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If nothing is done to require responsible corporate behavior, then J. P. Stevens and other companies like it will continue to actively destroy the rights of workers and make a mockery of the federal labor laws.
The only thing this company and others like it understand is the "cost of doing business.” Congress must act to take the profit out of violating laws such as the National Labor Relations Act. You cannot legislate morality but you can legislate a responsibility that Stevens and others like it will have to respect.
There are many other cases that come immediately to mind when we think of the tendency of some major corporations to flout existing law. During the 1950's and 1960's American industry engaged in a massive merger movement. According to Dr. Willard Mueller, former Director of the Bureau of Economics of the Federal Trade Commission, the top 200 manufacturing firms acquired some 3,900 companies which had a collective value of more than $50 billion. The result of this merger activity was the emergence of what we now think of as conglomerate corporations.
Conglomerates are firms that do business in a number of largely or totally unrelated industries. The impact of labor relations of conglomerate organizations has been profound. Such firms, operating in a variety of industries, have been able to fragment traditional relationships between employees and local managements. In certain cases, the administrative, financial and logistical advantages enjoyed by conglomerates have been used to frustrate the collective bargaining process itself by effectively impairing the bargaining strength of the unions.
In 1953, Litton Industries was a small electronics producer. By 1970 it had made more than 100 conglomerate acquisitions, and in 1975 it was the nation's 53rd largest industrial corporation. During that period of time, Litton Industries could be identified as the parent corporation involved in 29 sepa rate National Labor Relations Board proceedings in which General Counsel for the Board issued complaints against Litton or its subsidiaries for alleged unfair labor practices under Section 8(a) (although in one instance Litton accepted a unilateral settlement agreement).
Litton operations were found by the NLRB to be in violation of the law on a total of 18 counts, in 13 of the 18 cases which reached the Board itself. A synopsis of these cases is attached herewith as Table 1. It was prepared by Dr. Charles Craypo, Associate Professor of Labor Studies, Pennsylvania State University, for presentation to the House Committee on Labor, Subcommittee on Labor Management Relations, last February.
The power of Litton Industries extends far beyond the borders of the United States. Litton is a prime example of the worst tendencies of an emerging form of corporate organization—the multinational firm. Multinationals can do things that purely domestic corporations cannot. Most typically, they are conglomerates on an international scale. They search the world for situations that will provide the maximum profit in the shortest period of time. They owe allegiance to no particular flag and are frequently able to operate in ways that thwart the laws of parent and host countries alike.
Frequently, a company such as Litton, which has the capacity to move its production sites from place to place throughout the world, uses that power to destroy collective bargaining relationships with its employees. Other multinational firms have done the same thing.
Because they are essentially unregulated by the bulk of U.S. corporate and tax laws, most of which were written prior to the emergence of multinationals, these firms exploit not only the labor force but the taxpayers and consumers of this country as well. By shifting production to foreign countries, these firms have drained over two million job opportunities from the U.S. economy. This estimate of job losses is only part of the story, since it excludes the construction work and other indirect inputs which would have serviced these jobs and the facilities in which they are performed. These firms have eroded the U.S. industrial base, sacrificed the growth of American productivity, created a situation which many in this country lament as a "shortage" of domestic investment capital, and have generally distorted the U.S. economy and international trade. A variety of tax loopholes, subsidies and deferrals makes the multinational life almost irresistible for U.S. corporations. In 1970, the total foreign-source income of American corporations was $17.5 billion. Of this, the U.S. Treasury collected only $900 million in taxes an effective tax rate of 5.1 percent. Most of this income, of course, went to the very large U.S. corporations that come off quite well on their domestic tax bills anyway.
The most important multinationals are among the 100 largest U.S. corporations—which paid an effective tax rate in 1970 of 26.9 percent while the remaining American corporations paid Uncle Sam an average rate of 44 percent. One result of these discrepancies in corporate tax rates is that the rich keep on getting richer, the biggest corporations get bigger, and American business is further encouraged to move its production profits overseas.
These discrepancies in tax rates are clearly not the only cause for the multinationals' export of production. But they have established a legal framework within which it is more profitable to operate overseas than in the U.S. The United States, in effect, often pays multinationals to relocate the sources of corporate income outside the borders of the U.S. The results are unquestionably profitable for the firm, but they dictate a premature death for American industries and unnecessary hardship for the workers and communities that depend on them. If we are to survive as a viable economic force in the world, we should see to it that laws governing corporations are recast in ways that will prevent U.S. firms from participating in such destructive pursuits.
