because 3 months later they came in and threw themselves upon the mercy of the court. Of course, the court said, “All you people go on home, you have no responsibility, we will wipe the slate clean, the Government will pick up the chips."

I do not know those bonds and those stockholders, but if you want to buy some stock, I think I can get it for you at a rather reduced price.

What I am asking you now is, what was the responsibility? We could have gone ahead and nationalized the railroads. That would have been one thing. The other thing we could have permitted was collapse. We would have had a collapse of the national transportation system. Here we are, 1976, some 6 years later trying to put the pieces back together.

Was that a legitimate national goal to be concerned about? Would we not have had some type of proper corporate structure there, some proper mechanism that you could have made sure that those directors would have given a little bit more of attention to what was going on. And would we not have had more corporate responsibility, not alone to those people who were stockholders, but to the public generally as to compliance with the law?

Mr. CROMPTON. I do not believe so, Senator. I believe that the Penn Central collapse would have occurred whether it was a corporation chartered under national statute or

Senator HARTKE. I am not talking about the collapse. I am talking about the responsibility of coming in 3 months beforehand telling the U.S. Congress—which represents the people—that everything was absolutely in good shape and that they were not in danger of collapsing.

If they had known there was some type of legitimate structure there on a national level, some type of mechanism there which would have monitored their actions would they not have complied with the law much more carefully?

Mr. CROMPTON. I think not, Mr. Chairman. At that time, there were existing Federal laws—and the SEC was active in enforcing themthat required them not to make misleading statements to the public. There are now dozens of lawsuits in the Federal courts charging the company and its directors with violating the existing Federal statutes. If there had been another Federal statute, and another Federal agency defining some other responsibility, I think it would have been breached in the same way.

Senator HARTKE. Let me get this straight. To whom does the responsibility lie as far as the board of directors are concerned! To whom are they responsible?

Mr. CROMPTON. Are you speaking now

Senator HARTKE (continuing). I am just asking you about the directors of a corporation. To whom are they responsible?

Mr. CROMPTON. In a direct sense?

Senator HARTKE. In any sense whatsoever. There was a contract, a contractual relationship between the State and a group of people in which they created a corporation; right?


Senator HARTKE. Created by the State; in your case the State of Delaware, the government of the State of Delaware.

They established certain legal responsibilities. To whom are they responsible! I am not talking about under Delaware law. To whom should the board of directors feel a responsibility?

Mr. CROMPTON. You just said not under Delaware law but in general ?

Senator HARTKE. That is the essence of the problem. After all, the Delaware law, whether it is good or bad, is maybe, as Senator Biden indicated, open to discussion at this moment.

Mr. CROMPTON. That is right. I agree. A board of directors of a national corporation should feel a responsibility not only to its shareholders but to the public at large, to its employees, its consumers.

Senator HARTKE. You tell me how that applies under the Delaware law.

Mr. CROMPTON. Mr. Chairman

Senator HARTKE. In other words, would a corporation would a director have any type of liability? Is there any type of definition about his responsibilities at large? Is he simply to accept the accounting of all

the money that comes in, that is expended?

Mr. CROMPTON. Not at all, sir. He has a duty to exercise, a duty of a fiduciary who is managing property basically owned by another. Senator HARTKE. But no responsibility to the public at large? Mr. CROMPTON. Well, yes, sir. As far as that responsibilitySenator HARTKE. Does he have a responsibility to the employees?

Mr. CROMPTON. I think so.

Senator HARTKE. Like what? Other than negotiating a contract, what is his responsibility to the employee?

Mr. CROMPTON. To exercise his best business judgment in a fair and just manner for anybody who contracts with the corporation.

Senator HARTKE. Oh, come on. I certainly do not believe that. Do


Senator HARTKE. You do?
Senator HARTKE. Well, I tell you, most employees do not think so.

Mr. CROMPTON. Well, I agree it has gotten to the point where each side looks at the other as an opposing camp to be met across the table.

Senator HARTKE. Does the corporation have any responsibility to a community, to help invest in the community's welfare?

Mr. CROMPTON. I think it has one. I do not know that it is defined under the Delaware corporation law.

Senator HARTKE. Does it have responsibility in the field of pollution?
Mr. CROMPTON. I think it has one.
Senator HARTKE. But not under Delaware law?
Mr. CROMPTON. Right.

Mr. Chairman, I thought I made it clear in my speech that I thought those topics were not properly the subject of State chartering statutes.

Senator HARTKE. My understanding was that according to what you said—if I read it correctly—is that the Nader plan will politicize the corporations because the end result is to replace the stockholder as the ultimate arbiter of corporate activity.

Is that a fair assumption that you are saying the stockholder, or the shareholder, is really the man to whom the directors have the responsibility?

Mr. CROMPTON. Yes, sir. Under the Delaware corporation law.

Senator HARTKE. We had hearings here on Tuesday. Two academic witnesses, supporting the status quo, as you are, argued that the stock market not the shareholder is the ultimate arbiter. They maintained the stockholder is only an interested individual. If the shareholder does not like the corporation's economic results, he sells his stock. Or if he likes it, he buys it. Is that not at odds with your Do you maintain really that the average shareholder of a major publicly held corporation really has an effective voice in the management of that corporation or even wants such an effective voice!

