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This result is always predictable. The Sherman Act, as every lawyer knows, is so obsolete as a legal weapon that it is almost inoperable. The supercorporations know how to get around it. They stall and they survive. IBM tied up the government for six years in delaying actions before its antitrust trial finally got going last spring. The big oil corporations, accused in 1973, have counterattacked with batteries of lawyers—who ought to be able to put off that trial at least until 1978, if not beyond. (And then would come the appeals.) Since 1960, the Justice Department has brought at least 20 actions against the steel companies, with results that are hardly discernible.
The Corporate Citizenship and Competition Act, which I introduced May 22, 1975 (Congressional Record, page H-4648), would be the kind of law that would put an end to this guerrilla warfare. With a built-in timetable, it would force the corporate heavyweights to stand and fight, round for round, under rules that would dictate a quick and final decision. It would adopt a new strategy for restoring competition in key industries by holding, in effect, that an anticompetitive market structure in such industries is illegal per se, however it came to be. It would take its cue from Burns' warning: “We urgently need to revitalize competition in our economy through structural reform.” This is the kind of reform that would cut down the big oil companies and other behemoths of the corporate world, dissolving oligopolies to allow relatively small businesses to enter the market and compete for consumer dollars by offering lower prices.
Action would not be precipitate under this bill. The corporations and all other interested parties would have their day in court, as it were, but the day could not be stretched to a decade. Anyone who is familiar with political realities and the legislative process knows that a hurry-up lynching of a powerful corporation is virtually impossible under our system. There would be a full and fair trial of the facts.
I have been asked whether the time is ripe for such a law. I think it is-providing that the people are ready to assert themselves, providing they are not so turned off with the political process as to suppose that they have no usable power. A president has fallen; this alone ought to teach us that the ITTs of this country cannot be invincible.
But first we have to see the supercorporation in its true light. While legally it is a "person," entitled to rights under the law, it is not more a person than we are. It is not immortal, endowed with some inalienable right to live on forever as presently constituted. It may or may not be “the Frankenstein monster" that frightened Justice Brandeis, but no one can deny that it exists only as a creature of the government, which is to say, the people.
Corporations achieve birth through charters granted to them by state governments. In fact, some state governments, notably Delaware, specialize in corporate pregnancies. They hand out charters promiscuously, in exchange for fees that fill the state treasury. Corporations prefer a parent like Delaware because such states agree beforehand to be permissive and to exercise little supervision. The incongruity of it all becomes evident when we contemplate the fact that the mammoth corporations do business in all 50 states, and around the world, and yet are answerable for their charters only to a single state that is so impercunious that it is dependent on its offspring.
So, pursuant to the constitutional mandate that Congress, not the states, regulate interstate commerce, the Corporate Citizenship and Competition Act would require federal charters for the 100 largest corporations—those with annual sales exceeding $2 billion. The founding fathers and, later, William Howard Taft, Theodore Roosevelt and Woodrow Wilson, advocated federal charters. I believe the time has come to revise these proposals, to examine them in the light of modern conditions. Because federal charters would delimit the scope of the company's operations, they could be used as a tool to reorganize the vital industries of the United States in the way that would make free enterprise truly free. This is the new start that we need.
STATEMENT OF THE U.S. INDUSTRIAL COUNCIL The United States Industrial Council is an organization representing 3.500 business and industrial firms which together employ more than 3,000,000 people. It is dedicated to preserving and strengthening the free enterprise system which is the source of our strength as a nation.
Our free enterprise system has given the people of the United States the highest standard of living of any country in the world. It has produced a wealth of goods and services at prices which make them readily available to the average citizen. Despite its remarkable achievements, there are those who are bent on radically changing the system, among them being the advocates of federal chartering of major corporations. They are urging enactment of legislation which would use federal chartering as the means of restructuring these corporations, supposedly to make them more "accountable" to the people.
Leading and directing the attack on our major companies are Ralph Nader and his "Corporate Accountability Group." The legislation they propose would wreak such havoc on our free enterprise system that we find it appalling that one of the major committees of the Congress would dignify their proposals with a public hearing. The federal chartering legislation would be a big step toward nationalization of private business in the United States.
Under the proposed legislation, in order to obtain federal charters permitting them to engage in business, corporations with $250 million or more in annual sales would have to so alter their management structure and operating procedures that free enterprise forces no longer could come into play.
