terns, such that I would require companies to establish certain patterns of information flow. I think the information controls are particularly important because in all of the cases that were analyzed at U.S.C. under my supervision-cases where there have been some terrible pathology, where corporate behavior had broken down-there was always a clue somewhere in the corporation well in advance, that there was going to be trouble; clues in the laboratory that monkeys were losing their hair, going blind; testing rooms that brakes were not braking. The trouble is, the clues were never passed up, never rose to people who had both the power and authority to do something about it. If that is the problem, then I think the solution is clear.

You require patterns of information flow. You require that organizations establish patterns of reporting such certain counterindications of a pharmaceutical laboratory, whatever, must be reported upward. I would like once more to give credit to the FDA for the new rules published in the Register in February of this year, which have adopted this tact (41 Fed. Reg. No. 31). They are now saying that the company must establish lines of reporting to people in positions of responsibility. That is the drift of the changes that I outline more fully in my testimony and in my book.

Senator HARTKE. What about the antitrust laws? Do you feel that they have been an effective mechanism to create some responsibility or to alleviate some of the difficulties that have occurred?

Mr. STONE. I think the massive price fixing indictments against the electrical companies in the 1960's did throw a chill into industry, and I think were effective. So far as price fixing is concerned, my sense is that the risks have increased especially with the increased Sherman Act sanctions. Industrial concentration itself, however, does not seem to decrease.

I am not sure this effect of increasing concentration should be ascribed to a weakness of antitrust enforcement more than to the nuances of the tax laws. It is regrettable that the tax laws induce industrial concentration independent of any economies of scale. The way things stand, one cannot infer from increasing concentration that it testifies to greater efficiencies; rather, it testifies to the problems with the present treatment of capital gains, to all the different reasons why, from a tax point of view, it becomes beneficial for companies to merge, even if they do so at the cost of true efficiency, because they or their stockholders gain certain tax benefits.

Senator HARTKE. Well, that is not really what I was addressing myself to as much as whether you find that the antitrust laws, where they have been pursued, have had any demonstrable effect upon the corporations' insistence that the board of directors take more responsibility or that they have a greater feeling inside the corporation that the civil or criminal penalties shall, in fact, affect what actually happens in regard to the corporations' relations with its officers and directors?

Mr. STONE. From that point of view, I think the results have been unfortunate. It is a very critical question for these hearings. What has happened is this: The way the law has gone, especially the law of Delaware, it still may be to the advantage of the directors to know nothing.

Let me give you an illustration in Graham v. Allis-Chalmers. Graham v. Allis-Chalmers was a case that flowed in the wake of the

heavy electrical equipment industry price fixing. After Allis-Chalmers had to make payments, both criminally and civilly, a shareholder brought a derivative suit against the directors, saying it was your responsibility to have attended to the operation of the corporation and kept it out of trouble. All the more so, said the shareholder, because Allis-Chalmers was operating under a consent decree that ought to have put those directors on notice.

Yet when it got to the highest court in Delaware, they ruled that the directors had no obligation to institute a system of espionage that is the way the court put it-to ferret out evidence of wrongdoing. Since the director did not know, in fact, of the price fixing and since they had no obligation, even in light of this consent decree, to institute any monitoring, they would not be liable.

Now how was that read? A direct answer to your question is how did I read that? How did I read that as a Wall Street lawyer?

If you talk to your directors about such gray areas, is the kind way we put it, in any thing but private, you will be doing them a disservice. The law not only is ineffective as to make people alert the directors, I submit that the law is actually counterproductive, that the law is operating--the total system here, taking the antitrust laws, the Delaware laws together-in such a fashion as to dissuade the company from instituting the very sort of informational reporting that we would most want it to have.

Senator HARTKE. In other words, the profit becomes so overriding as a major concern that the penalty which should accrue to the officers and directors is really substituted with a reward?

Mr. STONE. That's right, or they are insulated.

Senator HARTKE. I was wondering, though, in two areas as I understand the sum and substance of what you are saying, and the thrust of what you are saying is that you anticipate the "law", will take the necessary steps to make some change in the present attitude.

