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One of these outside directors, commenting on his board experience, said: “I have always felt that my ideas were not only welcome but were continuously solicited. TI has changed the 'board's right to know' into the directors' duty to know.”

The other said: “Perhaps the outstanding feature is that the main thrust of the board's work is not carried on through an executive committee, but through the work of the board itself.”

Senator HARTKE. That is a 5-minute warning on a vote which I have to go to the floor on. And I have some questions which I would ask counsel to ask you while I am gone. But basically what you are saying is that reformation is a reality here. Ultimately, the question is, Did that reformation occur on a voluntary basis, or did it occur because of recent revelations?

And how are we going to make sure that the corporations which are not so concerned with the public interest will make these same reforms and reflect greater public concern?

It is the old story again where you permit rotten apples to accumulate. We have gotten rid of most of the worms, but occasionally we get a bad one.

I will let you answer that for the record here. I have to go and vote. Mr. CUNNINGHAM. Why don't you proceed with an answer to that, Mr. Smith ?

Mr. SMITH. Shall I wait for the Senator to return?

Mr. CUNNINGHAM. He asked that you go ahead, because they are going to cut the hearings off at noon, unfortunately, and we have other witnesses.

Mr. Smith. In the first place, the experience I have just described began, as I mentioned, in 1966, which was 10 years ago, and long before any of the revelations that have become public information in the last several months were even suspected.

Also on the basis of my own experience, and I think it represents a very valid cross section as a result of the participation that I described in various conferences and meetings and in individual meetings with representatives of other corporations who have been interested in the kind of thing that we have done, that there is a very strong move to reexamine critically the role of boards of directors in individual companies.

I think this is a very constructive thing, and I am very optimistic that out of it indeed will come some voluntary actions to improve individual boards and the Harvard study that I also mentioned, which is going to come out in various parts over the course of the next couple of years, I feel is going to make an important contribution to the learning on this subject, which will be helpful for all people who are involved in it.

Mr. CUNNINGHAM. As you know, there has been a tremendous conflict as to the role of the board as a political aspect of our society. I think the thrust of the Senator's question was what are we going to do about those companies who don't seek to reform themselves?

Texas Instruments obviously is taking significant steps to reevaluate and continually evaluate the role of its board of directors.

Gulf Oil, following the calamitous revelations that recently came forth, is also taking steps like that.

Do we have to wait for other companies to suffer setbacks before they will begin this reevaluation process?

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tended to be an executive committee in any sense of the term, and will not in any way act for the board. In fact, it has been decided that the conventional executive committee is not appropriate for Texas Instruments. Membership on the administrative committee includes the chairman of the board and those directors whose time commitments to board activities normally are in the 50-day-and-above category. While this normally will mean that most of the members will be those whose previous experience has been from within the company, it does not preclude the service by others whose experience has been with other organizations. A director serving in a category involving fewer days' service but whose interest or expertise is in the development of board concepts and administrative activities might also become a member of the committee. The existence of such a working group has been vitally important in the development of the statements of policy and guidelines for board operations such as those mentioned.

The charters of the individual committees are spelled out in detail, in writing, and approved by the full board before they are implemented.

The specific activities have three basic characteristics: (1) Those actions the committee would take for the board without specific prior approval of the board in an area prescribed for the committee or as approved by stockholders. A typical example is the granting of incentive awards and stock options by the compensation committee.

(2) Those areas in which the committee would review and study and then recommend action by the board. This could be one of a number of things, such as changes in dividend policy or major financing steps.

(3) Those areas in which the committee would act as the eyes of the board and, following a review or study, would inform the board. An example would be a review of changes in accounting policy proposed or adopted by organizations such as the FASB or the SEC.

Committee assignments and the functions of the individual committees are reviewed at least annually and provide an opportunity for change, if desirable. It also provides a review of the time which board members spend on board matters, and, in turn, the basis for determining their individual compensation. Currently, among the directors who are not officers of Texas Instruments, two have a commitment of 30 days; four of 40 days; one of 60 days; and two of 65 days.