In the book, "Constitutionalizing the Corporation: The Case for Federal Chartering of Giant Corporations" of which Nader is a co-author, it is alleged that corporations have "escaped the kind of accountability that the democracy imposes on its centers of power.” We can find no basis in fact for that statement. Corporations are accountable to the public by reason of a multitude of laws already on the books, placed there by the public's elected representatives. They are subject to the antitrust laws, the rules of the Federal Trade Commission, the Environmental Protection Act, the Occupational Safety and Health Act and numerous other laws and rules administered by a score of government agencies. As a result, the rights of corporations have been severely limited.
Corporations likewise are accountable to their Boards of Directors and their stockholders. But even more important, they are accountable to the public on which the corporation depends for sales of its goods and services. If a corporation does not provide the buying public with the quality of products and kind of service it wants, it can put the corporation out of business by withholding patronage. That is the ultimate accountability which the private enterprise, free market system imposes. Government intervention distorts this "selecting out" process. What is needed in the public interest is not more government intervention, as would occur under federal chartering of corporations, but less.
In their book advocating federal chartering of corporations, Nader and his co-authors ask "if big business today is so good, why are things so bad?" With the American people enjoying a standird of living that excells that of all other countries—with this nation spending billions of dollars every year to help nations less fortunate than ourselves-on what basis can things be said to be "so bad” in the U.S.A.?
The period of inflation and unemployment which this country has been undergoing is seized upon as an excuse for restructuring large corporations. Inflation and maladjustment of the economy was brought on by excessive government spending and borrowing, plus high energy costs due to oil price increases in the Mid-East--not by U.S. corporations. Furthermore, the rate of inflation has been lower in this country, by and large, than in nations which have placed restrictions on free enterprise like those the advocates of federal chartering of corporations would impose.
In the book we have referred to, the authors speak of a "corporate crime wave" and refer to major business enterprises as “this rogue elephant in our midst.” What is this crime wave? A handful of corporate executives have admitted paying bribes to officials of foreign governments in order to be permitted to do business in their country. While we do not condone this practice, of asking for and receiving bribes, it has been an accepted way of life in many countries for generations, and the payment of bribes by U.S. corporations in those countries must be considered in that light. A few corporate executives have made political contributions in contravention of the law. We do not condone that practice either, but at the time it occurred it was condoned by a great many people, including some of the most prominent members of the United States Senate who accepted such contributions.
These violations of law involved only a tiny percentage of the corporate executives in this country. They occurred in the past in a climate different from that which prevails today. If they are what Nader means by a "corporate crime wave," he has distorted them into a vicious charge of widespread corporate criminality that simply does not exist.
Another distortion is found in the basis used for the claim that federal chartering would be "Constitutionalizing" the corporation. In the Nader book on that subject, it is asserted that the Constitution's "silence about giant corporations" was due to the fact that at the time the nation had an agrarian economy, the inference being that the Founding Fathers simply overlooked the need for federal intervention into the operation of large-scale private enterprises. History is quite clear that the Founding Fathers believed in limited government, individual liberty, and permitting free men to conduct business in a free market. The people who founded this country deliberately and wisely kept laws unduly limiting the operations of corporations out of the Constitution.
So much for the rationale for federal chartering of corporations. We turn now to some specific provisions which Nader and his followers would like to have included in proposed federal chartering legislation. Most of them are directed to circumscribing the rights of corporate managers to manage the affairs of the corporations. One of the ways in which this would be done would be the creation of full-time, fully staffed corporate boards of directors. Placed on these new boards would be "public" representatives, union representatives, and others with little or no experience or knowledge in running a big business enterprise. They would be able to interfere with and overrule the decisions of men who have spent their lives in developing knowledge and experience in corporate management—who worked up to their management positions step by step, being forced to prove their ability at each stop along the way.
The federal chartering law would make top corporate management jobs so undesirable from several standpoints that it would be difficult to obtain qualified people for these demanding jobs. They simply would not be worth the risks involved. Managers could be sued by shareholders alleged for "negligence" in performing their jobs. Corporate executives would be subject to arrest and trial for violating provisions of the chartering act and subjected to fines, which proponents of the legislation say should be calibrated to the annual sales of the corporation If convicted, they would not be allowed to serve as an officer or director of a corporation for five years.
