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estimate and reduce the unemployment, you'd have a surplus of $15 billion. That's all economics. I don't mind discussing it with you. I think that it's fine. I think it has some bearing upon the point. But the question that I'm directing to you—and I think that the National Association of Manufacturers is going to have to address themselves to—is there have been some abuses. There have been some illegal practices. There have been some absolutely disturbing elements in the American society for which there is no definite appropriate relief under the present law. Now the best that we have so far, as Mr. Hills' statement says, the best thing to do is to go ahead and expose this to the public view.
Mr. Smith. Exactly right.
Senator HARTKE. But there is no mechanism at the present time to even require that type of exposure that happened on the Gulf case. What happened is it was leaked out and then it came out to the public view.
I'm asking, assuming that we are going to continue the corporate structure, what is their responsibility in this society?
Mr. Smith. I can define it reasonably concisely. It's to make the best possible product at the lowest possible price. Second, it's to try to show a profit. Third, it's to account in its own corporate practices for growth that will allow an increase in the number of jobs. Fourth, it's to take into consideration in all of its corporate activities all of the factors that have an impact on that corporation and on which that corporation has an impact. That includes public concerns and every other concern that is addressed in increasing volume in the board room.
Senator HARTKE. Go right ahead.
Mr. Smith. One of the biggest problems with today's study of the corporate enterprise is a misconception about what the corporate director is or ought to be and what the nature of the corporation is. In substance, the corporate accountability research group would have the American corporation participate in some kind of collegial decisionmaking process in a democratic institution. Now I have been exposed to collegial decisionmaking processes for a long time and, believe me, they are utterly unworkable. Some of the most archaic structures in the world are colleges and universities. They are terribly inefficient. The collegial decisionmaking process is great if you're not trying to make current decisions on current issues and do so expeditiously. If you've got time to agonize ad nauseum, at great length over how many angels can dance on a head of a pin, then collegial decisionmaking is entirely appropriate.
In order to accomplish this goal of the collegial decisionmaking process, the boards of directors would be restructured to create permanent professional directors whose salaries would be established by the corporate chartering act, each of whom would presumably be charged with the duplication of the management responsibilities presently given to the corporate management.
Mr. Chairman, the corporate enterprise is not and, in my opinion, should not become this style of institution. First of all, executive decisionmaking in corporations today is not, should not, and must not become collegial decisionmaking in any sense. Moreover, for the very reasons that Mr. Nader cites in the deficiencies of foreign corporate structures, the identification of directors with special constituencies effectively hamstrings the board's operations. More importantly, it hamstrings the professional judgment of the corporate managers.
Under the proposed grand design for corporate structure there would be a virtual duplication of the present management process at the board of directors level. This is impossible of attainment in the large corporation and to maintain otherwise is sheer folly.
Mr. Chairman, I think perhaps the most important thing for this panel to recognize is that what is being proposed here is not merely some patchwork process of strengthening governmental regulatory agencies powers. What is being proposed by Mr. Nader is a basic restructuring of the economic system of the United States. The justification which he proposes for this is increased efficiency in the market process and the inability of the present governmental agencies through understaffing and underfundings to enforce adequately the laws which are available on the books.
Now neither of these basic proposals justify the kind of massive overhaul of the market process which is being proposed. If antitrust statutes are being violated, then staff the appropriate agencies with sufficient staff and give them sufficient funds to do the jobs with which they are charged. If there are suspected deficiencies in other requirements of the law, such as corporate reporting responsibilities, then certainly the governing statutes and regulations should be reviewed. To say, however, that the entire economic process needs an overhaul in order to accomplish these somewhat narrower goals is entirely incorrect.
Mr. Nader's paradigm is certainly ambitious, to say the least, but can the country live with it? It would be well to examine the consequences of implementing some of these proposals before drawing any conclusions about their desirability.
