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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:)
STATEMENT OF LOWELL C. SMITH, Ph.D., VICE PRESIDENT FOR ACADEMIC AFFAIRS,
BRYANT COLLEGE, SMITHFIELD, R.I., ON BEHALF OF THE NATIONAL ASSOCIATION OF MANUFACTURERS
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
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 period since the end of World War II, several conclusions are readily apparent just from looking at the employment figures for that period. Employment in the federal government has been flat, employment in the armed services has been flat and declining, employment in state and local governments has expanded very considerably, but most of all the growth in the labor force has been accomplished by the growth in the private sector employment. This means that businesses and companies have grown sufficiently to provide the extra jobs that are needed to keep a growing population supplied with sources of income. Now these jobs didn't just happen. These jobs were created because forward thinking managers, directors, and stockholders were willing to risk considerable amounts of capital in order to create the jobs that would be necessary to build new goods and services. The key here is on risk. If corporate managers and stockholders were not willing to assume the risk required, jobs could not be created. It's just that simple. The reward for risk-taking is salaries paid to management and dividends paid to the stockholders.
Let us speak about the issue of risk briefly. Many people of Mr. Nader's philosophical persuasion tend to think of the stock market as a continually growing institution. Nothing, of course, could be further from the truth. There have been long periods of growth in the stock market but there have also been sharp and precipitous declines in the values of stock which effectively wipe out fortunes and destroy many corporations in the market process. One need only look at recent history to see the impact of the very steep decline in the value of corporation stocks in the last few years. When the stock market drops by a matter of 30 to 40 percent over a relatively short period of time, this means that the stockholders of all kinds, including large financial institutions such as mutual funds and pension plans, experience a very severe loss. The fact that these funds may be managed by professional investors does not allow them the option of controlling the market forces which dictate reductions in stock values. The purchase of corporate securities is a high risk venture no matter what Mr. Nader and his group seem to think. When the risk becomes too high and investors are not willing to purchase securities, the ability of a corporation to raise the capital necessary to expand production facilities becomes severely limited. This can have very severe long-term repercussions for the economy as a whole.
Let me illustrate. In the most recent severe inflationary pressure that this country has experienced, the underlying cause of the inflation was inadequate production capacity, the inability of basic sectors of the economy to produce the goods and services that were being demanded. The money for the purchase of the commodities was there, consumers were willing to buy, but the goods and services simply weren't available because there were inadequate facilities for the manufacture of these goods and services. Among the industries that suffered severe shortages of production facilities were the paper industry, the petroleum industry, basic steel, non-ferrous metals, and others. The result, of course, was a severe escalation of prices for the existing products. The unwillingness of the managers and the stockholders to expand their production facilities in the short run because of the high elements of risk involved in these kinds of investments and the competition for funds in the capital markets caused by huge government deficits explain very graphically what the role of risk is in the market system. And, of course, as was the case in this incident, as surely as the night follows the day, recession follows extreme inflation.
Perhaps it would be well also to speak about the role of profits. It is fortunate that the very foundation of our free enterprise system has as its ethical base, the profit motive. Unfortunately, the profit motive is understood less by most modern philosophers than any other aspect of our society. There is nothing wrong with profits. The fact is, of course, that no one can force an investor to invest his money in a particular stock. One of the major reasons for investment is the ability to convert that investment into a profitable one, either through growth in the market value and subsequent sale of that stock, or through the distribution of dividends. It is this cardinal factor that allows our society to create the millions of jobs necessary to allow the growth of our society and to keep infiation under control by providing adequate production facilities. This is something which seems to have slipped Mr. Nader's mind.
Perhaps the greatest fallacy of the entire work is Mr. Nader's misconception about what the role of the director 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 a "collegial decision-making" process in a democratic institution. In order to accomplish this 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 decision-making in corporations today is not, should not, and must not become collegial decision-making 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 underfunding to enforce adequately the laws which are already available on the books. 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 fund to do the jobs with which they are charged. If there are suspected deficiencies in other require. ments 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 conséquences of implementing some of these proposals before drawing any conclusions about their desirability.
For instance, on page 248 in the attack on corporate advertising, Mr. Nader et al., assert that the largest corporations have exploited their opportunity to increase general demand and specific product identification—at the expense of consumers' knowledge about the comparative advantages of products, the goods and services of smaller producers, or the less advertised virtues of thrift, conservation, self-sufficiency, nutrition, health or safety. Suppose this really were true and, somehow or other, we were able to decrease general demand and instill in consumers a sense of thrift that caused them to purchase less. Suppose that this reduction in general demand were only five percent of consumer expenditures. In the fourth quarter of 1975, the personal consumption expenditures in the United States were $1,001 billion out of a GNP of $1,572.9 billion. That's a reduction of slightly over $50 billion, but when the multiplier effect is considered, it would be a reduction of final demand of roughly $125 billion. That is, of course, a reduction of about eight percent in national income. If it were perceived by industry that there was a permanent reduction of eight percent in GNP, what would be the effect on investment for new capital goods? What would happen to governmental expenditure plans if there were an erosion of the tax base of eight percent? How many jobs would a reduction of this kind cost the labor force? What would the impact on the unemployment rate be and the attendant social costs of the welfare programs addressing this problem? The fact is, of course, that scholars have been writing for almost 300 years that what was a private virtue might easily become a public vice. The principle is as valid today as when it was first postulated.
Let us consider population trends and employment patterns. The modern pattern in all societies has been long-term growth of populations. Certainly that has been true in the United States. I can remember when I was a boy in school being staggered by the concept of a U.S. population of 120,000,000 people. Today it's twice that. In spite of a major depression and several recessions of minor consequence and a few wars too, population has continued