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that private label products sell at a discount of something like 20 percent on the average over their brand name competitors, even though in most cases the private label products are of identical quality and are often even manufactured in the same factories.

Now what I am suggesting merely is that it would make good deal of sense to give the consumer sufficient information on product quality that he can make the decision to choose between the brand X bleach, brand X bleach being the well-known brand name, and Safeway bleach or Giant bleach, or one of the private label bleaches, which is chemically identical to brand X, but sells at 20 to 30 percent less.

As things stand now, the big manufacturers in the bleach industry have an incentive to conceal from consumers the fact that all liquid household bleaches are essentially chemically identical.

Mr. CUNNINGHAM. But the argument goes that the consumer, if he wanted this information, would demand it, he would not buy the product unless he had this information, and yet presumably he is buying, or enough consumers are buying the off-brand product to keep it on the market.

Mr. STEVENSON. Well, I can say no more than that I see that argument as based on a premise which is simply false.

Mr. CUNNINGHAM. What sort of bureaucracy do you think would be necessary to administer the general disclosure rule that you propose ?

Mr. STEVENSON. Not a large one. The SEC already administers several disclosure statutes, and requires in many cases, I think, too much information, with a relatively small staff.

I would think that the disclosure statute which I have in mind could probably be administered by the same staff as the SEC now has, perhaps slightly expanded, if we cut back on some of the kinds of excessive disclosure which we now require.

Mr. CUNNINGHAM. Most of it presumably would be done through the courts, by individuals seeking the information?

Mr. STEVENSON. What I propose is two different parts to a disclosure program.

One is an affirmative reporting requirement, which would require the reporting of certain information that is not now reported.

I would add, for example, to what is now reported to the SEC, in annual reports, 10-k statements, 8-k statements, and the like, product line reporting, the "unconsolidation" or "disconsolidation" of reporting by divisions and subsidiaries, more detailed reporting of the overseas activities of multinational corporations, and a number of others which I have listed in my statement.

But those facts need not occupy a great deal of paper, nor are they complicated or unavailable to management.

I would add also some information in a few areas. I haven't studied all of the potential areas. But, for example, it would be no trick for corporations to provide in public reports copies of their EE0-1 forms, which are provided to the Equal Employment Opportunity Commission now, and which contain information on hiring and promotion policy and statistics with respect to women and minorities.

I see absolutely no reason why that kind of information should not be in the public domain.

It might be possible, although I think difficult, to provide some sort of reporting requirement on the environmental activities.

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The Senate is now considering a bill

that would require reporting of illegal contributions made overseas. That sort of thing could be in this statute, and it would make for a more wholistic approach and would get away from what I understand as the tension between those who think the SEC ought to administer this sort of statute, and those who think it ought to be administered somewhere else.

Mr. CUNNINGHAM. Thank you very much, Professor Stevenson. I have no further questions. [The statement follows:] STATEMENT OF RUSSELL B. STEVENSON, JR., NATIONAL LAW CENTER,

GEORGE WASHINGTON UNIVERSITY It is impossible to discuss intelligently the desirability of some form of federal intervention in the law of corporations without eventually considering, at least in broad outline, what form such intervention might take. I understand that other witnesses will address the questions of what functions should ideally be served by corporation law, the defects in the state corporate chartering system as it now stands, and whether federal intervention is an appropriate means of remedying those defects. I would therefore like to direct my own testimony toward the task of giving some content to the general principle of an increased federal role in the chartering of the modern Leviathans that have come to dominate our economic and increasingly, our social and political lives.

Corporation law has as its principal end the establishment of the organic structure for the corporate institution; and this structure plays a large role in determining how corporations behave as members of the society. One of the more important aspects of the organic law of corporations is the rules governing access to information about corporations, their products, and their activities. It is those rules, and what might be done to improve them, that I would like to discuss.