What do you mean by the "law"? The courts? Is that all?

Mr. STONE. Thank you. There are two approaches I see, one involving new rules from the legislature and the agencies, the other from the courts under present law.

Senator HARTKE. Let me stop you a moment there.

Why would not the suggestion of Ralph Nader, for example, of having some type of mechanism which was on the Federal level, be at least a step in the direction toward what you think should occur? Mr. STONE. Well, I do not have much faith in Federal corporate chartering. I am not strongly behind it for this reason: Any company that is constitutionally amenable to Federal chartering under the commerce clause could be reached by the Congress under the commerce clause powers already available to it. If one uses Federal chartering to reach companies, and tries to attach the needed conditions to the Federal charter, then the conditions, the constraints, the limits, are attached only to the largest companies that are made subject to charter.

If one goes the direct route, through amending the criminal code in a way which I have recommended, one gets all companies. I think it is an important point, Senator, because my own experience has been that the largest, giant corporations, though they grab the headlines, are far more responsible citizens than the smaller ones.

I have more faith in the giant chemical companies exercising a little more care, and establishing better internal mechanisms, and spending the money and being in enough fields so they can afford to abort a drug that is looking bad, than I do in the marginal companies. It is the marginal companies that I am convinced are more likely to cut costs on worker safety. I am convinced of that.

Now if one takes the Federal chartering approach, you see, and tries to build in these sorts of mechanisms through Federal chartering, the limitations that are imposed would be imposed only on giant companies. If one goes the direct route, through changes in the FDA regulations, through reforms in the criminal code, then the net that one spreads reaches the entire corporate community that is engaged in interstate commerce, which is to say all of them.

Senator HARTKE. Well, you say the "direct route." Isn't that one of the big complaints that many of the business people have today, the fact that there are so many direct routes that they can't find out which direct route they are supposed to follow? For example, they say that everything is an after-the-fact determination. They never have any distinct guidelines from the FTC, from any agency, from the EPA, from the Justice Department. Everything is after the fact as far as they are concerned.

Mr. STONE. I think there is truth in that to some degree, although the complaints are exaggerated.

Senator HARTKE. In other words, wouldn't they be better off if they had a central forum from which they could make their determinations as to what their responsibilities are, and what their liabilities are ultimately going to be?

Mr. STONE. Yes, but to the extent that central messages, rules, regulations were attached to the Federal charter, then it would be necessary, I suppose, to establish a very large new Federal agency in charge of the chartering operation which would immediately come in conflict with the SEC to the extent that they were invading the area of securities regulation. They would come into conflict and there would be friction with the FDA to the extent they are getting involved in drugs.

I agree with the business community that there are a great number of difficulties with the rules presently being handed out. An advantage of my recommendations from this point of view is that they try in large measure to build into the organization, with the assistance of the organization, internal changes that would affect the way corporate decisions are made, rather than have the Government lay down hard and fast, inflexible rules from the outside.

To some degree our problem-and the corporations' problem-stems from a common root. Right now the law is kept at a distance from the centers of corporate decisionmaking. Our present way to deal with corporations is to set traps around their environment, and if they do something wrong, then you lay down a battery, a barrage of regulations. Worse, all the agencies want to protect themselves from criticism, so that if something goes wrong, they cover themselves by laying down a great barrage of rules-after the fact-and without always sensitivity to the costs.

The corporations complain, and rightly so. But what the corporations have to understand is that this is the quid pro quo for our being kept at a distance from their decisionmaking processes. If one adopts

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the approach that I have been recommending and says, "Look, we want to be sure-we, society-want to be sure that before marketing a toxic substance, you perform premarket testing. We want to be sure when you send those drugs on the market that you have had a good, solid quality control group. If we, the society, have those assurances that the internal configurations of your institutions have appropriately adjusted, then we do not have to hit you with so many rules that are very, very detailed as to the end-results." The rules would go more toward how the companies organize themselves.

Senator HARTKE. Let me take you down that road for a minute, although I think it is a side road we went onto and not the main street. The fact of it is on the toxic substance, have you followed that legislation?

