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Can I make one additional point? There is a now famous article by Prof. Melvin Eisenberg, of the University of California, in which he points out that the typical shareholder is not a widow or orphan, someone who has one or two shares. He shows that the average shareholder is sophisticated, for example, a lawyer, accountant, or other professional, a person who puts money in the market as an investment. The typical investor has a sizable portfolio and considerable financial acumen.
If typical shareholders are not financial virgins, why do they need duennas or chaperones in the marketplace? Why does anyone say that these people don't know what they are doing with their own money! If they are willing to invest money in a corporation, and if no fraud is perpetrated against them, then the Government should keep out.
Senator DURKIN. Mr. Hessen, on behalf of the committee, I want to thank you. I appreciate your coming a long distance and being very patient while
I am not sure we are supposed to be meeting today. Thank you.
Mr. HESSEN. Thank you. I wish Congress could legislate about the weather in Washington. I must say it has been a unique experience.
Senator DURKIN. You know, if this were a normal working environment, with the air quality index that will be this afternoon, I am sure it would violate at least 25 OSHA standards for having Congress to be in session today. But that is our friends, the auto industry. That competitive auto industry.
Mr. HESSEN. I must say the good old days weren't as good as we imagine. I don't think you would care to step out in what the horses left behind.
Senator DURKIN. I grew up on a farm. One thing about what the horse left behind, you can wipe it off. You can't wipe the carbon dioxide, the pollutants off, unfortunately, and is one reason that the cancer rate, at least among my constituents, is extraordinarily high. I submit for the record that if we had some competition in the auto industry, we would have a car that would withstand a normal accident without having to be towed off.
We would have a nonpolluting, high efficiency, energy efficient engine, and we would have cleaner air in most of your cities.
But that is just one man's opinion.
Mr. HESSEN. Mr. Chairman, if I can offer another man's opinion in a one-line rebuttal, I think it's wrong to criticize the people who make cars. The people who should be criticized are the ones who merely complain. If they think they can do a better job, let them come forward.
Senator DURKIN. I would gather you would not support, to get the Government in building cars?
Mr. HESSEN. No. I am afraid it would look like the post office, sir. You wouldn't be able to get from here to there by letter or by car.
Senator DURKIN. It's been observed the way to bring the country to a standstill is to merge the post office and American Telephone and Telegraph.
Mr. HESSEN. That would do it. Thank you.
(From Barron's National Business and Financial Weekly, May 24, 1976)
CREATURES OF THE STATE?
THE CASE AGAINST FEDERAL CHARTERING OF CORPORATIONS
(By Robert Hessen) After a decade of attacking individual companies and industries, Ralph Nader has now launched a frontal assault against big business as a whole. His new report, Constitutionalizing the Corporation, written in collaboration with Mark Green and Joel Seligman, is the "solutions book"—the battle plan to rid the U.S. economy of the "evils" wrought by giant corporations. Nader is urging the Democrats to include federal chartering in their 1976 platform, and they probably will. Three Senators Jackson, Durkin and Tunney-have endorsed the proposal, while a fourth, Senator Magnuson, has scheduled hearings on it before the Senate Commerce Committee in mid-June.
What is federal chartering? What does Ralph Nader hope to achieve? Briefly, Nader wants Congress to require each of the 700 largest U.S. corporations—those with sales exceeding $250 million, or with more than 10,000 employes-to obtain a federal charter in addition to the state charter which they now hold. A federal charter will serve as an internal passport entitling its possessor to engage in interstate commerce. If a federally chartered corporation violates any of the conditions or restrictions imposed by the federal government, its passport can be revoked. Nader is confident that Congress can use federal chartering as a weapon to force certain basic changes and "reforms" upon the companies involved.
Proposed changes fall into three main categories. First, in order to encourage "corporate democracy," Congress would compel the giant corporation to strip its top executives of their decision-making powers and to embrace a new system of shareholder plebiscites on all "fundamental transactions." Second, in the name of "full disclosure," corporations would be required to release complete information about their operations to any government agency or outside critics who might demand it. Third, in the name of making the economy "more competitive,” the giants would be broken up through the use of a stringent new test of “monopoly power."