One of the things which has attracted a great deal of attention recently has been the amount of staff support which is necessary or desirable for board members. I am sure that most of you are familiar with the proposals which have been made by Arthur Goldberg for setting up a separate, independent staff for board members presumably to permit the board to have an independent check on management. We have carefully reviewed the pros and cons of this whole subject, and feel that a very important principle is that adversary-type conditions should not be generated. We do not feel, therefore, that a separate staff for the board is at all necessary and have concluded that the only full-time staff available will be those individuals providing secretarial services. Recognizing that the greater expertise on most subjects concerning Texas Instruments is within the operating organization, the existence of a separate, small staff to obtain information for directors would be an undesirable duplication.

Therefore, we have concluded that without such a separate staff, it will be necessary for directors to rely upon individuals throughout the operating organization having the expertise needed to serve the needs of the committees of the board.

These individuals will be made available on a reasonable priority basis, but requests for their time which would require more than several hours will be coordinated with the individual's supervisor.

If we are to be able to retain and attract competent directors, it is of great importance to provide compensation beyond the conventional few hundred-dollars fee per meeting that most directors receive. General directors, that is, those who will commit to approximately 30 days per year, including attendance at board and planning meetings and committee assignments will be paid at the basic rate of $30,000, a rate comparable to that charged by consultants when serving corporate clients.

In addition, if more days of service are required and agreement with the individual director is reached, a fee structure has been established that goes beyond the basic rate for general directors, and which is computed by relating such fees to the compensation of the key officers of the company.

For those directors whose responsibilities include minimum attendance at monthly board meetings and annual planning meetings for a total of approximately 15 days per year, the fee is $15,000 per year.

If additional committee assignments are undertaken on days not including board meeting dates, a rate of $1,000 per day will be paid for such additional duties. Compensation for directors who are officers of the company, such as the chairman, president, and officers of the board, is determined taking into account their specific duties.

In evolving these principles and recognizing the scope of our longrange development programs, several vital concerns became more obvious. Not only must the organization possess a completely adequate staff of managers currently, but it must have available a succession of competent and trained individuals for the years ahead. A corollary and primary concern for both the board of directors and the company's top management is the need to provide the maximum opportunity for all tiers throughout the world to realize their desired potential.

As key steps in meeting these two vital concerns, in 1973 we adopted an early retirement policy which covers the chairman, president, executive vice presidents, and officers of the board.

Briefly stated, the chairman and president must retire at 62 but may retire as early as 55. Executive vice presidents are expected usually to retire at 55; this is the mandatory age for officers of the board.

One of the principles related to the election of officers of the board is to encourage them to develop a dispassionate and independent view of Texas Instruments operations. We therefore adopted additional policies to help them become independent in their judgment, including retirement at 55. This, however, is not intended to preclude their continued service

, as a director, most likely as a general director, thereby retaining the value of their years of experience as executives with Texas Instruments, but such early retirement is to encourage and emphasize the independent viewpoint expected by terminating their previous employment and thus breaking sharply their relationship, both subordinate and superior, with Texas Instruments executives. Obviously, there is also great value to the corporation in retaining men with years of experience as Texas Instruments executives.

Now I do not presume to suggest we have the ideal solution. What we have added a re (a) more precision to the distinction between the board and operating management; (b) more emphasis to the time required to perform the board job; (c) a pattern of compensation for board members which recognizes the value of their time commitment, and (d) a definite emphasis on the objective and independent viewpoint of the individual board member.

Mr. Chairman, my purpose here today has been to share with you my experience and that of Texas Instruments in determining the role of a corporate board of directors. In addition, I would like to comment briefly on a related matter.

Mr. Chairman, my purpose here today has been to share with you my experience and that of Texas Instruments in determining the role of a corporate board of directors. In addition, I would like to comment briefly on a related matter.

