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 that 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 weaknesses." 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 enforce ment. 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).

tive with respect to what might be called the pathology of secrecy. As Max Weber and numerous successor students of bureaucracy have demonstrated, information is such an important tool of power within a large organization that -secrecy tends to take on a force of its own, quite apart from the legitimate needs of the organization. The result is that not only does the world outside receive less information than is desirable, but the flow of information within the organization becomes distorted in such a way as to hamper its effective functioning. The opening up of corporations to the public would aid substantially in limiting the effects of this unfortunate characteristic of bureaucratic structure.

At this point it may be wise for me to repeat that there are legitimate, indeed essential needs for corporate secrecy in some areas. Without exploring them in detail, let me list the most important. First, secrecy is necessary to protect incentives for innovation. Firms would spend a good deal less time and money on developing new or improved products or better ways to produce old ones if they knew that their competitors could have immediate access to any new ideas developed. Second, there is clearly a need to protect the vigor and candor of intra-organizational discussion about corporate decisions. The freedom of this kind of discussion would obviously be substantially inhibited if corporate executives were unable to count on the confidentiality of their conversations and written memoranda. Third, information in the possession of corporations includes much that bears on the personal privacy of employees, customers, and stockholders. Files and records of this sort need, if anything, more protection from disclosure than is provided under existing law. Finally, there are certain classes of information that if disclosed would prevent the economic game from being played at all. Competitive bidding, for example, could hardly work if each bidder knew the bidding plans of all other bidders.

With the exception of information falling into one of these four principal categories, the law might well provide that all other corporate information is in the public domain. A coherent policy toward corporate information based on this principle might have two aspects. First, it would make sense to expand the current patchwork requirements for the affirmative disclosure of corporate information and coordinate them into a more carefully designed reporting system. Such a system ought to require, at a minimum, substantially improved financial reporting including detailed line-of-business data, the "disconsolidation of subidiary and divisional accounts, reporting of substantially more information than we now have on the overseas operations of multinational corporations, and perhaps some statutory guidelines aimed at improving the informational quality of the typical accounting statements.

Corporations ought also to be required to publish reports on areas of their activity of particular social concern, at least where the cost and bulk of such reports is small enough to justify it. Statistics on the employment and promotion of women and members of minority groups, for example, would cost virtually nothing to disseminate, since such figures are already kept by most if not all large companies. It may well be possible to design a system of reporting on the environmental consequences of corporate activities. In light of recent events, it might also be desirable to require corporations to report their expenditures for lobbying and other political purposes. And there are probably other areas where disclosure requirements could markedly improve the social behavior of large companies.

Finally, attention should be given to the possibility, in some industries, of requiring the publication of data on product performance and reliability in a form that would permit purchasers to make better informed choices. We already have examples of the feasibility and utility of such a system in the labelling requirements applicable to various food, drug, and other consumer items. Such a system could hardly be extended to all product lines, and care would have to be taken that disclosure requirements did not become too rigid or costly; but it seems likely that the principle could be substantially expanded beyond its present areas of application.

Besides affirmative requirements that corporations report and publish certain specified data, the rules governing access to corporate information ought to be opened up by the enactment of a sort of "freedom of information act" applicable to large, public corporations. Such a statute should, of course, contain exemptions for information whose continued secrecy serves one of the legitimate social interests discussed above: protection of the incentives for innovation, the confidentiality of the corporate decision making process, indi

vidual privacy, and the "game" aspect of the competitive market. The statute ought also to permit corporations to require payment for information sought under its terms, including the full clerical costs of searching for and copying documents, although substantial shareholders might be entitled to access to some kinds of information for free.

What I have been saying can be summed up simply: Corporations have no "right" to keep secrets, indeed they should be permitted to do so only where secrecy serves the public interest. Greatly expanding public access to corporate information should constitute an important part of any effort to modify the institutional structure of large public corporations to make them more responsive to the needs of the society they serve. Such a policy could only be effectuated by federal legislation, for the states lack the incentive, and as a practical matter, the power to make such a program a reality.

Mr. CUNNINGHAM. I wish to make the announcement that the chairman has made at each of these hearings, which is that this issue will be under continuous consideration by the committee for the rest of this session, and presumably in the next Congress.

These hearings will be recessed subject to the call of the Chair, and it is not clear yet what decisions the leadership will make as to whether hearings on issues not requiring legislative solution in this Congress will be, so we don't know if hearings will be resumed in this session or

not.

We are, however, requesting that any individuals who are interested in this issue, and feel they can make a contribution to the committee's consideration of the issue of relative roles of the Government and the corporation in defining corporate rights and responsibilities in our society, submit papers to the committee for inclusion in the record of these hearings, or addendum to that record, for the consideration of the members and the staff.

The issues have only been broadly defined in these last 6 days, and a much closer examination of many of the subjects that have been presented to the committee in these hearings will be necessary before the committee can make any decision as to what further action, if any, may be necessary.

The hearings are recessed, subject to the call of the Chair.

[Thereupon, at 12:30 p.m. the hearings were recessed, subject to the call of the Chair.]