Why does Nader believe that government has the right to regulate the internal affairs of private business? His answer—the foundation on which his whole proposal rests—is that corporations are not private enterprises. Instead, he claims that every corporation, regardless of size, is a creature of the state. By this he means that a corporation owes its existence to governmental permission, and through its charter, enjoys special privileges which only government can confer. Writing in The New Republic, Nader has claimed: "The charter is basically a contract between the corporation and the state acting as representative of the people. As a legal entity, the corporation is given many privileges, such as limited liability, by its charter."
Although Nader is not the only one who holds the view that a corporation is a creation of the state, he is perhaps its most vocal proponent. But the theory has no basis in fact. A corporation is created by a voluntary contractural agreement between individuals seeking to promote their financial self-interest. The articles of incorporation (or charter) are a contract solely between the individual founders; the state is not a party to it. The articles contain purely factual information, such as the name and purpose of the business, its intended duration, the number of shares to be issued, and so on. The state does not give life or birth to the corporation. Just as the Registrar of Deeds records every sale of land, and the County Clerk records the birth of every baby, so the Commissioner of Corporations records the formation of every corporation--nothing more.
What privileges, then, does Nader think are conveyed by government to the corporation via the charter? He cites, first, the privilege of being a legal entity. But this merely means that a corporation can sue (and be sued) as a unit, instead of having to specify the name of every shareholder. It also means that a corporation can hold legal title to property despite changes among its shareholders. But partnerships are also legal entities, and any other type of business organization (i.e., limited partnership, trust or joint venture) can appoint trustees to represent the owners in lawsuits, or to accept and convey title to property. Being a legal entity, then, is clearly not unique to corporations, nor is it a state-created privilege.
Nor does limited liability depend upon governmental sanction. It can be achieved by many kinds of contractual procedures, including an agreement between a corporation and its creditors that they will look only to the paid-in capital for the settlement of claims. Contrary to popular belief, limited liability does not arbitrarily favor the corporation at the expense of creditors. The latter are not obliged to do business on the basis of limited liability; they can, and often do, insist that one or more corporate shareholders be a personal guarantor of corporate debts. Since limited liability can be achieved by contract, it cannot be viewed as a state-created privilege.
"Perpetual life" is the third example Nader offers of a special privilege conferred upon corporations. But this simply means that a corporation need never renew its articles unless the founders originally specified that the enterprise would exist only for a fixed period of time. The "privilege" of perpetual life does not guarantee that a corporation will live forever; witness the fact that more than half of all corporations go out of business within five years of inception. By contrast, partnerships do not have the “privilege" of perpetual life, yet many have been in existence continuously for a century or more.
In fact, none of the corporate advantages cited by Nader depends upon statecreated privilege; they can be attained by contractual agreement, as they often are in partnerships and other non-corporate forms of business. Thus, any attempt to justify stringent controls over corporations because they are "creations of the state" or recipients of "special privileges," collapses for lack of evidence.
Nader's anachronistic use of the term "charter” is deeply revealing of his political philosophy, as is his proposal that federal charters should serve as passports for giant corporations to engage in interstate commerce. His concept of the charter—as a promise to serve the state-derives from the 16th and 17th Centuries, when the Tudor and Stuart monarchs reigned in England. Englishmen who wanted to trade overseas had to obtain royal permission; freedom of commerce-to join with others to engage in overseas trade was regarded as a privilege which only a royal charter could bestow. So when men sought the King's permission, their petitions contained glowing promises to serve the King, to bring wealth and glory to his realm. In an age when the Divine Right of Kings was the prevailing political doctrine, any other approach was inconceivable. The Tudor and Stuart monarchs simply did not recognize the principle of individual rights.
Three centuries later, neither does Ralph Nader. He claims that all property rights are the creation of the state. “The law creates and protects that bundle of rights called property or the corporation, and this same law can rearrange that bundle of rights if it is in the public interest."
Nader's view is diametrically opposed to that of the Founding Fathers, who held that government is a servant whose purpose is to protect man's inalienable rights. He espouses the view that government is lord and master, a creator of rights which can be revoked at will. His use of the vague and rubbery concept of "the public interest" serves the same purpose as the theory of the Divine Right of Kings: to justify the government's exercise of arbitrary and unlimited powers. It is ironic that Nader's report appears on the 200th anniversary of America's independence. The Founding Fathers led a revolution to escape the same philosophy as Nader now seeks to impose in the name of progress and reform.
