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ceives fees. The more lawyers there are on boards, the higher the total law fees are. For detail see Highlights and Lowlights.

Directors should be hired for their ability. In too many instances in the past few years corporations have appointed women solely because they are women, bypassing qualified men. The same goes for promotions within the corporations. Directors should be required to

nd each stockholder meeting or be bounced from the boards. Legal and accounting firms should be rotated every 5 years, not just the partners. More disclosure as to political contributions should be made, both foreign and domestic as well as disclosure of expenditures made in promoting or defeating legislative issues and referendums.

Full disclosure of the hiring of former Government officials and employees should be made to stockholders with details given as to matters they dealt with affecting the corporation while in office.

There should be a time lapse of say 2 years before a Government official can take a job with a corporation or act as legal counsel, lobbyist, or consultant in the industry he dealt with before.

Perhaps this will put an end to the "revolving door syndrome." where someone from the corporate or financial world takes a job for a few years in Washington and then returns to the corporate world with his own stock greatly boosted.

And, finally, charitable contributions given by corporations should be abolished. Stockholders should receive higher dividends and give to charities of their own choice, instead of the charities of the directors' choice.

Senator HARTKE. Thank you, Ms. Davis. I am going to move along because of the limitation we have on time.

Ms. Davis. I thank you very much for giving me the opportunity, Senator Hartke, to speak. I think it was quite coincidental that the previous speaker was from Texas Instruments, and you brought up Mr. Batten's board memberships.

Senator HARTKE. I used your information to ask that question.

Ms. Davis. Right; thank you very much for giving me the opportunity.

Do you have Highlights and Lowlights? I will give you another copy anyway.

Senator HARTKE. Thank you.

The next witness is Professor Russell Stevenson, George Washington University.

Mr. Stevenson, I might say it is interesting to note your quote from both Woodrow Wilson and Teddy Roosevelt. I think that demonstrates again how ideas themselves and expressions, when removed from personalities, sometimes leave a different impression.



Senator HARTKE. Sometimes expressions come from people who are not necessarily given that type of recognition. So I think you have a rather unique approach here, and I think it is worthy of some exploration.

I will turn the matter over to competent counsel here, Paul Cunningham.

Mr. STEVENSON. Thank you, Senator.

In view of the lateness of the hour and the length of my prepared statement, which I am sure you have had a chance to read, Mr. Cunningham, perhaps it might be well for me to just briefly summarize what I have to say this morning, and then to respond to any questions you may have.


Mr. STEVENSON. I would like to say I was fascinated by Mr. Smith's statement. It calls to mind a remark by Scott Buchanan a few years ago. He said a corporation is an amoeba grown to the size of a whale.

What is interesting in Mr. Smith's statement is that the directors of Texas Instruments have apparently found it necessary to start providing a little structure to their whale.

As you probably know about the only thing in most State corpora. tion chartering statutes addressed to the function of the board of directors is the simple statement that, “The business of the corporation shall be managed by a board of directors.” With that, the guidance given by the State statute ceases.

I am pleased to see Texas Instruments has found a need to do something more about giving its directors some more guidance, and its management some more structure.

Unfortunately I haven't the same confidence that Mr. Smith seems to have that other corporations will follow Texas Instruments lead.

Texas Instruments, I might say, has been characterized throughout its life by an independent, aggressive, intelligent management, and I am afraid we can't say the same about all our larger corporations.

My prepared statement is addressed to one aspect of what I think might be contained in a Federal chartering statute.

I addressed that aspect with the idea of attempting to give some content to the notion of Federal chartering.

Much of the debate about the subject has taken the form of ships passing in the night, with the proponents setting up different models of what they view as the proper ends of a Federal chartering statute, and the opponents setting up strawmen which are so absurd that they are easily destroyed.

I think, therefore, it is necessary that we begin to talk at least in some respects about what a Federal chartering statute might contain.

