CORPORATE RIGHTS AND RESPONSIBILITIES

TUESDAY, JUNE 22, 1976

U.S. SENATE,

COMMITTEE ON COMMERCE,

Washington, D.C.

The committee met at 10 a.m., in room 6202, Dirksen Senate Office Building, Hon. Vance Hartke presiding.

Senator HARTKE. Before we begin the fifth day of hearings on corporate rights and responsibilities, I have a letter for the record from David L. Chambers, professor of law at the University of Michigan Law School, containing a statement by 80 law professors across the country that expresses their belief that State corporation statutes no longer adequately serve to guide and regulate the activity of large corporations and their managers. I'll put that in the record.

[The letter follows:]

THE UNIVERSITY OF MICHIGAN,

LAW SCHOOL,

Ann Arbor, Mich., June 25, 1976.

Hon. VANCE HARTKE,
U.S. Senate,

Washington, D.C.

DEAR SENATOR HARTKE: I am enclosing a statement signed by a large number of professors of law who teach corporate law: 80 professors at 62 different law schools in 28 states. The statement expresses their belief that state corporation statutes "no longer adequately serve to guide and regulate the activity of large corporations and their managers." The signers, without recommending a specific approach, conclude that "there is a particular urgency at this time for the Congress to consider some form of federal intervention."

The signatures are the response to a letter sent to teachers of corporate law at American law schools listed in a directory of the Association of American Law Schools. The letter was written by Professors Marvin A. Chirelstein of Yale Law School, Donald Schwartz of Georgetown University Law Center, and Russell Stevenson of George Washington University National Law Center. You and your fellow members of the Committee are to be warmly commended for convening these exploratory hearings.

Sincerely yours,

Enclosure.

(343)

DAVID L. CHAMBERS,
Professor of Law.

Statement on a Federal Role in Corporation Law

As law teachers who have had a special opportunity to study the law of corporations from an independent perspective and to reflect on the proper function of corporation law and the extent to which the law in its current state fulfills that function, we have a particular interest in the current hearings on the possibility of an expanded federal role in corporation law.

While we believe that it would be difficult if not impossible at this time to achieve a consensus among us as to the precise role the federal government should play in shaping the organic law of corporations, we are in general agreement that state corporation statutes and case law have suffered over the years from what Professor William Cary of Columbia University has called a "race to the bottom," and that as a consequence they no longer adequately serve to guide and regulate the activity of large corporations and their managers, as is the proper role of organic law. We also believe that, with the Supreme Court apparently in the process of drawing limits against the further expansion of federal regulation of corporations through the medium of the securities laws, and with public concern about various kinds of corporate impropriety running at a high level, there is a particular urgency at this time for the Congress to consider some form of federal intervention in this area, whether through the means of a federal chartering statute, through federal "minimum standards" for state corporation laws, or some other mechanism.

Senator HARTKE. I believe we are making considerable progress in addressing these issues and I want to thank all the people who are participating.

Today we will have three witnesses that will present a wide range of views and issues before us. The first is Dr. Lowell C. Smith, vice president, academic affairs, Bryant College, Smithfield, R.I., on behalf of the National Association of Manufacturers.

Good morning, sir. Go right ahead.

STATEMENT OF DR. LOWELL C. SMITH, VICE PRESIDENT, ACADEMIC AFFAIRS, BRYANT COLLEGE, SMITHFIELD, R.I., ON BEHALF OF THE NATIONAL ASSOCIATION OF MANUFACTURERS

Mr. SMITH. Mr. Chairman, I am delighted to be here this morning to represent the views of the National Association of Manufacturers mostly because I believe so enthusiastically in what I am about to present to the committee as my views.

I would like permission to depart occasionally from the prepared

text.

Senator HARTKE. The entire text will appear and then you just proceed in the way in which you think you can be most helpful to the committee.

Mr. SMITH. Thank you. Well, part of my concern is dealing with the vagaries of what this committee is supposed to be addressing. I'm not quite sure whether I'm supposed to be responding to legislation which is waiting in the wings or to Mr. Nader's very formidable document or some other more obscure concept of what corporate rights and responsibilities really are. But in the absence of any formal preparation, I will assume that Mr. Nader's document is the departure point and will address the issues that he deals with.

Mr. Nader has prepared a document for the committee's consideration which ascribes all of the ills of society to the corporate form. The assumptions upon which this study is based are fallacious but that doesn't stop his group from presenting them simply because their assumptions are incorrect.

In order to go through this very long study and deal with each of the problems and errors that it contains it would take more time than this committee has to deal with these issues, but I would like very simply to draw some assumptions from which the study bases its arguments and ask if this is a model with which the country can live. The study suggests several key considerations which the corporate chartering act should address:

1. Remove the power to charter corporations from the States and vest it in some kind of Federal bureaucracy as yet undefined.

2. Eliminate the boards of trustees of the top 700 corporations in the United States and substitute for them boards composed entirely of outside directors who would be full-time directors with unique functions.

3. Salary ranges for the board of directors would be established by the Federal chartering bureaucracy in the enabling legislation.

4. There would be a redistribution of income, particularly of corporate management, to reduce compensation levels.