5. Have the board of directors designate executives responsible for compliance with all Federal and State laws and require periodic signed reports describing the effectiveness of compliance procedures. This, in itself, is such a staggering concept that it's almost unbelievable.

6. Have the board review important executive business proposals to determine their full compliance with law, to preclude conflicts of interest, and to assure that executive decisions are rational and informed of all foreseeable risks and costs with an emphasis on all foreseeable risks and costs. It would require the board to review the studies upon which management relied to make decisions, require management to justify its decisions in terms of costs or rebutting dissenting views, and when necessary request that outside experts provide an independent business analysis.

7. In the relocation of principal manufacturing facilities, the board would require management to prepare a "community impact statement" which would require the corporation to state the purpose of a relocation decision, to compare feasible alternative means, to quantify the cost to the local community, and to consider methods to mitigate these costs.

I'd like to depart from the prepared testimony here for just a moment, Mr. Chairman. The State of Rhode Island, which is our home, at the present time is suffering one of the highest unemployment rates in the country. At the start of the recent recession, the unemployment rate reached 151/2 percent, which by any standard is excessively high.

Now everyone I think in this room, and certainly in the public at large, would concede the U.S. Congress is an ethical group, has a high moral sense, and has a reasonably well-established concept of community impact. One of the primary reasons that the State of Rhode Island has such a high rate of unemployment is because the Congress in its wisdom cut DOD appropriations and, in their wisdom, the DOD closed Quonset Point Naval Air Station and vastly reduced the size of the Newport Naval Station.

I would suggest this was an entirely appropriate thing to do if facilities were old, incapable of modernization or at a cost much too high to be sustained, or if for some reason or other these functions could be done better at some other facilities. If the decisions were not politically motivated, but economically motivated, then the decisions were just.

On the other hand, to the best of my knowledge, there was no such thing as a community impact statement. At the same time the Federal Government is creating a massive community problem with which the community must deal with little or no castigation of the Federal Government from the press. This is not the same kind of circumstance under which business would be served had the circumstances been essentially the same I think.

Senator HARTKE. Let me say to you, I'm going to have to go vote. I'm not too sure I understand what you're saying. Are you complaining that the press is not fair?

Mr. SMITH. No, not at all. What I'm

Senator HARTKE. I thought the press might like to find out whether they are or not.

Mr. SMITH. NO. What I'm saying is that

Senator HARTKE. Are you saying that the Pentagon made a mistake? Mr. SMITH. I'm saying that precisely the same kind of circumstances which dictate changes in business environments and relocations of major manufacturing facilities are in operation outside the competitive sphere without the restraints which are being proposed in the Nader document.

Senator HARTKE. Let me see if I understand what you're saying. In other words, what you're saying is that they did this specifically without considering the social consequences?

Mr. SMITH. No. I think that there were probably serious considerations given for the social consequences but they were done anyway. Senator HARTKE. All right. And you say they weren't criticized for it?

Mr. SMITH. Except in Rhode Island.

Senator HARTKE. Is that the essence of it? Let me ask you then, you say a 15-percent unemployment rate is unacceptable. What is an acceptable rate of unemployment for Rhode Island?

Mr. SMITH. I would say that somewhere near the national average would be much more palatable.

Senator HARTKE. Well, I don't think anyone is going to disagree with you that 7-percent unemployment is a lot better than 15-percent unemployment. Is that an acceptable rate?

Mr. SMITH. No.

Senator HARTKE. What is?

Mr. SMITH. I would say full employment. As economists define it nowadays, it is somewhere in the neighborhood of 6 percent.

Senator HARTKE. I don't accept that. In other words, I don't think that's the issue we are addressing ourselves to at all. We are talking about corporate responsibilities. The fact that other people have not met their responsibility-and I quite agree with you that Government has been derelict in so many fields-does not mean-that's a different problem.

Mr. SMITH. All right. Let's address just the issues on the relocation. Senator HARTKE. Äll I can see is what you're saying is that the press has seen fit not to give that the same treatment.