I might also say while I am on the subject that while much of the substantative changes in the law that have been discussed as possible candidates for inclusion in a Federal chartering statute could conceivably be implemented by separate Federal legislation, or by amendments to existing Federal legislation—including much of what I have to propose here I do think it is important that we give some attention to the structure of this amoeba grown to the size of a whale as a wholistic matter.

We are, after all, talking about some of the most important of our major social institutions, giant corporations, and it seems to me important that we recognize that they are social undertakings, and that the institutional structure of those undertakings, which in many re. spects guides the way they operate in the real world, is a concern of society. Unless we address that structure, I think we are bound to see repeated again and again the kind of corporate misbehavior with which we are all too familiar, and which has provided, sadly, too much copy for the newspapers in recent times.

No doubt the kind of misconduct that we would find a year from now or 5 years from now or 10 years from now would be different from the kind of misconduct going on now, but it would all grow essentially out of the problem, as I see it, which is created by an institution which essentially is amorphous, and which has no structure imposed on it by the society which is intended to be served by that institution.

With that introduction, I would be glad to respond to any questions you may have. Mr. CUNNINGHAM. Thank you very much, Professor Stevenson.

You addressed out of the context of your statement the problem of a wholistic approach to the corporation, and that in fact has been the overriding theme of these hearings for the last 6 days, and perhaps precipitated more than anything else by Mr. Nader's recent publication about constitutionalizing the corporations, in which he, too, argues there must be a wholistic approach.

Yet when that proposal and similar proposals are examined closely, they are not at all wholistic, except for the name, "Federal Charter," or the mechanism by which the various controls would be imposed.

Analytically they are extentions of existing law, generally, governing disclosure, Securities regulation, the responsibilities of directors and management.

There does not seem to be a well-developed rationale for governing the corporation.

I wondered if you had any thoughts or could direct perhaps the committee, in this case the committee staff, to intellectualization of the concept of the corporation as a social entity, and not solely as a unit of production which will be governed by various incidental regulations on the external performance?

Mr. STEVENSON. Perhaps I ought to address what I see as the problems with the existing state of what we might call the organic law of corporations and by that means get at what might be done in terms of a wholistic treatment.

To take the area of disclosure; for example, one of the most important disclosure obligations in most major corporations is that imposed by the Securities laws. Those laws were designed to protect investors.

What I am suggesting and what I think Mr. Nader suggests, some of which I agree with, some of which I do not agree with, is that what we need is a statute which is designed not only to protect investors, but to protect members of the public, to provide governmental agencies charged with regulating corporations with certain kinds of information which they are now unable to get, and ultimately to stimulate and improve the workings of the competitive market, which in the end is the principal force we rely on for governing and legitimatizing the power of corporations.

But the SEC statute is designed to protect investors, and it has been so interpreted by the SEC, I think probably by and large correctly, but with the result that there are enormous pressures being placed on the SEC today to expand their disclosure requirements to take care of other social problems, which the SEC says, and I think in a sense probably rightly, are outside of its jurisdiction.

It is not possible, I think, to consider amending the Securities laws to require this additional disclosure without looking at what you are trying to do with disclosure, and to do that it is necessary to look at the corporation as a social, economic, and political institution.

The same is true of the fiduciary obligations of corporate managers, as now regulated almost exclusively by State corporation law.

As you are aware, the expansion of the Federal securities laws into the area of the regulation of management fiduciary duties has been rapid and continues to grow--although recent cases decided by the Supreme Court shed some doubt on whether that expansion will continue—but again, you have a tension between a defective system of State regulation and a system of Federal regulation which was designed to protect only one segment of the public, the investor community, and which was simply not designed to handle problems of fiduciary duty.

Again, I think it is necessary, in taking a wholistic view, to attempt to integrate disclosure; for example, with a statute designed to deal with management fiduciary obligations in the the same approach to statutory drafting. It is difficult to deal with fiduciary obligations if you don't consider what kinds of disclosure are available. And the reverse is true.