We are submitting, along with this testimony, Volume 5, No. 4 of Viewpoint, an IUD quarterly magazine. In it you will find further descriptions of the multinational threat, and a study of one of the many cases involving Litton Industries. The article shows how the power of multinational firms can destroy the intent of the National Labor Relations Act and the lives of American workers.
There are additional areas in which corporate law needs to be reformed. For example, when a firm goes into bankruptcy, it is unlikely that its employees will be able to readily collect monies that are due to them. Even where they are able to collect, the law (written in 1926) covers only the first $600 of employees wage claims.
Most recently, we have been alerted to some of the ways in which corporations have misallocated stockholders' funds in attempts to influence individuals, firms and even entire governments. Because these funds have been misallocated by corporations rather than individuals, it is unlikely that the persons responsible for these misdeeds will suffer any serious consequences. We charter corporations in no small part to relieve some aspects of the liability which unincorporated business would be subject to. If we are to continue this practice, we must reexamine just which misdeeds can be hidden under the corporate rug.
Another area which requires great scrutiny involves the extent of corporaate disclosure both to the government and to the public. Many sets of government data which could be useful analytical tools are rendered useless because there are no uniform requirements as to how corporations handle their accounting. This means that the investing public cannot readily compare the performance of various firms and also makes it harder to arrive at meaningful public policy decisions. The little bit that corporations do report is frequently hidden under confidentiality rules which make it even more difficult to get a proper fix on the role of corporations in our society.
We talked earlier about the role of U.S. multinationals. The government collects precious little data on U.S.-based multinationals. Those of us who are interested in their economic and employment performance must rely totally on estimation and guesswork. There is no public data whatever on individual multinational firms.
We applaud this committee for undertaking this examination of the social and economic rights and duties of corporations. We feel that this area requires periodic reexamination so that public policy with regard to incorporated firms can be adjusted to reflect the concerns and realities of a changing world.
TABLE 1.--UNFAIR LABOR PRACTICE CHARGES FILED AGAINST LITTON INDUSTRIES' SUBSIDIARY COMPANIES IN WHICH THE NLRB GENERAL COUNSEL
ISSUED COMPLAINTS, 1963-75
Case (year of decision)
Airtron (Wichita, Kans.).
do. American Book (Florence, Ky.).
do.. 214 NLRB 44 (1974).
do.. Automated Business Systems (Clifton, N.J.). Electrical (IUE).
205 NLRB No. 35 (1973).
do. Automated Business Systems (Athens, Ohio). Graphic Arts
156 NLRB 1096 (1966).
Refusal to bargain.
217 NLRB 34 (1975).
do. Hewitt-Robins (Columbia, S.C.)..
Steelworkers. 11-CA-4962 (1973)
Refusal to bargain.
Refusal to bargain
do. Louis Allis..
Refusal to bargain
Refusal to bargain-
Interference, assisting rival
employee organization, Royal Typewriter (Springfield, Mo.). Allied Industrial Workers. 209 NLRB 174 (1974).
Refusal to bargain.-
26-CA-5655 (1975), 26-CA-5736 Discrimination.
(1975) Triad-Utrad (Blytheville, Ark.).
7 cases consolidated (1975). Interference, discrimination.. Twin City Tools
1 Indicates the year in which settlement occurred. Unilateral Board settlement.
No complaint issued.
Senator HARTKE. The next witness is Chancellor Bryan F. Smith, from the University of Dallas.
STATEMENT OF BRYAN F. SMITH, UNIVERSITY OF DALLAS Mr. SMITH. Mr. Chairman, my name is Bryan F. Smith, and I reside in Dallas, Tex.
I am a lawyer by profession and I was employed by Texas Instruments Inc. from June 1, 1951 until July 9, 1975.
During that period í served in several executive positions, including corporate secretary, principal legal officer, and principal financial officer.
In 1972 I was elected a member of the board of directors and I continue to serve as a general director, a term I shall define later.
On March 1, 1976, I also became chancellor of the University of Dallas, a private university with about 1,800 students.