Mr. CROMPTON. I do not know what you mean in the last phrase "by the average shareholder.”

Senator HARTKE. I am talking about the average shareholder. The average man who owns stock. In other words, in the big 500 corporations, the average man out there who owns it. Do you really contend that he has an effective voice?

Mr. CROMPTON. I do not contend that the average shareholder of GM really effects the policv of that board of directors. That is right.

Senator HARTKE. Or of the other 499 out of the 500?

Mr. CROMPTON. I do not agree with that. In those-many of those companies there have been substantial battles.

Senator HARTKE. Let us take GM. After all, what is good for GM is good for the rest of the country, is that not right?

Mr. CROMPTON. You said that, not me.
Senator HARTKE. I did not say it either. President Wilson said it.

Do you really believe, are you really telling me that what you said is your real concept, or do you really contend that it is sort of a nice little nomenclature to throw in?

Mr. CROMPTON. I was describing what I thought was the Nader plan.

Senator HARTKE. Just one second.
(Whereupon, a brief recess was taken.]

Senator HARTKE. Let me ask you again; in other words, do you really believe the shareholder is one who has the effective voice?

Mr. CROMPTON. Well, he does in a number of ways, Mr. Chairman. I think you are right that the average shareholder of a huge corporation does not really have any opportunity to cast a vote on certain things that that corporation is going to do; but he might have an effect in another way by selling his shares. That is what I think some of the earlier speakers meant by the marketplace

being an arbiter. I do not know that they said the exclusive arbiter. But it is an arbiter.

There is another way. Sometimes even in a large corporation, the top 500, as you said, a group of shareholders might oppose management.

Senator HARTKE. They might, but chances are, they will not.

Mr. CROMPTON. It is a difficult battle. Another avenue is the existing judicial process.

Senator HARTKE. You are really opposed to national chartering? Let me ask you, would you be opposed to having the duties of the directors and the general responsibilities outlined on a national level, say for those big corporations?

Mr. CROMPTON. I would not be opposed to that as a Federal versus State system; but, frankly, I am opposed to it in general no matter who does it. I think as soon as you start to define and codify somebody's duties like that, you are going to leave something out or be met with the ingenuity of somebody else who knows a way to get around it.

I think in fact the Delaware Bar Association just last year received a suggestion presented to it by the model business code draftsmen who want to set out in the model corporation law a definition of directors' rights and responsibilities.

I understand that that was warmly supported by managementoriented people because that would give a list of do's and don't to the directors. While that gives them some comfort, I think that tends to stultifv the development of the law and maybe permit one to find ways around it.

I would prefer to have a general statement that a director will be held accountable as a fiduciary which is the Delaware law.

Senator HARTKE. Would you have that on the national level?

Mr. CROMPTON. I would have no objection to such a national standard.

Senator HAPTKE. As a fiduciary, just in regard to the financial matters of the corporation ?


Senator HARTKE. What with regard to any other type of results that occur in the social field?

Mr. CROMPTON. I do not know how you could divorce his responsibilities as a director of a large corporation. Everything that corporation does has such an economic effect, does it not?

Senator HARTKE. In your statement, where you talk about predictability and uniformity of decisions, they are more likely to provide a uniform national rule under the Delaware Corporation Code than any Federal Corporation Code. That would only be true if all the corporations were incorporated under the Delaware law; is that right?

Mr. CROMPTON. That is right; or if such a large number of them were, that other States follow Delaware's precedent.

Senator HARTKE. Are you not really saying then in substance, that what you would advocate is a national corporation charter in Delaware?

Mr. CROMPTON. No; that really was a response to what I think is a false advantage presented to a national charter. That is, that there would be uniformity of interpretation.

Senator HARTKE. The uniformity you look for, though, and the flexibility, and the question of predictability now occurs by virtue of the fact that each State has its own laws; and, therefore, the Supreme Court of each State ultimately makes a decision. If you are really looking for predictability and uniformity, would you not be better off to have one ultimate court? That would give you a predictability and uniformity which would be much more apt to come forward.

Mr. CROMPTON. I do not think it has occurred in 40 years under the Security and Exchange Act. I do not know why it would be likely under another statute.

Senator HARTKE. There are problems in the Securities and Exchange law; no question about that. But, I do not know many people who would like to go back to each individual State trying to provide the general overall regulation of the sale of securities, because most corporations that I know are fairly well-satisfied with the type of program that is administered by SEC.

Mr. CROMPTON. I did not mean to suggest that, Mr. Chairman. What I meant was there is no likelihood of a uniformity springing from a new chartering statute.

Senator HARTKE. Your argument is—and I suppose very persuasive that the concept of Federal chartering is merely a procedural device by which to gain control of the corporations in order to achieve more substantive ends. I think that might be a fair conclusion. That may be true.

Nr. CROMPTON. Thank you, sir. Senator HARTKE. But where corporations are engaged in bribery, illegitimate political crises, or an antitrust violation, there is usually an economic penalty associated with it. That ultimate penalty is paid by the shareholders. It will appear in the declining value of his stock or in the declining profits of that corporation. Do you not think that in such situations the shareholder ought to be able to somehow obtain some type of compensation for the economic damage that has been done to him?

Mr. CROMPTON. I think he should and I think he does. There are class-action and derivative-action remedies now available to shareholders, just for such things.

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