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doubt today that the federal government can charter business corporations." In a footnote, he elaborates : “Although once hotly disputed, there is today no serious question that a federal chartering law would be constitutional. ..."
In support of this opinion, Nader cites two authoritative sources. But the firsta 1969 essay by Adolf A. Berlemakes no mention of the issue of constitutionality. The second reference is to a 1934 Federal Trade Commission report. Now 1934 bardly fits Nader's twice-repeated claim that "today" the constitutionality of federal chartering can hardly be denied. But anyone who manages to track down the FTC report (the one cited in such a way as to discourage its being found), will not discover an FTC opinion on the page Nader cites, but rather an excerpt from an article by H. L. Wilgus in the Michigan Law Review. Since Wilgus (1859–1935) was a reputable scholar, Nader's "authority” does not seem to be controverted except for one fact: the article was published in February 1904, not exactly "today."
Nader's report is a classic example of sciolism, a pretense at scholarship, a show of learning without substantial foundation. In Chapter III, eight of 22 footnotes are unverifiable either bogus or deceptive-an error ratio of 36%. The entire report contains 996 footnotes; if the same ratio holds up, there will be 359 phantom footnotes. Nader's report is a dangerously defective product which should be recalled by its manufacturer before it inflicts injury upon unwary users.
If Nader's proposal for federal chartering is to be defeated, a systematic, widescale counterattack must be launched against the critics of corporations. But it must be an intellectual counter-offensive, one which not only challenges the specific policy recommendations of the critics, but also, more importantly, the philosophical premises on which they base their claims. A proper defense of corporations must emphasize that they are created and sustained by freedom of association and contract, and that the source of these freedoms is individual rights. Rights are not suddenly forfeited when a business grows beyond some arbitrarily defined size, either in terms of assets, sales or profits, or the number of investors, employes or customers.
The productive members of the American business community have no need to apologize for their achievements. They are responsible for the fact that Americans enjoy a standard of living-of luxury, leisure and longevity-unprecedented in world history and unparalleled in contemporary socialist societies. But production and prosperity depend upon freedom-and freedom cannot survive unless we speak out in its defense.
Senator DURKIN. Dr. Gordon Adams.
Dr. Adams, do you want to proceed in any manner that you find most comfortable? This is an exploratory hearing. So feel free to proceed. We do have some time constraints. We have to disband by 1 p.m.
STATEMENT OF DR. GORDON ADAMS, DIRECTOR OF MILITARY RESEARCH, COUNCIL ON ECONOMIC PRIORITIES, NEW YORK, N.Y.
Dr. Adams. I expect I won't be that long, Senator Durkin. I will abbreviate the statement I submitted for the record.
I am very pleased to testify before the committee this morning on behalf of the Council on Economic Priorities. Public interest research groups on corporate activity are a relatively recent phenomenon in American political life, and we are gratified that the Congress is taking an interest in our work and in our views on what is probably one of the most difficult issues in American politics today: the role and responsibilities of increasingly concentrated corporate power in our country's social, economic, and political life.
For the past 7 years, the council has worked to define the meaning of corporate responsibility and to research corporate performance in America in areas which affect our personal and social existence : environmental pollution and its control, energy usage, equal employment, health and safety, and military production. Our research has covered a variety of industries: pharmaceuticals, steel, oil, pulp and paper, retail merchandising, utilities, and defense. In addition, we report annually on stockholder and activist efforts to change corporate social behavior.
Our work has been widely used in corporate self-evaluation; consumer actions; Federal, State, and local legislation; and congressional hearings. Moreover, we have not worked alone. An increasing number of organizations have become involved in efforts to make corporate behavior accountable to the public. To list only a few, we are joined in our efforts by such groups as the National Resources Defense Committee, Friends of the Earth, Environmental Action, Media Access Project, the Interfaith Center on Corporate Responsibility, the Sierra Club, Corporate Data Exchange, Project Standard Oil, Clergy and Laity Concerned, Women's Action Alliance, the Black Economic Research Center, the North American Committee on Latin America, and the Institute for Food and Development Policy.
Slowly but surely our efforts are making headway. Corporate disclosure requirements, on which I wish to concentrate this morning, are gradually being broadened. Shareholders are demanding more responsible performance by the firms in which they invest. In a sense these are the disgruntled shareholders the preceding witness was looking for.
