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Mr. SMITH. The market is a very important concern, Mr. Chairman.
Senator 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.
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. [Recess.] Senator HARTKE. We will resume.
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.
Mr. Smith. No, Mr. Chairman. What I'm saying is not that. I'm saying that where there are abuses of corporate power they should be addressed under the existing statutes because presumably they are violations of the law. Is that not correct?
Senator HARTKE. I don't know.
Senator HARTKE. What violation of the law is there by an American corporation bribing a foreign official !
Mr. SMITH. I would assume that it depends entirely on how that bribery is reported, both to the SEC and
Senator HARTKE. I'm asking you, what's the violation in the United States under the corporate structure?
Mr. Smith. Well, if you won't allow me to answer under the SEC rules or the methods of reporting these as legitimate expenses, I don't know how I can answer it.
Senator HARTKE. Go ahead.
Mr. Smith. If they are legitimate business expenses of doing business in a particular country where that corporation exists and they conform to the mores of that society and corporate disclosure has been followed, then I would suggest that they ought to continue.
Now let's take the myriad of cases inbetween that you continually hear about. Let's take the cases where corporate bribery is not reported and where it's not shown in the corporation's reports to the SEC and where the auditors have not uncovered it. Those are violations of the law and the corporate firms responsible for those acts should be dealt with strongly, as strongly as possible under the laws. Senator HARTKE.
How can you deal with them strongly? Let me ask you another case. The J. P. Stephens case. In the past 11 years they have been cited 15 times for violating the National Labor Relations Act and they have reported that the cost of these violations is not material to the operation of the company. I mean, you'll have to admit, there is no procedure in the corporation law to take care of that situation.
Mr. Smith. There are no procedures under the National Labor Relations Act for
Senator HARTKE. Not for continued violation. In other words, you have the directors in the corporate structure, in which they are continually found guilty of violating the law. You feel that the profit motive as far as they are concerned is sufficient to go ahead and justify that continued type of antisocial action.
Mr. SMITH. I'm sorry, Mr. Chairman, I can't answer that question because I don't know what's going on in the minds of the board of directors of the J. P. Stephens Co. and I'm not familiar enough with the background to make the judgments with which you are so familiar. I simply can't answer.
Senator HARTKE. Well, evidently, there are economic incentives for them to continue to violate the law.
Mr. SMITH. If there are provisions in the law that provide for recovery of damages, then those ought to be pressed very fully and actively.
Senator HARTKE. All right. Go ahead. Proceed with your testimony. Mr. SMITH. Well, perhaps it would be well to depart from the Nader proposals and skip to the end of the 21 different citations of what these proposals attempt to accomplish and proceed on the general terms of corporate responsibilities. What this study which Mr. Nader and his group have conducted hopes to accomplish is a massive overhaul of the free enterprise capitalistic system. This, in my opinion is a curious proposal which is incapable of accomplishment first, and one which is actively to be fought. That's not to say that there's no room for improvement in business practices in Western civilization. There is. There is room for gradual and progressive change, particularly where significant deviations from well-accepted moral standards can be established and specific answers to these kinds of problems can be developed.
Senator HARTKE. What are those ?
Senator Hartke. Mr. Smith, you say there's room for improvement in business practices in Western civilization. What type of improvements would you suggest?
Mr. SMITH. I would think that there would be several things that might be done. For instance, encouragement of corporations to engender a feeling of openness in the operations of their boards of directors, perhaps a greater reliance on the outside directors.
Senator HARTKE. What if the corporation says I don't like openness, period? How do you engender that ?
Mr. Smith. I don't think that you should legislate it. I think it can be encouraged by the market forces themselves. For instance, in the Gulf Oil case, Gulf has really taken a shellacking in the public view. The front cover of this month's Fortune magazine has a large foldout of the sign Gulf having some of the mud wiped off of the sign. The Fortune magazine, Mr. Chairman, not Forbes.
In any event, what is happening within Gulf Oil Co. is an overhaul of the board of directors, the firing of the chief executive officer, and some of his cadre of senior management officials, and a change in the operation and policies and practices of the company,
These are the kinds of market forces which are infiltrating today's boards of trustees and which are vital to the process. But I don't think that for legislative morality to be forced on them is the appropriate approach. Increasing use of outside directors is another very good method of strengthening the corporate structure.
A third possibility might be the creation of audit committees composed of outside directors; internal auditors reporting directly to the outside directors of the corporation. These are the kinds of things that would be a helpful addition to the corporate process.
Another observation of the Nader report which it would be well to address I think is the contention of the corporate accountability research group that the Constitution of the United States does not deal with the corporate form since it was not a primary form of business organization at the time the Constitution was formed. This assumption is entirely incorrect.
The commerce power of the Congress has given it an unpresented scope of regulation of all aspects of business enterprises today. There is virtually no segment of business enterprise which is free from actual or prospective congressional inquiry, investigation, and legislative