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ing) 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 Do you want these laws repealed ?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. No.
Senator HARTKE. Or modified ?

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 firm? What 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tax credit which one President asked to be suspendedthat was President Johnson—and another one asked that it be repealed—his name was Nixon.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.
Senator HARTKE. Rather significantly?

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. No.
Senator HARTKE. And return?
Mr. SMITH. I think not.
Senator HARTKE. Go ahead.

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 many cases to the corporation itself. They are not doing a service to the corporation.

Now you mentioned Forbes and Miss Scribbs in here and I guess she's one of your associates in the economics field. She says, "I just assume that managements are honest. I assume that all people are honest.” That's a fine assumption, but that assumption has been severely racked. If she makes that assumption, is that all there is? Is management per se to be assumed never to be involved in these nefarious activities which have become a matter of public concern? That's what we're after.

I'm going to let you go because I have taken enough of your time, but I just hope that you would be willing to address yourself in a broader spectrum, rather than just simply becoming so obsessed with the fact that Nader is out there and the fact that he's able to attract attention.

Mr. Smith. Well, Mr. Chairman, all too often, we don't tell our story actively and forcefully enough-business—like the Congress I think has not really put its best foot forward in public forums. I suppose that if we were to ask what two institutions of the country today were the most unpopular, probably the Federal Government would rank very close to big business, and I would like at every opportunity to make my position known as forcefully, as actively, and as sincerely as I can.

Senator HARTKE. What I'm suggesting is an entirely different thing. I'm suggesting that you have taken what I would consider a much more narrow view than the intent of these hearings are to be and I've encouraged the staff to have people submit papers and written statements because I think we are here to go into something which is not going to be decided in this Congress or decided at this moment. We are into a process which is not alone of great concern here, but it's of great concern in Western civilization all over the world.

Mr. SMITH. I would agree. Senator HARTKE. Thank you. [The statement follows:



Mr. Chairman, I am delighted to appear on behalf of the National Association of Manufacturers and to present the case against the federal chartering of corporations. I am pleased to do so, primarily because the Corporate Accountability Research Group has done a shoddy job of research and ascribes all of the ills of society to the corporate form of business organization. This is a matter about which I feel very strongly and I want this Committee to understand that I appear before this group enthusiastically.

Mr. Nader, et al., have prepared a document for the Committee's consideration which ascribes all of the ills of society to the Corporation. The assumptions upon which this study is based are fallacious but it doesn't stop the group from attacking the corporate form simply because their assumptions are incorrect. In order to go through this long study prepared by the Corporate Accountability Research Group, it would take a great deal more time than this Committee has to spend on the matter just cataloguing the errors. Suffice it to say that there are several glaring deficiencies which the report makes, which cast all of its conclusions in doubt.

It is difficult to conceive that the Congress would seriously consider a piece of legislation of the magnitude being proposed in this study. It might be well to outline briefly what the study recommends. It suggests that some federal corporate chartering act should accomplish the following:


(1) Remove the power to charter corporations from the states and vest it in some kind of federal bureaucracy.

(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 fulltime directors with unique functions.

(3) Salary ranges for the board of directors would be established by the Federal Chartering bureaucracy.

(4) Redistribute income, particularly of corporate management, to reduce compensation levels.

(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.

(6) Have the board review important executive business proposals to determine their full compliance with law, to preclude conflicts of interests, and to assure that executive decisions are rational and informed of all foreseeable risks and costs. t 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.

(8) The board should be able to veto the nominees of the chief executive officer for the principal executives of the corporation.

(9) Open the board meetings to any shareholders who desire to attend.

(10) The board would be required to prepare periodic public reports describing the corporation's operations.

(11) Structure the board so that it will have only nine directors, each representing a separate constituency, so that public concerns are guaranteed representation on the board. These nine directors would represent the following:

a. employee welfare
b. consumer protection
c. environmental protection and community relations
d. shareholder rights
e. compliance with the law
f. profits and financial integrity
g. purchasing and marketing
h. management efficiency

i. planning and research Parenthetically, it is interesting to note that only one of the directors would be directly concerned with profits and financial integrity, and no one would be concerned with such mundane concerns as production or manufacturing.

(12) Change the decision-making process of the corporation to become a collegial decision-making process.