Nader's three major “reforms” require close scrutiny. First, "corporate democracy.” Every giant corporation would be compelled to conduct shareholder plebiscites on all "fundamental transactions." These would include "executive proposals involving the purchase, sale, lease, merger, consolidation, financing, re-financing, dissolution, or liquidation of assets equal to, say, 10% of the corporation's total assets or over $100 million, or the authorization of corporate securities in any amount." An executive proposal could not be carried out until the corporation held a plebiscite by mail, giving every shareholder an opportunity to vote.
Without offering the slightest evidence that shareholders want or need a veto power over corporate transactions, Nader proposes a paralyzing new system of voting. But a much simpler system already exists: the stock market functions as a daily plebiscite. Those who are satisfied with a corporation's policies and proposals can continue as shareholders; those who disapprove can easily withdraw.
In fact, corporate shareholders are deliberately and intentionally inactive. The purchase of corporate shares is attractive to people who are seeking a sideline investment, one which will not require their active participation in managerial decision-making. Although the "separation of owernship and control" in giant corporations is frequently denounced, it merely represents a widening specialization of function, or division of labor. There is no reason why a shareholder must personally manage his own wealth, instead of entrusting it to managerial specialists, as investors do when they become limited or silent partners, or buy mutual funds, or deposit money in savings accounts, or purchase corporate bonds. None of these other investment opportunities carries any voting rights or voice in management.
Similarly, there is no reason to assume that when corporations "go public,” the founding officers or their successors intend to relinquish any of their managerial authority. For example, when Walt Disney, Edwin Land and Thomas J. Watson sold stock in their companies to outsiders, they were seeking capital, not advice on how to produce cartoons, cameras and computers. New investors were never led to believe that they were acquiring managerial powers equivalent to those of general partners. If the relationship between investors and managers is mutually acceptable, if millions of people willingly invest their money in corporations which they will not personally manage, then outsiders have no right to interfere.
Nader's second proposal is "full disclosure." Because he believes that all wealth rightfully belongs to the government, not to those who produce it, Nader demands that all corporate income tax returns be published and widely distributed so that "members of the public" can know "whether their (!) largest corporations are honestly paying their taxes."
Because he believes that there is no legitimate reason for privacy (which he condemns as "secrecy"), Nader proposes mandatory disclosure of the names of those who currently own stock in "street name," or through nominees. “These contrivances," he says, “are only useful to individuals or companies who wish to evade law or public knowledge ..." He overlooks the fact that everyone has a right to confidentiality, which need not be justified to anyone else. Privacy is not a law-breaking act.
In the name of full disclosure, “no corporation shall be allowed to keep confidential information required by government ..." In other words, he wants to give government a blank search warrant to comb through corporate records. This proposal would deny to businessmen the safeguard of the Fourth Amendment against unreasonable search and seizure. If it were aimed at muggers or murderers, civil libertarians would rally to their cause. But since it is directed against businessmen, no one has protested.
Nader's third major proposal, antitrust action to break up the giant corporations, is based on his claim that they are monopolistic and anti-competitive. He defines neither term; instead, he makes sweeping allegations that giant corporations have become bloated, wasteful and inefficient. "Unchallenged economic power deadens initiative, discourages thrift and depresses energy." They have sunk into institutional senility because “the spur of constant stress is necessary to counteract an inevitable disposition to let well enough alone."
The only firm which truly fits this description is the U.S. Postal Service, a government-enforced monopoly. It surely does not fit IBM, Xerox or most of the other giant corporations which, ironically, are attacked by smaller firms in their industries because they innovate too often and never seem willing to "let well enough alone.”
If competition means a process of rivalry for sales and profits, it is a myth to claim that giant firms are immune from it. Companies within the same industry compete with each other, e.g. Kodak vs. Polaroid ; companies in different industries compete with each other, e.g. steel vs. aluminum; companies keep branching out into new lines of production, e.g. IBM has challenged Xerox's dominance in the field of photocopying, while Xerox has introduced an electric typewriter to compete with IBM's. In fact, as long as the government does not create legal barriers to entry-licenses, franchises, tariffs or import quotas-the giants cannot afford to stagnate.