CEP research shows that corporate proxy resolutions on social issues have increased from 36 in 1972 to at least 105 this year. Even more significant is that companies are accepting such resolutions as binding policy at premeeting negotiations with their proponents.
Investors' interest in social responsibility work continues to grow, from the search in the 1960's for a "peace portfolio," to subscriptions to our publications, to greater media coverage for social responsibility issues. Some efforts even go beyond this level to raise fundamental issues about the criteria for chartering corporations. This committee is surely familiar with the effort to transfer chartering responsibility from the State to the Federal level. Perhaps the public interest can be more clearly defined at this level, where States will not be competing for the investment dollar by lowering standards of public protection and accountability.
I want to emphasize this morning that it is our sense at CEP that an increase in the flow of information on corporate activities is an essential first step in making corporations more accountable. Our task has been to gather and disseminate systematic information on the social impact of corporate activity. We have cast a wide net, seeking to make public information that many companies would rather keep private. Company environmental pollution, for example, once seen as an accepted external effect of production, and now the object of systematized clean-up efforts, has been one major focus.
Company performance in equal employment of minorities and women has been another. We have examined futuré energy choices and compared the cost of nuclear with fossil-fuel-generated power. And we have explored the intimate relationship between military producers and their major buyer, the Department of Defense, to which I will return. Some firms respond well and some badly.
In the steel industry, for example, one firm, Bethlehem, found our requests so ludicrous as to send us a copy of their latest comic book called "Mark Steel Fights Pollution.”
The voluntary cooperation of the corporations under study has been an important source of information for CEP. Although voluntarism has an important place, such information is often haphazard. No two firms report on pollution and employment exactly alike. Nor do they report regularly, unless asked. And their replies to one public interest group are not necessarily available to others.
What we need to make our work more effective is stronger Federal corporate disclosure and reporting requirements. It is clear to us that neither our work nor public policies on corporate issues, that is, neither our work nor yours in Congress, can be effective without standardized, comparable, regular, and accessible disclosure of socially relevant corporate data.
By standard and comparable we mean that all corporations should report the same categories of information on comparable forms. By regular, we mean that such reports should appear on at least an annual basis. By accessible, we mean that one should not have to undertake a lawsuit under the Freedom of Information Act to pry the information loose. Both Government and the public should be able to obtain this data easily, from convenient locations.
I want to discuss two general areas of corporation disclosure which would make Congress and the public interest groups' work more effective. These proposals start from a basic principle, which these hearings have addressed, that corporations do in fact differ from individuals in their legal basis of existence, in the privileges that they receive from the State, such as limited liability, and citizens' rights (e.g privacy) and they differ from the individual in their power. Hence, they have special standards of public accountability.
Legally, corporations obtain their right to exist from the Government. Thus the public has the right to make certain demands of them, in granting that public trust. More basically, corporations are more powerful in affecting people's lives than most individuals. Their ability to create and eliminate jobs, productive resources, and sometimes entire communities far surpasses that of any other institution, save government itself.
In the era of the multinationals, moreover, we may even be witnessing the eclipse of the Government's ability to exercise power on a par with that of a corporation.
Congress has already acted in ways which have encouraged greater corporate disclosure. The Environmental Protection Act and the Freedom of Information Act have already opened some avenues for increased disclosure. But a great deal more could be done to broaden and standardize disclosure. Congress has already helped in the effort to obtain the first type of disclosure; I want to discuss basic information on corporate structure, ownership, and production.
The regulatory agencies, in response to Congress urging in 1975, formed a steering committee and reported out a proposal on uniform disclosure which I have introduced in the record. If it were implemented, this model corporate disclosure regulation would apply to all firms regulated by Government agencies.
The first item covers corporate structure, that is, all subsidiaries and joint ventures, their names and addresses, bases of control, principal business activities, balance sheets, and so on. This would go a long way toward answering the difficult question of who owns whom.
Second, the MCDR would require a report on voting stock ownership, including the top 30 owners, down to one-tenth of 1 percent of the outstanding stock. It would require the aggregation of nominee holdings and a clear description of the real voting powers of the shares.
The third category of information, corporate interlocks, covers the affiliations of the owners and directors of the firms and their business contracts with other firms.