The consequences of replacing able, experienced corporate management with a board of the type envisioned by the federal chartering advocates are not difficult to imagine. The errors, the inefficiencies—magnified to tremendous proportions in a large-scale corporation-would threaten the investment of millions of stockholders. Quality of products would decline and prices would increase. Consumers would be hurt most.
Another provision of the proposed legislation is increased disclosure of confidential corporate operating information. Much corporate information already is available to government agencies which regulate corporations in various ways and can be obtained by interested persons from those agencies. The chartering advocates would go further and force corporations to reveal information which has been considered proprietary, with the owners having the right to safeguard it. Forcing the release of this kind of information couid cause serious financial loss to a corporation. Furthermore, by making a corporation's trade secrets available to its competitors, competition would be diminished rather than enhanced.
The so-called "free speech rights" which the legislation would confer on employees would seriously infringe management right and could produce a kind of anarchy among the employees of a corporation. Employees would be protected against any disciplinary action by the corporation for making accusations against their employer to legislatures, law enforcement agencies, or directors. The corporation could not maintain any kind of confidential personnel files, since each employee would be permitted to look at his corporate personnel file whenever he wished.
One of the most absurd provisions of the proposed legislation is that which would authorize communities to "expel" the facilities of a corporation from their midst by popular vote for creating a “health emergency" It makes as much sense as authorizing a neighborhood to expel one of the neighbors because their garbage drew flies.
The legislation would further endanger the financial stability of corporations by liberalizing the provisions for, and thus encouraging, class action suits by consumers, workers and stockholders against "unresponsive corporate bureaucracies".
One of the key provisions of the chartering legislation would force the break-up of several of the largest U.S. corporations. Nader and his cohorts say that "a program of deconcentration is essential” to produce "lower prices, less waste, more innovation, greater variety of goods, and less centralized power". Actually, the conditions which they say breaking up those companies would produce are the very ones in which the companies excelled and caused them to attain their large size. The legislation would make size and share of the market “a presumption of illegal monopoly" and would set up an Anti-monopoly Court, whose rulings "would usually entail divestiture". It also would bar any federally chartered corporation from acquiring any company in any industry where four or less companies control 50% of the market.
In answer to the statement that the federal chartering legislation would lead to a federal takeover of business and to socialism, the Nader group declares that we have had federal chartering of banks without this result. The act establishing federal chartering for banks was not filled with the radical provisions for restructuring business and drastically altering the free enterprise system that are contained in the proposed legislation for federal chartering of corporations. The United States Industrial Council reiterates that, whatever Nader and his followers may say, the legislation they seek would lead to nationalization of private business and socialism in this country. We will oppose it with all the resources at our command.
STATEMENT OF JOHN R. PHILLIPS ON BEHALF OF THE CENTER FOR LAW IN THE
I. INTRODUCTION AND SUMMARY My name is John R. Phillips. I am one of the founding attorneys of the Center for Law in the Public Interest, a nonprofit charitable corporation based in Los Angeles and governed by a prominent 30-member Board of Trustees. The Center is funded by charitable contributions (including foundation grants and membership dues) and court-awarded attorneys' fees.
The Center originally focused on environmental litigation but more recently has established a new litigation project on corporate responsibility. Our involvement in this new project has taken the form of three shareholders' lawsuits against corporations (Northrop Corporation, Phillips Petroleum Company and the Lockheed Corporation) which made illegal domestic political contributions and/or improper overseas payments. The Northrop and Phillips cases have been resolved through court-approved settlements, both of which involved major institutional and structural changes that will directly impact these companies and their shareholders in a positive way for years to come. The Lockheed litigation continues.
I would like to describe to this committee the background of these cases; the settlements and how they were achieved ; what in our opinion are some serious structural deficiencies of most major American corporations; and, what role we believe Congress should play in attempting to rectify these structural weaknesses.
The Center's objective in commencing such litigation was to create a model of corporate structural reform that could be used by other boards of directors and other lawyers who are also engaged in various types of shareholder litigation. From the beginning, our aim was to implement many of the corporate reform proposals that scholars and business executives have written about over the last several years but have rarely implemented. We were assisted in this task by Melvin Eisenberg, professor of law at the University of California at Berkeley, who is a recognized national expert in the field of corporate law.