I might take as my text a pair of interesting quotations, by two well-known social critics. The first wrote:

"A modern ... corporation cannot in any proper sense be said to base its rights and powers upon the principles of private property. Its powers are wholly derived from legislation. If possesses them for the convenience of business at the sufferance of the public. . . . It is a segment of the public; bears no analogy to a partnership or to the processes by which private property is safeguarded and managed, and should not be suffered to afford any covert whatever to those who are managing it. Its management is of public and general concern, is in a very proper sense everybody's business.” 1

The second quotation is very similar:

"Great corporations exist only because they are created and safeguarded by our institutions; and it is therefore our right and our duty to see that they work in harmony with these institutions. ... The first requisite is knowledge, full and complete; knowledge which may be made public to the world.” :

The identity of the authors of these two radical-sounding quotations would probably surprise a good many of those who find themselves quite content with the present state of corporate information rules (or think them already too liberal). Neither is Ralph Nader. Neither is Fred Harris. Neither, for that matter—to go back in history a bit—is Lincoln Steffens or Robert La Follette. The sources from which sprang these bits of radicalism are both former presidents of the United States, the first, Woodrow Wilson; and the second, Theodore Roosevelt. I cite them here merely as evidence of the respectable lineage of the ideas I wish to discuss.

What Roosevelt and Wilson were saying, and what I hope to establish as my principal point here today, is that there is nothing private about a public corporation. (By "public corporation" I mean—and I would like my remarks to be understood as limited to the country's several hundred largest corporations. A precise definition of the class is not important for our present purposes.)

There is increasing concern, and properly so, about the erosion of individual privacy in our society. But the interests comprehended by our conception of individual privacy are altogether different from the interests that cause corporations to claim entitlement to "corporate privacy." To equate, as is so often done, the individual right of privacy with an asserted corporate “right of privacy" is to commit a blatant logical fallacy. There is nothing about a corporation, which Chief Justice Marshall once described as "an artificial being, invisible, intangible, and existing only in contemplation of law," that entitles it to any "right" of privacy. Our concern for the protection of individual privacy grows out of fundamental human values shared by people of every society. That there are legitimate corporate needs for secrecy cannot be doubted. But none of them is absolute. All are derivative of other, more basic social interests. Properly understood, “corporate privacy” is deserving of our concern only where it appears that permitting corporations to keep information secret will serve to protect individual interests or to improve the functioning of the economic system, in which corporations play so important a part.

1 Woodrow Wilson, The New Freedom (1913). 2 Theodore Roosevelt, First Annual Message to Congress (December 1901).

The odd thing is that largely because of the historical accident that led us for legal convenience to “personify" the corporation, thereby endowing it with most of the legal privileges of tangible, warm-bodied "natural" persons, the presumption in our system of laws is that, with a few limited exceptions, corporations are entitled legally to keep secret any and all information they are able to. The question I would like to explore here today, stated in its simplest form, is what would happen were we to stand this legal premise on its head and require that corporations provide the public access to all information about themselves except when it can be shown that secrecy is justified because it serves a larger social end.

Since, as Sir Francis Bacon taught us nearly four centuries ago, knowledge is power, the mechanisms that define and limit the flow of knowledge are a crucial part of the structure of any institution. If, as social scientists tell us, technological advances in the field of communications are making ours increasingly an information-oriented society, the role played by information rules in guiding the conduct of our major social institutions is bound to take on an evergrowing importance.

Let us consider some of the ways in which we can now get information about corporations. First, corporations volunteer a good deal of information about themselves, largely in the form of advertising. While most advertising serves to convey at least some minimal amount of useful information-if only that "This product exists"-as anyone who watches even as little television as I do can tell you, the quality and utility of that information is severely limited.