Mr. SMITH. What I'm saying, Mr. Chairman, is that precisely the same considerations that go into the abandonment of any large manufacturing facility or job center anywhere may be applicable, and the fact that it has a community impact is of secondary consideration to some of the other considerations on which the decision is based.

Senator HARTKE. I understand what you're saying, but does that lessen the responsibility of the corporation to give consideration to those matters?

Mr. SMITH. I don't think anyone is suggesting that they should not give consideration to these issues. I'm suggesting that they should not be a part of legislation.

Senator HARTKE. Why not?

Mr. SMITH. Because there are many other things which should have overriding considerations. For instance

Senator HARTKE. In other words, the effect upon a community certainly is, in my judgment, a proper concern of a legislative group. Isn't that right? What other concern is there except the people?

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Mr. SMITH. The market is a very important concern, Mr. Chairman. Senator HARTKE. The market before people?

Mr. SMITH. The market for labor, yes indeed.

Senator HARTKE. NO.

Mr. SMITH. The market for capital, the market for productsSenator HARTKE. The market for products is more important than the people?

Mr. SMITH. In the long run it is the same thing as the market for people. What you're talking about is products prepared for sale to

consumers.

Senator HARTKE. Well, are you trying to contend that there should be a study made of the impact upon a community whenever a government closes a plant in the same fashion as when a big corporation closes a plant? Is that what you're saying?

Mr. SMITH. No. I'm saying that while these are important considerations, they are not overriding considerations and should not be part of legislative prerequisites to the operations of the corporate form.

Senator HARTKE. You tell me why they shouldn't be part of legislative prerequisites. Isn't there an effect upon a community, say when a government closes a plant or when a big major corporation closes a plant? You see, you are prejudging what I'm saying because of the fact you're sitting there on that side and you think I'm being antagonistic with you. I'm asking you almost the heart of this question, is this or is this not a legislative responsibility? You say no. So I asked you why not?

Mr. SMITH. Is it going to be the legislative responsibility to assure by some kind of bureaucratic fiat that all corporations shall make a profit or that all corporations shall create products at the lowest possible price or that all corporations shall take risks in order to create new jobs?

Senator HARTKE. I'm talking about the social consequences. You're talking about the profit consequences.

Mr. SMITH. The first consequence is the profit consequence.
Senator HARTKE. What?

Mr. SMITH. The first consequence is the profit consequence. Without profits, there can be no jobs.

Senator HARTKE. Well, let me just say to you I do believe that there is a responsibility by government to try to go ahead and make it possible for people to live better. You figure out what that means. That's what we're trying to deal with here. I've got to go vote. I will be right back.

The question, Mr. Smith, still remains. Why is it not a legislative concern?

Mr. SMITH. I think it's a legislative concern, Mr. Chairman, but I don't think it's an overriding one or an appropriate one for legislation. Senator HARTKE. Well, why is it not an appropriate one for legislation?

Mr. SMITH. Because the overpowering considerations are whether or not American industry ought to be able to make a profit, because profits are the source of risk capital; profits are the source of dividend payments that encourage investors to buy stock; and profits are the

source of new jobs. This is the primary function of the corporation. Without it, it ceases to exist.

Senator HARTKE. But is profit such an overriding consideration that it's allowed to override all other interests?

Mr. SMITH. No. I think it's the primary concern.

Senator HARTKE. Let me ask you very specifically, is it allowed to override the effect upon a community?

Mr. SMITH. I think so. I think it must be.

Senator HARTKE. In other words, you're saying that profit comes before the community.

Mr. SMITH. I think it must for the longrun survival of the corporation.

Senator HARTKE. In other words, profit without any limitation becomes the sole criteria, the ultimate judge?

Mr. SMITH. The sole arbiter of whether or not a corporation will survive in the long run. Without the corporation survival, the impact on all communities will be considerably greater. If the corporation dies, by being forced for instance into an adverse competitive situation, then all communities lose.