Fourth, corporations should report on all outstanding debts, including the creditors and amounts of debt and all leasing arrangements.
And finally this form of disclosure should include an item that goes beyond the model regulation. Corporations should be required to report a standard breakdown of sales and income by product line, as well as sales and income from domestic and foreign operations. The United States, which has been a leader in corporate disclosure for years, could break new ground by requiring such information.
Research organizations, such as Corporate Data Exchange, spend an exhausting amount of time trying to obtain stock ownership information, which a firm would have little difficulty compiling and reporting. This data would also be a service for groups of disgruntled stockholders preparing stockholder proxy resolutions, such as the Interfaith Center on Corporate Responsibility, which otherwise have difficulty obtaining a complete list of stockholders. There is no defensible reason for a company operating under public charter to withhold such information. So far, only the ICC has begun to act on the model corporate disclosure regulation. We encourage other regulatory agencies to act in a more speedy manner as well.
My second heading today is social impact data. I want to break this item into two categories, one of which I will go over briefly and the other in a little more detail.
Briefly, social impact data is particularly useful and important for our work as a public interest research group. We are very interested in having comparable, regular, and accessible data in such areas as the environment, employment, and military production.
To do one study, at the council on environmental or employment matters consumes 1-2 years of time at a cost of $40,000 to $150,000. Management consultants have told us that if this were done by their organizations, the studies would probably cost between $200,000 and $400,000.
I have attached to my testimony a copy of the statement on disclosure made last year by the executive director of our council.
Briefly, in the environmental area, this report covers the corporation's air and water emissions, manufacturing processes, pollution control efforts, energy usage, legal suits pending on environmental issues, and future plans for pollution control.
The employment report provides information on personnel distribution by job category, race, sex, and salary, affirmative action plans, and pending employment litigation. Both this and environmental information are probably maintained already by the corporations and could be easily assembled for public and governmental inspection.
Beyond these two categories, I would like to focus on a third area, military disclosure. In doing a relatively straightforward study for the council on the B-1 bomber, I spent 2 months pursuing the most minimal information about employment and subcontracting by the prime contractor, Rockwell International.
Military disclosure is one of the most significant areas for the Government, since military spending is one of the single largest categories of Federal spending. Not only are military contractors publicly chartered, but in some cases their financial well-being depends on the public purse. Moreover, military contractors, such as Lockheed and Northrop, have stood out in recent revelations of questionable foreign sales and domestic political funding activities.
Sound public understanding and intelligent congressional debate on the military budget, I would suggest, depend on regular, accessible disclosure of the following kinds of data by military contractors.
One, employment of retired military personnel. Contractors should report fully the number of retired military employees on salary or consulting contract, and the nature of their responsibilities in the firm. Congress has held a set of hearings on this question in the past 6 months and I expect more will follow as information becomes public.
Two, Government connections. Contractors should report the names and corporate responsibilities of employees who take jobs with the Federal Government. They should also report all company memberships on governmental advisory committees.
Three, size of military business. The contractors should report on sales and income from subcontracting work for other military contractors. Although contractors will protest that this information is proprietary, the public has the right to know how significant this public money is for the contractor.
Four, subcontracting. Each contractor should report on the dollar amount, firm, work location and employment on all work it subcontracts to other military contractors. A significant portion, sometimes over 60 percent, of military contracts are subcontracted, yet there is no regular reporting of such information below the first tier subcontractor.
Five, cost data. Here, too, Congress has expressed a concern in recent years. Contractors should report detailed data on the cost of military work. The Defense Department receives such information, while Congress and the public must make do with the selected acquisition report, which uses meaningless categories and dated information.
Costs are a major issue in military production, and any efficiently managed firm can gather and report weekly or monthly cost changes for machinery, raw materials and labor. None are now required to disclose this data, and costs soar before Congress can perceive a cost problem and act to control it.
Six, public and governmental relations. Contractors should report all expenditures for legal work, advertising, lobbying and public relations. Ideally, all lobbying contracts with Government officials should be reported, though this could prove costly and time consuming. Instead, firms could be asked to report general areas of lobbying activity.
And finally, disclosure of what has been a larger and larger part of the military business, that is, overseas military sales. Contractors should report all overseas sales contracts and licensing arrangements of both parent and subsidiary companies. This has been the focus of a great deal of attention the past few months.