There's a long and detailed explanation there about the impact of cutting corporate advertising in order to effectively reduce demand. Let me encapsulate it thusly. If Mr. Nader and the Corporate Accountability Research Group were successful in effectively reducing consumer expenditures by changing the kinds of corporate advertising and were able to do so by perhaps as much as 5 percent, there would be a resulting decline in national income, no matter how you measure it-net national product, gross national product, or whatever-of about 8 percent. The impact of a decline of that magnitude on the job market, on employment, on investment opportunities, on the Government tax base and everything else would be insufferable and completely unacceptable.
We have discussed what happened to employment trends and population trends and I don't think it's necessary to go back over that.
Suffice it to say that this Government has made their commitment to full employment an important one since the Employment Act of 1946, and I would suspect that any device that would have the effect or the impact of changing that commitment would be unacceptable. A splintering up and a division, a deconcentration of corporations, would have that impact.
Apart from the defects in his personal views as the great social architect of our time, part of the defects from which this study suffers are caused by Mr. Nader's misconception of what a corporate director is and does. He has selected isolated abuses among a limited number of companies and draws the faulty conclusion that all corporations must be that way. I would like to suggest that there is a much more accurate and better balanced viewpoint of directors in the May 15, 1976 issue of Forbes magazine. Copies have been provided for your consideration. There are articles in there about well-managed corporations, about problems in corporations, about Gulf Oil, about some of our former congressional colleagues, for instance, Martha Griffiths on page 115, who has written an article entitled “Politicians Just Don't Understand.” Now I think that's simplistic. I think politicians do understand and I think they do understand very well that if corporations can't make a profit, then the corporation cannot survive. I commend this issue to you very highly.
For instance, the article on "Active, Yes; Running Things, No," on page 108, where Mr. Wary of Ingersoll-Rand offers his approach; Textron, Bill Miller, and his approach to his board of directors and how they operate that major conglomerate; and I think you will find that there's a much more balanced viewpoint on how the corporate structure operates, what the role of the corporate director is, and why the changes that are creeping into the board room now are a much more satisfactory approach to the problem than legislative dicta would be.
Perhaps the best explanation of what a board of directors is was voiced by T. William Miller in his article, "Invitation to a Board Meeting." He describes the board of trustees as a council of peers for chief executives strong enough to seek that advice. Other directors indicate that they see their roles as that of policymakers but not as managers. Mr. Nader's model would have the board of directors second-guessing all of management's decisions and effectively acting as some kind of watchdog. Attitudes in a corporation board room have changed very significantly since the revelations of Watergate and nowadays corporate directors are demanding and receiving a great deal more information than ever before and the policy decisions which are made by boards of trustees are made after a great deal more soul searching and definitive explanation than has ever been the case before. To now substitute a Federal bureaucracy for this council of peers would fundamentally change the nature of the American corporation in a direction which is not desirable.
Specifically, this committee announced that its purpose was to address the broad issues of corporate rights and responsibilities. If Mr. Nader's model on the nine areas of corporate social responsibilities is used as a starting point, and I strongly suggest that they are most inappropriate, one might wonder what possible goals expansion of Government involvement could accomplish. There are already such a plethora of laws and regulations to conform to that corporations are becoming overburdened with staffs whose interests are external to the central issues of providing quality products at the lowest possible prices.
For instance, under his very first title of employee welfare, one might list the Fair Labor Standards Act; the Wagner, Taft-Hartley, and Landrum-Griffin Acts; the Occupational Safety and Health Act; the Employees Retirement Insurance Act; the Hobbs (Antiracketeering) Act, the Lea (Anti-Petrillo) Act; the Railway Labor Act; the Walsh-Healey Act; the Davis-Bacon (Prevailing Wage) Act; the Miller (Heard Act); the Copeland (Antikickback) Act; Executive Order 10925 (Committee on Equal Employment Opportunities); title VII of the Civil Rights Act; and literally thousands of cases interpreting these laws. Pick any other area of major corporate concern, and governmental regulation is equally pervasive and comprehensive.
Senator HARTKE. Do you want these laws repealed ?
Mr. SMITH. What I'm saying is that there's already a solid foundation of corporate law governing the corporations' social responsibilities, particularly in the area of employee welfare.