(13) Change the method of selecting directors so that any group of share. holders that owns 1/10 of 1 percent of the stock in the corporation or comprises 100 or more individuals would be allowed to nominate up to three candidates for the directorship. Theoretically, this means for any single director's vacancy, 3000 people could be nominated for that vacancy.

(14) Restrict the voting rights for the election of directors to “beneficial owners of stock" which by this definition means that large institutional holders of stocks, such as banks, trust funds, insurance companies, mutual funds, universities, foundations, and other charitable institutions would be prohibited from voting their blocks of stock, irrespective of their interest in competent corporate management, while allowing union pension funds and other similar institutions to "block vote" their shares.

(15) Exclude any corporate executive from voting his shares of stock. (16) Require the company to finance board elections completely.

(17) Require specific shareholder election approval of all "fundamental transactions" which is defined as management proposals involving the purchase, sale, lease, merger, consolidation, financing, refinancing, dissolution, or liquidation of assets equal to say 10 percent of the corporation's total assets or over 100 million dollars, or the authorization of corporate securities in any amount.

(18) If any three directors or three percent of the shareholders of a corporation find that a public health hazard is being created by the company, a community political referendum, paid for by the company, should be held in the political jurisdiction affected by the health hazard. In other words, the local community should determine whether or not the corporation should be allowed to survive.

(19) Massive public disclosure of virtually every aspect of corporate operations.

(20) A complete overhaul of the process of advertising a corporation's product which would limit advertising to items that can be substantiated as a result of scientific research.

(21) The creation of an "employee bill of rights” which would prohibit corporations to require applicants for jobs to take personnel and psychological interviews and tests, prohibit the corporation from making inquiries about a prospective employee's health, records at previous jobs, debts, drinking problems, drug addictions, sex deviancy, or possible criminal violations. This would, of course, be accomplished outside of any collective bargaining process.

(22) The “deconcentration," i.e., the breaking up of the largest corporations.

(23) The creation of a vastly expanded federal bureaucracy for the regulation of corporate enterprise, including changes in the structure and composition of the Securities and Exchange Commission and the Federal Trade Commission.

Mr. Chairman, what this study hopes to accomplish is a massive overhaul of the private, free enterprise system, which in my opinion, is a heuristic proposal which is incapable of accomplishment and one which is actively to be fought. That is not to say that there is no room for improvement in business practices in western civilization. It would be foolish not to acknowledge that gradual, progressive change would be in order. It certainly is necessary in some sectors. Nevertheless, having said that, it would be well to examine some of the glaring deficiencies and false assumptions upon which this study is based.

The first of these, of course, is that the Constitution of the United States does not deal with the corporation because the corporation was not a significant business organization form at the time the Constitution was written. The fact is, of course, that our forefathers were wise enough to recognize that the document was a model which, if it stood the test of time, would be as valid 200 years down the road as it was when it was written. It is unusual that Mr. Nader doesn't recognize that the commerce clause of the Constitution encompasses a great deal more than the corporate form of business organization and allows the Congress an almost infinite capability for regulating business, a power which it has exercised time and time again over almost every phase of business enterprise. One need only look at recent legislation, including such items as the Occupational Safety and Health Act, recent pension legislation, the civil rights acts and their expanded focuses since 1964, the clean water and air bills, significant changes in accounting practices and securities regulations and a myriad of other issues upon which the Congress has acted that give one an understanding of the scope of Congressional control over corporate form and practice. To ascribe all of the societal deficiencies catalogued in the first chapter to the corporate impact is to deny that the commerce power of Congress exists. Mr. Nader and group are wrong in this assumption.

A second major consideration of Mr. Nader's research is that bigness is bad. Economies of scale are glossed over and it's assumed that because a corporation somehow or other manages to become one of the 700 largest corporations in the country, it must, therefore, be guilty of all sorts of evils and sins against the public good. Nothing could be further from the truth. The fact is, of course, that capital intensive industries, such as steel, transportation, automobiles, and others virtually require a huge size in order to operate efficiently. The fallacy that bigness is somehow or other bad is a fundamental defect of the study, but it is one of the premises on which Mr. Nader bases the entire work.

Perhaps the most aggravating aspect of this study is a failure to recognize what the corporate form of business organization has been able to accomplish and the problems which society has encountered because of attacks on that corporate form. The system of free enterprise "guided capitalism” which is currently the primary pattern in western civilization allows this country to create over a million new jobs every year. There is no other complex form of society in an at. mosphere of freedom of choice where that claim can be made. If one takes the pe

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