« AnteriorContinuar »
many instances they perform services beyond the customary director.
Some corporations such as Texas Instruments have developed some unique techniques for improving director involvement. I don't think many corporations have emulated the details of their program; nevertheless, most corporations are paying heed to these problems.
So I think we approach the problem of how we should deal with directors, whether legislative change is necessary in the pattern that exists with regard to their responsibilities, at a time when I think vast changes are already underway, when old patterns are being broken, when significant experiments are being undertaken, when there is an abundance of concern-much of it stemming from fear-about the proper role of outside directors.
In these circumstances, I think there are two things to avoid. One is percipitate action that would interrupt healthy developments in this area. The second thing is equally dangerous, that is to stand aside and do nothing if these developments slow down or are reversed.
I think we must avoid both of those dangers.
It seems to me that in considering the desirability of governmental action to strengthen the capacity of directors to function effectively, you have to start with a clear understanding of what directors should be expected to do.
That, of course, involves some notion of what corporations are expected to do.
Corporations basically—and this is probably oversimplified—are associations of people and aggregations of capital that are accorded certain advantages by law. They are the principal means by which in our capitalistic society wealth has been garnered from savers and put to productive use.
With all of their faults, they have been successful as producers, albeit at times at social costs which for a long time we did not realize.
While it is important that corporations not be polluters of the environment, not be bribers of public officials, not be violators of the law, not be indifferent to their public responsibilities. I think it is also extremely important that they function in their prime role as the producers of goods and services in our society and as the mechanism through which capital wealth can be used for the benefit of society.
There are those who would conceive of directors as simply policemen on the premises to assure that management doesn't transgress any laws or follow policies socially undesirable. There are some who think that directors should be detectives, constantly investigating management. Another misconception stems from the language of many State corporation laws which speak of the board as “managing" the corporation, when what they really mean, I think, is monitoring the conduct of management.
While no one has said so explicitly, it does appear that many cases brought against directors are premised on the notion that they are the guarantors of the conduct and economic success of the corporation.
I would suggest that the first responsibility of directors, but not by any means to the exclusion of other responsibilities, flows from the nature of the corporation as an economic entity. Preeminently, the directors should be the monitors of the manner in which the corporation is functioning as a corporation in the sense in which we generally regard it.
Thus, I think directors must be concerned with the economic and other goals that management has established and as a matter of fact, they themselves should be involved in the establishment of those goals.
And then the directors should be concerned with the extent to which the management of the company is achieving its goals, and if management is not competent to do that, then they have an obligation to see that other management is brought in.
Thus, their prime responsibility is to assure, consistently with their position as monitors and not managers, that the corporation functions in an economically productive and useful fashion, but that does not exhaust their responsibility.
They also have responsibility to see that the corporation conducts itself as a good citizen, that it does not pursue policies that are at variance with society's objectives and goals, that management uses the shareholders' money in a manner that is consistent with their stewardship and with the laws of the countries in which the corporation conducts business.
Quite obviously, those without economic dependence upon the corporations are in the best position to engage in an objective, careful, unbiased, analysis of the manner in which the corporation is serving its economic function.
Does this mean that only outsiders should be on the board of directors? I would suggest that is not necessary to achieve the benefits of outside directors.
Chairman Roderick Hills of the SEC has suggested that the stock exchanges should change their listing agreement to require that a majority of the board consist of outside directors.
An alternative proposal would be to provide that there should be a minimum number of outside directors, say, four, five, or six, regardless of the size of the board. Thus, you would have a sufficient sounding board, a group that could stand with strength, a group large enough to make its presence felt.
Most decisions at the board level are not reached by counting heads, but the influence of four, five, or six outside directors could be significant in determining the course of affairs of the corporation.
I would suggest that this should be done not initially by Federal legislation, but by pressure upon corporations from stock exchanges, selfregulatory agencies, public opinion, all the other forces that are presently afoot, and which are having an impact upon the manner in which corporations structure their affairs.
I think it would be unfortunate to adopt the proposal set forth by. the Corporate Accountability Research Group that each director have a special responsibility-consumers, labor, environment, and so on. It seems to me it is much better to place upon the whole board of directors the responsibility for all of those areas, so that none of the directors has an excuse for limiting his activity or his concern or his attention to a narrow corporate constituency or only certain corporate affairs.
Similarly, I think the appointment by public authority of one or more directors would be unwise, because it would mix, I think, government and a free economy to an extent that would be undesirable.
Proposals have been made that there should be outside staff people, independent of the corporation, to assist the directors. Justice Goldberg
It seems to me that suggestion is a problem because then you would have a staff that would be adversary to the staff of the corporation, that would be sort of a quasi-inspector general. I think hostilities would be developed and the staff of the directors would very easily find it more satisfying to fault-find the activities of regular management than to contribute to the goals of the corporation.
Again, bearing in mind that the primary function of the corporation is the production of goods at a profit, consistent with its responsibilities to the community and to the people, it seems to me that the establishment of a separate staff answerable only to the outside directors would elevate the role of directors as monitors of the propriety of the conduct of management to an excessively high level of priority.
Mr. Chairman, that is the end of my prepared statement.
Senator DURKIN. I gather that you would favor a more restrictive Federal law.
Mr. SOMMER. Yes.
In the remainder of my prepared statement, which I omitted because of time considerations, I state there is a lot to be said for a Federal corporation law that would be of an "enabling" sort, similar to those that exist in States, and I would hope that one of the more enlightened States would be the model for it.