I am a member of the board of Preston State Bank of Dallas, Mary Kay Cosmetics of Dallas, Engraph, Inc. of Charlotte, N.C., and the French American Bank of New York.
For several years I have been interested in the organization and operation of industrial boards and I participated in a major reexamination of the role and functioning of the Texas Instruments board. The study began in 1966 and its various phases took almost 10 years.
I have been a participant in seyeral conferences dealing with boards of directors, and I am a consultant to a research program underway at Harvard Business School, where the objective of the work is to find ways of improving effectiveness of board operations by exploring operations of the overall board, including the flow of information to the board, charter and operations of board committees, such as audit committees, compensation committees, and the education of board members.
Mr. Chairman, I appreciate the opportunity to appear before you to discuss the role of boards of directors in American corporations.
Peter Drucker, the management specialist, has recently cautioned:
It is becoming increasingly clear that top management will not--and in the large corporation must not-be permitted to operate without an effective and strong board. The alternative to top management's developing an effective board for its own needs and those of the enterprise, is the imposition by society of the wrong kind of board, especially on the large corporation. (P. F. Drucker, Management: Tasks, Responsibilities, Practices 630, 1974).
Some members of corporate management have undoubtedly been awakened by rustlings of growing litigation against directors under the Federal Securities Laws, and by fiduciary standards established by the Employee Retirement Income Security Act of 1974.
Reaching a conclusion as to the director's role is the key step in understanding a director's responsibility and potential liability.
Dean Courtney C. Brown, formerly the dean of Columbia University, has observed:
One basic reason for the short-comings of boards of directors is that their functions have not been clearly defined and especially kept separate from those of the management.
The Board of Directors is the appropriate unit for the establishment of broad policies and procedures, and for reviewing performance. Management is the agency delegated by the board to make those policies and procedures effective, subject to board review." (C. C. Brown, Legitmacy, Objectivity and Vitality of the Board of Directors of the Large Company. pp 3-4, 1974.)
Having in mind the role of the board, and the advisability of keeping it "separate” and “independent” from executive management, the challenge is how best to organize and people the board. Obviously, each organization has its own considerations. No single approach will cover all situations. The issues to be resolved, however, would likely be common to most organizations: For example, size of board; criteria for selecting directors; time requirements; directors' fees; relationship among the board, its chairman, and the company's president; and retirement policies.
In 1966 at Texas Instruments, when our sales were $580 million, our then chairman, P. E. Haggerty, recognized the difficulties presented by the increasing demands on executive management and saw the strengthening of the board as a salutary step.
In an internal memorandum, he stated, in part:
TI will relatively soon be a $1 billion corporation. The growth in its size and complexity places increasingly intensive demands on its chief operating executives and makes it difficult for such executives to spend the time necessary to study, to think quietly about, and to comprehend the importance of this rapidly changing internal and external environment.
I suggest that several factors such as these make it desirable and necessary to do some real pioneering in the structuring of a board of directors. I think by grappling with the problem and deliberately structuring our Board and its operating procedures, we can provide a badly needed coupling between the rapidly changing external and internal environments.
As a result of our subsequent study, we have developed a written statement of policy covering composition, operation, and compensation of the board, including committees. In our view, that policy can best be implemented by a board ranging between 8 and 12 members.
The fundamental principles are: (1) In addition to the chairman and president, the TI board will be composed of general directors, officers of the board, and directors. I will describe the characteristics of each in a moment.
(2) Board members who are employees ordinarily will include only the chairman of the board, whose time commitment to TI activities may range from full-time to part-time; the president, whose time commitment to TI is full-time; and from time to time one or more "officers of the board” whose time commitment usually would be parttime, but in exceptional instances could be full-time. (Occasionally, another full-time operating officer, such as an executive vice president, may also be elected to the board, for example, while serving as chief operating officer or during a transition period prior to his service as an "officer of the board" or general director.)
(3) The president is usually the chief executive officer, although the chairman could serve as such during a transition period seldom expected to exceed 2 or 3 years.
(4) The chairman of the board is usually the chief corporate officer, but only by virtue of his responsibilities as chairman of the board. As such, he might be considered not an administrator, but the professional leader of the directors.
(5) Interim periods aside, the president, as chief executive officer, does not report to the chairman, but rather to the entire board. This