Mr. STONE. Yes, to some degree.

Senator HARTKE. I have been eminently involved. In fact, I redrafted the original one and got it passed in the Senate. We are still having trouble with the House.

The chemical companies, of course, are doing everything they can to defeat that bill. I don't think it is in their best interests to do so. I think I could show them they are being very shortsighted.

You see, what I look upon as corporate responsibility are much broader questions instead of those which have been traditionally raised. I look at the entire scope of their social responsibility.

We have had testimony here that a corporation has no social responsibility. That is from Professor Manne. I don't agree. But then the question arises. What is the social responsibility? What is the responsibility to the employee? To the community as far as moving the factory into a community or out of a community or what responsibility does it have once it is in a community?

You hear corporations say, "We are a good citizen of Eddyville. Why are we a good citizen of Eddyville? Because we give to the Community Chest $1,000 which we extract from the employees on a Ford contribution. That makes us a good citizen."

What I am asking is how do you bring into focus-and I am not purporting to say that there is an answer to that at this moment, or at least a clear-cut answer-but how do you bring that into focus through what you call the legal procedures. In other words, I can see you dealing with the critical areas. In other words, the nuclear capacities.

I can see us dealing with the chemical toxic substances. I can see us dealing with price fixing. I can see us probably dealing with monopoly and predatory practices.

What I am talking about is that broader scope.

Mr. STONE. I deal with that as a central problem in my book. I think that most debate one hears about the social responsibility of corporations is terrible "mush" and dreadful. I think it is a debate the companies like because the corporate statesmen can get up and say, "We are socially responsible, we believe in it."

I say in my book, look, what does responsibility mean? What does that term mean? What is a responsible human being? Let's take the model of a responsible human being and try to transfer that to an organization.

A human being who is responsible is someone who, for example, reflects before he acts; who takes into account that his actions are going

to have an impact upon the environment; who scans his environment for those impacts and considers them and considers alternatives. That is what we would say is a responsible person.

Then the question becomes, to what degree can you transfer the model of a responsible person into an institution? What do you have to do in a concrete way to the institutional framework to make the company go about a decision in a manner parallel with a responsible person?

Now to turn to the toxic substances bill, it connects here. It is a very good bill in my view. According to the latest data I have seen out of GAO, incidentally, it indicates that the companies have grossly exaggerated the costs.

I mention it here because that law is a special sort of law, one aimed at bringing about socially responsible behavior of the sort that I am advocating. It does not say that if you harm someone, then we will sue you. We cannot say that any more. We cannot afford the luxury of saying that any more.

What the law says is to me solid corporate responsibility. It says we want you to do what a responsible human being would do before he develops something in his own backyard. Your backyard is the world.

So before you market these drugs, you have got to reflect upon certain impacts that are going to happen on technology, reflect upon what it is going to do to your neighbors, to your workers. That is a marvelous piece of legislation, and it is quite responsive to the problems of corporate responsibility.

Now I differ from Professor Manne. I differ from Professor Friedman considerably on this point. They say that if the company doesn't behave rightly the way society wants it to behave, then pass a law. It is simply unrealistic in this day and age when the corporations are moving so quickly into new fields, into new technology, into new ways of having a large impact, to say we will wait until something goes wrong. The companies have information right now in the laboratories that puts them far ahead of the Congress and the statehouses. There is a timelag in the transfer of information. We no longer have a society in which the wrongs that occur are the classic auto accident, that the tort law rose up around, carriage accidents classically. We now have a situation where the harms of what we are doing today are going to be visible only in 12 years, 30 years. We cannot wait until the people are dying, and say, "Now we had better pass a law."

That is why the toxic substances law as you drafted it has a lot of appeal.

Senator HARTKE. Let me ask you this now in relation to another matter.

I gather from what you have said here that there are some people who say bigness in and of itself is not a question. I have asked Senator McCarthy to come and testify. He and I have had discussions along this line.

He is of the opinion that bigness of itself is not a question. I gather from what you say that bigness may be a big question. It may be a big problem. In other words, I gather from what you have said that when corporations are too big, the directors don't know what is going

on.