Senator HARTKE. Let me make it very specific. Let's go right down here to the place in Virginia, Hopewell, where the Kepone incident occurred. Hopewell, an appropriate name. Was the continuation of the profit motive so overriding in the community of Hopewell to have that kind of result?

Mr. SMITH. I'm sorry. You are speaking about a case with which I am not familiar.

Senator HARTKE. Well, I'll just describe it. They were manufacturing a chemical down there in Hopewell which resulted in the employees' health being permanently damaged. And the children that lived in the community, and the rest of the people who were not even working in the chemical plant, were exposed to the effects of the chemical, too.

Mr. SMITH. Of course not. That's an unacceptable conclusion that the profit motive ought to be so overriding that it takes a toll in lives. You're suggesting an extreme.

Senator HARTKE. Let me just tell you something. A study has been made now by some eminent doctors that 1 year forced unemployment at this moment is estimated now to cut a man's life by 5 years. Now I'm not saying that's right. But what is the difference between poisoning, the actual poisoning, or the poisoning of the mental processes of

a man?

Mr. SMITH. Senator, let's start with your question and let's back it up a moment. Suppose that in order to protect the community from shortrun effects of unemployment a decision is made to keep a firm in an uneconomical environment. As a result the corporation ceases to make a profit and ultimately collapses. What you have then is the end result which is essentially the same for that community as well as the loss of jobs wherever that corporation might have relocated under better circumstances.

Senator HARTKE. It might have.

Mr. SMITH. So you're talking about a multiple effect, not just a single circumstance.

Senator HARTKE. But you see, the situation you have described is not what we're talking about. We're talking about what the legislative responsibility of a corporation is to a community. You say that is not the proper role in which we should legislate. In other words, you're saying, in substance, that there is no corporate responsibility which is sufficient to require legislation. Is that what you're saying?

Mr. SMITH. I'm not saying that at all. I'm saying that there are much more important considerations than the corporation's responsibility to the community in which it's located. Its responsibility to survive for the community at large is a great deal more important in

some cases.

Now there's a second issue here, however. You're talking about corporate responsibility in a broad sense and localizing it to a particular community. I think that what we are really talking about is a fundamental change to the free enterprise system to adopt standards which have not been fully established in the minds of the legislators. For instance, take the issues of social concern which Mr. Nader uses as his paradigm for the board structure. For instance, in my prepared testimony he has selected nine corporate directors, each of which would assimilate some social responsibility, one of which might be employee welfare; another might be consumer protection; another one might be environmental protection and community relations.

Each one of these is an ill-defined public policy area where there isn't any public policy. How can you legislate a morality that will cover all circumstances, for instance, on consumer protection? If you were to appoint a director whose primary constituency was to be the protection of consumers, what are you going to charge him with? What are you going to say to that man? How are you going to define what consumer protection is? There isn't a vacuum in the board of directors dealing with consumer protection issues. It's a very real and a very live issue, but the fact is, by isolating it, making a particular individual responsible for it instead of the board as a whole, you're saying you're privy to something that nobody else is and you have an omniscience in the field of consumer protection and the constituency to protect, which simply isn't so.

Senator HARTKE. Let's first define what we're doing here.

You're talking about the Nader proposal. I'm talking about corporate responsibility.

Mr. SMITH. All right.

Senator HARTKE. Now what I'm saying to you is that you might find-and you have directed a lot of your attention here to the Nader proposal and that's fine. I'm not objecting to that whatsoever. I think that's perfectly legitimate. But the whole question involved in these hearings is not whether the Nader proposal alone is an item or whether your testimony in rebuttal of that will make a decision.

The question very simply is: Is there a responsibility to the community which is not being met by the corporate enterprise at the present time?

Now we have seen a lot of items which have come to the public's attention-bribery, corruption in high places-and from what you're saying-and I gather what you are saying is that-nothing needs to be done about these things.