riod 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 inflation 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 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.

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

to grow, the labor force has continued to grow, yet unemployment rates have remained among the most stable in all of western civilization and, by the way, among the lowest. What that means, of course, is that the system has created continuously rising income levels for more people while creating more jobs for larger and larger numbers of people. But this is not a new discovery.

Much of the material from John Maynard Keynes' The General Theory of Employment; Interest and Money was based on Thomas Malthus' works of the late eighteenth century. The fact is that even then some scholars realized that there is a distinct relationship between income and employment. This is no less certain today. No economy has yet discovered how to increase employment while decreasing general demand. It's pretty clear what the philosophical commitment of the United States government is-we will do everything possible to ensure that every person who wants a job can get one. This goal was rather clearly stated in the Employment Act of 1946 and the commitment hasn't diminished.

Has the system responded to this caveat? Most assuredly! In 1970 there were 78,627,000 members of the civilian labor force employed. Today there are 86,692,000. That means that in less than six years there have been eight million new jobs created. What other complex society based on freedom of choice can make a claim like that? What about inflation? For decades there has been a very real concern that price increases were wrong and excessive and yet, since 1900, the average annual rate of inflation has been roughly 21⁄2 to 3 percent. No other major society in western civilization can make the claim that its record comes anywhere near that low a figure. In many economies the levels of inflation over long periods of time have wreaked havoc with real growth in income and rising population levels have actually decreased per capita income and wealth.

Now comes Mr. Nader with his simplistic solutions to complex problems. Break up all large corporations, overhaul their systems of government in accordance with the Nader model, diminish stockholder prerogatives in line with Mr. Nader's perceptions of who should and who should not be allowed to exercise his corporate suffrage rights, create a new bureaucracy within the corporation to duplicate management functions and deal with social concerns while ignoring such fundamental functions as manufacturing, open the corporate records to public scrutiny except for "trade secrets" (whatever that means), create massive new bureaucratic reporting requirements, and so forth ad nauseam.

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 is 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 are provided for your consideration.

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" in the May 15 issue of Forbes. 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 policy makers 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 corporate boardroom 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 istance under Mr. Nader's very first title of employee welfare, one might list the Fair Labor Standards Act; the Wagner, Taft-Hartley, and LandrumGriffin Acts; the Occupational Safety and Health Act; the Employees Retirement Insurance Act; the Hobbs (Anti-Racketeering) 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 (Anti-kickback) 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.

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. It's almost as though we though 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 princples 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 for your very kind attention.

Note: All of the figures for employment and national income were taken from the March 1976 issue of The Federal Reserve Bulletin.

Senator HARTKE. We have Prof. Donald Schwartz from Georgetown University Law Center.

STATEMENT OF PROF. DONALD SCHWARTZ, GEORGETOWN

UNIVERSITY LAW CENTER, WASHINGTON, D.C.

Mr. SCHWARTZ. Thank you, Mr. Chairman. It's a pleasure to appear before you in this ambitious undertaking by the Senate to ask some very basic questions about our economy and the performance of corporations.

I have a long statement that I will not read. I even have a shortened version of that that I won't read, but I have still a shorter version that I will read and ask that the full copy be inserted in the record.

Senator HARTKE. Let me say that the fact that you don't read it certainly does not mean that it goes unattended.

Mr. SCHWARTZ. I understand that and that's why I will just try to summarize my remarks in about 10 minutes.

Proposals for corporate reform in this country have a unique character to them because of the uniqueness of our Federal system. What

troubles the critics of corporations and what impels reform is a catalog of serious substantive issues: Conflicts of interest that benefit managers at the expense of stockholders, stock market manipulations and unfair securities transactions, corporate improprieties that go unchecked and often undiscerned by an ineffective board of directors, anticompetitive trade practices, an unhealthy concentration of power, and socially irresponsible behavior.

Mr. Chairman, I do think that most people are honest. Most business people are honest, but I'm reminded of a story about the late Paul Porter when he was Chairman of the OPA. He was visited by a group of business people who said, "Mr. Porter, you do great injustice to businessmen; 90 percent of business people are honest men." And Porter said, "No; I disagree with you. I'll do you one better-100 percent of American business people are honest men-90 percent of the time."

Despite the fact that there are serious substantive problems that trouble us, we devote considerable energy talking about jurisdictional issues--whether a particular problem is one for the States or for the Federal Government. The jurisdictional argument is often an euphemism masking the underlying inquiry into the substance of the problem.

Proposals for corporate reform, at least the kind that is accomplished by law, concern the role the Federal Government should play in corporate law, and more specifically, whether corporations should be chartered by the Federal Government. What is really at stake is not whether application for a charter should be sent to Washington, D.C., or Dover, Del., but what kind of law will govern the creation and continued existence of the corporation. The drive for Federal chartering expresses a goal for corporate law reform that its advocates firmly believe cannot be achieved unless there is a break from the existing State jurisdiction over corporation law.

The main function of corporation law is to define the internal relationship between the corporate entity and its stockholders and the managers, as well as establishing the relationship of the corporations to other interests in the society that are affected by the corporation. Advocating reform of this law amounts to an assertion that corporate structure, and not just particular corporate conduct, and that organic law, not just regulatory law, are related to the issues of corporate reform. Moreover, there is implicit in this approach a downgrading of reliance on specific regulation as a means of dealing with at least some of the problems.

There are more than 50 State corporation laws. The content of each State law differs somewhat, and Delaware has emerged as the most popular choice among major companies. However, the differences are relatively slight. The State legislatures claim to share in a policy of enablingism.

Undoubtedly, the fact that there is a marketplace for corporation law has much to do with the content of those laws. Each State has a law for sale. The purchase is made theoretically by the corporation, but one must remind himself that this shopper is a legal fiction, and the real choice has been made by the promoters or the managers of the corporation whose interests do not always coincide with the stock