The settlements achieved in both the Northrop and Phillips cases were in sharp contrast to typical resolution of shareholder disputes in the past. In those disputes, the traditional remedy of money damages was the only remedy sought. While we felt that recoupment of corporate funds was an important objective, we believed that it did not go far enough and did not strike at the heart of the problem which gave rise to the litigation. These corporate cases provided a unique opportunity to use the rather strong bargaining leverage that we obtained through litigation to fundamentally alter the decision-making process of these corporations in a way that will benefit the corporations and its shareholders.
The litigation against Northrop Corporation and Phillips Petroleum Company brought to light common structural weaknesses. These created a climate of corporate isolation in which illegal acts could go unchallenged. It revealed that the boards of directors were essentially nonfunctional and ill-equipped to play their independent role of controlling and monitoring corporate management and formulating corporate policy. The institutional reforms implemented through the courtapproved settlements were designed to force these boards to become more aggressive and independent of management and to create a climate that would encourage enlightened decision-making which would take public policy implications into account.
The settlements required, among other things: 1) appointment of new independent outside directors jointly selected by the company and shareholder representatives; 2) a minimum (60%) of independent outside directors on each board ; 3) creation of audit and nominating committees composed solely of outside directors with independent staff if necessary; 4) limitations on executive committees; 5) limitation or extraordinary disclosure requirements regarding expenditures on political activity; and 6) in the case of the Northrop Corporation, the selection of a new president.
To encourage corporations to voluntarily adopt similar measures, Congress should mandate the Securities and Exchange Commission ("SEC”) to: develop a structural model for boards of directors of major corporations similar to that instituted in our Northrop and Phillips cases; require the board of directors of each corporation over a certain size to carefully file a written report (similar to an 8-K and 10-K) with the SEC stating whether they have adopted the various provisions as goals to be met within a certain timetable and, if not, the supporting reasons. Those corporations which do not adopt each proposal should be required to disclose annually to the shareholders and public in both the annual report and proxy materials that they have refused to adopt the recommended proposal of the SEC.
If there is minimal voluntary compliance, Congress may wish to enact federal chartering legislation that would require adoption of these proposals as a prerequisite for being granted a charter.
II. THE LITIGATION
At the outset, I would like to state that it was unusual for the Center to engage in shareholder litigation. We concluded that it was appropriate for us to file litigation against these three corporations because the shareholders' interest and the public interest appeared to be congruent. We fully recognized, however, that if these interests ever diverged, that it would be our ethical responsibility to represent the shareholders' interests as we perceived them. We did not perceive ourselves as public prosecutors.
It is instructive to analyze the factual background of litigation in both of these cases because it gives an insight into the rather limited role played by the Board of Directors in each instance.
The attitude of both corporations were quite different. Northrop went along with the proposed settlement with considerable reluctance; the Phillips Board, on the other hand, demonstrated a greater degree of open-mindedness and took a more farsighted approach in approving the settlement.
Northrop Corporation Litigation. The disclosures regarding Northrop Corporation's creation and maintenance of an illegal campaign fund that was generated through foreign transactions over a ten-year period came about quite by accident and not through the probing of its own Board of Directors. Herbert Kalmbach first testified in July, 1974 before the Senate Watergate Committee that he had received $75,000 in cash from Thomas Jones, the Chairman of the Board of Northrop. Following this testimony, Mr. Jones repeatedly and falsely represented to his own Board, the F.B.I., and the General Accounting Office that these were personal rather than corporate funds. Six months later, after an investigation by the Special Prosecutor and after Frank Lloyd, a top vice-president and director of Northrop, made it clear that he was going to answer truthfully all questions put to him by the Special Prosecutor, Jones finally admitted that the funds given to Kalmbach (which were apparently used to pay off the Watergate burglars and their families), and an additional $100,000 paid to the Nixon campaign, were corporate funds drawn from a secret cash fund generated through foreign transactions and that they were under the exclusive control of himself and his top lieutenant.
Mr. Jones and the company both pleaded guilty to felony violations of the Federal Elections Campaign Act. Immediately following that plea of guilty, the Board of Directors issued a statement that this was an abnormal departure