There is a desirability in a uniform set of standards to be developed through statutory law and in cases concerning the relationships between managers, directors, and shareholders. I feel that burdening that sort of statute with a number of regulatory provisions that would apply only to large corporations is not sound policy. I think those regulatory provisions, such as concern for environment, concern for labor, concern for equal employment, should be dealt with across the board and be binding upon all businesses and all corporations. I think they should be dealt with separately from the question of what is the desirable configuration for corporate law.
Senator DURKIN. The corporate law, to allow for pollution, but allow the criminal law dealing with bribery
Mr. SOMMER. Deal with them separately but reasonably, as has been done in most cases.
I think mixing those matters with corporation law which is designed to deal with the relationship between managers, directors, and shareholders and the procedural matters of how to hold meetings and that sort of thing, is undesirable.
Senator DURKIN. Would you recommend preempting State law?
Mr. SOMMER. With regard to a corporation that would be subject to Federal corporation law, yes. I think some sort of cut should be made. In other words, corporations of only a certain size would be required to incorporate under Federal law. As you probably know, at the present time, the corporations that have more than 500 shareholders and $1 million of assets are required to file a periodic report with the SEC.
A similar kind of discrimination, I think, would be appropriate with regard to Federal corporation law.
Senator DURKIN. One of the better kept secrets of State government in New Hampshire was that the insurance commissioner was also securities commissioner. But it seems to me there was a dual regulation in some aspects that didn't benefit anyone.
It became a revenue producer for the State to a certain extent, but I don't think it benefited any investors.
With this, with the two tiers, wouldn't you get into a similar problem?
Mr. SOMMER. The States would continue to have jurisdiction over smaller corporations, which tend to be more concentrated geographically.
As I indicated, what leads me to believe in a Federal corporation law of an enabling sort is not a notion that is the only effective way to deal with the regulation of corporations. Rather, it seems anomalous that in a corporation that has plants, shareholders, employees all over the country, the relationship among the various constituents of that corporation, the basic ones, should be determined by the law of one particular State.
I am perhaps not as aggrieved as some people are with regard to Delaware law. I think the statement was made earlier that in many instances corporations go to Delaware because of the relative certainty of law there. That is probably valid.
I would hope that as Federal judicial law built upon a Federal corporation law, you would have the same sort of activity, only this time on a national basis. You would develop an integrated nationwide series of precedents that would provide much the same sort of certainty afforded by Delaware law at the present time.
Senator DURKIN. You have said some of the States—you have inferred some of the States are relatively lax.
Do you think there is anything specifically Congress could do, should do now by way of legislation other than what we have talked about earlier ?
Mr. SOMMER. Prof. Abraham Cary has made proposals with regard to minimum Federal standards of fiduciary responsibility and conflict of interest laws. His notion in recommending that stems from despair over enactment of a Federal corporation law that would incorporate those.
I think the kind of proposal he made ought to be carefully considered along with any sort of proposal for Federal corporation law.
I don't think that necessitates any massive change in the relationships that exist among directors, shareholders, and management, but I think that the possibility of strengthening the fiduciary responsibilities of the various parties to the corporate process might well be considered as a part of any proposal for Federal corporation law.
Senator DURKIN. One of the reasons I am here, I think, is the frustration that the people of New Hampshire—and I think it just reflects across the country-with_what appears to be big and unresponsive Government, namely, the Federal Government.
There is a tremendous amount of power that exists with the big corporations.
Do you think there is anything we should be doing specifically to harness that rather severe concentration of economic
power, or substantial power?
Mr. SOMMER. I recognize the economic power and I think it is there,
I think Congress has done a great deal to make that economic power more responsive than it has been in the past, for instance, in the area of consumer safety and equal employment.
I think the SEC has done a great deal through its activities of course, I am more familiar with that than with other areas to establish through various means standards of conduct and to insist upon a candor, if you will, between management and the shareholders and the investing public that has benefited significantly the investment process in this country.
Obviously, echoing what Professor Winter said, I think rigorous antitrust enforcement with regard to such things as price fixing and restrictive combinations and conspiracies certainly should be rigorously enforced, and if anything, perhaps more so than we have in the past.
As far as utilizing the corporate structure as a means for better policing the activities of these economic concentrations, I am less convinced that is an effective means or would be a desirable means. I think there are other ways such as specific legislation and rigorous enforcement of the law to accomplish the same ends.
Meanwhile, as I say, the prime responsibility of the board-again subject to the law and they should not be unconcerned with the law, by any means should be to monitor the economic functioning of the corporation. That monitoring should obviously try to assure it is consistent with corporate responsibility.
Senator DURKIN. Is it unrealistic to expect that a corporate board will have much time or energy devoted to social responsibility ?
Mr. SOMMER. Mr. Chairman, I think the boards are becoming so, more than they were. I think there has been, as I indicated in my prepared remarks, a significant change in the last 5 years.
I base that on what I observed at the Commission and conversations I have had with people involved in the corporate process. A number of studies have been done indicating that larger amounts of time are being given by board members. It is unrealistic, I think, to expect them to be full time, because then they become parts of management, rather than bringing to the board, as many of them do, the experience that they have had in other lines of endeavor, which make them very useful board members.
But I think today people are not undertaking to become board members unless they are willing to spend enough time to familiarize themselves with the corporation's affairs, and they are familiarizing themselves with the affairs of the corporation. They are asking telling questions. More and more corporations are establishing committees from among the outside directors to recommend new board members.
Certain patterns with regard to boards are becoming current as a consequence of some of the settlements that the SEC and private litigants have been able to secure in litigation, much of which has arisen out of the election contribution and overseas payment scandals.
Senator DURKIN. What about class action?
I think they have had the effect of making all parties in the corporate process alert to their responsibilities. I think there have been some that have been launched without a sufficient basis, but in general