An intelligent approach, the only rational approach ultimately, is to look at the

institution as a whole. Mr. CUNNINGHAM. So in effect while not leaving behind the existing law, to integrate that law and to examine its purpose ?

Mr. STEVENSON. Exactly, and to look at not just the topics addressed by State corporation law, to the extent that it does address these topics, but to look at the problems of fiduciary obligations, corporate governance, et cetera. I have some resistance to writing antitrust provisions into a chartering statute, but we should certainly look at the topic. And we should look at protection of employees, and the protection of the public generally against corporate misdeeds.

All of those things ought to be looked at together, as separate sections in the same statute, if you will.

Mr. CUNNINGHAM. To turn to your disclosure proposal in your prepared statement, you argue the corporation has no inherent right of privacy.

Why doesn't the corporate right of privacy derive from the individual investor's rights of privacy,

whose property is held and used by the corporation?

Mr. STEVENSON. When we are talking about individual privacy, we are talking about a subject and a set of laws, such as they exist, to protect individual privacy which derive from social or psychological needs which we are all familiar with-which exist in every societywhich are very important that we protect.

But it is difficult to see how the personal privacy of an individual shareholder is invaded if his company is required to disclose, for example, the number of dollars it makes each year in the manufacture of widgets, or the amount of assets it has invested in the manufacture of widgets, or the cost of manufacturing the widgets. Those are not personal interests.

Mr. CUNNINGHAM. Pardon me for interrupting you, but an argument can be made that these are the personal interests of managers, just as they should have a right of privacy in their profession, just as the employee should have a right of privacy as an employee, and he should not be subject to incursions upon that privacy by the corporation.

I don't happen to adopt that view, but I am curious how you would respond to that.

Mr. STEVENSON. Again I don't see how the personal interests of managers, who are fiduciaries with respect to assets they have in their care, are any more involved in disclosure of corporate affairs than would be, for example, the personal interests of a trustee of an estate in disclosure of what he has done with the affairs of the estate.

There is simply no personal interest of the manager or trustee in those matters.

Now I think a case can be made that there are more personal interests involved in a closely held corporation, which is why I think it is important that we distinguish in our discussion, as I tried to do in my statement, between closely held and publicly held corporations.

Mr. CUNNINGHAM. One of the exceptions you make to your proposed general disclosure rule is business conversations between managers.

Where does that line breakdown? I think if we are really considering the preparation of a statute in this area, it would be very difficult to dif ferentiate the manager's confidentiality requirements, similar to the company's trade secrets requirements to protect innovation, from merely the desire to keep the competition out of your business, so you can compete on the basis of secrecy? How do you make that sort of distinction in a practical manner?

Mr. STEVENSON. Well, I don't suggest that that is the easiest job in the world. We do have a good analogy in the Freedom of Information Act, which has as one of its exemptions intra- and inter-organizational memorandums, which essentially are communications among Federal managers.

The courts have admittedly had a little difficulty in interpreting that, but so far the decisions seem to be developing a workable body of law. I don't see why we couldn't do the same thing in a Federal chartering statute.

Mr. CUNNINGHAM. One of the arguments traditionally made for more disclosure is the consumer needs the information in order to make better choices about products.

Yet many economists argue that if they are willing to buy the products now with little information available, that this additional information would be a waste, dedicating resources to provide this information is inefficient economically.

Mr. STEVENSON. Let me cite you one fairly apt example, and that is the case of industries which are essentially oligopoly industries.

There was a classic paper written back in 1950 by an economist named Tibor Scitovsky. He demonstrated in that paper that oligopolists, depending on the structure of the industry and the nature of the product, frequently have an incentive to conceal from consumers the qualities of their products.

That paper has been borne out more recently by a study done by Michael Scherer, which I think I cite in my paper, who is now the Director of the Bureau of Economics at the FTC, which demonstrates

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