One of the purposes of these hearings is to determine the need, if any, for Federal chartering of corporations. A major drawback to Government regulation, even needed regulation intelligently executed, is that it tends to introduce rigidity in the structure and operation of the regulated entity and to stifle innovation and problem solving.

I believe that would be the result if federally mandated standards as to the composition or the duties of boards of directors of corporations were legislated.

At Texas Instruments our board of directors has been tailored to help Texas Instruments meet its unique goals and fulfill its unique responsibilities. The makeup of our board and its duties as we perceive them are the result of an evolutionary process. We have had specific goals in mind to be sure, and we have proceeded toward them in an orderly manner. But we have also made changes along the way and we have responded to new needs and new problems as they arose.

Further, the process is continual. No corporation can set its board in concrete for all time and ignore a changing environment.

The kev, obviously, is flexibility. Flexibility to respond to new situations and flexibility to adapt the role of a board of directors to a specific corporation. The existing, evolving legal system is suited for this. I great!y fear that Federal regulation would not be.

Thank you very much.
Mr. CUNNINGHAM. Thank you, Chancellor Smith.
Let me pursue the question we were discussing earlier a little further.

As you well know, the bars of most States, if not all States, have both a canon of ethics and a code of professional conduct, which has the sanction of law and is applied to all attorneys, and is somewhat specific governing the roles of lawyers as officers of the corporation.

Inasmuch as the largest corporations at least have the appearance of public institutions in the sense that they control great concentrations of capital, labor, and technological expertise, do you think it would be appropriate for board members to be required to meet such standards of ethics and professional conduct as are imposed upon lawyers, although the standards would be adjusted, of course, to meet the needs of the industrial corporation instead of the bar?

Mr. SMITH. Of course, I can't argue with the fact that it would be desirable to have directors meet very high standards of conduct. I think they should.

I question whether it is possible to put them down in a precise way, so that each and every circumstance is contemplated.

I think, in most situations, in fact in all situations with which I am familiar, the very highest standards are indeed followed. And that is what the effort of each and every board member is, and that is what the effort of the board as a whole is directed toward.

Senator HARTKE. Is Mr. Batten a member of the board of Texas Instruments ?

Mr. SMITH. Yes: he is.
Senator HARTKE. Is he going to stay there?
Mr. SMITH. Yes; he is.

Senator HARTKE. Even though he is president of the New York Stock Exchange?

Mr. SMITH. Yes.

Senator HARTKE. And he is going to be on the board of J. C. Penney, A.T. & T., Boeing, and American Retail Federation !

Mr. SMITH. I don't know whether he will stay on American Retail Federation.

Senator HARTKE. He will stay on most of the big ones; right?

Mr. Smith. Except City Bank; he has announced he will resign from City Bank's board.

Senator HARTKE. You don't see any problems with that?

Mr. Smith. No; we have examined it very carefully from a legal standpoint, potential conflict of interest, as indeed has Mr. Batten, and I don't presume to speak for him, but I have discussed the matter with him personally as recently as yesterday.

Senator HARTKE. You don't see that consolidation of power in that fashion, that doesn't bother you?

Mr. Smith. No; I don't regard it as a consolidation of power. In fact, he himself is very anxious that the board memberships continue in order to be able to give him an insight as to how the corporation is acting, and he thereby feels, I think, that he can better fulfill his role as the chairman of the New York Stock Exchange.

Senator HARTKE. I will say one thing, he will be more powerful than the President of the United States. Really, I have to admit I am rather shocked.

Mr. Smith. I can't speak for Mr. Batten.

Senator HARTKE. No; I am shocked that anyone would not see that as a tremendous consolidation of power—it is not just a question of legality. We are not accusing anyone at this moment. The fact of the matter is that in the international bribery cases there is no illegality, because there is no law, unless we pass one. I mean that is one reason for passing one.

But my understanding is in the bribery cases, there is no law that has been violated in our country, or probably in their countries.

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