Given Nader's assertion that giant corporations are completely safe from competitive challenge, what is his solution? He proposes that within one year after enactment of the federal chartering law, the Antitrust Division publish a list of "relevant product markets." This list would be used retroactively to punish corporations whose share of the market exceeds the “permissible limits."
Three years ago, in his book Corporate Power in America, Nader said that no firm should be allowed to hold more than 12% of the market. Today he says that antitrust actions will be started whenever "four or fewer corporations account for 50% or more of sales." What his criteria will be three years from now is anybody's guess, as is the meaning of “relevant product markets," which he never defines. As Ayn Rand observed in Capitalism: The Unknown Ideal, “There is no way to legislate competition; there are no standards by which one can define who should compete with whom, how many competitors should exist in any given field, what should be their relative strength or their so-called 'relevant markets,' what prices they should charge, what methods of competition are 'fair or “unfair.' None of these can be answered, because these precisely are the questions that can be answered only by the mechanism of a free market.”
Nader views size per se as an evil, as evidence of criminality. Observe, however, that he holds this belief as an axiom, a self-evident truth. But if one company holds more than 12% of the market, or if four companies hold more than 50%, whose rights have been violated? Who has been wrongfully deprived of anything! Why are the rights of producers to be denied in the name of Nader's axiom? If a man described as a "consumer advocate" proposes to break up the companies which have supplied products of proven excellence and acceptability, one wonders what a "consumer enemy' would do.
In view of Nader's professed concern about protecting investors against fraud, and consumers against shoddy products, his silence is often eloquent. He has never spoken out against U.S. Savings Bonds, which the government promotes as attractive investments even though, after taxes and inflation, they usually yield a negative rate of return. If businessmen had been guilty of such a practice, Nader would accuse them of deceptive advertising.
Nor has he criticized Social Security, which, despite its soaring premiums, is flirting with bankruptcy. If businessmen had coerced people to participate in a retirement program, then had continuously raised the premiums while giving the participants no option to withdraw, Nader would denounce them for extortion and fraud. Nor has he spoken out against the U.S. Postal Service. One wonders why his demand for competition does not apply to this government-operated monopoly.
One final question deserves brief attention. Regardless of whether one agrees with Nader's viewpoint, is his report accurate and well-documented? At first glance, it seems like a work of serious scholarship, given its 63 pages of footnotes. After all, since footnotes can be verified, one assumes they must be accurate. It is hard to believe that a man of Nader's reputation would release a reportparticularly one which took five years to prepare—without scrupulously checking his sources and his facts. Yet this is precisely what he has done.
My suspicions were aroused by the very first words of the report, a quote from a Supreme Court decision. To misquote three times in three sentences is scarcely a way to inspire confidence. If this had turned out to be the only example of carelessness, it would not merit notice. But the report is littered with errors. Some are trivial (the result undoubtedly of careless proof-readiing); others are not. There are several missing footnotes and quotes without references, and a Federal Trade Commission report is cited in such a peculiar way that only someone experienced in the use of government documents can track it down. In many cases, footnotes refer to huge books but give no specific page references, so that citations must be accepted on faith-usually a tipoff that something is amiss.
Because it is the briefest chapter, I tried to verify every footnote in Chapter III. I found that it is shot through with what scholars call "phantom footnotes." In Nader's report, they come in three varieties. First, there are notes that fail to correspond to the text. Thus, a 1917 book is given as the place to find the text of a 1964 court decision; for the text of a 1942 case, we are referred to a 1903 newspaper story.
Second, there are sources which do not contain the material which Nader claims they contain. Note 13 of Chapter III cites President William Howard Taft as favoring federal chartering (which he did prior to 1912), but when one tries to verify the citation, one finds instead Taft's opinion that the proposal for federal chartering “would create the most monstrous monopoly of power in the history of the world-a power as much greater, as much more autocratic, than that of a Caesar or a Napoleon .
The third and most serious type of phony citation is one which seeks to by-pass argument by referring the reader to prestigious authorities. To the question: does Congress possess the constitutional authority to compel giant corporations to obtain federal charters? Nader offers an unequivocal answer: "There is little