Twenty-five years ago an economist named Tibor Scitovsky wrote a now classic article entitled, "Ignorance as a Source of Oligopoly Power," : in which he demonstrated that in many industries corporations have strong economic incentives to conceal from their customers most information about product quality. Thus. instead of advertising that enables consumers conveniently to compare quality and price without costly trial and error experimentation, we are bombarded with assertions that, "Acme fradastats have sex appeal," or "The Rattlesnake Mark III is the car for those who think young.” One result of this information phenomenon is that the retail price of “private-label" merchandise is often substantially lower than that of brand name products that are identical in qualitysometimes even made in the same factories. Michael Scherer, the respected economist who is now the Director of the Bureau of Economics at the Federal Trade Commission, has estimated that the average price differential between "private label" and "name" brands is in the vicinity of 20 percent.*

While this sort of failure to provide consumers with useful information does no positive harm, some corporate information practices are hardly so innocuous. For example testimony given only two weeks ago before another Senate committee indicated that some major American drug manufacturers, who are required to disclose potential adverse side-effects of their products in promotional literature distributed in the United States, leave out such warnings to physicians to whom they sell overseas. That practice, I suggest, is the height of corporate irresponsibility; and it is made possible exclusively because of the nature of this particular set of information rules.

There are a number of ways corporations may be compelled under existing law to provide access to certain kinds of information; but they fall far short of meeting the test of adequacy I have suggested. Shareholders for example are, under the laws of most states, entitled to "inspect the books and records" of

8 40 American Econ. Rev. 49 (1950). •F. M. Scherer, Industrial Market Structure and Economic Performance 331 (1970). 6 State ex rel., Pillsburg v. Honeywell, Inc., 291 Mind. 322, 191 N.W. 20 406 (1971). their corporations "for a proper purpose." But there is seldom any penalty on a corporation or its executives for an arbitrary denial of an inspection request, and the result is that far too often a shareholder seeking access to corporate files must undergo the time and expense of a lawsuit to get it. Then, having sued, he often finds that state court interpretations of what constitutes a "proper purpose" are typically rather narrow.

For example, in a recent well-known case the Supreme Court of Minnesota held that a shareholder had no legal entitlement to inspect corporate records relating to the manufacture of anti-personnel weapons being used in Vietnam. The shareholder's purpose, to communicate with other shareholders and try to persuade them to influence the corporation to stop making such weapons, was not, the court held, a "proper" one. This sort of judicial approach to the "shareholder inspection" brand of corporate information rules makes it virtually useless for any but the most modest and conventional efforts to pierce the barriers of corporate secrecy.

A little-known feature of the Internal Revenue Code is that a shareholder is entitled to inspect tax returns filed by his corporation-but only if the shareholder owns at least one percent of the stock. Why, it might be asked, are the tax records of relatively small corporations available to relatively small shareholders, but the tax records of General Motors open to no shareholder, since no individual shareholders own anything close to one percent of G.M.'s stock? I can find no good reason. It would seem to me that the returns of all public corporations ought to be freely available to any member of the public.

Probably the most useful corporate disclosure requirements are found in the federal securities laws. The information made publicly available under their requirements is of service to a wide variety of users. But the securities laws call for the registration of securities, not corporations; and the Securities and Exchange Commission is principally concerned with the protection of investors, not the public interest at large. The Commission has recently been experiencing a difficult tension brought about by the conflict between social and political pressures to use its disclosure powers in the services of the broader public interest and the SEC's traditionally more modest view of its proper function. The furor over the disclosure of improper corporate payments is only the most current example of that tension. The SEC's problem is that there is a rapidly-growing demand that someone provide access to more corporate information, and the Commission appears the most likely candidate for the task.

There are, of course, many other federal agencies that collect, and sometimes make available information about corporations; but the results of their uncoordinated information activities are all too often confusing, wasteful, and ultimately productive of far less information than is desirable. For example, while the Equal Employment Opportunity Commission is prohibited by law from publishing the EEO-1 Forms submitted to it by most large corporations, it now appears possible that the federal courts will require disclosure under the Freedom of Information Act of the same forms submitted to other federal agencies. Regardless of the outcome, both the firms and the government will have had to undergo costly, protracted litigation.

What is needed, I suggest, is a more rational, carefully considered approach to the rules that govern access to corporate information-one that takes account of the need for secrecy in some cases to protect the efficient operation of the economy and also considers the public interest in knowing a great deal more about our major corporations than we do today.