Now all this time we have addressed ourselves to concerns which are primarily public or social concerns. What about the concern for providing the best possible product or service at the lowest possible price? What about concerns over the survival of the firmWhat about profits; What about growth?
It's unfortunate that in 1976 we address the questions about profits or return on investments almost apologetically.
Senator HARTKE. Now wait a minute. I've just come out of the Finance Committee and there was a bill for an extension of the investment tax credit which one President asked to be suspendedthat was President Johnson and another one asked that it be repealed his name was Nixon. It's now the law of the land and it's been increased from 7 percent to 10 percent. Doesn't that affect profits and returns ?
Mr. SMITH. Yes; it does.
Mr. SMITH. And anything that will increase investment I'm in favor of.
Senator HARTKE. Is that an apology to the business on profits.
Mr. SMITH. It's almost as though we thought there is something wrong with earning a profit. On one hand there is a great hue and cry about high unemployment levels. At the same time Mr. Nader is attacking profits. The very fundamental fact that the very real risks of low profits, or perhaps even losses, keep investors from new venture capital moves and thus don't allow the creation of new plants which create new jobs seems to escape the loudest critics of the system. Profits as a source of or stimulus of new capital is not well understood except by freshmen in principles of economics courses.
Perhaps the most important defect in the study, however, is that it attempts to substitute the judgment of the Corporate Accountability Research Group for the judgment of the American consumer. It removes the freedom of choice of the American consumer to determine for himself what products he wishes to purchase, what advertising he wishes to respect, which stocks he wishes to buy, which corporate directors he chooses to elect, and a myriad of other decisions which basically are vested in the consumer at this point. The study takes a condescending approach which implies that the American consumer is ignorant and incapable of thinking for himself, without the guidance of the Federal Government and the restructuring of American corporate enterprise.
In my considered judgment, Mr. Chairman, the Congress of the United States cannot, should not, and must not allow this research study to find legitimacy through the legislative process. To do so would be a travesty against the American public and the American economic system. I encourage you as forcefully as I know how to discard the proposals currently being offered. Thank you.
Senator HARTKE. Thank you, Mr. Smith, and I appreciate the time that you have given to us. But while you did enumerate very simply and succinctly the responsibilities of the corporation, you did not put in that list—and I suppose you would include the fact that the corporate officials and their employees should obey the law, should they not?
Mr. SMITH. That's a given condition which is assumed.
Senator HARTKE. Now there are changes which are coming into the board rooms now, are there not? You have indicated that.
Mr. SMITH. Yes, there are. Senator HARTKE. But they came about primarily as a result of the Watergate fiasco and the resulting factors, not a generally broad statement, some rather startling revelations as to what was happening and so forth. The purposes of these hearings is to find out whether it's possible to institutionalize a method whereby instead of waiting for something to happen by accident or just by happenstance, that we could provide a structure whereby the corporation itself could automatically become socially responsible without having these sort of tragic and periodic feelings of despair.
If I could make a suggestion, I always find this sort of feeling that somehow or another the legislative process is something bad. That's a conclusion I feel you come to. In my judgment, many corporations might, if they would look upon this thing in an 'affirmative manner, find instead of having more paperwork, more employees dedicated to doing some of these things that you find would not be necessary, you might find you have less. As long as corporations assume that there is something wrong in institutionalizing our planning, which they hopefully do themselves, they are not being honest with themselves. There isn't a corporation I know that does not have its own procedures and regulations and planning, and yet somehow plan for the future. Somehow the very organizations which insist on planning find it absolutely antagonistic to them to see that being done on a regular basis across the board for all of businesses and all corporations.
Now let me say to you, in this statement, for example, you say that the Nader approach-which evidently you don't like-does away with all State corporate chartering. That's not true. The State chartering is going to go ahead, but there have been some rather persuasive statements from people, who are not speaking from any antimanufacturing position, that the present system is not at this moment performing in a socially responsible way, not alone to society, but in