Let me summarize briefly the more important social uses of information about large corporations. First, and most important, information is crucial to the functioning of our economic system. We rely on the restraints of the marketplace as the principal means of harnessing the energies of private producers to the vehicle of the welfare of society. But as any first-year economics student knows, a critical assumption in the theories in which we repose so much trust is that information about prices, products, and profits is freely, in fact perfectly, available. Of course that is not and cannot be true in the real world; but what is true is that the closer we approach the state of perfect information, the more efficiently the economy should function.

The business community, itself, has recently provided eloquent, if unintentional, testimony to thot fact. Within the last few years both the SEC and the FTC have attempted, with only middling success to require large corporations to report figures on assets, income, and profits for each line of business in which they are engaged. The principal reasons for this campaign were that investors need this information to evaluate a firm's performance and those charged with the enforcement of the anti-trust laws need it to locate industries in which high profits may indicate non-competitive behavior. The reaction of business to these efforts was predictable although not a little ironic. A top executive of DuPont said, "[Line of business reporting) could lead other companies to concentrate on our most profitable lines." The president of the Automobile Manufacturers Association said, “The disclosure of detailed financial data by a company would enable competitors to determine its points of weakness and strength. The competitors could then avoid a competitor's strengths and exploit its weak. nesses.” The same sentiment was echoed by the Executive Vice President of another large manufacturer, who said, "[Line of business reporting) can be definitely detrimental. If competitors know all about you, they can pick out your weaknesses and then go after you.”

Precisely. And that is what in a competitive, free market economy is supposed to happen. Certainly the insecurity line-of-business reporting would generate would make corporate executives a little uncomfortable. But a little insecurity is good for our business leaders, just as the insecurity of knowing that they have to stand for reelection periodically is good for our political leaders. If a major company is performing inadequately in some product area, its competitors should go after it. That is what keeps the system healthy. And more and better information of that sort is just what the system needs.

While we are on the subject of the economic uses of information, I should also mention the importance of information to consumers. Most firms test their products. They develop masses of data about performance, service, useful life, and so on. But seldom are consumers given access to this kind of very useful information. They must rely, if it is available, on test data produced at substantial cost by private organizations like Consumers Union. What a wonderful world it would be if Consumers Union could simply collate, verify, and report on the data produced by the manufacturers themselves. How much easier it would be for consumers to make informed selections. How much better aligned to consumers' requirements would be the products that eventually reached the market.

Information is also essential to governmental policy making and law enforcement. The FTC has, as I have indicated, been seeking information about the line-of-business performance of our largest manufacturers in part for the pur poses of improving its ability to implement its antitrust mandate. But business hostility has been so enormous that the agency was forced to promise not only not to release the data to the public, but to limit access to a handful of members of the Bureau of Economics staff. Not even the Director of the Bureau is to see the raw data.

An even more striking example is provided by the Federal Power Commis. sion, which is charged with regulating the prices of natural gas. It must depend for its information on available reserves of gas on figures supplied by the American Gas Association, an industry organization. And the Commission has no means of verifying the reliability of this crucial body of facts, for gas producers treat their own estimates of reserves as confidential.

A third important use of information is in the area of what must be called, for want of a better term, "corporate accountability." Corporations are not inherently evil organizations. The great bulk of their activities are useful and productive and injure no one. But they are composed of fallible humans. And because of the nature of the corporate institution and the forces that drive it, those humans often find themselves subjected to temptations, indeed sometimes to severe pressures, to commit acts that were they to come to light would be a source of painful embarrassment, or worse, to the individuals and firms involved. I do not need to recite here instances of corporate abuse of this nature. They have become an all-too-familiar feature of the contemporary scene. All that I suggest is that Justice Brandeis was right when he said that “sunlight is the best disinfectant.” And that principle applies in areas of corporate wrongdoing far removed from the kind of securities fraud with which that familiar quotation is most often associated. As Professor William Cary has said, “The requirement of disclosure in certain instances, and its possibility always, is ... a most important regulatory force in our society."

There is one final "use" of the disclosure principle that is worth mentioning, and that is that the public availability of information serves as an effective pallia

• Cary, Corporate Standards and Legal Rules, 50 Calif. L. Rev. 408, 409 (1962).

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